Omega Healthcare Investors Inc (OHI) 2017 Q2 法說會逐字稿

Good day, and welcome to the Omega Healthcare Investors Second Quarter 2017 Earnings Conference Call. (Operator Instructions) And please note, this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.

Good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; Chief Corporate Development Officer, Steven Insoft; and SVP Operations, Jeff Marshall.

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 restructurings, 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 our 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 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 release issued today. I will now turn the call over to Taylor.

Thanks, Michele. Good morning, and thank you for joining Omega's Second Quarter 2017 Earnings Conference Call.

Adjusted FFO for the quarter is $0.87 per share. Funds available for distribution, FAD, for the quarter is $0.78 per share. We increased our quarterly common dividend by $0.01 to $0.64 per share. We've now increased the dividend by 20 consecutive quarters. The dividend payout ratio remains very conservative at 74% of adjusted FFO and 82% of FAD.

We increased the low end of our 2017 adjusted FFO guidance range by $0.02. The new range is $3.42 to $3.44 per share, which reflects our $219 million of new investments, including capital expenditures completed year-to-date, the issuance of $700 million sub-5% long-term debt, repayment of our last high-yield bonds and a new 5-year credit facility including extensions.

Our operators continue to successfully manage through labor and census challenges. Occupancy increased slightly while EBITDAR-to-rent coverage was flat.

Turning to the Department of Justice investigations. Three top 10 operators are responding to information requests made by the DoJ. One top 10 operator is in ongoing discussions with the DoJ with respect to potential settlement. At this time, it is too early to determine the outcome of this operator's settlement discussions or any of the other DoJ inquiries.

Later in the call, Dan will discuss the status of 2 large operators that have fallen behind on rent payments. One important item to note is that neither one of these operators is experiencing any unusual impact from the industry challenges, labor, reductions in length of stays and rate pressures. Rather, both operators are experiencing other issues as a result of management changes, portfolio changes and the litigation environment in Kentucky.

We continue to strengthen the balance sheet with no debt maturities until 2022, variable rate debt at less than 1x EBITDA and over $1.1 billion in liquidity. Our superior balance sheet strength provides us with ample room to capitalize on opportunities in the skilled nursing facility industry and navigate through some of the challenges that individual operators will face.

We believe that some of the negative news regarding the reliability of our future rents and the ability to continue to deliver dividend growth to our shareholders significantly overstate the issues that our operators are managing through today and ignores the enormous demographic wave of aging seniors that will have greatly expanded health care needs over the next 5 years.

Bob will now review our second quarter financial results.

Thank you, Taylor, and good morning.

Our reportable FFO on a diluted basis was $151 million or $0.73 per share for the quarter as compared to $172 million or $0.87 per share for the second quarter of 2016. Our adjusted FFO was $179 million or $0.87 per share for the quarter and excludes the impact of $23.5 million in interest refinancing cost, $3.7 million of noncash stock-based compensation expense, $2.7 million in provision for uncollectible accounts and $1.9 million of onetime revenue.

Operating revenue for the quarter was $236 million versus $229 million for the second quarter of 2016. The increase was primarily a result of incremental revenue from over $600 million of new investments, net of asset sales, completed since the second quarter of 2016. The $236 million of revenue for the quarter includes approximately $18 million of noncash revenue and $1.9 million of onetime revenue related to operator earn-outs that did not happen.

Our G&A expense was $7.8 million for the quarter, and it is in line with our 2017 expense guidance of $8 million to $9 million per quarter. In addition, we expect our quarterly noncash stock-based compensation expense to be approximately $3.8 million.

As Taylor stated in our first quarter earnings call, we continue to work with our operators to identify opportunities to improve portfolios via asset repositioning, including sales and asset transfers. As a result, in the second quarter, we recorded $10.1 million in real estate impairments to reduce 6 additional facilities to their estimated selling price.

Interest expense for the quarter, when excluding noncash deferred financing cost and refinancing costs was $48 million versus $40 million for the same period in 2016. The $8 million increase in interest expense resulted from higher debt balances associated with financings related to our 2016 and '17 investments and a higher blended cost of debt, primarily a result of issuing $700 million of new bonds in Q2, converting our $250 million term loan from floating to fixed rate in December 31, 2016, and overall higher LIBOR rates.

Turning to the balance sheet, during the quarter, we sold 8 facilities for approximately $46 million, recognizing a loss of slightly under $1 million. We recorded approximately $600,000 in Q2 revenue related to these 8 facilities. Five of the 8 facilities were classified as investments in direct financing leases and 2 as held-for-sale at March 31, 2017. At June 30, we had 7 facilities valued at $19 million classified as held-for-sale.

In April, we completed the issuance of $700 million of new bonds by issuing $550 million 4.75% notes due 2028 and adding $150 million to our existing $250 million 4.5% notes due 2025, making that issue index-eligible. Proceeds from the bond deal were used to redeem our $400 million 5.875% notes due 2024, repay a $200 million term loan and the balance to repay credit facility borrowings.

In May, we terminated our then-existing, $1.25 billion credit facility and repaid $550 million in term loans, while simultaneously entering into a new $1.25 billion 4-year credit facility, a $425 million 5-year term loan and a GBP 100 million 5-year British Pound Sterling term loan. For the 3-month period ended June 30, 2017, we incurred approximately $23.5 million in interest refinancing expense related to the redemption of our $400 million bonds and the termination of the credit facility and term loans.

Our balance sheet remains exceptionally strong for the 3-month period ended June 30, 2017. Our net debt to adjusted pro forma annualized EBITDA was 4.77x and our fixed charge coverage ratio was 4.3x.

I will now turn the call to Jeff.

Thanks, Bob, and good morning, everyone.

The Republican-controlled Congress and the new CMS administration have actively engaged in legislative or regulatory reform measures affecting the SNF industry over the past few months, continuing an unprecedented pace of industry reform that we briefly summarized on last quarter's earnings call. This update focuses on legislative and regulatory reform activities since that call.

On the legislative front, congressional efforts to repeal and replace the Affordable Care Act or Obamacare have included several items that would significantly impact SNFs. However, despite passage on May 4, by the House of Representatives of its repeal and replace bill, called the American Healthcare Act or AHCA, the Senate's move to craft its own repeal and replace legislation, called the Better Care Reconciliation act, failed last week for lack of unified Republican support -- in large part because of opposition to the proposed draconian cuts to federal Medicaid funding growth that would've adversely affected SNF Medicaid rates in future years. Such opposition was heavily influenced by active lobbying from both SNF providers and the American Healthcare Association.

The Senate is now debating potential amendments to the AHCA, which may or may not impact Medicaid with a conference reconciliation process likely for any bill that might pass. The House AHCA bill contains provisions that would significantly alter federal funding of state Medicaid programs from its current unlimited matching methodology to a capped per capita methodology that would improve current Medicare funding for the long term care population. Opposition from Senate Republican moderates to any amendment that reduces Medicaid funding appears strong enough to kill any such measure.

In other legislation the House passed, in late June, an industry-friendly federal tort reform law that would cap noneconomic damages at $250,000. However, due to objections based on states' rights, the bill is expected to fail in the Senate.

On the regulatory front, CMS has continued its trend toward more favorable industry measures with its announcement on July 7 of revised and less onerous policies for assessment of civil monetary penalties related to compliance survey deficiencies, a move influenced by meetings with industry advocates.

Additionally, CMS moved to eliminate its previously proposed ban on SNF arbitration agreements that had been temporarily halted with a federal court injunction initiated by the American Healthcare Association. Further, CMS delayed for 1 year the imposition of any fines for failure to implement Phase II of the new requirements for participation scheduled for implementation in November 2017, signaling CMS's willingness to consider further reductions in the regulatory burdens created by the new requirements.

Finally, CMS has extended the comment period to August 26, 2017, for its new budget-neutral resident characteristic system that would replace the current prospective payment system for SNF Medicare patients, allowing more time for provider groups to assess and comment on this significant proposed payment change that will likely take effect in October 2018. While engaging in these favorable steps, CMS has also stated its intent to continue the push toward more value-based payment initiatives, though at a somewhat slower pace to allow the industry time to absorb the related changes.

In conclusion, we are very encouraged that congressional legislation adversely impacting federal Medicaid funding will fail, reflecting the SNF industry's influential advocacy efforts, and that regulatory reform efforts to date under the new CMS administration have been quite positive.

I will now turn the call over to Dan.

Thanks, Jeff, and good morning, everyone.

As of June 30, 2017, Omega had an operating asset portfolio of 986 facilities with approximately 99,000 operating beds. These facilities were spread across 77 third-party operators and located within 41 states and the United Kingdom.

Trailing 12-month operator EBITDARM and EBITDAR coverage for our portfolio remained stable during the first quarter of 2017 at 1.69x and 1.33x respectively versus 1.69x and 1.33x respectively for the trailing 12-month period ended December 31, 2016. Both periods represent a slight uptick over trailing 12-month results for the third quarter ended September 30, 2016. While we are cautiously optimistic that portfolio-wide coverages have stabilized, we continue to see certain regional operators struggle with various operational pressures, including a tightened labor market, length of stay compression and an increase in PL/GL claims.

2 of our top 10 private operators, in particular, have seen margins and coverages decline and, as a result, created liquidity concerns. The first of these private operators and one which we discussed on our last earnings call, has continued to experience the quarterly pressures despite finally showing signs of operations improvements. Coverage for the trailing 12-months ended March 31, 2017, remains slightly below 1x. However, results for the standalone first quarter was 1.12x and year-to-date results through May remain consistent.

Efforts to manage through these operational pressures have included the following initiatives: replacing the entire executive management team, including a very recent and significant downsizing of both corporate and regional staff; establishing a new disciplined corporate culture, which involved replacing the majority of facility level management; rebranding its corporate identity; revising its mission statement; and implementing new business practices; negotiating numerous vendor contracts; and lastly, establishing a centralized referral network.

Additionally, Omega has helped concentrate this operator's geographic footprint by selling off 6 of its 7 Northwest facilities to third-party operators. One remaining facility in the Northwest is expected to be sold on August 1, pending regulatory approval. Omega has also transitioned this operator's entire Texas region, which consisted of 9 facilities, to another existing Omega tenant.

We are cautiously optimistic that the combination of these efforts will result in steadily improving margins and eventually return to its former profitability. However, in the meantime, our past due rent has reached nearly 90 days in arrears. As such, any further deterioration and/or the failure of the tenant to achieve its budgeted plan may result in cash basis accounting and a potential review of the value of these capital lease assets.

The second of the aforementioned top 10 private operators, while experiencing modest labor and census issues, has had the added challenges of a recent slew of PL/GL claims, particularly in Kentucky, an OIG DoJ investigation that has resulted in ongoing settlement discussions and ongoing restructure discussions with its working capital lender and another sizeable landlord.

While Omega has reached a tentative amicable restructure plan with this tenant, the ultimate successful resolution with these other constituents will possibly be necessary to conclude a successful out-of-court settlement.

It is important to note that Omega's specific stand-alone portfolio, while down from its historical performance, continues to produce coverage levels only slightly below Omega's overall portfolio mean. In addition, Omega has considerable security deposits and significant personal guarantees to support what we believe are short-term liquidity issues. As of today, this operator is currently nearing 90 days past due without the application of its security deposit, which, in conjunction with our personal guarantees, more than covers the entire past due balance.

Overall, while the ultimate outcome of these 2 portfolio issues could potentially cause a continuing but temporary interruption of current rent and prompt further discussions, we remain confident in both current management teams' expertise. Furthermore, we are confident that the physical assets themselves and strong markets within which they are located provide comfort in the long-term longevity and future success of these facilities.

Lastly, we continue to work with all of our operators to provide support for the challenges currently facing the industry. Accordingly, Omega has repositioned a number of assets within our portfolio, including the sale of 23 facilities through year-to-date ended June 30, 2017, the subsequent sale of 1 additional facility in the third quarter of 2017 and the closing of 2 additional facilities. We expect to continue these repositioning efforts throughout 2017.

Turning to new investments. During the second quarter of 2017, Omega completed 3 investments totaling $133 million plus an additional $48 million of capital expenditures. As previously announced, the first of these transactions was a $113 million purchase leaseback for 18 U.K. care homes in greater London and Birmingham. These facilities were leased back to Gold Care Homes, a new Omega tenant, pursuant to a new 12-year master lease agreement with an initial cash yield of 8.5% and annual escalators of 2.5%. This transaction establishes Omega's second operator in the U.K. and similar to Healthcare Homes, Omega's first U.K. operator, Gold Care Homes has a highly experienced management team with strong aspirations to grow.

Omega's holding in the U.K. now consists of 53 care homes across Central London and the Southern and Eastern regions of England. In addition, during the second quarter, Omega completed an $8.6 million purchase lease transaction for 1 skilled nursing facility in North Carolina with an existing operator and provided $11 million in mortgage financing for 3 facilities in Michigan to an existing Omega operator. As of today, Omega has approximately $1.1 billion of combined cash and revolver availability to fund future investments and provide capital funds to our existing tenant base.

I will now turn the call over to Steven.

Thanks, Dan, and thanks to everyone online for joining today.

In conjunction with Maplewood Senior Living, we started foundation work on our planned 215,000 square-foot ALF memory care high rise at Second Avenue and 93rd street Manhattan. The project is expected to cost approximately $250 million and is scheduled to open in mid-2019. We are very pleased with the progress of the New York City project. Including the land and CIP of our New York City project, at the end of the second quarter, Omega Senior Housing portfolio totaled $1.45 billion of investment on our balance sheet.

While anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties as well as Healthcare Homes and Gold Care in the U.K., our overall senior housing investment now comprises 128 assisted living, independent living and memory care assets in U.S. and U.K. On a stand-alone basis, this portfolio not only covers its lease obligations at approximately 1.2x but also represents one of the larger senior housing portfolios amongst the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 12 Maplewood facilities, and the related pipeline is predicated on coupling our tenants' operating capabilities with our commitment to having in-house design and construction expertise. Through this same capability, we invested $47.7 million in the second quarter in new construction and strategic reinvestment.

We currently have over 85 active capital reinvestment projects at the end of Q2. 14 of these projects represent new construction with a total budget of approximately $500 million, inclusive of Manhattan, and are actively being funded. We have $215 million of construction in progress on our balance sheet as of June 30, 2017. The remaining projects encompass approximately $171 million of committed capital, $108 million of which has been funded through 6/30/17.

Thanks, Steven. This concludes our prepared comments. We will now open the call for questions.

(Operator Instructions) Our first question comes from Tayo Okusanya of Jefferies.

Just to focus on the 2 top 10 tenants that are 90-days late on rent, I just want to make sure I fully understand this. When was the last time each one actually paid rent? Was that in March, April? And you haven't got anything since then?

Yesterday. Both of them paid, actually, rent checks yesterday. So no, it's not like it's just -- was just a dead drop-off of rent payments, it's just that they slowed down. Actually, closer to the beginning of the year, some -- a couple of these guys are making payments almost on a weekly basis. It's just somewhat less than what's due on a monthly basis. So that's caused that number to grow over the last few months.

Got you. So they're just not paying the full amount, and that difference is worth about 90 days of rent. Is that what you're saying?

Yes. It goes up and down, I mean. At the end of the first quarter, it was approximately 90 days for one of our operators, and then it went down and now it's bounced back up a little bit. So it depends on the cycle of a month.

So Okay. So they're just paying a -- they're not paying the full amount is what's basically happening. But they are kind of paying regularly?

Correct.

Okay, correct. That's helpful. The -- with Signature, you kind of mentioned that there's some type of restructuring plan in place that you've agreed upon. Can you share any of those details about what that could entail?

Actually, I didn't mention Signature by name, but there is an operator that we have had some restructure discussions with. They are still ongoing. They're fluid -- we have a deal with them, and I won't go through specifics on an earnings call, but it involves some potential asset sales in the near future.

Does it involve any rent relief?

No.

Okay, that's helpful. And then just another quick one from me, Bob. I just -- I noticed from the supplemental this quarter that the statement of cash flows wasn't in there. Any particular reason why we missed it this quarter?

Sorry about that, Tayo. We moved our earnings call up about a week due to management scheduling issues, and the statement of cash flow wasn't fully reviewed last night, when I posted the supplement to the website. So I chose to post a supplement with the earnings release, knowing that I'm going to go ahead and repost a supplement either today or tomorrow with a statement of cash flows in there. It was just a timing. I thought it was more important to get the supplement out with earnings then wait for 1 schedule to be put in.

Our next question comes from Chad Vanacore with Stifel.

So on the 2 tenants that aren't current on rent, can you go into a little more detail what gives confidence that the cash flow issues on these operators are temporary and they're specific to these companies and not endemic to your portfolio?

Sure. The second operator that Dan talked about, where we have coverage that's literally just below our mean, has external issues that Dan also mentioned, the DoJ investigation and a piling up of claims -- PL/GL claims in Kentucky and that's really the rush of people to file claims before tort reform occurs in Kentucky, which is effective July 1, so you have those couple of issues.

And in addition, this operator has a broader portfolio and some assets that don't perform as well as the Omega assets have performed. So there's been liquidity pressures from various points affecting that operator, yet our portfolio performs at a level that we'd underwrite to. So that's getting through these liquidity issues and having them in a position where they can pay our rent current based on coverage. So I look at that and I go, all right, we've got to get from here to there, but it has nothing to do -- like everyone else, they saw a [diminution] in coverage that we saw through the whole portfolio of about 10 basis points. They saw a similar diminution but nothing more.

And then the first operator that Dan spoke about, they made a decision to change the culture of their business and change the management team, and it was the right decision but it created a fair amount of turmoil throughout that organization. And from our -- and every week, we get updated cash analysis, updated budgets, we're -- we see these numbers, we might as well be in their corporate headquarters. And -- so part of the analysis for us is their budgets, which show them in a position, at least for now, being able to pay our rent current and not get further behind. But as Dan mentioned, we'll have to evaluate that because they're right on the cusp at [1.0]. And we want to be as transparent as we can in terms of, this is where that operator stands.

We think there's a pathway. We've pruned off 2 bad pieces of that portfolio. We're talking about a couple other one-off assets that may be better off in somebody else's hands. And if they're able to perform their plan, which they've started -- as we mentioned, the last quarter, they were above 1.0 . They seem like they're starting to pull out. If they're able to hold to their plan, then we are encouraged that the plan would be that they stay inside 90 days and then they slowly grind that AR down.

All right. That's a good answer, Taylor. And just thinking about if you're not current on cash collections for some of these tenants, there should be a difference between FAD and actual cash collections. Can you talk about that difference or give us some guidance there?

It's Bob. On the FAD side -- first of all, FAD is a non-GAAP, non-cash flow measure. And so looking at the right component of that, Taylor just went in why we believe it's collectible. If we thought it wasn't collectible, then we would've reserved for it.

And the other thing is -- so when someone pays early, we don't include that in FAD for that period. And if you look at like the expense side of FAD, like all of the public companies that have bonds out there, you accrue your bond payments quarterly but you pay them semi-annually, so -- and you don't break out that timing either. And so bottom line is, based on what Taylor just went through, we believe the collectability and therefore, it's in the FAD number.

All right. So then we've got a balance sheet. It shows rising accounts receivable. Is that basically the 1 or 2 tenants? Or is that something endemic across the board?

That is the 1 or 2 tenants. And I know the statement of cash flows wasn't out there, Chad. But when it's posted, you'll see our cash from operations on a year-to-date basis was $263 million and in the first quarter, it was $114 million. So you'll see roughly $150 million of cash flow from operations. The AR component of it went up slightly, about $4 million, and that's all based on that second tenant that Dan spoke about. But as Dan also spoke about that, that tenant has security deposits and personal guarantees that more than cover that entire past-due balance.

Yes, I think that's important to -- I'd just like to reiterate that 1 component. Although that tenant is behind, there's no issue at all about the collectability of that component of past due because those security deposits, letters of credit and personal guarantees far outweigh where we are with them today.

Our next question comes from Nick Yulico with UBS.

So sorry, can you just repeat the numbers that you talked about, Bob, on the what the cash from operations is going to look like?

Yes, so the year-to-date statement of cash flows will show cash from operations of $263 million plus or minus a little, I'm just going off the top of my head. And I know at the end of the first quarter, it was $114 million so that change right there is roughly $150 million for the quarter.

Okay. And then, just want to go back to the operator -- the second operator you talked about, the one that's restructuring, I mean, there's been -- this has been news about Signature in the press about that they do have a working capital loan out. And so I'm wondering, if you -- if one of the steps of relief in a restructuring, would you be willing to step in as a working capital lender to this tenant in case they cannot get their current lender to restructure?

Something that we haven't talked about, Nick, but it's something -- we've been through dozens of these and occasionally that is part of the solution. So it hasn't been discussed. But if it's part of the solution that makes sense, then we'd probably go down that pathway.

Okay. And then just going back to the rent that is in arrears, what is -- can you give us a dollar amount of the differential on the rent that has -- where you've booked it as revenue versus you haven't actually received it as cash year-to-date?

Yes, Nick. So the first tenant operator that Dan talked about, the past due is about a little over $11 million and that's down from the first quarter slightly, and the second tenant we talked about is about $10 million.

Okay. So I guess, just tying this all together. I'm trying to understand, if you have these 2 tenants that are -- together they equate to 13% of your overall revenue, they haven't paid all their rent in the first half of the year. How does your -- how do you think about raising FFO and FAD guidance in the face of that? I think that's what some of us are struggling with.

Well, the -- I think what -- we're trying to be very transparent about where we stand with both of these tenants. The 1 tenant that's $10 million behind, literally the LCs and personal guarantees beyond cover that, well beyond. So that's collectible. It's just a question of, as you work through a process, there are steps in that, and there's no reason for us to pull that lever because we know where we stand and we're working through with them where we're going to be and we see -- we think there's a process that takes us through. And they are paying us to the extent they can. So we look at that and we go, okay, that's that tenant.

And then the second tenant, the first one that Dan talked about, that is $11 million in arrears, doesn't have the kind of security behind it that Signature does, but that's one that we have to evaluate. And we've been -- and we're really clear on that, that if there's further deterioration, meaning they can't hit the plan that they've put forward to us, then we'll have to look hard at whether or not you go to cash basis accounting. But we're not there yet, we just want to be clear where we are.

Okay, that's fair. And then just on that second -- on this tenant you're talking about where you might have to go to cash-based accounting. I mean any number -- so people aren't surprised if this happens, any number you can give us on what would be the FFO impact if you had to go to cash-based accounting on this tenant?

I think the issue is if the rent from that tenant, post carving off in Northwest and Texas, is about $44 million a year. So when you think about 1x cover, that's $44 million in cash flow right now with $44 million of contractual rent. So if you put it -- if you think it about it as a 1.2x cover, let's just assume that they can't improve, you can do the math, it's $0.01 a quarter maybe, maybe, pretty de minimis.

But sorry, just to be clear, this is not an issue where you're saying you'd remove a straight line rent benefit from your FFO?

No, you know what, the accounting side, we'd have to cross that. I think that you have to think about all the accounting, so.

Okay, I was just wondering when you talked about moving to a cash-based accounting, if this is an issue where you'd have to -- you're losing a straight line benefit from your FFO and that's the issue. I wasn't clear if that was the issue or if it's one where you're saying you have to actually cut the rent. I'm a little unclear about that.

Yes, I think we're going through sort of theoreticals of the accounting that -- the point is, we'd have to -- we'll have to evaluate where we are with that operator if they fail to perform based on the plans they provided us. So that accounting is going to depend on exactly the facts and circumstances when we cross that.

Okay, but there's no -- I mean, as of today, I mean, there's nothing you could cite about whether -- I mean, is this tenant -- is there actually straight-line revenue being booked in your FFO for this tenant?

(inaudible)

It's $3 million a quarter.

Our next question comes from Michael Knott of Green Street Advisors.

Sorry to beat this horse, but on, I guess, it would be the second tenant that we're talking about where you have a restructuring agreement, my question is, can you remind us if you have any debt investments in that operator? And if that's influencing how you think about whether to take it through bankruptcy or not? And then also it sounds like the outcome here is out of your hands in terms of some of the other landlords that have a say here. Can you just comment on some of those factors?

Just a couple of things. One, Dan had mentioned, it's a tentative agreement. We don't actually have something that's signed with this operator. And he also mentioned, there's a possibility that if there's not an agreement with other operators that it could take a different pathway, but it's not as definitive. So there's a couple -- a little bit of moving parts there I want to be clear about. We do have a piece of debt with that operator. Part of our discussion with them is that debt would remain in place. And again, given the cash flow that they have, our existing tentative term sheet with them does not include any reduction in contractual rents.

Okay. You -- are you willing to disclose the amount of the debt investment in place there?

It's $37 million. I'm sorry, Mike. Tell me exactly the number.

It's a total of $62 million but we have $30 million offset against that.

So net, it's $32 million

Yes, $32 million net.

I'm sorry, there is an offset from what?

It was a purchase accounting thing. It -- there is a reserve on the books that was -- it's not because we put a reserve on the books, it's was all related to the purchase accounting on the Welltower, when we did the 9/30 transaction with Welltower. So you put the receivable on the books and you put a reserve up at the same time.

And then, just to sort of follow-up on Nick's question about the guidance because I think many of us had the same type of question. Does the guidance as it stands today for '17 reflect the scenario where they get back on track and there's no more of this past due rent or -- and these unpaid balances don't grow further? Or -- because if I think about -- my understanding of the accounting, perhaps, if you were to have to convert some of these letters of credit or personal guarantees to resolve some of the growing receivables, I just wonder if that would actually even hit the FFO number or not.

No, it wouldn't. I mean, I think what you said earlier is exactly right. If we have status quo in terms of the past dues, we wouldn't expect any reduction -- we would expect our FFO to continue at the current pace.

So the current guidance is sort of a good case FFO scenario where these issues do get resolved, which it sounds like that is your expectation, but if they don't get resolved then the guidance would be at risk, is that -- Do I understand that right?

That's fair.

Okay. And then if I could just ask one more. On the operator EBITDAR coverage less than 1.0x schedule, are there anybody -- are there any other operators that are not current on rent that are not on that schedule because, for some reason, their coverage is not on that table?

No, not of any materiality. No.

Our next question comes from Juan Carlos Sanabria from Bank of America.

Sorry, this is a bit odd just because you guys changed the time of the call. I'm not sure what's been asked. But could you just comment on your decision not to have -- or provide a statement of cash flows? And how that would change given that some of your tenants aren't current on rents?

Juan, it's Bob. Yes, we did cover that. But when we published the supplemental last night, the statement of cash flow was not ready because we moved our earnings call up about a week due to just management scheduling issues. I chose to publish the supplemental without the statement cash flows and wait till either today or tomorrow when it's finalized. I didn't want to hold the whole supplemental for that.

Can I ask what tenant is rolling in next the year at 3.5% of NOI and if there's any discussions or risks around coverage there?

Yes, there is one and we are in discussions. And the coverage of that particular tenant's quite good, so we don't see a big risk of that coming back to us unexpectedly.

It'd be better -- just if you change the time of the calls going forward, it'd be better to have, I don't know, maybe a separate press release calling that out.

Juan, it's Bob. If you can call me -- we did not change anything. It's been published. So call me after so I can find out where you're getting that data so we can correct any problems...

Our next question comes from Tayo Okusanya of Jefferies.

I just wanted to talk about the whole tort reform situation in Kentucky that -- now that we have this in place July 1, how do you kind of think about ends up changing things for some of your tenants that have meaningful exposure to that state?

So tort reform in Kentucky is kind of multi-staged. What has passed in the state was a medical review panel, which we've seen in another states as kind of the first step towards an overall global tort reform, if you will, and putting caps on punitive amounts. But -- so that's what took effect on July 1, which was the medical review panel, whereby a plaintiff has to present their case, basically, to a panel, and it could take up to 9 months before they can go forward with an actual suit. So that's what they have right now.

They do feel that, that is the first step toward going to a full-blown tort reform. But that's legislative in nature, and it will take a little bit of time. It will take probably a year or more to get that fully implemented. And there's no guarantee that it will but, right now, they feel pretty good about it.

Okay, that's helpful. And then the tenants under the DoJ investigation, again, everything is kind of a work in progress, so to speak. But any kind of real concerns that a settlement could create some real negative financial impacts for some of these companies?

I think where, I think it's going to be consistent with what we've seen from the DoJ in much bigger cases where the ultimate resolution is one that is sustainable from a cash flow perspective.

Got you. And then last one from me, any update on Consulate at this point with their litigation issues?

I don't think there is any update on the litigation front.

No, I think it's actually being stayed at the present stage.

(Operator Instructions) And our next question is a follow-up from Michael Knott of Green Street Advisors

I'll avoid the horses this time around. Can you talk about -- I know Maplewood is one of your key operators. There was an interesting story the other day that you probably saw about their interest in eventually growing pretty ambitiously. I think the number cited in the story was something like $5 billion. Can you just talk about how much of that you might be interested in doing over time with them or how you sort of think about that?

We think about them as our permanent partner. So we're -- Greg Smith is an ambitious guy, and he likes to look at a lot of things. And we feel great about him as a partner for us. So we will look at everything that he's interested in.

So we should take that as, if he really does do $5 billion, that that's something you guys want to fund that aggressively?

I think that he's really going to do $5 billion has got a little question mark around it. But, look, we think Second Avenue is going to be home run. Everything we've have done with them to date, the 13 facilities we have that are active, all performed beyond plan. And if we can find more opportunities with him, we're going to take advantage of it. I think $5 billion would be pretty tough. I'm looking at our Senior VP of Real Estate, and he's just nodding, yes, that's a tough one.

Okay. And then can you just comment on investment landscape and where you see yields and opportunities? And then also any comment you have with respect to where market level SNF coverages are today? In some sense, when you talk about all of these operators missing rents and everything and if you're sort of -- if you were new to the space, you'd sort of look at it and say, why do all of these SNF owners, why are they okay with taking a 1.35x coverage, it just seems like overly risky. So just any comments you have on, sort of, where that stands in the marketplace today?

So generally, just market conditions, it's running pretty choppy right now, I would suggest. There -- we haven't seen a lot of large deals be brought to the market other than the Kindred transaction that was announced. But for the most part, it's been -- we've been seeing small to midsized deals in different geographic regions. But once again, none of the big stuff. When we look at underwriting, we're still looking at a 1.4x coverage. That's bounced around over the years, it went down at one time to a low of 1.25x. But given the uncertainty and the different issues, it's back up to the 1.4x coverage and that's what we underwrite to today.

Okay. Any comment on just where yields are?

Well, for SNFs, they're north of 9%, pushing 10%. At least the way we look at the world.

So, the large private equity deal you guys did with -- on Genesis, the Welltower deal, I think that was [9.45]. Do you think yields have gone up since then?

It's in the 9s. And it's going to range from [9.25] to the high 9s, [9.75].

(Operator Instructions) And we have no further questions, I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thanks for joining our call today.

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