Omega Healthcare Investors Inc (OHI) 2015 Q4 法說會逐字稿

Good day, and welcome to the Omega Healthcare fourth quarter earnings conference call and webcast for 2015.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference call over to Ms. Michelle Reiber. Ms Reiber, the floor is yours, ma'am.

Thank you and good morning. With me today, are Omega's CEO, Taylor Pickett, CFO, Bob Stevenson, COO, Dan Booth and our Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial part objections, dividend policy, portfolio restructuring, rent payments, financial condition or prospects of our operators, contemplated acquisitions, and our business and portfolio outlook generally.

These forward-looking statements involve risks and uncertainties that may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission including without limitation, our most recent report on form 10-K which identifies specific factors which may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures such as FFO, adjusted FFO, FAD, and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under Generally Accepted Accounting Principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the financial information section of our website at www.OmegaHealthcare.com, and in the case of FFO and adjusted FFO in our press issue release issued today.

I will now turn the call over to Taylor.

Thank you Michelle. Good morning and thank you joining Omega's fourth quarter 2015 earnings conference call. Adjusted FFO for the quarter is $0.81 per share.

Adjusted funds available for distribution - FAD - for the quarter is $0.72 per share. We increased our quarterly common dividend rate to $0.57 per share. This is a 2% increase from last quarter, and an 8% increase in the fourth quarter 2014.

We have now increased the dividend fourteen consecutive quarters. The dividend payout ratio remains very conservative at 70% of adjusted FFO, and 79% of FAD. Our full-year 2015 FAD was $2.79 per share.

Our full-year 2015 adjusted FFO was $3.08 per share, ahead of our original guidance range of $2.98 to $3.04 per share, and an 8% increase over 2014 adjusted FFO of $2.85 per share. We have announced our 2016 adjusted FFO guidance range of $3.25 to $3.30 per share, and 2016 FAD guidance range of $2.95 to $3.00 per share. Our guidance includes $650 million in new investments including the $186 million closed today in 2016.

As a result of the recent Genesis and Manor Care earnings announcements, we have been asked about a number of specific items. First, as it relates to our modest impairments and write-downs, we have normal asset redistribution from one operator to another, resulting in a accounting write-downs of a previously recorded straight-line [red]. And very modest write-downs, related to a couple of Aviv legacy assets.

Second, we evaluate our capital costs and our related acquisition opportunities weekly. Given our current cost of capital and leverage, we have sufficient capital to support our operators' near-term capital needs. Our conservative balance sheet management, with no maturities in the next three years, and over $1 billion in liquidity, puts us in an extremely strong position with respect to capital allocation decisions.

Lastly, the ongoing shift from Medicare Part A to various forms of capitation and insurance products is, A, not a new trend. B, been managed by CMS in an organized and thoughtful way, and C, has created a slow but manageable shift in how providers meet residents' needs. Furthermore, it is important to remember that there are over 900,000 Medicaid residents occupying less than 1.6 million total skilled nursing facility beds.

The obvious point being, that you cannot ignore the stable payor source for the majority of patients that occupy a typical skilled nursing facility. In summary, we've positioned our portfolio via well-structured leases and strong coverages, to withstand the challenges that our operators are facing today, and we have partnered with operators who have been aggressively addressing the issues facing our industry for many years.

I am confident that Omega is the best positioned capital provider to manage through the ongoing shift to a more efficient reimbursement system and to identify opportunities as less efficient and less sophisticated providers continue to exit the market. Bob will now review our fourth quarter financial results.

Thank you Taylor, and good morning. Our reportable FFO on a diluted basis is $127.4 million, or $0.65 per share for the quarter, as compared to $87.4 million or $0.68 per share for the fourth quarter 2014. Our adjusted FFO was $159.4 million or $0.81 per share for the quarter, and excludes the impact of $20.5 million of interest refinancing expense, $7.6 million in provisions for uncollectible mortgages notes and straight-line receivables, $4.5 million of non-cash stock -based compensation expense, $2.8 million of interest carried and $2 million of acquisition and merger-related costs. This is partially offset by a reduction of by $5.4 million for in-place lease revenue amortization catch-up in connection with the assumed Aviv leases.

Turning to revenue and expenses, operating revenue for the quarter was $210.5 million, versus $131.3 million for the fourth quarter 2014. The increase was primarily a result of incremental revenue from a combination of the Aviv acquisition and other new investments completed in 2015, capital improvements made to our facilities, and lease amendments made during that same time period. The $211 million of revenue for the quarter includes approximately $17 million of non-cash revenue.

Operating expense for the fourth quarter of 2015, when excluding acquisition-related costs, stock-based compensation expense, impairments and provisions for uncollectible accounts receivable, was $33 million greater than our fourth-quarter of 2014 due to the Aviv merger and over $500 million in new investments. During the quarter we recorded approximately $7.6 million in provisions for uncollectible mortgages, notes and straight-line receivables.

The non-cash charge included $4.7 million resulting from the transition of seven facilities from an existing operator to another operator in our portfolio, requiring the write-off of straight-line receivables. And $2.9 million resulting from recording and reserve of one Aviv legacy note. In addition, during the quarter we recorded a $3 million real estate impairment charge to reduce the net book value of one asset held for sale to its estimated selling price.

Our G&A was $7.6 million for the quarter, and we have worked just our quarterly G&A expense for 2016 to be approximately $7.5 million to $8 million per quarter. In addition, we expect our non-cash stock-based compensation expense will be approximately $3.7 million per quarter.

Interest expense for the quarter, when excluding non-cash deferred financing cost and refinancing cost, was [$30.6] million versus $32 million for the same period in 2014. The $6.6 million increase in interest expense resulted from higher debt balances associated with financings related to our 2015 investments including the Aviv acquisition on April 1, 2015.

Turning to the balance sheet for the quarter, in December we repaid $25.1 million on two mortgage loans guaranteed by HUD. The $25.1 million of HUD indebtedness had a blended interest rate of 5.45% as a result of the repayment of the HUD debt, in the fourth quarter we recorded a $900,000 gain on the extinguishment of a debt, due to the write-off of $2.1 million in fair value adjustments recorded at the time of the acquisition, offset by a prepayment fee of approximately $1.2 million.

In December, we entered into a new $250 million, seven year term loan priced at LIBOR plus180 basis points. Upon completion of the term loan, we entered into a forward starting interest rate swap agreement, effective December 30, 2016.

In September, we issued 600 million 5.25% senior unsecured notes due 2026. Proceeds from that offering reduced to redeem our $575 million 6.75% senior notes due in 2022.

On September 25, we deposited about - approximately $615 million with a trustee of the 2022 notes. That amount included a redemption premium, semi-interest and additional proved interest and redemption date of October 26, 2015. The $615 million was classified as other assets for our September balance sheet.

The Company has adjusted FFO, or added back, $2.8 million representing 26 days of interest at 6.75% resulting per the requirements of deposit with the trustee, the principal balance and accrued interest in September. In addition during 2015, under our dividend reinvestment account and stock purchase plan, we issued 4.2 million shares of common stock, generating gross cash proceeds of $151 million.

For the three months into December 31, 2015, our funded net debt to adjusted pro forma annual EBITDA was 4.4 times in our adjusted cash fixed-charge coverage ratio was 4.8 times. I will now turn the call over to Dan.

Thank you Bob, and good morning everyone. As of the end of the fourth quarter 2015, Omega had a core asset portfolio of 932 facilities with approximately 93,000 operating beds distributed among 83 third-party operators located within 41 states and the United Kingdom. Trailing twelve-month operator [EBITDARM] for our portfolio remained stable during the third quarter at 1.8 times as of September 30 versus 1.8 times as of June 30. Correspondingly, trailing twelve-month operator EBITDAR coverage also remained stable at 1.4 times as of September 30, versus 1.4 times as of June 30.

Turning to new investments. During the fourth quarter ending December 31, 2015, Omega completed $39 million of new investments, which included a $5 million acquisition and $34 million of capital expenditures. Not including the Aviv merger, Omega closed on $507 million of new investments and capital expenditure projects during the 12 months ended December 31.

Subsequently, in the first part of Q1 2016, Omega closed on $186 million of new investments in three separate transactions. In January, Omega closed on a $9 million purchase-lease transaction for one care home in the United Kingdom with 52 operating beds and was added to the existing master lease with Healthcare Homes, Omega's current UK operator, and bears an initial cash yield of 7%. Also in January, Omega funded a $6.8 million mezzanine loan that bears an interest rate of 11% per annum.

In February, Omega closed on a $170 million purchase-lease transaction for ten facilities located in Ohio, Michigan and Virginia with 985 operating beds. The facilities were leased to affiliates of CNA Healthcare - an existing Omega operator - pursuant to a ten-year master lease with an initial cash yield of 8.5%.

Omega continues to invest capital in both major renovation projects and new development projects with our existing operators. As of today, Omega currently has approximately $358 million committed for the development of new [sniffs, and outs] and to reinvest capital in our existing portfolio. Omega currently has approximately $1.1 billion of cash and availability to fund new investments. Turning to our existing portfolio.

As of December 31, 2015, Genesis Healthcare was our largest single tenant in terms of revenue at just over 7%,and our fifth largest investment overall. We currently lease 58 facilities in 13 states with annualized fourth quarter rent of approximately $51.5 million. EBITDARM and EBITDAR coverage for the 12 month period ended December 31 with 1.72 and 1.26 times, respectively. This calculation does not include any top side adjustments for any rehab margins.

We currently have an agreement with Genesis to either sell or release six of their existing facilities on or before March 2017. It is expected that Genesis' coverage will ultimately improve at these dispositions, however we do not expect Omega's revenue to be materially altered. I'll now turn the call over to Steven.

Thank you Dan, thank you everybody for joining. As discussed last quarter, we remain active in the senior housing space, but do so on a very selective basis. Our operator Maplewood opened two properties in Q1 in their core markets of Cape Cod, Massachusetts and metro Cleveland, Ohio.

They received strong market response to both of these facilities upon their opening. The 134-unit facility in Brewster, Massachusetts on Cape Cod has a 34-unit dedicated memory care program in addition to its traditional assisted-living focus. And the 48-unit facility in Cuyahoga Falls, Ohio is dedicated solely to varying levels of memory care.

We, in conjunction with Maplewood, continue to finalize the permitting of our planned approximately 200,000 square-foot ALF and memory care high-rise on 2nd Avenue and 93rd Street in Manhattan. We anticipate construction commencing according to plan in Q3 of this year. In addition, we purchased two parcels of land in Q4 of 2015 in a metro Richmond, Virginia market, and metro Greenville, South Carolina markets and are constructing 48-unit dedicated memory care facilities to be operated by our current operator Phoenix Senior Living.

The investments were structured as construction loans and bear an interest rate of 8.75%. The transaction provides Omega an option to purchase the properties upon stabilization, at a discount to market. Furthermore, our commitment to reinvesting in our assets continues to be a primary part of our overall investment thesis.

In the fourth quarter, we invested $34 million in strategic renovations and new construction, and $96 million for the year ended December 31, 2015. This excludes amounts invested by Aviv REIT in the first-quarter of 2015. We currently have over 90 projects in process at year end.

This ongoing effort is made possible by the commitment we have made to have a dedicated team of eight real estate professionals, led by Steve Levin, whose sole focus is maximizing the quality and market competitiveness of our portfolio, while allowing our operators to better allocate their resources to the successful operations of the facilities. This commitment to programmatic reinvestment in our portfolio provides superior risk-adjusted returns, both in the short and long run, as we position our assets and operators to be leaders in their respective markets.

Thanks Stephen that concludes our prepared remarks we will now open the call for questions.

Thank you sir.

(Operator Instructions)

Juan Sanabria, Bank of America Merrill Lynch.

Hello. Good morning. First question, it was a pretty good decline in the amount of rents sub-one-time EBITDAR coverage quarter over quarter/ Can you just comment on what drove that? Was there any asset sales and or CapEx invested in those assets to turn around the coverage?

Actually no. I think that will drive changes in that metrics going forward, but for quarter-over-quarter it was really the result of three operators who were sort of all at 0.9 or above, shifted over to one-to-one. So it was really just improvements in operations of the upper three operators that were in that lower tier.

And consistent with our discussions in the past, that we have operators in that lower tier that have assets that we planned on cash flow growing and turnaround so that is just happening.

And what drove the turn around? Anything specific, or --?

It wasn't anything specific other than just improved margins. You're talking about operators were just below one-to-one to begin with, so there wasn't a whole lot to tip them over. But it was improved margins.

It was improved occupancy. It was improved cost containment. It was all of the above.

Okay. Got it. You mentioned a fairly sizable development in redevelopment pipeline. What is included in the 2016 budget, and what is earmarked of that for the Manhattan development? And how much should be spent for the Manhattan project in 2016?

The, as Steven said, we are going to put a shovel in the ground in Q3, so I don't know that it will be a dramatic spend in the back half of 2016. Our CapEx budget for the year -- what is it?

$100 million.

$100 million. It is likely, given what we have going on, that we will exceed that budget. That is part of the $650 million that we're going to spend in new investments.

And then last, but not least, we also were awarded a number of CONs in the state of Florida to build new skilled facilities. And we have broken ground on one, and over the course of the next several months we will break ground on several others. I don't know the exact numbers that are going into Florida SNF newbuilds, but it is something less than 100 and probably more than 50.

Okay. And then what kind of yields are you budgeting for those developments? Quick follow up to that.

On the SNFs it is 9%. On the SNF new builds or rebuilds.

Okay.

On the Manhattan Project, so to speak, we are looking at 8% stabilized plus 3% escalators.

Okay. And just a quick one on a -- can you just give a little background on that Aviv one- time rent increase that you noted in the release?

Rent increase? You mean the write-off?

The $5.4 million catch up?

Oh, thank you.

Its part of the merger via acquisition of Aviv - we have purchase accounting, you have one year to true-up the assumed in-place lease asset that we bought the leases. So we had a third party -- who went out and evaluated them in late December and we got their evaluation, and we had to adjust our in-place lease liability, which means we should have booked slightly more in-place lease non-cash revenue in the second and third quarter. So we caught it up.

So you have Q2 and Q3 revenue that would have otherwise been recognized in those quarters, one for the fourth quarter, and we just pulled out of it. It's just an FFO because it doesn't represent our run rate.

That $5.4 million will go away in the first quarter of 2016?

Well, the in-place lease accounting is part of our run rate and the non-cash straight-line rent that gets recognized. But I think the best way to look at it is, our run rate for the fourth quarter is pretty clean on a forward basis.

Okay. That is it for me. Thank you.

Thank you.

Nick Yulico, UBS.

Sorry -- I don't know if I missed this, but can you just talk about -- all the coverage you report here on page 6 of the supplemental as of the third-quarter, trailing 12 months and the public operators talked about a tough fourth quarter. So how should we think about how this coverage moved, if it got worse in the fourth quarter?

We have always reported coverages driven on a trailing quarter basis. Its just the nature of the beast and when our financial statements come in. Genesis, as a public company, did report or didn't -- hasn't yet reported, but was able to give us a facility financial level information, so that is why we were able to give you trailing 12-month coverage ratios for Genesis.

But other than Genesis, we really don't have any public entities of any significance, other than Diversicare and a little bit of revenue with AdCare. So I don't expect them to materially change our coverage ratios. And at this point in time, it is too early to predict where we come out in the fourth quarter.

We have got information for October and November, but most of your adjustments are made in the month of December.

We have not seen anything that indicates a trend that is concerning.

Okay. Then on that same page, you have that 32 operators that are in that 1.2, to 1.8 rent debt service coverage bucket, how -- that is a pretty wide range to have. It is your biggest bar on that chart. Can we get some sensitivity to what - how many are 1.2, 1.3, 1.4 versus --

Fair question. I think the best way to think about it is our average is 1.4. So almost by definition, it is going to skew toward the average and frankly the deviations away from that average aren't that big.

You are going to have most of our top 10 operators bunched around that 1.4, and then you will have folks that are either side of that number. Obviously the operators up near 1.8 tend to be a little bit smaller, or else they would drive the average. But what we think about and look at our top 10, they cluster around that 1.4 pretty tightly.

Okay, and then just going back to the same chart, if you have the 13 operators below one times coverage and then the [9.1 to 9.12], why should we think that you are not going to have to cut the rents for those operators?

Well because they had -- they continue to pass. They have maintained their coverages in these ranges. We have not seen -- if what we're talking about, is this sense that the industry is shifting downward, we are not seeing it with these operators.

Okay but we should just -- it sounds like the message is we are not concerned about these operators that are paying our rent, and until they are not able to pay our rent, then we might cut the rent? So this process may happen at some point in the future, but it is not something that you are going to give some visibility on potential for cutting rents for these operators today.

I don't think there is any -- there is nothing from a business perspective where we look forward and say there is meaningful rent reductions in our portfolio.

Okay. And then just on the acquisitions, can you talk about what your guidance assumes about how you're going to fund those acquisitions?

Well, we have got over $1 billion of availability on the line. Part of our plan, as its been for 12 years in doing acquisitions, we will put those acquisitions on our line and then we will look at the markets, in terms of permanent financing. But we have so much flexibility, we will put it online and just step back and say does the bottom of the market look appealing?

Does our stock price recover? Is that appealing? Will we make capital decisions when we get the line into the $500 million, $600 million, $700 million range? And frankly, if the capital markets don't get better and cap rates don't change, then the acquisition activity slows down.

Okay, but it sounds like for the guidance, you are pretty committed to doing those acquisitions even if you have to put it all on the line and not be able to raise equity in the market? Or we do not --

Yes. I think the point -- go ahead, Dan.

While most of the acquisitions we talk about are truly in the pipeline. They are deals that have come a ways. A lot of them were teed up in the fourth quarter. So yes I think those -- for the most part we are all in on those transactions that we have talked about in terms of guidance.

And it really goes back to being the capital partner for our tenants, and having capital available and having a balance sheet that you constantly keep flexible enough that you are not saying no to those important transactions for our tenants.

The 650, we feel confident about and there's really no reason for us to turn it off. Additional acquisitions is going to be driven as I said, cost to capital, cap rates, we will make the decisions as we move forward.

Okay. That is all I had.

John Roberts, Hilliard Lyons.

First, let's get a little more color on the dividends. I know in the past, you have discussed a 80% 85% payout ratio. You're obviously significantly below that at this point. Any thoughts on that front?

A couple. To the extent that we retain cash and invest it in the business, we think that is a pretty good use of internal equity. But the second point being, where we are today at 79% of FAD and continuing our one penny per quarter, which is a trend we want to continue -- at some point, there is a chance that we run into a taxable income issue in terms of how much we distribute.

So we like the trend of one penny a quarter. We love having available cash as equity capital to reinvest in the Business. We think that is the right decision today. But at some point, I don't know if it is this year, but at some point we may have to actually increase the dividend little bit more just to maintain our -- to meet the tax requirements.

All right, that is very helpful.

And following up on the last question, obviously at this point with the stock where its at, and the market's where its at, you are not going to issue equity other than probably what you do on the DRIP. What is the top end of the leverage ratio you feel comfortable with at this point?

We have always maintained our debt to EBITDA in the four to five times range. In our plan with $650 million of acquisitions we will continue to maintain it in that range. The question then becomes, are there opportunities that we find to support our tenants where we think it makes sense to go beyond that leverage point.

As a Board we have not made a decision about that, but it might become a discussion in June, if the world doesn't change. But as of now we continue to maintain four to five times debt to EBITDA as our principal metric.

Super.

And finally, obviously because of the compression and stock prices here, that is going to maybe have an impact on the acquisition environment down the road. Have you seen any change? I know it is early -- the decline in share price has only happened in the very near past, but have you seen any change in the acquisition environment given the change in capital conditions?

No, you said it. It's just too early to know.

I will tell you internally for us, our mindset has changed in terms of cap rates. It is not attractive to think about new deals. I'm not talking about the pipeline that we have coming because we're not going to re-trade our deals that we are negotiating today, but new deals are tough to think about.

Okay, very good, thanks a lot.

Thank you.

Tayo Okusanya of Jefferies.

Good morning everybody.

Just a couple of quick things. The $650 million of new investment in guidance. I just want to make sure I understand that number relative to 2015.

You have the $186 million of deals you did in 1Q in there, you have about $100 million of CapEx, as you mentioned earlier, in there. Is the balance really the development commitments you have of the 250 million bucks, or am I missing something?

The balance is acquisition activity that is in the pipeline, for the most part.

Okay. So what is this $250 million of development commitment that you have, that I think was mentioned earlier on?

Well a chunk of that -- a big chunk of that is 2nd Avenue, and as we mentioned earlier, shoveling the ground in Q3. It is not likely that a whole lot is going to be spent on 2nd Avenue this year. And then you have the weird timing related to the stuff coming out of the ground in Florida. It is hard to predict that.

I would say, as I mentioned earlier, the $100 million that we budgeted for CapEx, could easily be $150 million, and our total investments could be $700 million, but I would not get too caught up in that. You have $186 million we have $100 million budgeted in CapEx, so by definition, the Delta for us is acquisition activity.

Okay, that doesn't include any of the development activity, that's helpful.

In the development - because the timing is hard to predict.

How confident do you get with that number, because if I do an apples-to-apples comparison versus last year, it is a higher number versus last year. But you have a lower stock price today, and you still have a pretty aggressive acquisition market with extremely low cap rates on the assets that you target?

Our confidence level is based on the existing pipeline that we are negotiating right now. We feel pretty confident.

Okay. Are you comfortable with the idea of doing everything on the line and just waiting things out?

I think that is the way we have to do it. And seeing as an example, obviously Treasuries are way down, but spreads on bonds are way up. But you know, day-to-day, as we put stuff on the line, we will look at the bond market, and if there is an opportunity to do a seven or do an add-on to an existing bond, we will take advantage of it quickly.

As we think about the idea of you increasing leverage going forward versus utilizing your ATM to do deals on a leverage-neutral basis?

I think it goes back to a comment I made earlier, that the Board -- we have not made a decision as a Board to go beyond five times debt to EBITDA, and our existing plan does not take us beyond that. That being said, if we need to meet the needs of our tenant operators and their opportunities, I am sure there will be a Board-level discussion as to whether we move that metric to five and a half. That decision has not been made, and we're living within our budget today and I think that is really a discussion for our next call, in all likelihood.

If we think the market -- if the market is still as horrible, and our equity still trades where it trades today, I think that is a Board discussion of - if we want to meet our tenant operator's needs and their opportunities, maybe we slide beyond that. But I want to make it clear, that decision has not been made as a company today.

That's helpful. Last one for me -- there's been a lot of use of term loans of late. I was just wondering how you think about that as a source of capital versus doing more unsecured deals out there, given the asset liability match between the length of your leases and the duration of these shorter-term term loans?

While the term loans were unsecured, and at the time we were looking into them, the bond market did dry up. On a cost basis, they were much cheaper, from a rate standpoint to do the seven-year term loan versus the seven-year bond at the time.

Look from our perspective, it fits into the capital stack. They are not large maturities. They are easy for us to handle.

Obviously not our preferred piece of paper. We would rather go long, but given where the market was, and the pipeline we saw coming towards us - we wanted to go into 2016 with our line fully available.

Okay that is fair enough. Thank you very much.

Kevin Tyler, Green Street Advisors.

Thanks. Going back to CapEx for a second, I think there was about $16 million in true CapEx in the fourth quarter. If you analyze that pace, it seems like a very high run rate for a triple net owner, something like 10%-plus of NOI.

And then I think when you were just answering Tayo's question, you said $100 million was a guidance for 2016 on the CapEx front, which would be 20%-plus or -minus. How do you think about allocating these investments, and how should we think about a return profile on that spending?

All that CapEx has 9%-plus returns attached to it so we can -- Steve?

Kevin, as we've said on ongoing basis, our CapEx program is really a proactive way of helping our operators strategically reposition their assets to be market competitive. These are not deferred CapEx programs. Maintenance CapEx programs are funded by the operators and have been on an ongoing basis. So as the number gets larger, it's partly a by-product of the fact we've dedicated human resources in the organization to deploy capital.

I think over the long run we will end up with far better quality assets in a relative basis to our peer group. We have already seen the results of that, in the results of our -- financial results. So again, it is proactive, it is not a reactive part of the process.

Yes and frankly, we will spent as much we can in CapEx. That is a preferred use of capital from where we sit, because of the enhancement to the portfolio.

So you are thinking about more as redevelopment more than anything maintenance-related. Its all --

Yes a lot of that is newbuilds. You're not just talking about paint and powder, a lot of it is newbuilds.

Okay, that's helpful, thank you.

Tayler, you pointed out earlier in the call, the Medicaid revenue stream certainly seems to be more consistent as of late. But on the Medicare side, the more regionally-focused operators in your portfolio, do those folks become more of a focal point for -- or less of a focal point for private insurers as they seek out Medicare Advantage providers? So the smaller, are they less in focus for the Aetnas, the Humanas of the world, when they're looking to shift people over from Medicare to Medicare Advantage.

I don't think so. Well, I think you have to define the size of the operator. We have regional operators that are the biggest operators in the states they operate in. The CommuniCares of the world, Sabers, and Siena, they are dominating these markets, and typically you're looking at not even state markets. You are looking at the Cleveland market as an example and you have a big presence there, you are the folks that insurers are going to be talking to.

So we have to be a little careful to in terms of how you think about that versus the mom-and-pop that has five facilities. That is a little different gain. Maybe they don't get the attention of the hospitals, or the insurer, whomever is controlling the payment system.

But that is also the catalyst for what we've seen for a long time and I think we are going to see more of. Discontinued consolidation from the folks that can't fly.

Okay. That's helpful color. Thank you, appreciate the time.

Chad Vanacore, Stifel Nicolas.

Morning all. Genesis is your largest operator, but that is only 67% or so of revenues, and you don't have any exposure to ManorCare or Kindred. Are there any take-aways or differences from those public operators' performance that you think apply to the smaller, private operators in your portfolio?

Maybe the only take away would be that ManorCare as an example, we know for years, their focus was Medicare patients. They had an extreme focus on that, and obviously to the extent that payment stream changes, it affects them more than someone that has a little more balanced approach to the market. So there is a little bit of that, that is going to play through.

I don't think Genesis, it may not be as extreme as a ManorCare example, but Genesis is in urban markets, where there tends to be a little more push toward the Advantage plans. Our portfolio is spread out. We are in urban markets but it tends to be spread out among lots of different markets, so you don't see the impact quite as dramatically that they are seeing.

And I will say also, when you listen to George Hager, and he talks about the impact of an example of Medicare Advantage in the fourth quarter, it was $5 million of revenue on a $5 billion revenue portfolio. So 0.1% of his revenue was impacted from the census change that we see. When I think about that, and our coverages - that is the reason we look at coverage and say at 1.4 times, you have a lot of room.

All right thank you. Just thinking about the M&A market in the past six months. Have you seen any changes? I noticed that you pushed a few investments from the fourth quarter to the first quarter. Anything to take away from there?

No just really all about timing. Some of these deals just have taken longer to do. There are some the bigger deals are three-party deals so you have a seller, and then you bring in a separate tenant, and then us as the capital provider.

So they just become a little bit more complicated, then they take a little bit more time than one would hope. But as far as what today's market looks like, as Taylor said, it is a little early to predict.

Okay, thank you Dan, thank you all.

Thank you.

Eric Fleming, SunTrust.

Hello. Other than the six Genesis properties that you are talking about selling, are there any other divestiture expectations in 2016?

We have -- we are always looking at the portfolio. We're calling it to the extent that there are facilities that don't work for a given operator. So I think that is an ongoing thing that we look at. There will be more divestitures.

There will be more releasing activities. We have a handful of closed billings that we will be selling. So yes, that activity is ongoing.

It will be bigger than it has been in the past. But it is all part of our plan, and really most of it doesn't move the dial at all.

Okay. Thank you.

Follow-up from Juan Sanabria, Bank of America Merrill Lynch.

Hello. Thank you for taking the extra question. On acquisitions, what should we be thinking in terms of cap rates for the balance of what's left to meet your budget for the 650 [million] of acquisitions, and has your hurdle rate moved any higher? Are you trying to repress anything, given you're trading on an implied basis?

This is a great question. We won't retrade deals that we negotiate with our tenants. We just think that is the wrong thing to do.

You will see cap rates on stuff that is in the existing pipeline. They are still 8.5%. But to your point, as we think about new deals, they all start with a 9% or higher on the SNF side.

Okay. And what are you underwriting from a EBITDAR coverage on new transactions?

For SNFs, usually 1.35% 1.4% in terms of DAR coverage.

Yes. And then just back to the Medicare Advantage question, or topic -- do you have any sense of the percentage of revenues for Medicare Advantage comparing Genesis to the rest of the portfolio? And how that may be transitioned over time?

I don't have a very good sense. I will tell you that George Hager made some prepared comments at a conference a month ago, and he said that his Medicare census was divided two-thirds Part A, and one-third Advantage and other insurance-type products. That is a pretty good indicator. That is somebody who is fairly heavily weighted in that direction. I would say in general, our operators are probably less weighted than that.

Okay, great, thank you.

Michael Gorman, Cowen Group.

Thank you, good morning. Could you provide just a little more color on the six leases that were transitioned and were part of that provision for uncollectible during the quarter? What drove the change, and how maybe the new lease terms compared to the old lease terms?

Yes. What we had is -- we had what I'll term a mom-and-pop who just decided to effectively get out of the business, and sell their operations. We put them together with one of our existing operators who happened to be in that same state.

Really the transition did not change from an economic perspective. We just moved six buildings over from an operator who was really getting out of the business into an operator who is growing the business. The write-off was an accounting charge that associated with the straight-line rent.

From our perspective that was a good transition and a good deal and we got an operator that did not really want to be in the business anymore, and we got the facilities in the hands of an operator who did.

Okay and then just recognizing its a small sample size. I'm curious, did they provide any color on why they were looking to get out of the business? Were they operating closer to your average coverage ratios? Or were they a little more challenged?

I would say they were just ever so slightly -- they were below the 1.4, but they were certainly providing adequate coverage. It was just a matter of -- they were a smaller mom-and-pop operator who, when confronted with the changes, and the perception of changes in the industry, decided they did not want to be in it anymore. It is what has created an opportunity for us for 15 years.

A great example of what Dan is talking about with this operator specifically is, they installed all the equipment for electronic medical records but did not have the staff capability to train up the staff throughout their six facilities, so they were not using that. That is the mom-and-pop, who just did not have the skill set, and looked at that and said, I need to move along.

Okay, great. Thanks. And then on the acquisition side, we talked a little bit on the target coverage ratios when you underwrite the acquisitions. I'm curious, have you changed at all? What are you targeting for escalators, kind of on average, when you look at new acquisitions at this point?

2.5%.

2.5%, okay. And then --

That is consistent with the past. That is where we have been for a long time.

Okay great, and then just one last one. Understanding that you monitor the investments weekly to keep an eye on collectibles and things like that, do you have a set criteria, or a threshold, of something where it would trigger a reserve against the straight-line rent?

Or is that just a case-by-case basis depending on what you are seeing out of the operators? Or is it a coverage breakpoint, or how do you think about the straight-line receivables as you look at it from a week- to-week basis whether you reserve or don't reserve?

It is a case-by-case basis.

Step one, obviously is, you have rent that is not paid or is being delayed and you're looking back at the credit, and making a decision about the reasons why. And whether it is temporary or more potentially permanent. It just becomes a credit discussion.

It would be shocking for us to not receive a rent payment and have us otherwise not be paying very close attention to the operator. That's really never happened before.

We look first at the coverage, and then the underlying credit is sometimes equally important, and thirdly, what they are doing to rectify the situation. They do have coverage that is below 1 to 1 or its falling or trending downward.

Okay, great. Thanks.

Follow-up from Nick Yulico, UBS.

Hello. Good morning. Its actually Ross Nussbaum here, with Nick. Two questions, first just a clarification. In your guidance for 2016, I believe you said there is no capital transactions in there. Are you going to leave the DRIP program turned on, or are you going to shut that off at that current level,?

Right now we're going to leave it turned on.

Off?

On.

Okay, on. O-N?

Yes, on, sorry.

Can you maybe help me understand why is it appropriate to issue equity through the DRIP, but not in an equity offering to the market? What is the inherent difference between those two?

Well the DRIP plan, you want to go ahead and talk about this?

Yes, What we are talking about, leaving the DRIP on is, that really a dividend reinvestment, and that runs $5 million to $6 million a quarter. The part I think you are thinking, when we issue equity through it there is an optional cash component that we don't have on right now.

Got it. So it is just the dividend reinvestment at $5 million, $6 million a quarter you're leaving out? Okay.

Correct. Our view is turning that off, our shareholders have supported us for a long time. We turned it off once many years ago when our stock price, when our dividend yield was trading north of 10%. At some point the yield gets so high, you have to think about whether you want issuance through the DRIP, but to the extent that it is dividends being reinvested and our stockholders want that, its something that we prefer not to turn off.

Understood.

The second question is, if you turned the clock ahead a year, and I think about your EBITDAR rent coverage for your tenants, if I incorporate a tough December of last year, a couple headwinds on bundling and potential therapy reimbursement changes; if you just had to guess where we are a year from now, is your EBITDA rent coverage the same, higher or lower than it is today? And factoring in contractual rent agreements.

Our operators have been nimble and they have been able to maintain the 1.4. I think the answer to that, is we have not seen in our portfolio any indication that that 1.4 will not be sustained.

You have lots of moving parts in a portfolio as big as ours, so that does not mean that one operator goes up and the other one goes down, it is just driven by variety of issues. As we sit here today, we think the 1.4 that has been stable, probably remains stable for the near-term.

Okay. I guess you might understand that the market hears that and says, while in one hand, that is good. On the other hand, they look at Genesis, ManorCare, the stock prices, and they say - hmm, how is Omega doing so well when other big entities in industry just aren't? Right?

I think that is the big disconnect that maybe folks are struggling with today. Is there any --

Well, you know --

That is what I am struggling with a little, and I think that is what the market is trying to get its arms around.

You have ManorCare and Genesis, that are big entities that have had some issues, but Ensign isn't an inconsequential company, and they are seem to be handling this quite well. And they happen to be a modest tenant of ours.

Appreciate the thoughts. Thank you.

(Operator Instructions)

At this time it appears the we have no further questions. We will go ahead and conclude today's question and answer session.

I would now like to turn the conference back over to management for any closing remarks.

Thanks Mike, and thank you everyone for joining our call today.

And we thank you, sir and the rest of the management team also today. The conference call is now concluded. At the time you may disconnect your lines. Thank you, take care and have a great day everyone.