Omega Healthcare Investors Inc (OHI) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Michele Reber. Please go ahead, sir.

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 our fourth quarter 2017 earnings conference call. Today I will discuss 5 topics: Our strategic asset repositioning; second, the sustainability of our dividend; third, our 2018 guidance; fourth, the reimbursement and expense environment; and fifth, our internal resources, external resources and unique business attributes for future success.

Strategic asset repositioning. As healthcare delivery continues to evolve, we continuously evaluate our assets, our operators and our markets to position our portfolio for success, not just in the near term, but over the next decade. Our strategy includes selling and transitioning assets that do not meet our operator, real estate or market criteria. We expect the resulting portfolio to have improved coverage and provide significant growth opportunities and long-term durability. As part of our strategic repositioning during the fourth quarter and year-to-date 2018, we have disposed of $224 million in assets, and we are evaluating over $300 million in potential assets to sell in 2018. The revenue reduction related to our $224 million in assets disposed is $24 million, while the trailing 12-month cash flow on these assets was only $19 million. The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to rent yields of 10.7%. Our strong sales results today reflect the continued appetite for SNF assets by local market private buyers.

The second topic is dividend sustainability. We are proud of our unprecedented streak of 22 straight quarterly dividend increases, wherein we increased the dividend from $0.43 per share to $0.66 per share, 53% over 5.5 years. Our quarterly dividend growth was predicated on and driven by our consistent FFO and FAD growth. As a result of our strategic repositioning activities, 2018 will not be a growth year, and therefore, we do not expect to increase to dividend during 2018. However, I want to be very clear that we are confident in the payout percentage coverage and the sustainability of our current dividend of $0.66 per share per quarter. With a current yield of 10% and our strong belief that the headwinds we've been battling are beginning to subside, we believe we are well positioned to deliver substantial shareholder returns over the next 5 years.

Turning to our guidance. Our adjusted FFO guidance is $2.96 to $3.06 per share, while our FAD guidance is $2.64 to $2.74 per share. Timing will play a big role in our guidance as asset sales reduce adjusted funds from operations. And the longer it takes to redeploy capital, the longer it takes to restore this AFFO in our quarterly run rate. In addition, the timing and ultimate outcome of Orianna, and to a lesser extent, Signature may also impact our guidance. We expect that our quarterly AFFO results will trend upward throughout 2018, providing us with a solid baseline run rate as we head into 2019. Specifically, we expect asset sales of $300 million or more during 2018 with $35 million already completed year-to-date. We expect to redeploy most, if not all, of our sales proceeds capital by year-end, but the related timing and AFFO upside could be delayed. Furthermore, the ultimate outcome of our global resolution with Orianna will likely occur in the later part of 2018. However, we believe we are close to an agreement to restructure the Orianna portfolio in an organized way. The acquisition market remains choppy and today is not particularly robust. However, as we've seen through several cycles in the SNF industry, there tends to be a significant uptick in mergers and acquisitions as down cycles come to an end. I would expect to see meaningful growth opportunities later in 2018 and moving into 2019.

My fourth topic is the current reimbursement and expense environment. The labor market has been difficult, and direct care wages within the Omega portfolio have increased 2.9% year-over-year. Fortunately, although wage growth puts pressure on tenant coverage, the level of wage growth is generally manageable. And although related Medicare and Medicaid rate increases generally lag behind, eventually reimbursement rates catch up to labor inflation. On the reimbursement and regulatory front, the environment is generally neutral to favorable. Jeff will provide much more color later in the call.

Lastly, our overall occupancy has remained fairly steady over the last 6 quarters. We believe that this is just the beginning of a long-term positive trend across all markets. Our best intelligence is that by 2019, we should start to see an upward census trend in a significant number of markets. Our emphasis will be growth in these markets, which is consistent with our ongoing repositioning efforts.

My final topic is the significant internal resources, external resources and unique business attributes that Omega has that positions us for success. Internal resources include, one, an extremely experienced management team that has navigated through several industry cycles, including the late 1990s. The current environment, although not favorable, is not remotely close to the problems that we faced and solved in the late 1990s and early 2000s. Our staff is incredibly deep and knowledgeable, led by Dan Booth, Steven Insoft, Bob Stephenson, Mike Ritz and the dozens of employees that support them. Two, we have a significant in-house operating reimbursement and regulatory expertise led by Jeff Marshall; and three, we have significant in-house construction and development expertise led by Steve Levin that supports our strategic position of holding our core assets for the long term. From an external resource perspective, we have partnered with 2 leading consulting firms to gather an extremely comprehensive and detailed analysis of the demographics that will drive demand for skilled nursing facilities throughout the next decade. With literally thousands of hours dedicated to this analysis, we believe we will begin to feel the demographic demand wave going into 2019. And finally, we have unique business attributes that set us apart from our competitors. We have the most SNF operator relationships. We own the most SNF properties. We have the most geographic diversity. We have the best decision-making data. We have the best-in-class, high-end assistant living operator in Maplewood with a significant growth trajectory, and we have significant growth opportunities in the U.K. And lastly, we have a deeply experienced and engaged board and management team committed to capitalize on these advantages with a view to long-term shareholder value creation.

I will now turn the call over to Bob.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $159 million or $0.77 per share for the quarter as compared to $172 million or $0.84 per share for the fourth quarter of 2016. Our adjusted FFO was $164 million or $0.79 per share for the quarter and excludes the impact of approximately $3.9 million of noncash stock-based compensation expense, $900,000 in provision for uncollected accounts, $500,000 of onetime revenue and $200,000 in impairments on direct financing leases.

Operating revenue for the quarter was approximately $221 million versus $235 million for the fourth quarter of 2016. The decrease is primarily a result of placing Orianna and Daybreak on a cash basis in the third quarter and therefore recording no Orianna or Daybreak revenue in the fourth quarter. The decrease in revenue was partially offset by incremental revenue from over $375 million of new investments completed in 2017. The $221 million of revenue for the quarter includes approximately $15 million of noncash revenue.

Our G&A expense was $8.2 million for the quarter, which was slightly above our third quarter G&A expense. For modeling purposes, we project our 2018 first and second quarter G&A run rate to be approximately $9.5 million to $10.5 million, resulting from additional legal expenses related to operator workouts, transitions, and divestitures before returning to our traditional $8 million to $9 million of quarterly run rate. In addition, we expect our 2018 quarterly noncash stock-based compensation expense to be approximately $4 million, consistent with the fourth quarter of 2017.

Interest expense for the quarter, when excluding noncash deferred financing costs and refinancing costs, was $48 million versus $44 million for the same period in 2016. The $4 million increase in interest expense resulted from higher debt balances associated with financings related to our 2017 investments and a higher blended cost of debt, primarily resulting from issuing $700 million of new bonds in the second quarter of 2017 entering into swaps to convert our $250 million term loan from a floating rate to a fixed rate effective December 31, 2016, and overall higher LIBOR rates.

As Taylor mentioned, 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 fourth quarter, we sold 34 facilities for approximately $189 million in net cash proceeds, recognizing a gain of approximately $46 million. We also received $100,000 for final payment on 1 facility mortgage. For modeling purposes, in the fourth quarter, we recorded slightly over $5 million in revenue related to these 35 facility dispositions.

During the quarter, we recorded approximately $64 million in real estate impairments to reduce the net book value of 32 facilities to their estimated fair value or expected selling price. The $64 million includes a charge of $13 million related to 1 facility destroyed in a fire. We expect to receive proceeds from the insurance carrier in 2018.

We recorded approximately $900,000 in provisions for uncollectible accounts related to the write-off of straight-line receivables resulting from 2018 expected sales.

Dan will provide an update of our ongoing negotiations with Signature in his remarks. However, from an accounting standpoint, we would note that Signature is currently paying approximately 75% of its monthly contractual rent. As a result, its receivables balance continues to grow. As of December 31, we had approximately $21 million in contractual receivables outstanding, which is partially offset by a $9.3 million letter of credit as well as significant personal guarantees. While we remain optimistic that a resolution will be reached with Signature, if the net receivable balance continues to increase and the resolution is not reached on a timely basis, from an accounting standpoint only, we will have to analyze the collectibility of both their outstanding AR and future rental payments and may be required to place them on a cash basis of accounting. Or accounting decision has no impact on the negotiations or ultimate final resolution.

Turning to the balance sheet. At December 31, we had 22 facilities valued at $87 million classified as held for sale, and we're evaluating over $300 million in potential asset disposition opportunities, which could occur over the next several quarters. Our balance sheet remains strong. For the 3 months ended December 31, our net debt to annualized EBITDA was 5.87x, and our fixed charge coverage ratio was 4.1x. It's important to note EBITDA in these calculations has no annual revenue related to Orianna or Daybreak. When adjusting for the likely range of expected rental outcomes from Orianna, including expected cash received from Daybreak, in addition to removing revenue related to our Q4 asset sales, our pro forma leverage will return to its normal range of less than 5x.

I will now turn the call over to Jeff.

Thanks, Bob, and good morning, everyone. Activity in the past several months has concluded perhaps the most challenging yet positive legislative and regulatory year for SNFs in decades. The industry avoided further threats to federal Medicaid funding as tax reform took the focus off Medicaid reform in Congress. Regulatory compliance pressure on SNFs was again delayed. Favorable leadership at the federal health and human services agency will likely continue, and Medicare Part B therapy caps were permanently repealed, partially paid for with a small reduction in the Medicare Part A annual market basket rate increase.

In Congress, the risk to SNF fundings through Medicaid reform has lessened with a reduction in the Republican Senate majority from the Alabama election.

Looking ahead to 2018, the concern for SNFs is the potential that a cut to Medicaid provider tax funding could be used as an offset to any ACA modification legislation, though the opposition in 2017 from several Republican senators to Medicaid reform legislation indicates a low risk of such a cut in the coming year. Anticipated legislation to permanently repeal outpatient therapy caps finally passed with the budget bill attached to the February 9 continuing resolution to fund the federal government. This permanent repeal, effective January 1, 2018, restores approximately $811 million in annual SNF Medicare Part B funding and eliminates the annual legislative process to restore a therapy cap exceptions program that frequently resulted in SNF payment cuts. The repeal legislation is partially paid for with an October 1, 2018, cut to the SNF Medicare Part A market basket increase of approximately 0.3% estimated by the Congressional Budget Office to total $1.9 billion in reduced funding over the next 10 years or $190 million annually. Most importantly, the roughly 1 million Medicare Part B beneficiaries impacted by the caps will no longer be limited in receiving outpatient therapy services necessary to maintain or improve their quality of life.

Regulatory pressure that requires November 28 implementation of the extensive Phase 2 Requirements of Participation was reduced as CMS delayed compliance enforcement for 18 months on the most significant aspects of those operating provisions. Further, to allow sufficient time for state SNF surveyors to train on the new provisions, CMS announced that inspection star ratings would be frozen for the 2018 year. The industry awaits CMS's decision in the spring as to whether the previously proposed Resident Classification System will be implemented effective October 2018 to replace the existing prospective payment system for SNF Medicare fee-for-service claims. CMS previously announced its intent to maintain the overall level of Medicare fee-for-service SNF funding with such a system change, which would reallocate funding from the current heavy emphasis on therapy services to a more balanced approach based on resident acuity characteristic. Continuing its trend away from mandatory bundling programs, CMS announced in January a voluntary risk-based episode payment bundling model called the Bundled Payment for Care Improvement Advanced Initiative, or BPCIA, to begin in October 2018 and run for 5 years, covering up to 32 diagnostic categories down from 48 under the existing BPCI models. Notably, SNFs will not be eligible to initiate episode bundles under this model as they could under the existing BPCI models but can participate in bundles initiated by hospitals or physician groups. As such, BPCIA is not expected to have a significant impact on SNF revenues. On January 24, the Senate confirmed the appointment of Alex Azar to lead the Health and Human Services Department with oversight of CMS. Azar's confirmation provides assurance that the SNF-friendly regulatory policies to date under the Trump administration are likely to continue, especially with the continued leadership of CMS by Seema Verma.

On the state regulatory front, negotiations and litigation over the Florida governor's emergency rule requiring substantially increased generator capacity in the event of power outages appear to have been resolved with a revised rule that addresses provider concerns to allow for additional fuel sources, reduced on-site fuel storage and reduced scope of facility power coverage. The revised rule requires state legislative approval expected in early March, and the compliance deadline for the new requirements is expected to be June 1, 2018, extendable to January 1, 2019.

I will now turn the call over to Dan.

Thanks, Jeff, and good morning, everyone. As of December 31, 2017, Omega had an operating asset portfolio of 973 facilities with approximately 98,000 operating beds. These facilities were spread across 74 third-party operators and located within 40 states and the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio increased during the third quarter of 2017 to 1.72 and 1.35x, respectively, versus 1.71 and 1.34x, respectively, for the trailing 12-month period ended June 30, 2017.

Turning to portfolio matters. On our last call, we highlighted restructuring efforts relating to 3 operators, 2 of which are considered amongst our top 10 in terms of revenue. We are in active, confidential negotiations with Orianna and remain confident that our post transition restructuring rent or rent equivalent in the event of asset sales will be in our previously stated range of between $32 million and $38 million. We hope to reach a final agreement with Orianna in the next several weeks. We plan to press release the details at that time.

Moving on to Signature HealthCARE. Since our last earnings call, considerable progress has been made toward finalizing a comprehensive agreement among Signature and Signature's 3 primary landlords, which will effectively bifurcate each of the 3 portfolios into 3 distinct legal silos and separate virtually all legal obligations. As part of this agreement, Omega has agreed to defer certain rent payment obligations and provide for a working capital loan, while we remain cautiously optimistic that a satisfactory global restructuring with all constituents will be finalized in the near future. Such restructuring remains contingent upon Signature's successful resolution of its material PL/GL claims.

In addition to the ongoing discussions with both Oriana and Signature, Omega entered into a settlement and forbearance agreement during the fourth quarter with another sizable operator, Daybreak, which, as mentioned on the last call, resulted in rent payments in the fourth quarter being approximately 77% of contractual rent. As documented, beginning in January, rent has returned to the full contractual amount. And as expected, rent payments have been made in accordance with that agreement. We anticipate past-due amounts to begin to be repaid in the latter half of 2018. Daybreak has made considerable operational improvements over the last 6-plus months, including increasing their average Medicaid rate, reducing their corporate overhead by nearly a full percentage point and entering 14 of their Omega facilities into the Texas QIP Program, a federally backed program similar in nature to the UPL program instituted in other states. We have also agreed to 8 facility sales and several facility consolidations in an effort to carve out underperforming assets in overbedded markets.

In addition to the 3 operators just mentioned, another one of our top 10 operators, Preferred Care, a Texas-based operator, and certain of its affiliated operators in the states of Kentucky and New Mexico filed for Chapter 11 bankruptcy as a result of a $28 million jury award in the state of Kentucky and the overwhelming number of personal injury suit initiated against such operators in both states. While Omega has no exposure to Preferred Care in Kentucky, we currently lease 16 facilities to Preferred Care in New Mexico, Texas, Arizona and Oklahoma. In November of 2017, Omega and Preferred Care entered into a transition agreement related to all 16 facilities. We have identified operators for each state, and separate transition processes are currently underway. Historically, this portfolio has operated at less than a 1x EBITDAR coverage with trailing 12-month 9/30/17 results at 0.26x. It is currently expected that all 16 facilities will be released to current Omega operators under longer-term leases with enhanced credit profiles.

Turning to new investments. During the fourth quarter of 2017, Omega completed $71 million in new investments consisting of a $40 million purchase lease transaction for 6 skilled nursing facilities in Texas and $31 million in CapEx fundings. New investments for all of 2017, inclusive of CapEx fundings of $145 million, totaled $530 million. The acquisitions consisted of 45 facilities with 4,320 operating beds.

As Taylor mentioned earlier, during the fourth quarter of 2017, Omega disposed of 35 facilities for approximately $189 million in net proceeds. Year-to-date in 2018, Omega has disposed of 6 facilities for approximately $35 million in net proceeds. Throughout 2017, we work with our operators to aggressively reposition our portfolios through divestitures, releases and/or closure of facilities. Accordingly, starting early in 2017 at an escalating pace throughout the year, we divested a total of 62 facilities for net proceeds of $291 million. The majority of these sales were driven by either poor historical operating performance, obsolete or poor physical plants, deteriorating market conditions and/or weak operator relationships with which Omega sought to exit. We are currently evaluating approximately 50 additional facilities to sell in the coming quarters. While we believe we have identified the majority of dispositions for the near future, Omega will continue to review our portfolio and discuss strategic repositioning with our operators. Based upon our pending dispositions, we believe dispositions will likely outpace acquisitions for most, if not all, of 2018.

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 ALS 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 and CIP of our New York City project. At the end of the fourth quarter, Omega Senior Housing portfolio totaled $1.48 billion of investments on our balance sheet. While anchored by our growing relationship with Maplewood Senior Living and our best-in-class properties as well as Healthcare Homes and Gold Care in the U.K., our overall senior housing investment now comprises 133 assisted living, independent living, and memory care assets in the U.S. and U.K. On a standalone basis, this portfolio not only covers its lease obligations at 1.12x but also represents one of the largest senior housing portfolios amongst the publicly listed healthcare 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 our coupling our tenants' operating capabilities with our commitment to having in-house design and construction expertise. Through the same capability, we invested $31.1 million in the second quarter in new construction and strategic reinvestment. We currently have over 85 active capital reinvestment projects at the end of Q4. 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 $228 million of construction in progress on our balance sheet as of December 31, 2017. The remaining projects encompass approximately $197 million of committed capital, $135 million of which has been funded through 12/31/17.

Thanks, Steven. I want to thank our Board of Directors and management team and all of our dedicated employees for their efforts during these difficult times in the skilled nursing facility industry. The quality of our historical underwriting has limited the number of issues that we have faced, and the strength of our balance sheet has protected all of our constituents. We will continue to be extremely proactive in predicting the best markets, operators, and assets in this changing environment and will prudently allocate capital with a view towards sustainable and durable shareholder returns.

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

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

So based on your 2018 FAD guidance, you expect the dividend payout ratio that's approaching about 100%. What gives you confidence in the stability of the current dividend? And then what gets you back to a more normalized payout ratio in line with historical?

Yes. When we think about the dividend, and I mentioned it earlier in our prepared comments, we look at FFO throughout 2018 as growing as we put our recycle or sale proceeds back to work and eventually get the Orianna assets working. So we look at our fourth quarter FFO and FAD run rate of the year fourth quarter '17, and we expect that going in at the end of '18 and going into '19 that our quarterly run rate is going to be at or above the current fourth quarter '17 run rate. And that's redeploying the asset proceeds that we're selling and then putting Orianna to work. So although it looks tight in the near term, I think it's because we have assets on the sideline that we know we're going to have working by the end of the year.

So, Taylor, to get that at or above the fourth quarter run rate in light of your expectations of pretty aggressive asset sales, why wouldn't -- at some point, when you make those sales and there's that lag between or recycling that capital, why wouldn't that drop below that fourth quarter run rate?

We probably likely will and then place it over time. So that's the point of that as we think about our guidance through this year, the run rate quarter-by-quarter is going to increase as the year moves on until we restore ourselves at or above the existing run rates.

Okay. All right. And then, Taylor, you mentioned in the prepared remarks that you expect to improve census trend in many markets in 2019. So what signals are you looking at that point you toward that trend reversal? And you may have mentioned that demographic study that you did.

Yes, it is that. It's -- we've done an incredibly comprehensive study by individual age group and clinical condition in all of our major markets, and we feel highly confident that -- and trying to predict what everybody's talked about, when's the demographic wave actually going to come to fruition, and it's starting. It appears very clear to us that, going into '19, we will start to see the demographic wave in a meaningful way. And a little bit later in the next month or so, we'll provide some high-level guidance in our investor presentation that shows the detail that went into that thinking. But we're confident that that's the picture we're looking at.

All right. Any hints as to how aggressively that moves over time?

It's consistent. It's not -- there's not a spike. So if you look from this point forward, it's in the 2% to 3% range and it's annual. It's just a consistent push on the -- of demand on the pipeline of supply in this business.

All right. And then just one more for me. Last quarter, roughly $45 million of your total rent was below 1x coverage. This quarter, that's down to $20 million. Can you talk about what changes that you've seen in your portfolio that helped improve that metric?

Chad, can you come again on that one?

Oh, I'm sorry, Dan. So in your supplemental, you break out the percentage of rent under 1x coverage. It looked like it improved this quarter. I just wonder at what was driving that.

It was a couple of portfolios that were just up 0.9 or above that crossed over into the higher bucket, and then there was a couple of operators that we either sold or released to somebody else, so we got -- so they're out of there.

Our next question comes from Nick Yulico with UBS.

Just going to the guidance. I wanted to understand what's actually assumed in the guidance for some of the larger operators, Signature; Daybreak; Orianna is a little bit more clear; Preferred Care in terms of rent that's in, I guess, FFO versus FAD.

Yes. For Daybreak, Nick, as Dan mentioned, they've maintained their payment plan, and so once they caught up on the past-due AR, which is going to happen at or around the end of this quarter, we'll begin to book Daybreak on its contractual basis, which is a $7 million a quarter run rate. Orianna, you mentioned. That's likely to be towards the back end of 2018. And frankly, that's conservative in terms of timing, how we think about guidance. And if that changes and we get a little better result, we'll update that in our guidance. Preferred Care, as Dan mentioned, we've -- we're in the process of transitioning those 16 assets. Preferred Care contractual, the $11 million, we're not done with our negotiations as it relates to the transition of those assets. But it's likely that that's -- the contractual end up being in the $6 million, call it, $5 million to $7 million range. And then Signature is -- it's really just a question of getting to the finish line in terms of those negotiations, so our expectation is Signature will have no change.

Okay. And then -- and just to be clear there on Signature. I think -- I thought you said that they're paying 75% of their rent today. Is that right?

That's correct.

Okay. So from an FFO standpoint, you guys are still booking the full rent? And it's also assumed that the full rent is in for the guidance for FFO for the year.

We're recording the full rent. And part of that is that there's significant credit sitting behind that AR build to date. And part of our restructuring is a detailed plan and cash waterfall where we would love to recover that over time, so yes. The answer is yes.

Okay. But you said at some point, you may -- under the agreement, you may be deferring rent, I guess, which would be on top of what is already -- what they're not paying right now in rent?

No, no. That's not the case. If we're able to reach our ultimate agreement with them, the deferred rent will be deferred out of our full contractual rent. And as we disclosed in our supplement, their contractual rent is close to $60 million. So the deferred rent component of that, assuming we get to an answer, would be approximately 10%.

Okay. And then your FAD guidance for the year, does that actually factor in that Signature is not paying the full market rent right now?

It factors in our -- yes. It factors that in and our expectation for Signature.

Okay. Just one more for me. On the asset sales for this year, I mean, should we assume that the cap rate is similar to what you have recently sold at close to 11% since the coverages are, I assume, low on those assets?

I think that's probably reasonable. Call it 10% to 11% on a yield basis, Nick. And as I'm sure you've done the math from when I talked about it, we feel really good about the cap rates that we're seeing in the market where you have cash flow in the assets we sold of $19 million and $224 million in proceeds, which implies an 8.5% cap rate. And as you know, we don't talk about cap rates that much. We typically look at rent yields, but you have the math right. So I would think about it as in the 10% to 11% range. So from our perspective, the redeployment of those sales proceeds results in very little slippage in terms of run rate.

And then sorry just one more question, if I may. You gave a lot of detail on -- I didn't catch it on the numbers for construction budgets. It will be helpful to have this in the supplemental broken down somewhere. But what is the balance of what you sought to fund altogether on the Maplewood, New York City project and some of these other various projects? And then I guess how do you plan to fund that if your -- it sounds like your -- the dispositions are going to be used for acquisitions?

Yes. Just -- Page 7 of the supplemental includes a lot of the information. So if you look at Page 7 of the supplemental, Second Avenue, the remaining commitments, just over $100 million. And you can see the commitments for the other properties that we have coming out of the ground. So just short of total, including other CapEx besides new builds, just shy of $300 million. And really, this reflects our normal pacing of CapEx where we spend somewhere between $25 million and $40 million a quarter as Second Avenue accelerates and they go up a little bit. So from our perspective, that's part of our normal spend. And when we think about recycling of sale asset proceeds, the deployment of this is part of that. And a lot of this, as you can see, runs into 2019. So it's not all being spent this year.

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

Just with regards to your rent coverage disclosed in your sup where you exclude, it seems like, 17% of your rents. What is the coverage on that 17%?

I mean, it would be well south of 1:1.

And why is that excluded? because, I mean, it seems like the pressure is building on some of your operators. You've talked about number of them. But yet, you're disclosing that the rent coverage below 1.2x has decreased quarter-over-quarter, but that other bucket is growing. I mean, what is included in that bucket? Is it -- is like Orianna, Daybreak, Signature, are those in that bucket?

So Orianna is. We've run pretty consistent about -- core versus total is right around 93% for quite a few quarters. And if you remember last quarter, it dropped down to 87%, which was the inclusion of Orianna because we won on a cash basis. And if you add back Orianna, it moves the needle a little bit. Our coverage would go from 135 to 133, give or take. And then in this quarter, we went from 87% of our assets in core to 83%, so that's the 17% you're talking about. That was really 3 additional portfolios that we put into -- 2 were sort of put into held for sale because we got signed purchase agreements on them. And then the other portfolio is the Preferred Care portfolio that we mentioned, which are all transition properties. I mean, they've ultimately wind up in the hands of our other operators. But because they're either -- there was a purchase of sale agreement signed up or we have transition agreements that are in the works, they sort of fall out of our core, and that's been consistent with how we looked at it, Nick, for a long, long time -- Juan, I'm sorry.

It's okay. It looks like on CommuniCare, you had lowered your exposure there, either through asset sales or transition. What's going on with that tenant? Are there any issues that we should be aware of? And can you give us a sense of the coverage?

Sure. The -- we actually did a pretty sizable deal with CommuniCare. We took on 15 facilities in Indiana. But as part of that arrangement, we also did a deal with them where we allowed them to sell and/or buy back certain Ohio assets, which is overall -- their overall portfolio has been the ones that have been struggling. And so we have reduced our exposure to CommuniCare. Those were the underperformers of the facility. Overall, CommuniCare has been doing quite well there, slightly below the mean. Well, actually, in the last quarter, they're quite a bit above the mean. And so they're performing quite well. And to the extent we've got a few more Ohio assets that we plan on disposing of, their coverage will only get better.

And then on the asset sales at $300 million, what's the rent coverage on that pool of assets to -- that corresponds to that 10% to 11% cap rate that you just talked about?

I can tell you it's significantly below 1:1

Okay. And what's the coverage on a same-store basis for the 83% of rents shown in the supplemental to my initial question? How has that trended on an apples-to-apples basis?

I'd have to calculate that. I don't have that off the top of my head.

Next question comes from Michael Knott with Green Street Advisors.

On Signature, can you still help us understand how -- if you did take a deferred rental obligation, how that would fit with booking the whole rent and adjusted FFO? I just didn't quite understand that. And then sort of related to that, it sounds like going to cash accounting and that situation is a nonzero probability, but the guidance seems to assume 100% probability at status quo. Can you just help us understand that a little bit more?

On the guidance part, based on fact and circumstances, right now we fully believe and are confident that, that resolution will be reached. And basically, what I was saying that, if for some reason it keeps sliding and we put it in on a -- and we would be required to put it on a cash basis, again that is only accounting. There's no impact on the negotiations and the final outcome. It's just we would then stop recording revenue until their past-due AR is caught up to a certain degree. But that had no -- so given the fact the circumstance today, there's no need to do that so it is in our guidance. And then from the second part of that, on our guidance standpoint, we have factored in what we anticipate that final outcome would look like that's part of our guidance.

Okay. So if you did take a deferred rental obligation, that would reduce your adjusted FFO contribution from Signature for '18 versus '17, and that's in your guidance?

That's correct. That's in our FAD as well, yes.

Okay. That's helpful. And then on the asset sales, when you say evaluating the $300-plus million, just how far along are you on deciding on the amount? And what's the timing sort of -- from what should we expect? Do we expect most of that in the first half of the year? Or. . .

Yes. I would -- it's definitely going to be earlier in the year. The evaluation includes evaluating whether there are potential sellers out there. And some of these potential sales have moved up far enough along where we have purchase agreements. But as you know, Michael, signing a purchase agreement is different than closing. So I would expect from a timing perspective that you'd see a significant amount of this within the next 3, 4 months.

Okay. And then Taylor, while I've got you, can you give us a little more color on your M&A comment in your prepared remarks? Is that more at the operator level or real estate level? Or just any more color would be helpful on that.

The real estate level. I think it's just our -- what we've seen a number of times where you go through these cycles, there's a fair amount of uncertainty. The assets that are out in the marketplace for us generally aren't that attractive. But I think as this cycle begins to end, what we typically see is an uptick in real estate sale activity. And I would expect that to occur again, back end of '18 into '19.

And when you say that you mean more so it's sort of the fragmented part of the market, smaller owners and -- so those types of owner?

Yes, what we would typically focus on in terms of consolidating. Yes.

Okay. And then last one for me, and I'll hop off. Can you just comment on Genesis and whether the performance there is still, as you've said before, pretty good? And if it is, can you just maybe comment on why the performance there seems to be different than what other owners continue to experience?

Yes. The -- our Genesis -- our portfolio performance has continued to do well. It has been and continues to be above the mean. I can't really comment on why it does better than other portfolios, other than obviously there are different assets in different states. A lot of our assets are legacy Sun facilities. We continue to support the management team. We think they're doing a good job. They have done a good job, and we will remain supportive. But our portfolio has -- once again has been consistent and continues to perform.

Our next question comes from Tayo Okusanya with Jefferies.

A couple of quick ones for me. In regards to the acquisitions and sales plan for the year, can you just talk a little bit about just kind of timing? I think for the sales, you've kind of given us this 10% to 11% range on pricing but curious what kind of pricing you're expecting on acquisitions as well.

In terms of timing, from our perspective given what we see in our pipeline, it's pretty clear that our sales are going to be in front of the redeployment of cash into acquisitions. And the acquisition market, the SNF assets are still in the 9s, call it, 9.5% type yields as the norm. And I wouldn't be surprised, Tayo, to see that maybe creeping even a little bit more. And on the outside, we really don't look at a lot of that product but I will say on the U.K. front, the yields are 8.5%.

Got you. On the dispositions, again it's really obvious you mean that's like 1-3 event for the whole thing? Or it's more like a first half event?

I would call it a first half event from a modeling perspective. But as we've indicated, we have -- Dan mentioned earlier, we have a handful of purchase agreements that, depending on how things go, could be first quarter.

Okay. Got you, and that's helpful. Then going to Preferred Care, are you actually booking revenue for it today, even though it's in BK?

As of today on Preferred Care? Yes. They're on a cash basis. So whatever they pay, we book.

Okay. So then on a cash basis, okay. And then this idea of moving from $11 million in rents down to about $6 million to $7 million with the transition, when do you expect that to happen? Is that like most models in right now? Is that a back half event where you kind of have the drop in revenues? Or when are you kind of expecting it?

Our view is it's likely to be -- we're hopeful it's a first quarter event. They are moving through, as Dan mentioned, bankruptcy, so we have to deal with that element of it. But our hope is we move on in the first quarter because we're moving them to existing tenants that have really strong credit profile, so we feel very good about -- we don't feel good about the cut, although we knew that portfolio would get remarked eventually. This would otherwise expire in 2023. It was accelerated because of the event that occurred, but the credit is going to be incredibly enhanced.

Got you. And then Signature, again I think I kind of understand what's going on there. But I guess I'm curious. If they're only paying 75% of their rent today, why is the expectation that the rent deferral will only be 10%?

Well, they're going through a process, Tayo. So they've engaged professionals. They're expensive. They are working through a variety of other things. But it's principally going through this process and professional costs and paydowns of other obligations as running through the date of Signature. Dan, do you have any...

Well, the -- because of the resolution, once it's hopefully [8] is -- less with the discount, then this -- then the 75% is considerably less, so hence the difference.

Okay. And then last one for me. Again, I appreciate your patience. We've kind of talked through all the tenants where -- kind of known problems that you've you disclosed over the past few quarters. Could you just talk a little bit more about some of the other tenants we have not discussed, again names like CommuniCare, Maplewood, HHC, Guardian, Diversicare? What's kind of like the status of your other top tenants? What's happening with them?

All the names you just mentioned, including all the other top 10, are -- have been pretty steady over the course of the last several quarters. Everybody is dealing with labor pressures. Everybody is dealing with issues in different given markets. But for the most part, the coverages on the top 10, excluding Signature and Orianna, that really held up. We don't have any outliers there. And in fact some instances, we've got some portfolios that have actually crept up a little bit.

Our next question comes from Daniel Bernstein with Capital One Securities.

I actually just wanted to go back to Preferred Care. I just want to understand. Is the $11 million in contractual rent, that was -- that's in 4Q, and then it's going to drop to that $5 million to $7 million range in 1Q. Is that how we're going to model that? I just want to understand.

Yes. From a modeling standpoint, that's good.

Okay. And then in terms of -- how are you thinking about underwriting the credit? It seems like the industry is moving from more national operators to these smaller regional operators kind of almost like a re-fragmentation of the industry a little bit. Are you underwriting the credits of those operators differently? Are there new operators that may take over some of these assets? Or is it just all existing operators that you're going to transition to?

Well, most -- it's existing operators. And it's the same model that we've talked about, which is the regional players who continue to get bigger, folks that have 20, 30, 40 facilities that have the capacity to go to 50, 60, 70. That continues to be the strategy. So I don't think it's -- I think it's really just the regional consolidation, which has been a big part of our strategy for a long time, and that's where these properties will go.

Okay. And I don't know if you can do this, but are you able to bifurcate maybe some or how the lease coverages look between seniors' housings, skilled nursing and maybe the rental lease coverage versus the rent covered -- versus the interest coverage on your mortgage debt? It's a little hard to understand. Which of those buckets are doing well or worse? And I don't know if you can detail that a little bit more or not, but that's the question.

We don't have that by bucket today. I can tell you just generally speaking, our SNF coverages are higher than our out coverages. That's been consistent forever. But we could -- we thought at one point if it got -- the out portfolio got materially enough, then we would start to segregate how we look at the world. But to date, once again the out portion is still only around 10% or 12%. We could break that out, I suppose, in the future.

Okay, okay. Yes. No. I was just trying to figure out if the trends of the interest coverage versus the -- yes, the SNF coverage versus the seniors' coverage and it may be a difference of -- as how we view your -- the safety of the SNF leases versus the off leases, which obviously yield lower coverage.

Our next question comes from Eric Fleming with SunTrust.

The insurance proceeds, is that in the guidance? And the timing, would that be second half?

That's not in the guidance. Because again, that's just cash that comes in and what used to rebuild the facility or...

Yes. when we thought about it, Eric, the cash flow will come in likely as a rebuild. So we'll be able to redeploy it, but it's going to take a period of time.

Our next question comes from Todd Stender with Wells Fargo.

Maybe just wanted to get a sense of the current underwriting on an EBITDAR rent coverage standpoint. Maybe you can point to what the Preferred Care leases will go to, the ones they're transitioned and then what your current underwriting is on new acquisitions.

Well, our current underwriting on new acquisitions has held up. I mean, it's the 1.3 to 1.4 range and really, quite frankly, in the last year. So it's been closer to the 1.4 range. We're not done on the Preferred Care releasing. So I don't really want to telegraph what we're ultimately shooting for. It's going to be below that with the expectation that the cash flow will be supplemented by putting these facilities into the master leases of existing operators that have added rent coverage cushion, so they can absorb a period of time where they take on these underperforming facilities.

Okay. And how about -- just going back to Genesis. Are there any Genesis facilities included in the $300 million of asset sale expectations?

No.

And just as a reminder, what's the dollar amount in loans that remain outstanding to Genesis?

$48 million.

And then just lastly. I guess on the balance sheet, you guys were talking about the net debt to EBITDA. I didn't quite catch the pro forma expectations. It sounds like it was getting closer to 5, which should be a pretty good dip.

Well, yes. But that also posts the completion of the Orianna transaction.

Okay. So a year-end number that -- so for timing for the pro forma, that's a couple of quarters out, you'd say?

Absolutely, Again, it's post that and that you'll see that in the footnote in the website.

The next question is a follow-up from Tayo Okusanya from Jefferies.

Yes. Just a quick one. The -- Dan, you gave some really good color about the overall regulatory outlook, the -- some of the proposed cuts coming off, some of the changes. So the therapy caps are positive. When you talk to your tenants and they kind of juggle all the stuff, including potential RCS changes, what's the general tone? Do they feel the net impact of all this stuff will be slightly positive, slightly negative, neutral? Does it depend on the tenant and what their overall business mix is today? Just trying to get a sense over the next year or 2 what the regulatory changes could mean for the profitability of your tenants.

Yes. It absolutely is dependent on the tenant. But the overall general sentiment from everything, everyone knows at this point is that it's neutral to slightly positive.

Okay. That's helpful. And then one more for me. The insurance proceeds, again they're not in the numbers you set in guidance. But when you do get to proceed, do you book it as revenue? Or what is it booked as?

It is booked as income because we had to take the impairment, but that's not in the numbers.

So that would be upside to your AFFOs if you do get the proceeds...

I would exclude that from the AFFO, just as I excluded the impairment related to it.

Next question is a follow-up from Juan Sanabria with Bank of America.

Just to follow up on Todd's question, I believe, on the Genesis loan. So what's assumed there in terms of accruing for interest income on that $48 million loan? And then there was like a temporary forgiveness to them. And if you could just give us a sense of kind of what -- how that restructuring for Genesis is playing out when you expect interest to continue to repay it again.

So we continue to accrue the interest on that loan, Juan. That's our one significant concession and direct level workout that's really driven by rather 2 big landlords, Welltower and Sabra. Just to give you a little bit of color on that loan, that loan is fully collateralized, very sufficiently collateralized, including the accrued interest. So we feel very comfortable about that loan and any scenario. In terms of where Genesis is headed, we'll leave that to them. But the pieces, we know we feel good about their progress.

So when did they start paying cash again on the loan? What's your expectation? What's in the guidance, I guess?

My understanding was that they haven't stopped making any payments on that loan. There was a bifurcation between a cash component and a fixed component.

So the forbearance as of February. So we don't expect that to come back in March unless there are some -- there's no other -- there's been no other discussion related to it, but it would be -- the expectation would be March unless we have some change between now and then.

Okay. And then just on your demographic comment, what's the average entry age of a skilled nursing customer?

Yes. It's a very interesting, Juan. The utilization rates for skilled, if you look at each age from 65 to 75, the curve is very gradual. And it moves up, obviously, and then it's the 75- to 76-year-old age group and up each -- by each year. It starts to increase very significantly, as you would expect, all the way in through the 80s and 90s. It increases each year of age. So if we, call it, 76 years old as an [interesting] point where you start to accelerate utilization and you think about birth rates beginning to increase in 1940. So a couple of years ago, we started to see those 1940-year-olds first hit 76, now 77 and 78 years old. And they're progressing up and we have a lot behind them from a natality perspective from 1940 on. And then '45, obviously it explodes. But from '40 on, you have birth rates going up, and that's part of the driver in this demographic and part of the detailed analysis that Steven Insoft and Matthew Gourmand will work on to provide high-level information to our investors.

So the average age of a skilled nursing patient is in the mid-70s. So 10 -- more or less 10 years younger than seniors' housing? Is that what you guys are seeing?

If you look at -- and we'll provide the utilization curve that we've developed as part of our information on -- at least on a national basis, we'll provide it. The mid-70s utilization rates, that's where you really start to see it pick up in a meaningful way. So I hesitate to say an average, but because it weighs even more heavily as you get out on the curve. But I think it's fair to think about it as mid-70s and beyond driving a bulk of admissions into our facilities.

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

Thank you very much for joining our call today. We'll be available for any follow-up that anyone may have. Have a great day.

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