Omega Healthcare Investors Inc (OHI) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors Third Quarter 2020 Earnings 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.

Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; Chief Corporate Development Officer, Steven Insoft; and Megan Krull, Senior Vice President of Operations.

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, dispositions or transitions 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 identify 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 NAREIT 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 NAREIT FFO and adjusted FFO, in our recently issued press release. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega.

I will now turn the call over to Taylor.

Thanks, Michele. Good morning, and thank you for joining our third quarter 2020 earnings conference call.

First and most importantly, I again want to thank our operating partners and their staff who have cared for the tens of thousands of residents within our facilities. I would also like to recognize and thank the federal government and the states for their support of the skilled nursing and assisted living communities. The allocation and distribution of additional government funding, along with the communication and evolution of clinical protocols, had been critical in protecting and saving lives as we combat this unprecedented deadly pandemic.

Turning to our financial results. We are very pleased with our third quarter earnings. Our adjusted FFO of $0.82 per share and our funds available for distribution of $0.78 per share allowed us to maintain our quarterly dividend of $0.67 per share. The payout ratio further improved to 82% of adjusted FFO and 86% of funds available for distribution.

Additionally, for the third quarter, we collected virtually all of our contractual rents. Our second quarter consolidated coverage, excluding CARES Act funding, was 1.05x rent. This highlights the resiliency of the skilled nursing facility industry in the face of an unprecedented 800 basis point drop in occupancy. Our broad geographic and operator diversity has resulted in widely different results among our operators as COVID-19 hotspots have moved throughout the country.

Importantly, as we have seen high infection rate geographies abate, we've also seen operator expenses drop and related cash flows improve. This dynamic, the ebb and flow of infections and the ability of our operators to respond, control the virus and flex their care delivery model, provides us with cautious optimism that once the pandemic is controlled, pre-COVID operating environment, with appropriate new infection control protocols, will rapidly return.

In the meantime, as we think about getting from here to there, the federal and state government support will be critical for the skilled nursing and assisted living care settings. The latest round of CARES Act funding, which requests providers to detail revenue shortfalls and increased expenses, is an important step in targeting operators that have been disproportionately impacted by the pandemic. We remain hopeful that a vaccine will be available soon and appreciate the government focus on delivering the first round of vaccines, skilled nursing and assisted living residents and their frontline caregivers. This will be a crucial catalyst to returning occupancies and cash flows to pre-COVID levels.

I will now turn the call over to Bob.

Thanks, Taylor, and good morning. I would like to start by also thanking our operators and their employees for their continued heroic efforts during this pandemic. As Taylor said, they are saving lives every day and they are providing essential care to a portion of our elderly population.

Turning to our financials. Our NAREIT FFO on a diluted basis was $15 million or $0.06 per share for the quarter as compared to $163 million or $0.72 per diluted share for the third quarter of 2019. Our adjusted FFO was $192 million or $0.82 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release, in our supplemental and on our website.

In the third quarter, in consultation with our auditors, we determined we will no longer record lease-related revenue on a straight-line basis for operators that have reported substantial doubt regarding their ability to continue as a going concern. We had 3 operators communicate to Omega going concern disclosures, primarily as a result of COVID-19. As a result, we recorded revenue for each operator on a cash basis and wrote off as a reduction to revenue for previously recorded straight-line receivable and lease inducements, totaling $142 million. This accounts for nearly 100% of the difference from our revenue reported for the second quarter.

Revenue for the third quarter was approximately $254 million before adjusting for the nonrecurring write-down of the straight-line receivables and other nonrecurring revenue items. The revenue for the quarter includes approximately $8 million of noncash revenue. We collected over 99% of our contractual rent, mortgage and interest payments for the third quarter, excluding, of course, rental payments due from Daybreak, which is under a forbearance agreement and has not been making payments in 2020.

Our G&A expense was $9.3 million for the third quarter of 2020, in line with our estimated quarterly G&A expense of between $9.5 million and $10.5 million. Interest expense for the quarter was $51.8 million, with a $1 million decrease over the second quarter of 2020 resulting from lower average daily outstanding borrowings on our credit facility.

On October 7, we issued $700 million of 3.375% senior notes due February 2031. This transaction was a leverage-neutral transaction. However, we anticipate our quarterly interest expense to increase approximately $1.8 million as proceeds from the offering were used to repay $625 million of LIBOR-based term loan debt maturing in 2021 and '22 and $58 million of LIBOR-based credit facility debt, replacing them with a slightly higher fixed rate treasury-based debt.

Our balance sheet remains strong, and throughout 2020, we continue to take steps to improve our liquidity. At September 30, 2020, we had $171 million of outstanding borrowings under our $1.25 billion credit facility and had approximately $36 million in cash and cash equivalents. Our October bond issuance repaid $683 million of short-term LIBOR-based maturities. We have no bond maturities until August 2023.

In March, we entered into $400 million of 10-year interest rate swaps at an average swap rate of 0.8675%. These swaps expire in 2024 and provide us with significant cost certainty when we refinance our 2023 bond maturity.

While we believe our actions to date provide us with significant liquidity and flexibility to weather a potential pronounced and prolonged impact to our business, we continue to evaluate any additional steps that may be necessary to maintain adequate liquidity.

At September 30, approximately 88% of our $5.2 billion in debt was fixed and our net funded debt to adjusted annualized EBITDA was 5.25x and our fixed charge coverage ratio was 4.3x. It's important to note, EBITDA in these calculations does not include any revenue related to construction and process associated with 2 new builds scheduled to become operational within the next 12 months. When adjusting to include a full quarter of contractual revenue for new investments completed in the quarter as well as the 2 new builds and then eliminating revenue related to assets sold during the quarter, our pro forma leverage would be roughly 5.12x. It's important to note, we have lowered our leverage 4 consecutive quarters with the goal of returning our leverage to less than 5x.

I will now turn the call over to Dan.

Thanks, Bob, and good morning, everyone.

As of September 30, 2020, Omega had an operating asset portfolio of 957 facilities with over 96,000 operating beds. These facilities were spread across 69 third-party operators and located within 39 states and the United Kingdom.

Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio increased during the second quarter of 2020 to 1.84x and 1.48x, respectively, versus 1.68x and 1.32x, respectively, for the trailing 12-month period ended March 31, 2020. These numbers were negatively impacted by a number of external factors affected by COVID-19, including a significant drop in patient census and a dramatic spike in operating expenses, particularly labor costs and PPE, and which were offset by the positive impact of federal stimulus funds.

During the second quarter, our operators cumulatively recorded approximately $175 million in federal stimulus funds as a result of the CARES Act. Without federal stimulus monies being included, trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the second quarter of 2020 to 1.61x and 1.26x, respectively. EBITDAR coverage for the stand-alone quarter ended June 30, 2020, for our core portfolio was 1.87x, including federal stimulus, and 1.05x, excluding the $175 million of federal stimulus.

Operator performance, as described, was significantly affected in the second quarter of 2020 and will continue to be affected in the foreseeable future. On the negative side of the equation, cumulative occupancy percentages for our core portfolio went from pre-COVID rate of 84% in January of 2020 to a low of 75.1% in August of 2020. Based upon what Omega has received in terms of occupancy reporting for October to date, occupancy has rebounded slightly to 75.6%.

It's important to note that the impact on a specific facility's occupancy correlated closely with the number of confirmed COVID-positive residents and employees in any given facility. Some heavily affected facilities have seen occupancy erosion of 25% or more, while relatively unaffected facilities in non-hotspots have seen only minimal occupancy declines or, in some cases, none at all.

In addition to COVID's negative effect on occupancy, the virus has also caused a significant spike in operating expenses, particularly labor costs and personal protective equipment or PPE. Per patient day operating expenses for our core portfolio increased approximately $25 from January 2020 to June 2020, but decreased about $2 per patient day as of the end of August, the latest stats available. While too early to confirm and absent a significant COVID spike, we expect PPD expenses to decline in the coming quarters based upon our ongoing conversations with our operators.

As previously stated, our combined coverage for the second quarter ended June 30, 2020, on a stand-alone basis was 1.05x without taking into account the benefit of the approximately $175 million in federal stimulus funds recognized in the quarter. It is not hard to envision the financial devastation the virus would have had on so many operators had the CARES Act not been implemented.

It should be noted that initial guidance from the Department of Health and Human Services, or HHS, on revenue recognition for monies received via the CARES Act has resulted in Omega's operators recording and recognizing the stimulus funds on an inconsistent basis. These inconsistencies have resulted in unrealistic and unsustainable coverage ratios after applying and recognizing the federal stimulus funds associated with the CARES Act. However, we believe that newly released HHS guidelines will help operators achieve a more consistent methodology for the recognition of revenue in the coming quarters, thus resulting in coverages that, on average, resemble those coverages reported prior to the pandemic.

Turning to new investments. In the third quarter of 2020, Omega funded capital expenditures totaling $22 million. Year-to-date, Omega has made new investments totaling approximately $163 million, including $93 million for capital expenditures.

Turning to dispositions. During the third quarter of 2020, Omega divested 6 facilities via 6 separate transactions for total proceeds of $61 million. Year-to-date, as of September 30, 2020, Omega has divested a total of 19 facilities for $117 million.

Lastly, I would once again like to applaud our operators' tireless, selfless efforts, particularly those employees on the frontline. Thank you for your unwavering commitment to the health and welfare of our nation's most frail and vulnerable elderly population.

I will now turn the call over to Megan.

Thanks, Dan, and good morning, everyone.

Since our last earnings call, additional support has been provided by the CARES Act under the $175 billion health care fund. Details of the second targeted distribution to Medicare-certified nursing homes of $5 billion that was announced July 22 have subsequently been formalized. The first $2.5 billion was paid out in August at $10,000 per facility plus $1,450 per certified bed, equating to approximately $160,000 per facility. The second $2 billion will be payable in 5 monthly payments starting in October based on each nursing homes' performance for the month prior and one payment for the aggregate performance in terms of its rate of infection being below the county infection rate and its death rate being below a national performance threshold for nursing home residents. The remaining $500 million is likely to be based on infection control collaborations as well as for COVID-specific units.

In September, HHS announced that assisted living facilities would be eligible to apply for up to 2% of 2019 patient revenues under the Phase 2 general distribution allocation, which had previously only been open in Medicaid and CHIP program providers. The willingness of HHS to establish a portal for licensed assisted living facilities is a giant step in the right direction in terms of much needed support for that sector.

In October, HHS announced a new $20 billion Phase 3 general distribution, for which an application process is opened through November 6. Available to all health care providers previously eligible for payouts, both SNFs and ALFs will be able to apply. After all applications have been submitted and reviewed, payouts will be based on some yet to be determined percentage of change in net operating income related to patient care. Additionally, the repayment of advanced Medicare payments, originally to start in August over a 90-day period, has been extended out to 1 year from receipt of payment, March through April 2021, and will be payable over an extended period of time with recoupment at 25% of remits for the first 11 months, 50% over the following 6 months and any remaining amount via lump sum.

With testing key to the control of the virus prior to a vaccine, CMS in August mandated the regular testing of nursing home employees weekly, biweekly or monthly based on the positivity rates in the county each nursing home is located. And with accessibility to tests at reasonable rates, key to that mandate as well as the visitor testing, given revised visitation guidelines, CMS has also bolstered its initiative to provide access to tests. In early September, CMS announced that it had contracted with Abbott to provide nursing homes with an initial 750,000 antigen rapid tests where no machine is needed, with additional tests expected to go out in regular intervals throughout the remainder of the year, including to assisted living facilities. These tests can then be purchased at $5 per test.

HHS also announced in October that it had signed agreements with CVS and Walgreens to provide vaccines to nursing home residents, likely as a priority group once the vaccine is available. A steady continued support of the government, both financially and on the testing front, for the long-term care industry has been critical in providing operators the ability to control a virus that is unlike any other that the industry faces today. But there is no rest for the weary as it relates to the battle against COVID-19, and continued government support into 2021 is necessary to combat both the long-term and short-term effects of this virus on the industry and the population that it serves each and every day.

I will now turn the call over to Steven.

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

In conjunction with Maplewood Senior Living, we have completed work on our ALF memory care high-rise at Second Avenue and 93rd Street in Manhattan. The opening of the project is pending licensure by the New York State Department of Health. The final project cost is expected to be approximately $310 million.

The COVID-19 pandemic poses certain challenges unique to senior housing operators, including increased costs, the challenges of managing COVID-positive patients and meaningful practical limitations on admissions. While they very much appreciate the help they have received, private pay senior housing operators have not seen the level of government support provided to other areas of senior care.

We saw challenges to our senior housing census throughout the second quarter with variations tied to when and where COVID outbreaks were encountered. However, we've seen evidence of stabilization and strengthening of census in markets where admission freezes have been lifted. For example, our Maplewood portfolio, which is concentrated in the early affected Metro New York and Metro Boston markets, saw meaningful census erosion early in the pandemic, with second quarter census hitting a low point of 80.4% in early June. That said, their portfolio occupancy has returned to 84.5% by the end of August.

While anecdotal, this experience provides some evidence that the pent-up demand during admission freezes can translate to faster than typical fill rates in the months that follow.

Including the land and CIP, at the end of the third quarter, Omega's senior housing portfolio totaled $1.6 billion of investment on our balance sheet. All of our senior housing assets are in triple-net master leases. Excluding our investment in our New York City development, approximately 1/3 of our investment is in Maplewood assets, which are in 1 master lease; a third is in the U.K. with 2 master leases; 1 for Gold Care assets and Healthcare Homes assets, respectively; and 1/3 is intermixed with SNF assets in various master leases.

Our overall senior housing investment comprises 130 assisted living, independent living and memory care assets in the United States and United Kingdom. As expected, this portfolio on a stand-alone basis had its trailing 12-month EBITDAR lease coverage fall to 1.16x in the second quarter of 2020.

With COVID outbreaks affecting different markets at various times, it is reasonable to think that coverage may see additional downward pressure during the course of the pandemic. While we remain constructive about the prospects of senior housing, the COVID-19 outbreak has warranted a far more selective approach to development. While we make further progress on our existing ongoing developments, we continue to work with our operators on strategic reinvestment in our existing assets.

We invested $22.3 million in the third quarter in new construction and strategic reinvestment. $12.6 million of this investment is predominantly related to our active construction projects. The remaining $9.7 million of this investment was related to our ongoing portfolio CapEx reinvestment program.

I will now open the call for questions.

(Operator Instructions) Our first question today comes from Omotayo Okusanya with Mizuho.

Hope you're all keeping well and keeping safe. My first question was a 2-parter just on government reimbursement. Obviously, I think the rent coverage ratios indicate that that's been a big help. But question is, for how much longer do you think the government ends up supporting the space? Specifically, what are you expecting in terms of another round of stimulus? And even with some of the current stimulus complete as it pertains to programs that are temporarily increased, do you expect those to keep going? Or do you -- when they expire, do you expect the government to kind of stop supporting them? Just kind of curious, your overall outlook for further government support.

A couple of things. Remember, there's still $30 billion of unallocated CARES Act money available. And at some point, that will be allocated. I would expect that the skilled nursing facility industry will receive an amount that's consistent with what we've seen in prior routes. And I think ultimately, we will see another round of stimulus when the politics get settled out. It just -- it doesn't make sense to have provided the type of support that's been provided to date and then to just stop. And that goes back to just, as you know, the nature of this business is an important piece of the continuum. So our expectation is that there's a lot of money in the system. Not all of it has been used. There's more forthcoming. And I think, at some point, we'll have another round of stimulus.

That's helpful. But my second part on that is, again, some of your comments that have the weaker rent coverages. I mean they're all current on rent, which is great, but is there any risk there of kind of lease restructurings happening at some point down the road if you continue to get less significant government stimulus and support?

I think that's always a risk, but the one thing I would point out -- that I pointed out in my comments earlier is we've seen the hotspots move around the country. So you'll see stress with the hotspots that abates. And so it's very difficult to predict long term the operators that will have ongoing stress, but we've seen operators rebound pretty rapidly as well.

So I think the possibility is out there. I don't think it's broad and be much more targeted. And from our perspective, we haven't had those discussions to date. And we ultimately do -- I think any form of rent relief would be in the form of deferred rent because, ultimately, we know the back end of this and seeing the return of occupancies in markets as the virus has abated. I think that's the dynamic we're going to see going forward.

Our next question comes from Nick Yulico with Scotiabank.

Just a question on skilled nursing occupancy. I mean you did talk about how it's been a bit of a challenge for occupancy to come back for operators. Maybe you could just talk about what you're hearing from your operators about why that delay is happening. We have seen elective surgeries picking up again in the U.S. hospital system and yet it doesn't seem like that's really creating a bigger flow of discharge to skilled nursing and post-acute rehab yet.

So the first thing that we had to see was kind of a flattening of the occupancy trend, right? It's been going down for quite a few months. We think it sort of hit bottom, if you will, in August of this year. We have seen it creep up. It depends. It's market-driven, obviously. Some areas have seen it come up faster than others. But in our conversations with the operators, what they're looking forward to see is a rebound more of the long-term care resident. That's the one that has a much longer length of stay. But the admissions of those residents is much slower historically, maybe 1, 2, maybe 3 a month in a given facility. So that's a slower clawback, if you will, to regain pre-COVID occupancy levels.

On the Medicare side, we have seen a pickup in occupancies in acute care hospitals. They're certainly not back anywhere near what they were before COVID, but I think people that are doing elective surgeries are really more of your healthy folks that have put these elective surgeries off and not the type of patients that would go from an elective surgery into a nursing home for rehab. Those would be more your 80-plus-year-old residents with comorbidities. So a lot of these elective surgeries, they're not being discharged up to skilled nursing facilities. They would never have been in the past, and they're not now. So I think sort of the last piece of the hospitals having elective surgeries come back is these elderly population right now, who is, I think, just quite frankly, wary of going into an acute care setting and ultimately perhaps a skilled setting.

Okay. That's helpful. Second question is just on the acquisition market right now. I mean, are you seeing much in the way of opportunities? And I mean, how is -- how does underwriting work in a COVID world for -- if you're looking particularly to buy, let's say, skilled nursing?

We have seen a little bit of uptick in the acquisition environment. We've seen some more deals. Underwriting is challenging, depending on how hard what we're looking at has been hit. We, of course, look to historical levels pre-COVID with the -- we then try to -- a bridge to get back to those levels, but it is challenging. But we have seen an uptick. We are going to be opportunistic if we can. If we see deals that present themselves, we will look at them very, very hard.

Any pricing change that you guys are seeing? I mean, is it an attractive time if you want to be buying skilled nursing? Others have talked about that pricing has gotten more attractive on the senior housing side. What about skilled nursing?

I don't think we've seen enough trades in skilled nursing to really decide. I mean I think we're going to have to price it where we see it. And maybe that will dictate where pricing ultimately ends out, but there has not been enough deals consummated at this point.

Our next question comes from Connor Siversky with Berenberg.

First question on skilled mix. I mean it seems to be sequentially improving still and a little unsure of how to look at this going forward. So I mean, is this a trend that has just been exacerbated by the pandemic? Or is it something that we should expect to moderate over time? So any detail...

Yes. So we have seen an uptick in skilled mix, and it really is because of the ability of the facilities to skill in place. So if you have a resident that is otherwise not Medicare-eligible is infected with COVID, they automatically skill into a skilled resident. So that's really behind the big upswing in the Q mix going up. And so you can only expect that to continue as long as you've got COVID out there and COVID outbreaks. We would think that would moderate over time as the COVID cases decline.

Okay, and one other. Looking at EBITDAR coverage, above 1x during Q2, and then given some of the occupancy declines we had seen, maybe worse in some markets than others, I mean, could you help build the bridge here and then maybe outline some of the factors that were supporting coverage during Q2?

Well, some of the things that were supporting, obviously, there was government stimulus -- federal government stimulus. There was also the states, in many instances, increase their funding, both through FMAP and some just COVID-related increases in rates. As we just talked about the ability to skill in place, that's favorably impacted our facilities. You have the impact of the 2% sequestration going away. That was favorable. So you have some positive things happen during the quarter, which, I think, bolstered coverage to some degree.

Right now, in the short run with -- in the next 2 quarters, we don't see a lot of folks moving around in these buckets too much unless they change the methodologies, as I alluded to, about how they record federal stimulus. I think that's going to be the big driver in how these -- how people move amongst these different buckets.

Okay. And then -- and one last quick one for me. Looking at some news in regard to state budgets, reduction in tax revenues in a lot of cases, is this a concern for you guys, something you have eyes on and just maybe offer some color on how you plan to navigate 2021 if this issue is to persist?

Yes. So we always obviously pay attention to state budgets and think about the potential impact on our operators' revenue streams. But I will say that when you think about how Medicaid is funded and the fact that there's a substantial federal match, oftentimes up to 3x the amount of the state funding for Medicaid, very rarely do you see states confronted with budget constraints where they are cutting Medicaid rates because the federal match is a multiplier of that cut. So we've historically seen states where there's budget issues, whole Medicaid rates flat, which, frankly, in this environment, I think, would be okay.

Our next question comes from Daniel Bernstein with Capital One.

I wanted to just try to think about -- if we go post-COVID, and I know this is more theoretical and hard to predict, but what is skilled nursing going to look like? Is it going to be much higher acuity Medicare and more Medicaid mix going forward than what it was pre-COVID? I'm just trying to understand how you guys might or thinking about what skilled nursing might look like post COVID.

So I don't know that -- COVID has obviously accelerated a lot of other changes and shifts in other industries, particularly technology.

I think as it relates to skilled nursing, you're probably right in that we've seen, for the last decade, a shift into higher acuity Medicare, higher acuity Medicaid, frankly. I think that shift just continues. I don't know that COVID accelerates it dramatically. But given, as we all know, the demographics that push along, that shift will be welcome in terms of not overwhelming the limited supply in this system.

But I think that's what it looks like that we get to -- we get post-COVID, you'd have what you just said, continued higher acuity on the Medicare side and a Medicaid base that has more comorbidities than existed a decade ago.

Okay. Does that kind of vision allow you to underwrite assets? I know it's very difficult. You guys have alluded to it being difficult. But if you can go -- this is probably what it's going to look like, can you underwrite assets? Or is it just so varied by property by property or portfolio that it's just too much of a generality to go? This is how it's going to look like, let's underwrite it.

Well, one component of the underwriting is the structure of the physical plant. And we've seen almost the complete elimination of 3- and 4-bed type rooms. I think that gets completely accelerated with COVID-19. So you have to at least underwrite the physical structure knowing that you need to have at the middle, semi-private rooms, and then obviously, the ability to control infections within those facilities. And so that goes to airflow and those type of dynamics. So I think retrofitted buildings from the 1960s, that's a lot tougher to think about than purpose-built facilities in 1980s and 1990s.

Okay. And then the last question I have is just trying to understand portfolio performance in the skilled nursing industry itself. Was there -- and knowing that COVID -- wherever geographically COVID was high, it makes a difference. Did you see any difference between urban, suburban facilities, rural facilities in your portfolio in terms of performance? And then maybe again, where the facility started off with skill mix? Just trying to understand where the differences in performance are occurring within the skilled nursing industry.

Well, I mean, in our portfolio, yes, certainly, we saw it hit the urban markets first and hardest. Obviously, the biggest outbreak was in the New York City area, Connecticut, New Jersey, that was quite large. Although, quite frankly, we don't have much in that region, but obviously, we did see it hit that area hard and it hit the skilled nursing facilities hard. It also hit Southern California quite hard. And then all -- you just go around the country and pick out your bigger urban spots in those areas, a lot of them were hit, New Orleans, Detroit, Chicago.

So -- and then the rural areas, not near as much. I mean there's some isolated hotspots, but they were pretty isolated. We saw rural Texas not really get hit at all for many months and still it's pretty clean down there. So it did matter a lot where you were. And it did matter whether or not you had a hotspot in the community. So if your -- if that community was hot with COVID, it almost always carried into the nursing home within a week or 2.

Okay. So performance wasn't so much focused on like it was a Medicaid-heavy facility versus a Medicare facility was -- if you have COVID or not?

That's correct.

The next question comes from Nick Joseph with Citi.

You moved a handful of tenants to cash recognition and had the straight-line rent write-off. So I'm wondering if you view that more as onetime or would you expect additional tenants to express going concern and have additional write-offs going forward?

I wouldn't want to sit here and say it's onetime, but it is driven by accounting and how folks report their accounting. So to the extent that you have operators that haven't reported the way Genesis and Agemo reported to date, could they change? Sure, that's a possibility, but I think it's just as likely that they will continue to report as they ask. But remember, really -- this is really driven by an accounting disclosure that requires us to think in a different way about how we book our revenue.

But there's nothing from a facility standpoint with those tenants that you're -- I know the rent is being collected, but there's nothing from a facility standpoint that you're seeing different with those tenants than you're on for the rest of your portfolio today?

The general answer is no, nothing different.

Our next question comes from Rick Anderson with SMBC.

So to that accounting disclosure issue, is that what you're talking about when you mentioned the inconsistent basis -- the inconsistent recognition from HHS stimulus? And can you give me a 2-sentence definition of what that could mean? I'm just trying to understand what's...

So yes, the inconsistent recognition of stimulus money had nothing to do with the write-off straight line. So it's just that the guidance initially was not crystal clear. So some of our operators didn't recognize any stimulus money, even though they took it in, in their facility level financial statements. Some of them attempted to apply it based upon, I think, what the -- what they were intending to do, which is apply it to lost revenue and increased expenses, and the different operators use different forms of that. And then some operators, quite frankly, divided it by a quarter and did it up in 3 equal payments.

So it was all sorts of different methodologies, and that's what I meant by inconsistencies because all of our operators used it -- practically a different one. But we do think that's going to straighten out in the third quarter, in part, but more than likely in the fourth quarter.

Were -- so whatever coverages you disclose will be -- you'll have a lot more comfort with, I guess. Is that correct?

That's accurate. Yes.

Okay. So this is all great that stimulus is coming in and expect it to continue. And it's great that your coverage on average is above 1 even without it, but you obviously have a wide range as you discussed.

So in the aftermath of COVID, I'm wondering, is there going to be some kind of reset where the government says, okay, we helped you survive through this. Now you're on your own -- not on your own, but we have to scale it back a little bit, and so there's going to be some winners and losers in the aftermath of all this. And my question is -- you mentioned the good payout ratio on your dividend. Do you think that there's a reset among your tenants within Omega such that you'll have to, okay, really kind of reset the bar across the board, excluding stimulus because we're now in a more comfortable place regarding the virus, and that there will be a fair amount of tenants where you'll have to have a conversation about rents and coverage and all that sort of stuff such that the dividend could also have to be reset? Is that a too far-fetched of a scenario? Or is that a possibility in the aftermath of this?

I think it's unlikely in the sense of -- you have to look past just the context of our world with 5% of the skilled nursing facilities in the country and think about the other 95%. And part of our underwriting is to have upper quartile-type performers. So if you have an environment where you say, all right, we're going to just change the overall reimbursement of this industry and we're going to drop it, the lower quartile performers are not going to survive. And if you think about the government support of this piece of the care delivery continuum and the idea that you drop rates and force supply out of the system with lower quartile performers, the upper quartile performers are going to survive but you take so much supply out of the system that you work -- it's a cross-current. You work against yourself.

So I think it's -- look, you can never predict where the government falls, but the long-term ramifications aren't good public policy. And that doesn't mean that we wouldn't -- yes, obviously, we have such a big portfolio. There's going to be a component that's going to be in that lower quartile, but not much.

Well, I guess I'm not talking so much about cutting Medicare reimbursement or attacking PDPM or anything like that. If it just stays status quo pre-COVID without stimulus, your starting point in that environment is going to have a fair amount of operators that are underwater from -- relative to the rent payment. I'm just saying, leaving everything else alone, all else being equal, do you think that there's kind of a reset that happens within your portfolio even with a market basket of 2% and everything else that's involved in typical...

I don't think so. I think if you look at where we were pre-COVID and the trend of our coverages and the trend of occupancy, and if we return to that state, there was not -- there is very little pressure in the portfolio at that point in time so...

Right. There might be a period of catch-up to get occupancy back up to that pre-COVID, right? That's my point.

Look, if you have a gap, it's going to be temporary. And you deal with it, but I don't think you deal with it as in the form of a permanent step-down. I mean, that's just not the nature of how we deal with our tenant relations ever.

Our next question comes from Lukas Hartwich with Green Street Advisors.

You touched on -- a little bit on this earlier, but I just want to ask the question a little bit differently. Do you think that the election outcome next week impacts the odds of continued financial support for the skilled nursing sector?

I actually don't. I think that however -- whatever comes out of the election, it may affect the timing, but I think the odds are very, very high that we'll see continued support.

Okay. And then on the dispositions this quarter, do you have a sense of how the pricing on those transactions compared to where they would have traded pre-COVID?

I think most of the deals were struck pre-COVID. I don't think the pricing moved at all.

Okay. So no trading in that case.

And then the last, just a quick housekeeping question. What was the $8 million in nonrecurring revenue?

Yes. It's really 2 components there. It represents cash received related to a contractual repayment of a lease inducement as well as noncash revenue related to this long acceleration of a low market in-place lease assets resulting from transitioning a couple of facilities to a new operator, so really 2 components.

Okay. So some cash and noncash, though?

Yes, that is correct. .

Our next question comes from Jon Petersen with Jefferies.

Maybe I'll ask another election question, but obviously, the election is next week, but it kind of seems likely that we probably won't see any stimulus past or go into effect until next February when -- after everybody's put into place. I mean, is -- I guess, what does that mean for your sector? Is there enough of a bridge of funding right now that everybody can smoothly get to that point next year until the government steps in again?

I'm not sure if it's everybody, but substantially everybody because remember, we had mentioned earlier, there's still $30 billion of unallocated CARES Act money and there's $20 billion in this latest route where applications have been made, but no distributions have yet been made. So you have $50 billion that hasn't yet been distributed that -- think about it, it's 30% of the whole CARES Act pool, and we have 3 months to get into 2021.

Got it. Okay. All right. That's helpful. And then I know you guys said in your prepared remarks that Second Avenue is completed, I think just waiting for kind of approval to get open. I guess what's the time line there? Like do you want to open it right now? Or is it better to wait given the environment? Just maybe give us a little more details on what we should expect there.

Yes, that's a good question. Steven, do you want to take that?

Sure. I think the short answer is we would open it as soon as the state provides us a license to do so which, to your earlier point, is probably sometime in the next week or so until year-end-ish. We're in a funky environment. As you all know, it's a very tough environment in which to push the Department of Public Health given what's going on. We did see a building in Brooklyn get licensed in the last few weeks. So we know the surveyors are out there. We're working and communicating with the state, but yes, as soon as possible.

Got it. And then maybe just one more bigger picture question. I think you guys have alluded to, and I think in today's call, talked about longer term, the demographics are kind of positive for your industry and there's a potential shortage of beds down the road. I guess, does the current environment -- does it put more of a spotlight on the skilled nursing sector? Does it help kind of alleviate those problems? Do we see more construction, more approvals, stuff like that, like further down the road? I know we're all very focused on the COVID environment, but if we think 3 to 5 years down the road, do you think anything has changed?

I don't know that anything has changed. I don't think so. I think the supply constraints that we've seen and the time lags of states responding to lack of supply are always fairly big. So my guess is we will continue to see the dynamic that we saw pre-COVID for the next 5, 6, 7 years.

Our next question comes from Joshua Dennerlein with Bank of America.

Just a follow-up question on acquisitions. Are sellers just not putting assets on the market right now? Or is pricing just -- or are there assets on the market in pricing, it's just too far apart between buyers and sellers to get trades done? And if the latter, what's the big difference between buyer and seller underwriting?

I think there is -- has been a pickup in deals in the market, but it's all relative, right, compared to the last 2 quarters, which was nonexistent. It's picked up. There's a difficulty with underwriting and then there's a difficulty with due diligence, too. It's hard to go into a building and interview employees and kick the tires, bring in third-party contractors, et cetera, to do environmentals and assessments on CapEx needs. So it just makes it a much more challenging environment.

And I think the operators as a whole are just -- they are just trying to minimize the effect of COVID where it stands today. And I think there's a perception that if they were to put a facility on the market today, that it might seem like a little bit of a fire sale. So I think that's slowing things down a little bit. It's just a challenging environment to do deals.

Okay, okay. And then maybe one other one. It was brought up in the opening comments. You mentioned like the faster than normal fill rates of the Maplewood portfolio. Could you maybe elaborate on that? Like how much faster than normal fill up was going on?

Steven, do you want to take that?

Sure. Just by -- and again, it's anecdotal, but in early June, as I had mentioned in my prepared remarks, they hit a low point in their portfolio of just slightly over 80%. The month of June was actually their highest move-in rate in the past 18 months. And the point I was trying to make was just that there was pent-up demand that we saw in that portfolio. I can't quote you exactly move-in, move-out rates in that portfolio, but it was about 3x for that month what they typically saw, which is what we found encouraging.

(Operator Instructions) Our next question is a follow-up from Omotayo Okusanya with Mizuho.

Yes. The FFO impact from the move to cash accounting, could you just let us know what that number is and what -- and kind of what it will be going forward as we kind of model for 2021?

Yes, Tayo. So if you look at it, there was -- basically, you remove the straight-line component of those 2 operators. Most of that was removed in the third quarter. There was a little bit of residual that was not removed in the third quarter, roughly about $2 million of straight-line related to both the timing of Genesis and Agemo when we put it on there, but that's going to get offset by Maplewood receiving their temporary certificate of occupancy. So from an AFFO standpoint, you will see very little. And from a FAD standpoint, you won't see any.

From an FFO perspective, is it -- how much was it? How much is that -- the quarterly impact?

The third quarter had roughly $2 million of straight-line related to Agemo and Genesis.

Okay. So like $8 million annually, okay. That's helpful.

And then, Steven, I may have missed this, but for Maplewood, I mean, could you talk a little bit about what rents were kind of underwritten and what kind of lease-up was underwritten when this project was started? And kind of what your expectations are now that it's about to open?

Yes. Our expectations -- I think the only thing that's changed in the expectations is the timing. But the timing for a period in the past would have increased -- the delay in timing would have increased the overall cost because there was some additional accruals. There was also some additional construction costs, which I alluded to in last quarter's call, but the deposit level has maintained fairly constant. Maplewood has not stopped their marketing.

But that said, if you look at the list of people who are on the deposit list today, it wouldn't be the same list that was in early April, as you might expect, given the frailty of the population. I don't -- I think it's practical to think there -- when we underwrote it, we were expecting a 36-plus month fill up. Will that fluctuate a little bit? I'd rather not handicap it because I don't know when we're going to get the license, but I don't think it's going to move materially.

And what kind of rents were expected for -- that will be charged to residents? And if that number is changing materially, does that impact what kind of rents you're expecting to get from the operator of the building?

No, I don't think so. We're not seeing any degradation in their, what I'd call, sort of revenue per occupied room in their Metro New York properties today. There's been very little, if any, resistance to pricing during the marketing. We think it's going to be a mid to high teens average, call it, monthly fee because, as you will expect, some of that is a base fee and some of it is value-add health services. But there's no indication that the market in New York for those who need that kind of care has really been altered.

This concludes our question-and-answer session.

And I would like to turn the call back over to Taylor Pickett for any closing remarks.

Thank you. Thanks, everyone, for joining our call this morning. Please feel free to contact Matthew or Bob with any follow-ups you may have.