Omega Healthcare Investors Inc (OHI) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors' 2017 Third Quarter Earnings Conference Call. (Operator Instructions) Please also note that this event is being recorded. I would now like to turn the conference over to Ms. 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; 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, transitions or dispositions 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 yesterday.

I will now turn the call over to Taylor.

Thanks, Michele. Good morning, and thank you for joining Omega's Third Quarter 2017 Earnings Conference Call. Adjusted FFO for the third quarter is $0.79 per share. Funds available for distribution, FAD, for the quarter is $0.73 per share. The reduction in adjusted FFO and FAD is primarily related to converting the Orianna portfolio to cash basis accounting with no adjusted FFO or FAD recognized for Orianna in the third quarter.

During the third quarter, we cooperatively completed the transition of Orianna's Texas facilities to another Omega operator and we completed the sale of the Northwest facilities to 2 buyers. Unfortunately, the remaining portfolio continues to underperform and Orianna continues to apply free cash flow to pay down past due vendors and other obligations. We are in active discussions with Orianna's owners and consultants regarding the potential transition and/or sale of certain assets versus a federal or state court restructure. We are hopeful we can develop an out-of-court plan which, if successful, would likely result in cash rents of $32 million to $38 million per year as compared to the current annual contractual rent of $46 million.

We remain confident in our ability to pay our dividend, increasing our quarterly common dividend by $0.01 to $0.65 per share. We've now increased the dividend 21 consecutive quarters. Our dividend payout ratio remains conservative at 82% of adjusted FFO and 89% of FAD. And we expect these percentages will improve as the Orianna facilities return to paying rent. Our revised 2017 guidance reflects the impact of Orianna's cash accounting and our anticipation that no cash will be received for the balance of the year.

Bob will now review our third quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was a loss of $47 million or a loss of $0.24 per share for the quarter as compared to a gain of $163 million or $0.80 per share for the third quarter of 2016. Our adjusted FFO was $164 million or $0.79 per share for the quarter and excludes the impact of approximately $195 million in impairments on direct financing leases, $12 million in provision for uncollectible accounts and $4 million of noncash stock-based compensation expense.

Operating revenue for the quarter was approximately $220 million versus $225 million for the third quarter of 2016. The decrease was primarily a result of placing Orianna on a cash basis. And therefore, we recorded no Orianna revenue for the quarter. The decrease in revenue was partially offset by incremental revenue from over $300 million of new investments, net of asset sales, completed since the third quarter of 2016. The $220 million of revenue for the quarter includes approximately $13 million of noncash revenue.

Our G&A expense was $7.7 million for the quarter and is slightly less than our 2017 quarterly G&A expense guidance. As Taylor mentioned and as outlined in our press release, since Orianna did not achieve their revised operating plan and failed to pay their full contractual rent, we placed them on a cash basis. And therefore, our third quarter results, including adjusted FFO and FAD, did not include any revenue related to Orianna. In the second quarter of 2017, we recorded approximately $16 million of cash and straight-line revenue related to Orianna. Placing them on a cash basis and initiating the process of transitioning some or all of their portfolio to new operators required us to test the assets for impairment.

During the quarter, we reported approximately $204 million of impairments related to our Orianna portfolio. $195 million was to reduce our capital lease assets to their fair value, of which $40 million of that change related to writing off the lease amortization or straight-line rent equivalent on the capital lease. We also recorded $8.2 million in provision for uncollectible accounts to fully reserve Orianna's outstanding contractual receivables and $1.3 million to write off straight-line receivables related to their operating lease.

It's important to note that Orianna impairment is a subjective estimate and is subject to change based on the final outcome of the transition. We believe our estimate is conservative based on our current portfolio analysis. The impairment test for a capital lease is different than that of an operating lease. After the call, feel free to give me a call and Mike Ritz, my Chief Accounting Officer and I, can walk you through in detail accounting for impairments on capital versus operating leases.

As we stated in both our first and second quarter earnings calls, we continue to work with our operators to identify opportunities to improve portfolios via asset repositionings, including sales and asset transfers. As a result, in the third quarter, we recorded approximately $18 million in real estate impairments to reduce 5 facilities to their estimated selling price.

Interest expense for the quarter, when excluding noncash deferred financing costs and refinancing costs, was $47 million versus $43 million for the same period in 2016. The $4.5 million increase in interest expense resulted from higher debt balances associated with financings related to our 2016 and 2017 investments and a higher blended cost of debt primarily as a result of issuing $700 million of new bonds in the second quarter of 2017, converting a $250 million term loan from a floating rate to a fixed rate on December 31, 2016, and overall higher LIBOR rates.

Turning to the balance sheet. At September 30, we had 8 facilities valued at $17 million classified as held for sale and we are evaluating over $200 million in potential asset sales, which could occur over the next several quarters. Our balance sheet remains exceptionally strong. For the 3 months ended September 30, 2017, our net debt to adjusted annualized EBITDA was 5.46x and our fixed charge coverage ratio was 4.2x. It's important to note EBITDA and these calculations has no annual revenue related to Orianna. When adjusting for the length of range of rental outcomes, our leverage should return to its normal range.

We have lowered our 2017 adjusted FFO guidance to $3.27 to $3.28 per share. The reduction is primarily a result of 2 items. First, it reflects the temporary loss of Orianna revenue for both the third and fourth quarters. And second, we placed a non-top 10 operator on a cash basis effective September 1 as our outstanding contractual receivable exceeded our revenue recognition test. Our policy related to reporting revenue for operators with past due contractual receivables is multifaceted and includes significant judgment. Dan will be providing additional color on this operator.

I will now turn the call over to Jeff.

Thanks, Bob, and good morning, everyone. Significant legislative and regulatory activity impacting SNFs continued over the past few months with the industry escaping the adverse consequences of potential federal Medicaid payment reform legislation and benefiting from CMS's curtailment of certain mandatory bundling programs.

As to legislative activity, congressional efforts to repeal and replace the Affordable Care Act, which consistently provided for the reduction of future federal Medicaid funding to states, extended through September but ultimately failed. Following the Senate's failure in July to pass the Better Care Reconciliation act, Senate Republican leaders unsuccessfully attempted to push through the Health Care Freedom Act, also known as skinny repeal, hoping for a reconciliation conference with the House on its previously passed American Health Care Act.

Without sufficient votes for skinny repeal, Senate Republicans focused on their final repeal and replace hope for the fiscal year called the Graham-Cassidy bill. For SNFs commencing in 2020, this bill would have reduced the maximum provider tax assessment from 6% to 4% of revenues, costing SNFs in 35 affected states an average of $200,000 per year and would have replaced the existing federal Medicaid match funding program with a capped per capita funding program that would not have protected federal Medicaid funding levels for the elderly disabled from state budget allocations toward other Medicaid populations. Fortunately for the SNF industry, the Graham-Cassidy bill failed to garner sufficient Republican support at the end of September to even bring it to a floor vote, a situation heavily influenced by the unified lobbying opposition of the entire health care industry, a staunch Democratic opposition to any ACA repeal/replace efforts.

If Senate Republicans are to succeed in any future such efforts, they must use the single annual budget reconciliation opportunity under parliamentary procedure that allows for passage with a simple majority vote, a process that likely will be reserved for Senate Republican tax reform efforts currently underway. The risk to the SNF industry is that Medicaid and/or Medicare funding reductions might be included as a pay for in tax reform legislation, though Republicans would then face the same party objections that have stalled repeal/replace efforts to date. In other legislative activity, committees in both the House and Senate announced late last week that a bipartisan, bicameral agreement had been reached to permanently eliminate Medicare Part B therapy caps effective January 1, 2018. Legislation to affect this positive change for the industry is expected to pass this quarter.

As to regulatory activity, on August 15, CMS issued an industry-friendly proposed rule that would cancel the upcoming Medicare mandatory cardiac and hip/knee fracture bundling programs and would cut in half the geographic scope of the existing Medicare mandatory hip/knee replacement bundling program called Comprehensive Care for Joint Replacement or CJR. This rule would effectively reduce bundling program implementation pressure on SNFs and signifies CMS's willingness to incorporate industry input into future value-based program development.

CMS also finalized the fiscal year '18 payment rule effective 10/1/'17 that calls for the maximum 1% increase in Medicare fee-for-service daily SNF rates and confirms the implementation effective 10/1/'18 of the SNF Medicare value-based purchasing program. Pursuant to the Protecting Access to Medicare Act of 2014, this program calls for a 2% decrease in daily Medicare rates after application of the annual inflationary increase, offset by rebates based on each facility's comparative calendar year '17 performance on rehospitalization metrics.

At the state regulatory level, the death of 14 residents at 1 non-Omega Florida SNF following Hurricane Irma prompted Florida Governor Rick Scott to mandate enhanced generator capacity at all Florida SNFs within 60 days. While we are working with our operators to comply with the governor's order, we are following discussions in other states and at the federal level, involving the potential for similar disaster-related regulations for both SNFs and ALFs. Reports from our operators in both Texas and Florida following Hurricanes Harvey and Irma revealed incredible stories of staff dedication to resident safety despite the personal storm recovery issues facing most staff, resulting in successful evacuation efforts where necessary.

With the November 2017 deadline looming for the SNF industry's Phase 2 implementation of the new federal requirements of participation, regulations that by CMS's own estimate could cost the average SNF about $50,000 annually. As an unfunded mandate from the prior CMS administration, the American Health Care Association has launched a congressional campaign in both Houses to urge CMS to revise and delay various parts of the rule to allow providers more time to comply. Fortunately, CMS previously delayed for 1 year any penalties for failure to comply with the new requirements.

Finally, the resignation of industry-friendly Department of Health and Human Services Secretary Tom Price raises the question of whether his successor will continue the largely favorable treatment of SNF industry issues, strongly supported by current CMS Administrator, Seema Verma, a potential successor.

I will now turn the call over to Dan.

Thanks, Jeff, and good morning, everyone. As of September 30, 2017, Omega had an operating asset portfolio of 999 facilities with approximately 101,000 operating beds. These facilities were spread across 77 third-party operators and located within 41 states and the United Kingdom.

The current 12-month operator EBITDARM and EBITDAR coverage for our core portfolio increased during the second quarter of 2017 to 1.71 and 1.34x, respectively, versus 1.69 and 1.33x respectively for the trailing 12-month period ended March 31, 2017. The increase was due to the reclassification of our Orianna assets from our core portfolio to our non-core portfolio based upon the fact that these facilities are now considered to be in transition. Had Orianna remained in the core portfolio, the trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio for the second quarter of 2017 would have been 1.68 and 1.32x, respectively.

In addition to Orianna, we continue to experience specific operator performance issues as discussed in our last several calls, including Signature HealthCARE, another top 10 operator. In both cases, liquidity issues are impacting the ability of these operators to pay rent on a timely basis. The first operator, Orianna, has fallen significantly behind on rent and as a result, has been placed on cash basis accounting as previously discussed by both Taylor and Bob.

While we have endeavored to assist Orianna in streamlining operations by transitioning both their Northwest and Texas regions, the overall portfolio continues to struggle and past due rent has grown. Our next step hopefully is to consensually transition the remaining portfolio of 42 facilities by virtue of either asset sales or releasing to other operators. While we believe the remaining states are considered very attractive within our industry, we expect our contractual rent to decline by a range of between $8 million and $14 million per annum. This will result in a pro forma EBITDAR coverage ratio, assuming all the facilities are released, of between 1.2 and 1.5x, given current performance.

Our second top 10 operator, Signature HealthCARE, has also fallen further behind on rent in the third quarter predominantly as a result of anticipated tightening restrictions upon their borrowing base by their working capital lender, thus reducing availability. At this time, it is important to note that the vast majority of Signature's past due rent balance is covered by a letter of credit in excess of $9 million. Despite the current liquidity situation, we believe we have a path to continue our long-standing relationship with Signature under a long-term consensual restructure that involves multiple constituents and to keep Signature out of a formal court-involved reorganization.

This out-of-court restructuring may involve the following components of consideration: a certain amount of deferred rent, CapEx funds and a working capital line of credit. This scenario would involve the approval of other third-party constituents, including Signature's other significant landlord, Signature's working capital lender, the Department of Justice and certain other third-party claimants. While we cannot predict the ultimate outcome of these third-party constituent discussions, we feel that we have made significant progress and are optimistic that an out-of-court resolution can be realized.

In addition to the Orianna and Signature ongoing restructure efforts, we have 1 other non-top 10 operator that has fallen behind on rent, and thus has required future rent payments to be placed on cash basis accounting. Over the last several months, we have negotiated a settlement and forbearance agreement with this operator, which will result in rent payments in the fourth quarter to be about approximately 23% less than our current contractual rent. Beginning in January, we expect rent to return to the full contractual amount and that past due rents will begin to be repaid in the latter half of 2019.

In addition to these 3 tenants just discussed, Omega continues to work with our operators to divest, release and/or close facilities in order to ultimately strengthen their overall portfolios. Accordingly, over the last 12 months, we have repositioned a number of assets within our portfolio, including the sale of 45 facilities. In addition this year, we have also released 9 facilities to current Omega operators and closed 2 facilities. We are currently in the process of marketing additional properties for sale and continue to review our portfolio with the intention of opportunistically divesting further non-core assets over the coming quarters.

Turning to new investments. During the third quarter of 2017, Omega completed 2 new investments totaling $202 million plus an additional $36 million of capital expenditures. Specifically, Omega completed a $190 million purchase lease transaction for 15 skilled nursing facilities in Indiana, and as part of that same transaction, simultaneously completed a $9.4 million loan for the purchase of a leasehold interest in 1 skilled nursing facility with an existing Omega operator. Additionally, during the third quarter, Omega completed a $2.3 million purchase lease transaction for 1 assisted living facility in Texas with an existing Omega operator. As of today, Omega has approximately $910 million 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 on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our planned 215,000 square foot ALF memory care high-rise at Second Avenue and 93rd Street in 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 in CIP of our New York City project, at the end of the second quarter, Omega's senior housing portfolio totaled $1.47 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 United Kingdom, our overall senior housing investment now comprises 130 assisted living, independent living and memory care assets in the U.S. and U.K.

On a stand-alone basis, this portfolio not only covers its lease obligations at approximately 1.14x but also represents one of the largest senior housing portfolios among the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 13 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 $36.4 million in the second quarter in new construction and strategic reinvestment. We currently have over 85 active capital reinvestment projects at the end of Q3. 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 $212 million of construction in progress on our balance sheet as of September 30, 2017, the remaining projects encompass approximately $191 million of committed capital, $115 million of which has been funded through 9/30/'17.

I will turn the call back to Taylor for final comments.

Thanks, Steven. Omega has faced some operator-specific headwinds in recent quarters. However, I believe that the underlying business environment is solid and is positioned to improve in the coming years as favorable demographics and limited supply should lead to a prolonged period of robust operating performance.

However, the defunding environment proves more challenging than we envisioned. I still believe the company will be in a position to thrive. As a management team, we cut our teeth in an extremely difficult funding environment in the early 2000s. We faced multiple operator bankruptcies, lease restructurings, property foreclosures, collateral recoveries and operator transfers. It was not an easy time, but the opportunities with this environment presented set the company up for unprecedented subsequent growth and success. I believe our strong balance sheet focused on well-positioned properties run by quality operators and a management team that has a proven history of prudent but opportunistic capital allocation across the market cycle will put us in an excellent position to continue to create value for our fellow shareholders.

That concludes our prepared comments. We will now open the call up for questions.

(Operator Instructions) Our first question comes from Chad Vanacore of Stifel.

So last quarter, when you spoke about Orianna, you mentioned that the turnaround plan was in place. You replaced the management team. You provided operations and rebranded. So what didn't work? And why give up on a turnaround now and go the route of transitioning most of these assets?

I think that we had been working with Orianna, not just since the last quarter. I mean, it dates back several quarters. And as we stated on the call, its budget expectations weren't being met. And if we had fallen further behind on past due rents, we were going to look to take a different approach. And that different approach involves transitioning some, if not all, of this portfolio to other constituents. So I think it's just a matter of time being what it is. And we think that at this point, their efforts -- they have not been able to meet budget. They have not been able to continue making rent payments. And I think hopefully consensually, we'd come into an agreement that these assets are better off being moved.

All right. And so just thinking about coverage on that portfolio, I think it was under 1x last quarter. With this rent haircut, where does that bring the coverage to?

Well, the coverage is -- there is no rent haircut as of today. We just gave you a range of where it might land in the future when we transition these properties. But if in the event that we -- that occurs, and as I indicated, we'd take a rent hit of between $8 million and $14 million per annum, the coverage for this portfolio would land between 1.2 and 1.5x, given, of course, everything being equal (inaudible).

Okay. And then just thinking about Signature, there's a restructuring plan in place there. You had mentioned now taking cash -- it involves some potential asset sales but not rent relief. And that's still the case?

That's still the case, yes.

All right. Then what's their progress in terms of PL/GL claims in Kentucky and DOJ settlement discussions?

PL/GL claims are ongoing. I would say that the DOJ discussions are ongoing. Although they have been in discussions for quite some time now, I think they're pretty far along, I won't speak for the DOJ or Signature. But I think people are optimistic there that the discussions with PL/GL claimants are ongoing.

All right. And then you'd seen that you've got several tenants then that are in arrears on rent, you've made a decision to raise the dividend now. So how secure should investors feel about the dividend here? And what's your commitment as a management team?

Yes, we're comfortable raising the dividend this quarter, 21 quarters in a row. We've built over time a very significant cushion in that dividend. And we look at Orianna and Daybreak as temporary. So we feel like we're going to gain back quite a bit of that cushion in 2018. So we feel good about the dividend pattern and our payment thereof.

Our next question comes from John Roberts of Hilliard Lyons.

This is Tyler Agee on for John. Could you speak about some of the factors that led to the issues with Orianna? And do you see these same issues with other tenants? Or were they unique to Orianna?

Orianna is unique in the sense that we saw, as an example, occupancy declines from 92% to 89% over a 4-year period. And we haven't seen that in the overall portfolio. Occupancy has been fairly steady. And with that occupancy decline, we saw modest revenue growth of 2%, which is reflected in the rates, but not the kind of revenue growth you'd see if you had occupancy hold steady. So we look at the Orianna portfolio as a quality portfolio that possibly could do better in other operator's hands but not indicative of the overall environment, including coverage. When you look at our coverage, it's been fairly steady for the last 5 quarters.

All right. And then moving forward, will this affect your underwriting requirement and maybe push up the cap rates that you're willing to invest at?

I think we've stuck pretty tight to our underwriting. The 1.4 coverage probably dates back now quite a few years. We've stuck with that. I think we'll stick with that in the future. The one thing with Orianna that was a little bit unique was the geographic dispersion of this portfolio. I mean, there was assets in the Northwest, there was assets in Texas, and then there was assets in the Southeast. And that's a little different from our normal underwriting in which we've sort of aligned ourselves with regional operators who buy regional portfolios. This was a multiregional portfolio, if you will, which is just a lot harder to manage. So I think if we've learned anything in underwriting or if we'll change our underwriting, I think we'll stick to our knitting and stick with acquiring portfolios of a regional nature. Or if we acquire bigger portfolios that are in multiple regions, then we'll bifurcate those, I think, with our different operators in those different regions. So I think if we were going to make any change, I think if we were to learn anything from this, it's that really the success that we've had over the years are with operators that tend to stick in a given region and focus on that region.

Our next question comes from Nick Yulico of UBS.

First question, I think you said -- did you mention that the non-top 10 operator was Daybreak?

We didn't, but it is.

Okay. So I guess they were -- they're not a top 10 operator by revenue. But back in the second quarter at least, they were a top 10 operator by investment. So what's the difference there?

Just a mature revenue stream. So you had rent escalators in that portfolio for a number of years. So from -- it's just the difference between the investment balance and the revenue stream. They happen to be, what, $11 million or $12 million. I mean, frankly that gets -- they're up there, they're paying at $7 million -- what is it, Bob, $7.5 million?

$7.5 million.

$7.5 million of revenue a quarter.

Okay. And then just going back to Signature, you talked about the different options there, deferring rents, providing CapEx or some sort of working capital line of credit. I guess, in all those scenarios, even if they're not an official rent cut, it sounds like it's still just cash flow that's going out the door for you guys. It's not clear what the return is on that. So what I'm trying to figure out is what -- I mean, how we should think about the ultimate cash flow impact from Signature for you guys and how it might get resolved.

So it's not set in stone yet, Nick. But we're still in discussions with Signature on a number of these items. But as far as deferred rent goes, I mean, I think we've been talking around the 10% of our total rent would be deferred for approximately 3 years just to sort of put some brackets around it. Once again, not set in stone, but that's what we've been discussing with the company with other constituents.

Okay, that's helpful. And then just lastly, what is the amount year-to-date, the difference between on Signature, the rent that you're booking in your FFO, FAD versus the actual cash rent that you collected on a dollar basis?

Yes, hold on 1 second, Nick. In the third quarter, Nick, we had a $14.5 million of contractual revenue for Signature. We collected $11 million of that. So their AR did grow during the quarter. On a net basis, they're about 1 month past due on a net basis because, as Dan mentioned, we do have collateral supporting the rent.

Okay. And that differential, should we assume something similar for the fourth quarter based on what you have been saying?

Yes. At this point, I'd say that's fair to estimate that.

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

I was just hoping you could talk to the planned dispositions and how we should be thinking about that in terms of the rent coverage that, that portfolio may have or cap rates, we've seen some of your peers sell assets at kind of the mid-teens. Is that kind of the range of cap rates we should be thinking about for this $200 million you've earmarked?

No, I think the way to think about. And again, we're just trying to give our investors a sense of order of magnitude based on history and what we see in the portfolio today. But historically, we've been able to redeploy those sale proceeds and not have any diminution of rent. So when you think about cap rates, sale cap rates are going to be about the same as acquisition cap rates. So as we think about modeling, if we were to sell $200 million worth of property, we would put that money to work at 9%, 9.5% and would all set whatever rent we lost from the assets that we sold.

So you're not necessarily selling low coverage assets?

Some of them are a little coverage. But we found, based on the history of selling the last 45 assets that we've sold, that some of those cap rates on paper would look quite high and some were quite low. It's just the market, it depends on the region where you're selling. So from our perspective, we believe the way to look at it is just to replace rent for rent. We'll recycle the proceeds. And again, just to be clear, the $200 million is just an indicator of potential order of magnitude. And we still need to see where the portfolio sorts itself out over the next 9 to 12 months.

Okay. And then I was just hoping you could speak to Genesis. You talked about one of the lessons from some of these recent issues being wanting to be exposed more to regional players. But Genesis is a big national player. One of your peers is completely exiting the portfolio. How are you thinking about your Genesis portfolio? And if you could comment on their EBITDAR coverage on the underlying assets.

I mean, Genesis obviously is a legacy portfolio. It's been with us quite some time. And it's taken off in a lot of regions by virtue of acquisitions. But its performance has been quite good and quite stable over the last 4 or 5, 6 quarters. I mean, their coverage is well below -- well above our [mean]. And right now, we really don't have any issue. We did sell off a handful of facilities a few quarters back. But at this point, we really don't have any asset sales with them. We're happy with the performance of our portfolio. And there's really nothing on the plate between the 2 companies in the near future. We have some -- there's a coveted relief request, I guess, in the third and fourth quarter. And we're discussing that. But beyond that, there's really nothing there with Genesis.

Okay. And then just the last question from me, how do you guys think about the EBITDAR coverage going forward? If you look at some of the NIC data that's pointed to continued occupancy declines, which it seems, I think, that's part of the issues with Orianna. But the trailing 12 months is a bit stale, into the quarters in arrears. So how are you guys thinking that EBITDAR coverage level evolves over the next 12 or 18 months?

You hit on exactly the right thing. And it's going to be driven by occupancy. And it really comes down to the demographic shift versus all the other headwinds that we've seen. And we feel really good about our portfolio, where occupancy has been steady. It means that our operators have done a very nice job of maintaining referrals and admissions. So to your point, we monitor occupancy closely. And that will be the big driver in terms of coverage. That being said, we don't expect, even as we continue to feel pressure, that you're going to have a big dropoff of occupancy. And frankly at some point, the demographic wave will hit and we'll start to see it pushed the other direction. And hopefully, labor costs stabilize as well at some point because they really have been driving coverages for our portfolio.

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

Bob, I might have missed in the prepared remarks, I was trying to keep up. But did you happen to provide a detailed breakdown of the guidance change between Orianna and Daybreak?

Well, the guidance change, what I said was driven primarily due to those 2, putting them on a cash basis. So in the third quarter, we booked 0 revenue related to Orianna. And on the Daybreak, we put them on a cash basis, September 1. So we only booked 2 months of the $7.5 million that we said of revenue related to them.

Okay. And then on the Daybreak situation, is that not as far along in terms of providing a range, if there was a transition needed, a range of rents on that portfolio? Or is that not in the same boat as Orianna for now?

Not in the same boat at all. As a matter of fact, we have really very recently signed up sort of a settlement of forbearance agreement with Daybreak, whereby starting in January, they'll pay full rent. We don't think this is a transition portfolio. We think it was one short-term quarterly issue. So we feel good about the management team. We feel good about them as operators in the facilities. So we don't think there's any coverage diminution here. It's actually going to get -- improve over time.

Okay. And then just a question or two about the EBITDAR coverage bucketing that you show in the supplemental. It looked like the percentage of tenants that were below 1.2 ticked up significantly. Can you just maybe talk about anything in particular driving that? Or was that above your expectations?

I don't have the detail in front of me. I think it's because the main one is Signature going down below 1.2. And then we had another one, another sizable one, but this is a AA-rated credit that blipped below 1.2. I think that's temporary, it will go back above. But those are the 2 drivers.

And then last one for me on that same table, and maybe this is something to follow up offline, but the 1.2 to 1.8 range bucket seems pretty wide. And it's a big swap as a portfolio, 50%. I'd be curious what percentage of that or what amount of that is either in the 1.2 range or the 1.3 range.

I think it's going to coalesce around the 1.3 since our overall average is 1.3. And you don't have much above 1.8. So we can -- we haven't actually run that specific data point, Michael. But just looking at the way the bar charts line up, it's probably 1.4.

Our next question comes from Tayo Okusanya of Jefferies.

Just a quick one on Daybreak. I know you said you had moved them to cash basis on September 1. How should we be thinking about fourth quarter? Are you expecting to get any cash rents from them? Or are you also kind of zeroing them out in fourth quarter as well as part of your guidance adjusted?

Tayo, I'd zero them out from a guidance standpoint. Because when you put them on a cash basis, the first thing as they pay, they are paying. As a matter of fact, in October, they've already paid $1.4 million. That gets applied to their outstanding AR first. And as Dan had mentioned that we expect them by January to get back to their full rent. It's just whatever they pay in the fourth quarter will be applied against their outstanding AR. And then I fully expect sometime early in 2018 to put them back on, assuming they're achieving their plan and paying us, to put them back on their -- on straight-line accounting basis.

Got you. What's the AR balance at this point?

It's slightly more than 30 days. $7 million, roughly.

AR balance, about $7 million. Okay, that's helpful. And Taylor, this one is kind of for you. So I mean, I feel like over the past 2 quarters, we've been talking about more and more kind of tenant credit-related issues. And you did make the comment earlier on during the call about the last time we kind of had this scenario, you guys were diligently working through all your tenant-related issues back in the late '90s. But I guess, the question is, is this period any different? Do you feel this period is any different from back then? Because back then, what you kind of saw was a whole bunch of tenant credit-related issues and valuations going down even much lower than they are today for SNF-focused REITs. So could you just talk a little bit about how you kind of think about what happened back then versus what you're seeing today?

Yes, the late '90s was a fiscal issue, where the government looked at the reimbursement system and determined that it was broken, that people were being paid costs in an environment where it incented you to run your costs up and get them reimbursed. And the fix to that was to go from a cost-based system to a prospective pay, essentially a flat fee for different levels of service, which is the right answer from a policy perspective. But the rate cuts were very dramatic as older people on this call would know. And it was -- so it was fixing a fiscal issue that had very significant reimbursement impacts very quickly. What we're seeing today is really a policy fix as how can we be more efficient in terms of length of stay and the types of residents that we take care of, not necessarily fixing the dollar amount that's paid. I think there's a general sense that reimbursement rates in general are appropriate. And so policy fix of trying to get as efficient as possible is a very slow-moving train that's put in place to deal with the demographic wave that's coming. So I think this is a very different scenario in terms of one relating to dollars and the other relating to access to care and a much slower shift today. That being said, if you have any kind of shift where you push coverages down a little bit, and we've talked about it, our coverages have gone down 10 basis points, it puts you a little closer to different issues when an operator has -- makes a bad decision or has a balance sheet problem. And we work through that. And I think Orianna and Daybreak are both good examples, where Orianna is one that we thought they'd see their way through. We don't now think they will. We have lots of opportunities to transition those assets versus Daybreak, where they have a liquidity issue and there's plenty of light at the end of that tunnel. As Dan mentioned, we expect their coverages will be north of 1.5 going into '18.

Okay, that's helpful. And then with Orianna, what happens in a scenario where you don't do an out-of-court restructuring? Like if they end up having to either file, does that kind of change the math there in regards to your potential earnings risk? And also similar to Signature, what happens if they actually have to file?

I think the biggest issue with filing is time. We know that the answers typically are going to be similar. I mean, be it going through a restructuring has unknowns that can affect cash flows. And the longer you're in, the worse. But it's principally timing. How long does it take to get from the initiation of that process to exiting out of your assets? And 6 months would be very, very quick in an in-court-type scenario.

Got you. Okay, that's helpful. One more thing from my end. It's just there are a lot of kind of tenant-related questions on the call. It's clear that's where investors' focus is right now. I do think it would be very helpful now that you have a permanent person in IR to really kind of help investors walk through all these tenant issues so that we can fully redline what the potential risks could be to your earnings in 2018.

We agree.

Our next question comes from Daniel Bernstein of Capital One.

I just want to ask about if you've adjusted your underwriting for new acquisitions at all, given the environment. And are you still looking at 1.4 lease coverage when you underwrite? And is that still appropriate, given some of the risks out there?

Yes. That question came up a few questions ago. But I think we're still at 1.4. I think that there's -- a lot of times, we're taking 1.4, a lot of our new investments, all these are with existing tenants that have an existing coverage of 1.3 or north. And so it's additive to the overall portfolio. But I think even in this environment, 1.4 coverage still stands as the conservative underwriting policy.

I mean, the reason why I'm bringing it up is because if you look back like in 2014, 2015, you were at 1.4, 1.5. And now you're having some tenant issues. And that's the only reason why I'm bringing it up, whether that's really the appropriate number or not. But we can take that offline. The other question I have is does Orianna have any other landlords or creditors that you have to deal with as far as this transitioning, such as you have with Signature and other landlords? Or is this something that's a bit cleaner, that's more for you to deal with?

It's much cleaner. The legal entity, Orianna, is -- only has Omega asset.

Okay. Have you started the process? I assume you have. But how far long are you on the process in terms of talking to other operators about transitioning the assets? What kind of interest have you had to transition those assets? And I know you gave a 6-month timeline. But I just kind of want to understand what interest have you had from other operators at this point to take over those assets.

Yes, we haven't had any specific conversations. We've had kind of no-name conversations with certain operators in our portfolio that don't mention these properties specifically. But we have talked about portfolios in certain states and try to gauge levels of interest in facilities in given states. And we think we pretty well know the lay of land as far as who would be interested in what assets. But that's as far as it's progressed.

Our next question comes from Todd Stender of Wells Fargo.

Can we hear some of the math, I guess, behind the $195 million impairment? It just seems high. Do you take the expected rent reduction in aggregate? Or is there a capping of it? Can you just go through that?

Todd, I'll walk you through offline. But big picture, I have to recall, the big picture, an operating lease versus a capital lease, there's 2 different analyses, completely different that are done. First, there's an impairment indicator, they're identical, in either scenario. And in an operating lease scenario, which this is not, all you do is you look at the nominal cash flow of future cash that's going to come in over the expected life of the asset and compare that to your debt book value. So that's pretty straightforward. On the capital lease side, you're looking at the expected cash flow, discount it back at -- you see, you treat it like a mortgage. So you look at the -- you take the life of the mortgage, in this case, the life of the direct financing lease, the remaining life, and you discount back the expected cash flows at the initial rate on that mortgage, so to speak. And it comes up -- so again, present value versus nominal cash value, 2 different analyses. And then it does (inaudible) different.

Okay. And has that discount -- the discount rate changed since you've owned the property? That's I guess, what just appears that maybe the discount rate has dropped and the number seems high to me. I think the headline number is impacting the stock today. So I just wondered if that discount rate has dropped at all maybe.

No, it's not the same discount rate. And again, you've got $40 million of that number is the accretion or I'm going to call it the straight-line buildup on the capital lease.

Got it, okay. And just as a reminder, what was the rent coverage that Orianna was underwritten at? That's part one. And part two is what do you think it will be underwritten at, assuming a new rent level?

Back in '13, I believe it was in the 1.3 to 1.4 rate. I'm certain that it was. I can't tell you exactly. But it would have been in that range. And I believe that's what we'll be looking at going forward.

Okay. And then just switching gears, I guess, when we look at rent coverages for the assets that are held for sale, and then you guys gave kind of a big number, $200 million, that you may dispose of for the next 12 months, what kind of ranges for rent coverage do you have for those?

Well, the held for sale is a tiny number and the coverages are going to be less than the mean. But that (inaudible). And then the $200 million, as we discussed, we're just trying to give directionally an indication of order of magnitude of disposals. A lot of what we're thinking about hasn't been specifically identified. But I would expect again that you wouldn't -- it's not going to drive our averages at all.

This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thank you very much for joining our call today. If you have any follow-up questions, the management team will be available.

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