Omega Healthcare Investors Inc (OHI) 2016 Q4 法說會逐字稿

Good morning and welcome to the Omega Healthcare Investors fourth-quarter earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.

Thank you and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; 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 projections, 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 which may cause actual results to differ materially. Please see our press releases and filings with the Securities and Exchange Commission including, without limitation, our most recent report on Form 10-K which identifies specific factors that 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 measures 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 release issued today. I will now turn the call over to Taylor.

Thanks, Michelle, good morning and thanks for joining Omega's fourth quarter 2016 earnings conference call.

Adjusted FFO for the fourth quarter is $0.88 per share, funds available for distribution, FAD, for the quarter is $0.80 per share. Our full-year adjusted FFO of $3.41 represents a 10.9% increase over our 2015 adjusted FFO. In six out of the last seven years we've delivered double-digit adjusted FFO growth.

We increased our quarterly common dividend by $0.01 to $0.62 per share we have now increased the dividend 18 consecutive quarters. Dividend payout ratio remains very conservative at 70% of adjusted FFO and 78% of FAD.

Our fourth quarter adjusted FFO was above our guidance range as the sale of assets occurred later than expected while the closing of the LG joint venture occurred earlier than expected. Our adjusted FFO guidance for 2017 is $3.40 to $3.44 per share and our funds available for distribution FAD guidance is $3.10 to $3.14 per share. Our 2017 guidance excludes the impact of new investments beyond planned capital expenditure projects and reflects higher interest costs from converting our $250 million term debt from variable rate debt to fixed-rate debt and projected higher variable rates throughout 2017.

Notwithstanding our poor stock price performance, operationally, 2016 was a very successful year. We continue to reposition assets within the portfolio with asset sales and the transition of certain facilities to new operators. We sold 38 facilities with a realized gains of $50 million, basically offsetting impairments of $58 million. We have 20 assets held for sale year and expect these will be sold throughout 2017.

We invested over $1.3 billion and we raised $1.3 billion in new capital. Our balance sheet is particularly strong with annualized pro forma EBITDA in excess of $900 million. And a funded debt to EBITDA ratio of 4.7 times.

As I indicated in our press release we believe 2017 will be particularly challenging for the skilled nursing facility industry. The combination of labor cost pressures and [census] pressure will continue to challenge operators' net cash flow. In addition, and increasingly aggressive regulatory and Department of Justice environment continues to divert many management teams' attention away from patient care to deal with survey and legal issues not to mention the cost of defending and settling these issues. We will continue to work proactively with our operators to identify ways to maintain operating cash flow and manage through these issues.

Bob will now review our fourth-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $171.5 million or $0.84 per share for the quarter as compared to $127.4 million or $0.65 per share for the fourth quarter 2015. Our adjusted FFO was $180.4 million or $0.88 per share for the quarter and excludes the impact of $5.9 million in provisions for uncollectible mortgages, notes and straight-line receivables, $3.7 million of non-cash stock-based compensation expense and $650,000 of revenue recorded as a result of a legal settlement.

Operating revenue for the quarter was $234.5 million versus $210.5 million for the fourth quarter of 2015. The increase was primarily a result of incremental revenue from over $1.3 billion of new investments completed in 2016. The $234 million of revenue for the quarter includes approximately $18 million of non-cash revenue.

Our G&A was $7.5 million for the quarter and we project our 2017 quarterly G&A expense to be approximately $8 million to $9 million. In addition we expect our 2017 quarterly non-cash stock-based compensation expense to be approximately $3.7 million consistent with our fourth quarter of 2016.

In the fourth quarter we recorded $5.9 million in provisions for uncollectible mortgages, notes and straight-line receivables which primarily resulted from the write-down of an operator's notes to its fair value. Interest expense for the quarter when excluding non-cash deferred financing costs and refinancing costs was $44.4 million versus $38.6 million for the same period in 2015. The $5.8 million increase in interest expense resulted from higher debt balances associated with financings related to our 2016 investments.

As Taylor stated, we expect our 2017 quarterly interest expense to increase as a result of converting our $250 million term loan from a variable rate to a fixed rate on December 31, 2016 and overall higher projected LIBOR rates. For modeling purposes our guidance assumes 2017 interest expense will increase by $1.5 million to $2 million per quarter.

Turning to the balance sheet, during the quarter approximately $30 million of notes to operators were repaid. In addition, as Taylor mentioned, during quarter we sold 18 facilities for approximately $105 million recognizing a gain of slightly over $30 million. These facility sales and the repayment of the notes represented roughly $2.2 million of revenue or $0.01 per share of our fourth quarter adjusted AFFO. Our leverage remains exceptionally strong as does our balance sheet. For the three-month period ended December 31, 2016, our net debt to adjusted annualized EBITDA was 4.7 times and our fixed-charge coverage ratio was also 4.7 times.

I will now turn the call over to Dan.

Thanks, Bob, and good morning everyone.

At the conclusion of 2016, Omega had an operating asset portfolio of 981 facilities with approximately 99,000 operating beds. These facilities were spread across 79 third-party operators and located within 41 states and the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our portfolio dipped slightly during the third quarter of 2016 to 1.68 and 1.31 times, respectively, versus 1.72 and 1.34 times, respectively, for the trailing 12 month period ended June 30.

Our operator coverage has steadily declined throughout 2016 due to a number of factors including: increased labor costs, a dip in the overall quality mix as a percentage of revenue, which has been driven by continued pressure on the length of stay, and Omega's annual rent escalators which average over 2%. As Taylor mentioned we continue to work with our operators to provide support for the challenges currently facing our industry. Accordingly, during 2016 Omega repositioned a number of assets within our portfolio including a sale of 38 facilities and the re-leasing of eight additional facilities we expect to continue these reposition efforts throughout 2017.

In addition to our repositioning efforts Omega continues to support our existing operators with a strong capital investment program. In 2016 Omega funded $69 million of capital expenditures for the refurbishing or expansion of over 100 facilities. A large part of these CapEx dollars were spent to upgrade patient rooms, expand or improve therapy space, and refurbish common areas such as dining and activities rooms. Other projects involve the creation of specialty units such as memory care and short stay private suites.

Turning to new investments. During the fourth quarter 2016 Omega invested $50 million in a joint venture with Lindsay Goldberg to acquire 64 skilled nursing facilities for approximately $1.1 billion. The facilities were leased to affiliates of Genesis Healthcare, an existing Omega operator, pursuant to a 15 year master lease. The joint venture is 85% owned by affiliates of Lindsay Goldberg and 15% owned by Omega.

During the calendar that year ended 2016 Omega made new investments totaling approximately $1.3 billion including capital expenditures. As of today, Omega has $1.2 billion of combined cash and revolver availability to fund future investments and provide capital funds for existing tenant lease.

I will now turn the call over to Steven.

Thanks Dan and thanks to everyone on the line for joining today.

In conjunction with Maplewood Senior Living we finished abatement and commenced demolition on our planned 215,000 square foot ALF memory care high-rise at Second Ave and 93rd Street in Manhattan. The project is expected to cost approximately $250 million and is scheduled to open in the first half of 2019.

Our commitment to reinvest in our assets continue. Not only did we invest $40 million in fourth quarter in new construction and strategic reinvestment, we currently have over 90 active capital reinvestment projects at the end of Q4. Fourteen of these projects represent new construction with a total budget of approximately $490 million inclusive of Manhattan and are actively being funded. We have $191.3 million of construction and process on our balance sheet as of December 31, 2016. The remaining projects that aren't new builds encompass $163 million of committed capital, $107.5 million of which is been funded through the end of fourth quarter.

Our reinvestment strategy prioritizes the allocation of capital to those facilities that are not only in markets that present the highest potential for success but also leased to those operators best suited to succeed in the evolving marketplace. The $50 million joint venture investment, Dan mentioned earlier, allows us to leverage off of our relationship with trusted past partners not unlike our overall operator strategy. This relationship allowed us to invest in a high-quality portfolio at a 9.5% yield in addition to the asset management fees we will receive. Strategically it would not make sense for us to own this portfolio in its entirety today but through the JV structure we created path ownership should make sense of the future.

Thanks Steven. We will now open the call for questions.

(Operator Instructions)

Omotayo Okusanya, Jefferies.

Good morning, everyone. Can you hear me?

Yes, Tayo. Good morning.

Excellent. Congrats on the quarter and the good guidance. A couple of questions from me. First of all, Taylor, in your comments you mentioned -- I think everyone is aware of how soft it is for SNF operators out there, but one of the factors you mentioned was a more aggressive Department of Justice. Could you talk a little bit more about what you meant there and if any of your tenants are under any kind of DOJ investigation?

Sure. As most folks on the call are aware, the DOJ has investigated a number of the very, very big nursing home chains. And recently we've started to see a couple of our regional operators have requests for information from the DOJ. So it looks like there is a bit of an expansion beyond those very large operators into some of the regional operators. So we've got two or three that have had requests for information in our dealing with that. We will see where it falls.

And is it under request for information, is this around more around Medicare billing or anything like that? (Multiple speakers)

It's Medicare, but it's similar to what Genesis faced, and extended care faced, and [Medicare] is facing. It's Medicare billing where they take a look at something and they extrapolate it across a population. If there is a settlement, you end up with a corporate integrity agreement and compliance and that sort of thing. None of it is solidified to a number but we're now seeing it for the first time where they're reaching into smaller operators' portfolios.

Okay. That's helpful. Number two, any sense of if the new Secretary of Health, his views toward current CMS Actions around bundling. There some thought that maybe he will try to slow the process down. I'm just curious on what you guys think about what he could or could not potentially do.

I think frankly it's so early in the game to know. I agree with you, there's some commentary around slowing the mandatory bundles down. And, in general, Mr. Price has been -- has had favorable commentary around this industry but it's too early to know.

I will just add that generally our operators overall think highly of him, think that's a good fit.

Great. Okay, that's helpful. Last one for me, just your acquisition outlook, you definitely have the capacity on your line but again with a soft part not doing as well as I think most would have hoped, have you guys heard anything about funding deals in 2017, and your sense of what's happening with cap rates at this point in the market?

We are pricing in the mid-9%s from a yield perspective. That's where we bid deals. I want to be clear, there's activity in the market and we basically see everything. When we talk about our pipeline, we typically are talking about actionable deals and there's not a lot of that from our perspective today. But, there's certainly a lot of products out there.

So we will continue to look and if it meets our criteria we can get a deal done in the 9%s, from a yield perspective, we will pursue it. And one thing that we've talked about in the past when we haven't given yield guidance is to give some guidance of what yields mean in terms of accretion. So, from our perspective, every $100 million of deal-flow activity is worth about $0.015 of accretion on a go-forward basis. Just a little commentary around what's out there and how we think about it. I think we will see activity in our tenant base pick up after the first quarter.

Great. And is it pricing that is holding you back right now or really more just portfolio quality in regards to what you're seeing out there?

I don't think it's pricing as much as our interest in the type of things that are out there today.

Great. All right. I'll yield the floor. Thank you.

Juan Sanabria, Bank of America.

Good morning. Taylor, I was hoping you could speak to your expectations for EBITDAR rent coverage levels given the pressures you talked about with labor, DOJ investigation costs, et cetera. Any thoughts on where that may trend?

I think similar to our last-quarter call where we talked about flat is probably good. And it wouldn't surprise us to continue to see a very slow drop in coverage that we've seen. We had the 3 bps from 134 to 131. Over the next few quarters, could that go into the high 120s? I think that certainly possible. I wouldn't expect it to go up.

Okay. And then, a lot of these pressures have been around and you guys have not been as vocal in terms of the negative risks to this to the operators. What changed for you to flag this -- these risks now at this point so prominently? Should we expect the fourth quarter to be incrementally more challenging than what we saw in the third quarter? And what changed and how are guys thinking about the fourth quarter and into the first quarter?

I think the primary change -- and it hasn't been terribly sudden, it was throughout most of 2016 and you've seen our coverage ratios drop measurably -- has been just the tightening of the labor market. The nurses -- there is a shortage of nurses in this country. There is a shortage of nurses virtually everywhere in the world right now, but in this country it's pretty acute and it has been getting worse. And it just makes it that much harder. You have to go into overtime, you have to use outside nursing if you get callouts or whatnot. Over the course of the year, that has gone from being the challenge to being a pretty big issue and it's really hitting the expense line.

I think that's the big overall occurrence that happened in 2016. You have all these moving parts relating to a new revenue model out there. I don't think that's had a significant impact on us. We've seen, as I indicated, a shortening of the length of stay, that's just pressures from the different HMOs and payer sources. And we've seen that go down, and because of that we've seen a slight reduction in our quality mix. But it wasn't that significant. And then, if you look at occupancy, which is the other big driver, it's been virtually flat for the last three, four, five quarters. So there hasn't been anything terribly different but labor is a big component -- obviously it's the biggest component of any nursing facility's expense items.

Okay, great. Last one for me, have you had any discussions with Signature, one of your larger tenants, about any rent relief or rent cuts?

We've had ongoing conversations with Signature but we've had no conversations about any rent relief or rent cuts. We've had conversations with -- and I really hate to highlight individual names, but with Signature and with a lot of our other operators, quite frankly, about what can we do -- we talked about repositioning of our portfolio, what can we do to help them and whether it involves perhaps the sale of a few buildings that don't otherwise fit into their markets or their portfolio to a third party. If it involves the releasing of some of their facilities to another party, maybe even a closure of a building in the worst-case scenario. Those are the type of things that we're talking about with Signature and with a couple of other operators quite frankly. And that's what we will continue to do in 2017.

Thank you.

Thanks Juan.

Chad Vanacore, Stifel.

Good morning, all. You've covered the big questions a little bit, on investment portfolio coverage and then some challenges. I actually want to go a little bit deeper into those. Typically you give investment guidance now, how should we think about what Omega could do, and go a little deeper into how you're thinking about the market.

Sure. And just to be clear, historically we never gave guidance. But we felt with the Aviv merger we had to give guidance because that was a big part of the strategy of the merger was being able to deliver on deals. And last year we gave guidance because we had a number of deals we knew were going to -- were highly likely to close. For us, we're back to what we've done historically because, as everyone knows, it's a very choppy. That being said, we have the engine to deliver the type of investment volume that we did last year, $1.3 billion plus another billion in the JV that we had to underwrite and close, even though they're just a 15% partner. So we have the capacity to do $2 billion plus worth of deals the year. I think it really just comes down to what type of product are we presented with -- and as I mentioned earlier we haven't seen a lot that's out the market today that we're interested in, and we see everything -- but will that type of product start to come out Q1, Q2. Our view is it will and to the extent it meets our criteria we will close it.

So it's really not a question of balance sheet capacity or people capacity, it's just a question of will the product come out to the market that we like, and I think it will. It's just timing and ultimate volume is the question.

Taylor, do you think it -- is it more a matter of pricing or more a matter of operating and covering and underwriting? What do you think the -- why pullback now?

We haven't pulled back as much as we just haven't seen product that we like.

And quite frankly that our operators like -- in this day and age it's not so much about doing these gigantic acquisitions that cover a lot of geographic ground but the back fill in given markets for our operators. So it could just involve a small portfolio of tuck-ins in any given market and that's the kind of stuff we're really trying to root out and that our operators are looking to do. So it's not these massive portfolio deals, most of our operators at this point have pulled back from looking at those. They're more looking to fill in their market space.

But to your point, we've seen fill-ins and last year we did a couple quote-unquote fill-ins that were $200 million transactions.

All right. And then, thinking about the challenges you have, line labor costs, census decline, and administrative costs, and probably expect portfolio coverage to slip a bit. What can you do from here to mitigate the risk whether that be underwriting new deals or changing the deal structure that they have in place. Anything you could do?

I think it's just we continue to be proactive with managing the portfolio and, frankly, the one thing that we haven't talked about on this call -- what we've talked about in the past is it's really getting from here to there in terms of the demographic wave that's coming. 2017, I think, is going to be a tough year. But, we roll into 2018 and 2019, we will see the demographics that everybody knows are out there. So that's really the driver. A 1% change in census is really dramatic for some of these bigger operators in terms of cash flow. And I think we will see that turn, it's just 18 months from now.

Okay. And then, thinking about what you have done so far, it looks like you pared down the number of operators over the last couple quarters. Can you talk about what you're thinking there and what the plans are?

I would expect that operator number will be in the 70s. We will pare down a couple more. That's typically as a cooperative thing where we know we're not going to grow with some smaller operators and there are exits that make sense for both parties and we will take advantage of that. We will continue to pare down the portfolio and focus on the guys that we want to be with to grow.

Thanks for taking the questions.

Thanks, Chad.

John Roberts, Hilliard Lyons.

Good morning. Most of my questions have been answered but I just want to get a little more rationalization of the -- your guidance. If you look at Q4, annualize that you're at 352; back of the envelope you got $0.04 in dilution from the sales you made, another $0.03 and higher debt costs, that brings you down to about -- in the 345 area; you add in a 2% bump, rental bumps, and the various acquisitions -- various investments you make during the year, and it comes to probably somewhere in the 348 range, 347, 348. What else are you looking at negative in 2017 that is not reflected there?

There are a couple things. One is, the rent bumps are already taken into adjusted FFO because of straight-line accounting. So if you look at our FAD per share, that actually goes up year over year, which reflects some of the things you talked about. No straight line, that sort of thing. The other thing is, we've modeled in, for our variable-rate debt, increasing interest rates throughout this year.

That's about $0.03, right, you said about $1.5 million a quarter?

$1.5 million to $2.5 million a quarter.

So it might to $0.04 a share.

And then, we also gave guidance on G&A also increases.

Okay.

Versus the fourth quarter. Historically the fourth quarter is our lowest quarter and historically first quarter is our highest quarter in G&A.

That's more color. Maybe go a little more, what's your shadow pipeline? What are you looking at right now in the pipeline? What are you evaluating? A dollar amount, any thoughts on that.

At any point in time we will be looking at $500 million to $1 billion worth of deals. But, we talk about our pipeline, we think about what gets to the actionable and that's pretty limited today. But -- the point is we look at -- we see everything. There's a couple billion dollars' worth of stuff floating out in the market.

To emphasize something Dan had said earlier part of the challenge that we always face is it's not just pricing in underwriting, it's do you have the operator to couple with the assets we have confidence can execute the business plan. So, a lot of these portfolios are large and perhaps underwrite-able from a numbers standpoint, but if you don't believe the operator is coming along with it can execute, it's not something you want to be involved with.

Right. Okay, thanks.

Thank you.

Michael Knott, Green Street Advisors.

Good morning, guys. Just on coverage, just to touch on that again. Taylor, it seems like you're suggesting that maybe we will get down to the high 1.2 range but maybe not much lower than that. Hoping you can help me understand how it might not be worse than that just based on the roughly 10 bps of decline we've seen in the last several quarters.

I think part of it is that the decline hasn't been at the revenue line. Our operators have managed to maintain relatively flat census. So that's an important component. And then you look at the expense side of the equation and it's tough to predict labor but there's nobody in our group of operators saying labor is going to be a 5% component of the increase. But it's continued to put pressure on us. So as long as census continues to hold up, and we think it should, then it's really managing the expense side of the equation. And these guys are pretty effective at it but that's not to say that labor is not going to continue to pressure them throughout the year.

Michael, at a very macro-level, though, in increasing cost environment, the reimbursement systems, whether it's Medicare or the state Medicaid programs, are inherently lagging the market. In decreasing cost environments, they're also lagging the market but the operators get the benefit of it. So I think part of what you are going to see in the stabilization will be the per-unit revenues catching up, but that takes time.

Okay. So are we suggesting that the bottom, so to speak, in coverage, will be in 2017 or do you feel like this is potentially a multi-year trend, particularly if you make the argument that the change to some of these new revenue models could have some impact as it bleeds in over time in a very slow way.

I think it's just a question of when the demographics kick in to drive census. So could the bottom be 2017, sure. It certainly will be some time in 2018. From the way we look at the world today.

Okay. That's helpful. Thanks. And then, can you talk about on the investment side, I think on the last call you talked about maybe trying to get some traction with moving your yield hurdle up to10% on new deals, and today it sounded like mid-9%s. I'm just curious if you could give us some color on how you're thinking about that or are you strictly in the mid-9%s today or are you looking at 10% in some cases?

Yes, it's 9.5% to 10%. It's going to depend on the actual facility and how it underwrites. But 9.5% to 10% is our range.

Okay, that's helpful. And then, just in terms of market coverage levels just given the slippage in coverage that we've seen, just curious your thoughts and when your underwriting new deals it seems like market convention is still [1.35 to 1.4] coverage on EBITDAR. Just curious if you're thinking about if you need more coverage than that on new deals?

I think it still is really leaning more towards [1.4]. That's where we've been looking at for the last couple years now.

Okay. Maybe just last one for me, Bob, can you talk about since you gave quite a bit of color on interest expense in terms of 2017 guidance, can you give us some thoughts on where you're -- where you see your debt costs today on an unsecured basis versus maybe HUD financing and how you think about using those two different levers?

We've only ever used HUD financing as a -- basically being an assumption of the debt via an acquisition. So really it's not -- that's not a component on a go-forward basis unless we are assuming it via acquisition. But from a debt standpoint if we went out today, 10-year, the treasury is, what 2.50 -- 2.30, 2.50 so we would be at roughly 4.75 to 4 7/8 range for a 10-year, all in.

Okay. Thanks for that.

Michael Gorman, BTIG.

Good morning. Just a quick follow-up on the underwriting of new investment opportunities, given some of the commentary about working with existing tenants have you changed the average rent escalators that you're considering when you underwrite a new deal, what you would be able to achieve from that average 2% I think Dan talked about?

We've always looked at the escalator between 2% to 2.5%. And our current average is slightly above 2%. That philosophy hasn't changed.

Okay, great. And just given some of the stresses on the operators right now, Bob, there hasn't been any change in terms of reserving against any straight-line receivables or anything, correct?

No. No changes at all.

Okay. Great. Thank you.

Nick Yulico, UBS.

Thanks. First question, I wanted to go back to when you talked about the two or three operators that got some request for information from DOJ. Are any of these on your top 10 operator list?

They are. Yes.

Can you quantify then, not saying we need names, but maybe from a percentage of revenue basis, for these operators, what is the percentage of revenue and the current coverage for these operators?

They are within the top 10 and it's spread out. The coverages -- the coverages are top 10 coverages, they all perform well.

Keep in mind, these are requests for information --

Its clear, but if they're in your top 10 operator list presumably you have to put something about this in your 10-K filing, so I'm wondering if you can give us this information now or if we need to wait for the 10-K filings to understand what the ultimate exposure is here?

It won't be in the 10-K. Until there's any views to what the potential liability is, and then you have to look and say does it even affect us from a rental perspective. The more important point is, it's just another -- you have management now focused on not running the business but dealing with other issues. Marketplace is difficult. These are troubling, a little bit from a balance sheet perspective but more just having management focused on other things. And, frankly, if you get to a settlement with Department of Justice, it comes along with a corporate integrity agreement that costs money. So it's money and time and effort away from running the business that's the troubling part for us.

I understand all that, but if these are two -- and it's not clear if you said it was two or three, or what is the number? Of operators?

You've got two top tens.

Two top tens. Okay, so ultimately you're talking about at least 10% of your revenue. I guess I'm just wondering how this is not something that would be viewed as a material event since we know that for other companies that disclose a large operator who's under potential DOJ investigation, it's perhaps -- it seems like this would be across the materiality threshold. I'm a bit confused as to why this would not be considered --

How do you define materiality? Right now, all they've asked for is information. How do you put a number on it?

Okay. So I guess going back to the idea that your operators may face some more strain, if we go to your tenant buckets and the 27% of your rent where coverage is below 1.2, are you having conversations with these operators about rent relief or lower escalators?

No and no. I think I went through in some detail what we are going through with these operators, which is how do we call or reposition some of the assets within their portfolios, which in effect has the effect of reducing rent to some degree and to the extent that you sell off one of their buildings and you provide them with a rent cut that's equal to the amount of the sale proceeds times some cap rate, call it 9%. So in that way, yes, they would get a rent haircut and it does ultimately benefit them. And it takes away some of their time that they're focused on facilities that might otherwise be taking up an undue amount of their time. So, we are having those conversations. That's constantly --

Going back to the guidance for this year, does your guidance assume any rent relief or additional provisions for uncollectible mortgages, notes, and straight-line receivables?

No.

Okay. Just last question is on the charge you did take in the fourth quarter, roughly a $6 million writedown, you said it was mostly related to the Aviv note. It looks like that was about a $19 million balance on that note, which would mean this was about a 30% writedown. Is that math right and what drove that?

That's not correct. We wrote that thing down by about 70%, there's virtually nothing left.

I guess I'm confused because the -- you brought over $19 million fair value balance on Aviv note, and so --

Where are you [getting that from]?

That's in your 10-Q filing from last quarter.

We brought over a lot of balances from Aviv. This is just one note, the Aviv had several notes.

Okay. I'm sorry, what did you say the percentage writedown was?

Roughly 70%.

70%?

Roughly 70%.

Okay. Last question then is if we go back to your $640 million of mortgage receivables on your balance sheet, another $280 million of other investments which is various forms of mezzanine loans, working capital loans, what is -- and there's quite honestly not a lot of detail given on the specifics of some of these investments, what is the comfort level we should have that you are not going to take a meaningful writedown on this loan book?

The bulk of the mortgage debt, we've talked about in the past is mortgage versus a lease but the underwriting and the credit is the same as our lease. So it's a little bit of semantics there. On the mez debt, it's all been underwritten at very high coverage ratios so we're very comfortable with the collectibility of that. I think we have to be a little bit careful where you have legacy notes that when we did our merger with Aviv we knew there could be some trouble attached to them, and there are a handful of them. And one, persistently since we did the merger we've been dealing with. We thought we could work it out, we are unable to do it. We took the write-off. We don't have anything else like that in the portfolio that was a legacy of the Aviv merger. Everything else we've underwritten under our normal criteria just like we would do a lease.

Okay. Thanks, everyone.

Thank you.

Eric Fleming, SunTrust.

Most of the questions I had were answered. But this one, is just on the guidance, the legal sentiments, the $0.05 per share on the AFFO calculations, how does that -- can you remind me how that's going to roll in the [cost of quarters], is that just one quarter hit or is that going to roll across here?

It's one quarter, but that's actually an income pickup, one time that we reverse out for adjusted FFO. We're not going to take it through our numbers and say this is some recurring item. It's an income pickup, first quarter, through FFO. We will adjust FFO down to adjusted FFO because it's a one-time pickup.

But you're saying it's in one quarter of 2017?

It's in first quarter. We put it in active guidance because we knew it. It's done.

Okay. That's all. Thanks.

Thanks.

Omotayo Okusanya, Jefferies.

Steven, do you want to move onto the next one? We can always catch up with Tayo.

(Operator Instructions)

At this time, it appears we have no more questions, so this concludes our question-and-answer session. I would like to turn the conference back to Taylor Pickett for any closing remarks.

Thanks, Steven. And thank you all for joining this morning's call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.