Omega Healthcare Investors Inc (OHI) 2002 Q4 法說會逐字稿

Good morning. My name is Shawn and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Omega Healthcare Investors fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Pickett, you may begin your conference.

Thank you. Good morning and thank you for joining our fourth quarter conference call. Comments made during this call that are not historical facts may be forward-looking statements, such as statements regarding our business outlook, dividend policy, extension or refinancing of debt, and financial projections. These forward-looking statements involve risks and uncertainties that 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 form 10-K and form 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

With me today are Dan Booth, our Chief Operating Officer, and Bob Stephenson, our Chief Financial Officer, who will provide operating and financial reports. Other members of the management team will participate in the question and answer session. I will review our FFO results, our debt refinancing issues, our releasing and restructuring activities, and our dividend policy.

FFO; normalized FFO of $0.24 per fully diluted share is slightly ahead of our operating plan, and is a significant improvement over our third-quarter results. As Bob will review, our core revenue was up, while interest and general and administrative expenses are down. The following items are pulled out of our reported fourth-quarter results in order to normalize FFO.

First, owned and operated facilities earnings. We've pulled out a $2.6m loss from these assets in the quarter, in order to normalize FFO. That $2.6m includes a $1.7m non-cash write-off for owned and operated accounts receivable. We've also pulled out $2.7m related to the buyout of Colorado Vissault (ph) interests, also O&O properties that have gone away. Third, we pulled out capital raising costs of $7.0m. Finally, in addition, as part of normalizing our FFO, we backed out one-time revenue that we recorded during the fourth quarter of $1.2m. The total of those four items is $11.1m.

We also recorded a balance sheet provision or impairment, a non-cash charge, for facilities that have been closed, of $10.5m.

On the debt refinancing front, we have debt as of January 31st of $306m, consisting of bank debt of $177m, bonds of $100m, Baltimore Post Office mortgage debt of $18m, and other debt of $11m.

The company worked throughout 2002 on a commercial mortgage-backed security, CMBS transaction. This work included extensive legal structuring work, operator facility level diligence, appraisals, environmental and related loan diligence. Unfortunately, when our largest operator, Sun Healthcare, announced that they were going to do a comprehensive restructuring of their portfolio, we were advised that the CMBS transaction would be virtually impossible to market. Therefore the company wrote off the accrued costs of $7.0m related to the CMBS transaction.

We're currently pursuing a more traditional secured lending transaction, and we're hopeful that if a transaction can be completed, our extensive CMBS documentation and diligence will be useful in expediting a closing.

Third, owned and operated re-leasing and portfolio restructuring; today we are down to one facility that we own and operate. This facility generates a modest amount of positive cash flow, but we're actively exploring re-leasing alternatives. As Dan will review, all of the 2002 portfolio restructurings are completed or substantially completed. Unfortunately, we're now facing two new portfolio restructurings with Sun and Alterra (ph). Dan will review the current payment status and our current negotiations related to these facilities.

Turning to our dividend policy. We will not have taxable income in 2002; therefore no dividend will be required in order to comply with the redistribution rules. At March 31, 2003, the accumulated preferred dividend will be approximately $45m. There are two issues that we are looking to clarify before we reinstate our dividends. First, and foremost, refinancing of our debt. The Fleet revolving credit agreement expires December 31 of this year. We're working diligently on refinancing alternatives to extend our debt maturities. Second, our continued need to assess the affect of the recent Medicare reimbursement reductions, and potential Medicaid rate changes, on our operator’s ability to maintain the current rent levels.

I will now turn the call over to Bob Stephenson, our Chief Financial Officer, who will review out fourth-quarter financial results.

Thank you, Taylor. Our operating results for the quarter and our balance sheet continue to reflect quarter-to-quarter improvement. Funds from operations, as Taylor mentioned, on a normalized basis, are $13.1m, or $0.24 per fully diluted share for the quarter, as compared to $6.2m or $0.16 per fully diluted share in the fourth quarter of 2001. The $0.24 normalized FFO is also $0.04 cents higher per share than our third-quarter 2002 results. Remember, to normalize FFO we excluded $11.1m associated with nursing home revenues and expenses, refinancing expense, and non-recurring one-time provisions, as Taylor mentioned earlier.

Our reportable FFO on a fully diluted basis was $2.0m, or $0.04 per share for the quarter, as compared to a deficit of $1.2m or a deficit $0.03 per share in the fourth quarter of 2001. Accounting conventions require us to report the lower of basic or fully diluted per share amounts. Therefore, in the press release, we reported fully diluted FFO as a deficit of $0.02 per share for the quarter.

Revenue for the quarter, excluding our owned and operated assets and one-time revenue adjustments, was $22.9m, versus $21.4m in the fourth quarter of 2001. This $1.5m increase resulted from a $1.1m increase in rental incomes, a $600,000 increase in mortgage interest income, and partially offset by a decrease of $200,000 in miscellaneous income.

Turning to expenses, for the quarter, expenses excluding owned and operated assets, refinancing expense provision for impairments, were 31% lower or $12.7m, versus $18.3m for the same period one year ago. In addition, our expenses have decreased, from $15.8m in the first quarter of 2002, to $14.8m in the second, to $13.6m in the third quarter, to the $12.7m I just mentioned for the fourth quarter.

The $5.6m favorable reduction versus the fourth quarter of 2001 was primarily a result of $2.3m favorable G&A and legal costs, really as a result of the reduction in consulting and legal expenses associated with our owned and operated assets. We had 30 fewer owned and operated facilities versus December 31, 2001. We also had a reduction in corporate staffing of approximately 17 FTEs versus one year ago.

In addition for the quarter, we had $2.8m of interest savings, and $500,000 of non-cash adjustments for depreciation and derivatives. Interest expense of $5.6m for the quarter was $2.6m less than the fourth quarter of 2001, due to approximately $107m of reduced debt on our balance sheet. Additionally, we continued to benefit from the reduced LIBOR (ph) rates versus 2001. As Taylor mentioned earlier, in the fourth quarter we also recognized a $7.0m refinancing expense.

Turning to the balance sheet, year-to-date total assets decreased $88.2m versus December 31, 2001, primarily due to depreciation of $18m, impairments and reserves of $30.1m, cash collections and asset sales, of $40.1m. On the liability side of the balance sheet, debt year-to-date decreased $106.7m, from $413.2m at December 31, 2001, to $306.5m at December 31, 2002. This reduction was primarily due to the purchase and retirement of $97.5m of our June '02 bonds, of reduction in our credit facility borrowings of $16.7m, offset by net borrowings of $13.3m for the refinance of the Baltimore Post Office earlier this year.

At December 31, 2002 we had $35.5m of availability under our two revolving lines of credit. In addition, our debt to normalized EBITDA also improved from 3.19 times at September 30, 2002, to 3.80 times at December 31, 2002. This compares to 5.53 times at December 31, 2001. Operating liabilities for owned properties decreased $7.0m due to 30 [inaudible] owned and operated facilities during the year. Stockholders' equity increased $29m, due primarily to the completion of the Rights offering, and private placement in the first quarter of this year, which generated approximately $44.6m of net cash proceeds, or 17.1m additional new shares.

We face some issues that could potentially result in additional non-cash asset impairments, non-cash provision for uncollectible mortgage, notes and accounts receivable, as well as gains and/or losses on asset sales. The events that could trigger these charges include; 1) the outcome of restructure negotiations with Sun and Alterra, 2) the timing and net sales proceeds from eight closed facilities, with total net book value of $2.3m. These facilities are currently being marketed. 3) Our ability to collect owned and operated accounts receivable, which has a net balance of $7.5m at December 31, 2002.

I will now turn the call over to Dan Booth, our Chief Operating Officer, who will provide a general overview of our core portfolio, the Medicare 'cliff' issue, and the re-leasing transactions. Dan?

Thanks, Bob, and good morning. As of December 31, 2002, Omega had a core asset portfolio of 211 facilities, the majority being skilled nursing homes. This portfolio is distributed amongst 31 third party operators, and located within 28 states. Although Omega has a diverse number of core operators, our largest nine tenants represent nearly 80% of our investments, and slightly over 80% of our revenue stream.

Occupancy among these tenants, as well as the portfolio as a whole, has remained extremely stable over the last several quarters. Occupancy as of September 30, '02, for our largest nine tenants, and for the portfolio as a whole, was 83% and 82% respectively.

Coverage ratios also remained fairly constant over the last two quarters, both with our large tenant pool and the portfolio at large. Trailing 12-month EBITA-N (ph) coverage for the period ended 09/30/02 was 1.56 times, versus 1.62 times for the period ended 06/30/02 for the same property pool. Likewise, EBITDA coverage was 1.13 times as of September 30, versus 1.2 times coverage as of June 30.

Unfortunately the recent Medicare 'cliff' effect on October 1, 2002, is expected to have a negative impact on these coverages starting in the fourth quarter of 2002. As of October 1, 2002, the average net Medicare rate reduction across our entire portfolio equals approximately $25 per day. Pro forming in these rate cuts with September 2002 actual performance, results in a reduction in the EBITDA-N coverage from 1.56 times to 1.36 times. EBITDA coverage is reduced from 1.13 times to 0.93 times.

Actual results, however, for the months of October and November, actually show a slight increase in coverage ratios, as EBITDA-N rose slightly to 1.58 times, and EBITDA rose to 1.14 times. This unexpected improvement in actual coverage ratios versus our pro forma model was a result of significant improvement in several of our large operators who fought rate cuts with improvement in occupancy, expense cuts, and shifts in various RUGS (ph) categories.

It should be noted, October and November results could prove to be somewhat misleading, however, as many large companies await final audit adjustment before pushing certain accrued expenses down to the facility level in the month of December.

As far as owned and operating assets, Omega entered the third quarter of 2002 with eight remaining facilities. As reported previously, disposition of these last eight owned and operated facilities has posed a considerable challenge to the company, due primarily to the considerable losses generated by these facilities, and the unfavorable lease terms associated with four of the facilities, which represented leasehold interests.

During the fourth quarter of 2002, the company reduced its owned and operated assets from eight to three. For a total reduction of 30 owned and operated assets since December 31, 2001.

The company leased two facilities, previously classified as owned and operated, to two separate limited liability corporations, for an initial annual rent of $540,000 and subleased one facility to another LLC for approximately $150,000 per year less than our rental obligation. However, if the company is still the tenant under the prime lease after one year, then the annual rental payment under the other two leases, permanently increases $40,000 per annum, beginning in the second lease year.

Also in the fourth quarter of 2002, the company entered into an agreement to buy out the leasehold interests in two owned and operated assets in Colorado, subject to a change of ownership and licensure. As a result of this transaction, the company incurred a charge of $2.65m in the fourth quarter of 2002.

Subsequent to the fourth quarter, Omega entered into a binding agreement to buy out its last remaining leasehold interest in one facility in Indiana, for $350,000. The buyout of the Indiana leasehold and the two Colorado leaseholds, is expected to close effective March 1, 2003, subject to change of ownership and licensure, within the states of Indiana and Colorado.

The buyout of the Indiana and Colorado leaseholds is expected to save considerable FFO over the next several years, as lease payments, operating losses and potential professional liability claims are discontinued. In addition, Omega has made the difficult decision to close a 91-bed facility in Aaron (ph), Illinois. Despite considerable efforts by a dedicated staff and management team, the challenges facing this facility have proven too great to overcome. Accordingly, Omega has taken an impairment provision of $1.0m in the fourth quarter, to account for this closure. Omega will seek to sell this facility for its property value.

The closure of the Illinois facility should be completed within the next 30 to 45 days, thus discontinuing operating losses associated with that building.

Subsequent to the effect of buyout of the three leaseholds in Colorado and Indiana, and the closure of the Illinois facility, Omega will be left with one owned and operated facility, a 128-bed skilled nursing home in Paris, Illinois. Although this facility generates positive cash flow, after a 5% management fee, Omega intends to reach agreement to re-lease this facility in the near term.

By eliminating its portfolio of owned and operated assets, Omega expects to considerably simplify its income statement, balance sheet and expectations of earnings going forward, both from a historical perspective, a projection standpoint, and for the analysts and investors who are following our company today and in the future.

On the restructure front, effective January 1, 2003, the company completed a restructured transaction with Claremont Health Care Holdings, Inc. formerly knows as Lyric Health Care, LLC. Whereby, nine facilities formerly leased under two Master Leases, were combined into one new ten-year Master Lease. Annual rent under the new lease is $6.0m, the same amount of rent recognized in 2002 for these properties. As part of the restructure, one facility located in Sarasota, Florida was closed, and is currently being marketed for sale.

As Bob mentioned, and as a result of this closure, the company recorded a non-cash impairment of approximately $6.8m in the fourth quarter of 2002. In anticipation of this restructure, on November 1, 2002, Trans Health Management, known as THI, replaced Integrated Health Services as manager of these nine properties. THI is a fast-growing nursing home company based in Canthill (ph), Pennsylvania.

Separately in December 2002, an agreement was approved by the United States Bankruptcy Court in Wilmington, Delaware, between IHS and the company, whereby upon notice provided by the company, IHS could convey ownership of eight skilled nursing facilities, five in Florida, two in Georgia and one in Texas, to an affiliate of the Company, and transfer the operations to the Company's designee.

On February 1, 2003, the company entered into a Master lease to re-lease a 130-bed facility, formerly operated by IHS, with Senior Management Services of Treemont (ph), Inc. The initial term is ten years, with rent culminating at $400,000 annually by the end of the third year. The company is in the process of documenting leases on each of the reaming seven properties. Upon culmination of these lease arrangement, Omega will have no direct contractual relationship with IHS or any of its subsidiaries, thereby further diversifying its operator base.

In recent events, and as Taylor previously discussed, the results of Medicare 'cliff' reimbursement tests on October 1, 2002, have resulted in reduced cash flows for a number of our operators. As a partial result of the Medicare 'cliff', in February of 2003 Sun remitted rent of $1.6m, versus the contractual amount of $2.1m. The Company agreed with Sun to use a letter of credit, posted by Sun as a security deposit, in the amount of $500,000, to make up the difference in rent for the month of February. The letter of credit was otherwise expiring on February 28, and was not being renewed. The Company holds additional security deposits in the form of cash and letters of credit with Sun, of $2.3m.

On February 7, 2003, Sun announced "that it has opened dialogue with many of its landlords concerning the portfolio of properties leased to Sun and various of its consolidated subsidiaries. Sun is seeking a rent moratorium and/or rent concessions with respect to certain of its facilities and is seeking to transition its operations of certain facilities to new operators, while retaining others." To this end, Sun has initiated conversations with the Company regarding a restructure of our lease. At this stage, it is too early to predict the outcome of those conversations.

In additional portfolio developments, and unrelated to the Medicare 'cliff' reimbursement cuts, on January 14, 2003, the Company was notified by Alterra Healthcare Corporation that it did not intend to pay January rent and that a restructuring of its master lease was necessary. The Company currently leases eight assisted living facilities with 325 units located in seven states to subsidiaries of Alterra. The fourth quarter annualized rental income totaled approximately $2.6m. On January 14, 2003, the Company declared an "Event of Default" under its Master Lease and demanded payment under its Alterra guarantee.

Subsequently on January 22, 2003, Alterra announced that in order to facilitate and complete its ongoing restructuring initiatives, it filed a voluntary petition on the US Bankruptcy Court for the district of Delaware, to reorganize under Chapter 11 of the US Bankruptcy Code. Since that time Omega and Alterra have been in discussions concerning a lease restructure, which might include transition of some or all of its eight properties. At this time it is too early top speculate on the outcome of those discussions.

Thank you, Dan. As a quick summary, our core earnings are slightly ahead of our target, and we've almost complete exited our owned and operated portfolio. The Medicare 'cliff' issue has reduced cash flow to rent coverages, and as a result, Sun, our largest tenant, is looking to restructure their entire portfolio, including Omega facilities. Based on our projected Sun cash flows, we believe that the Sun portfolio continues to have significant long-term value. However, it's too early to predict if we will be able to reach agreement with Sun regarding all or any portion of their portfolio.

Finally, we continue to strengthen our balance sheet, our core cash flow revenue, and our overall credit with debt to normalized EBITDA of 3.8 times at December 31, 2002. This concludes our prepared comments. We will not take questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Eban Stein (ph) with EOS Partners.

There are a lot of questions I could ask. Let me just try to keep it brief. First of all can you talk about the refinancing and your confidence in regards to either replacing and/or extending the Fleet loan?

Sure. We've been actively talking with a number of potential lenders And are in that process it would be a typical secured loan. I think today to say whether or not we can get done is just too early to tell. I will say that there is some positive momentum to get a deal done, but we still have to line up an entire bank group we haven't been out to syndicate yet.

With regards to Sun, you pointed out it was $25m in rent, and they paid $1.6m out of the $2.1m. I'd like to know from a cash basis as well as from an accounting basis, how you're going to book that revenue going forward? Then secondly, can you give me a sense of the rent coverages on those properties? You said you felt it was good -- the portfolio had good value, although the timing of when you might be able to re-lease them or at what rate is yet to be determined. Could you just give us a feel for the occupancy, the rent coverages, and also how you book the numbers on an accounting basis?

Sure, Eban. I'll take the first part, and then turn it --

And can you speak to the same topic with Alterra?

Okay, I'll take the first part and hand the second part over to Dan. As it relates to our accounting, we're going to be driven by accounting rules. But the general intention would be to the extent that we receive cash or we exercise letters of credit, that's the income that would be recorded for the period. So when it's received or when the cash from the security deposit or other collateral is collected. And of course it's all going to be subject to detailed disclosure, just like our recent rent. And because we're in negotiations with them, I really don't know, as an example, where we would end up in March or April. Alterra will be handled in a similar way.

That's why we took some time to make sure it was clear what we had recorded in the fourth quarter, and it establishes our run rate. And we'll just continue on, but effectively we're going to look to cash both from what is paid directly and what would come out of security deposits. If at some point the security deposits are entirely used, then we would be back to cash.

Okay, and with regards to the Sun portfolio in terms of occupancy, your rent coverages? And obviously you guys, because I don't have a look into the specific properties, you guys have a much better feel about which property might be problems, which ones are good. I don't know the Master Lease agreements and all that type of stuff.

Looking at Sun as an entire portfolio, and looking not at historical results, but at 2003 sort of projected pro forma results. And by that I mean factoring in a $25 a day Medicare 'cliff' impact. And also factoring in various Medicaid cuts that we know about, it looks like Sun will produce a 2003 EBITDA, which is after, by the way -- also after a 5% management fee and approximately $400 of CAPEX per bed, it looks like Sun will have a run rate in 2003 in the low to mid 20s versus, as we mentioned a contractual rent amount of approximately $25m.

Now that does not take into account any expense cuts at all that Sun might be able to recognize. It also does not toss out a handful of properties which are dead losers by themselves, and which drag the portfolio down as a whole, because these properties produce negative earnings before rent. So that's kind of what we're looking at for Sun as a portfolio as a whole. You can do the math, but that's kind of where we sit today.

Just on that, I'm a little bit confused when you say low 20s rent, versus the --

No, no, I gave you a range for what their expected 2003 cash flow would be, net cash flow.

Okay, a estimate then.

And I gave it to you in a range because of various components, but one of the big one is the talked about MediCal (ph) cut in California, which is a fairly big swing number, and which is at this point, undetermined. And of our Sun portfolio we had I guess 16 Sniffs(ph) in Sun that could be affected -- in California, I'm sorry.

And the last question is can you just speak about any of the other operators in your portfolio? Obviously Advocate (ph) is another one that's going to end up in a restructuring, and that's kind of a large tenant of yours. And also just scattered about the other 20%, if you're going to start seeing similar problems.

Well let me tackle Advocate first. Advocate is in a different situation, there is an overhang with Advocate because of claims history. But our Master Lease we think is very strong. Facilities within that Master Lease are very, very strong, producing coverages of 2 to 1. So although there is an overhang on the corporate side of Advocate, we are not at all concerned with that facility group.

Many of the other large tenant pools have in fact been restructured or are being – the IHS Lyric one obviously a big one, I talked about that extensively. We expect to be done with that in a few weeks.

When you spoke about that, it was a little bit confusing, are you expecting relatively the same amount of rent on those properties as you got previously?

We've got the same rent for the Lyric portfolio as we recorded in 2002. We expect to get just almost nominally less rent for the IHS portfolio.

Okay. And you said the top nine were 80%, I was referring to the other ones who constitute 20%. It's still a large number, whether those operators were, or at least you thought some of them might experience similar problems to Sun, or whether the fact sometimes, because they're small, they actually can handle it a little bit better?

I don't have any real concern with that 20%. I have, and it fairly diversified, I have one or two very small players that have single facilities that we keep an eye on, but they continue to pay. The coverages are marginal, but still remain positive. And once again, they're very, very small, so that portfolio we feel pretty comfortable with.

I'd just add to that a little bit Eban. I think that we will -- there's no doubt that we will see issues crop up here and there, but to date our sense of that is that they're not going to surface in a large number. And that the issues that we face to date have been relatively modest.

Okay. Good. Last question, in regards to the legal expense ongoing, can you give us a sense - obviously if you're in negotiations [inaudible] but that could go up - just sort of a range where we might see that over the next six months?

Sure. You hit right on the issue, which is, if these restructurings get complicated, our legal expenses - although we've budgeted legal expense at $1.8m for the year - we're very hopeful that they would be much lower on an annual basis. I think we need to be careful with our expectation, that at least in the short term those legal expenses may be much higher.

To try to put a number on that, it's pretty difficult; it's really going to depend on how complicated these discussions become.

Okay, great. Okay, thanks very much.

Your next question comes from Mike LeConey with Gilford Securities.

Maybe you answered this question, but it terms of Sun, my sense was, looking at Sun and at you, that the rents you are paying to them currently are fairly low. I mean the rents that they're paying you don't seem to be excessive, relative to other levels throughout the industry. And you did comment, let's say that you saw EBITDA in '03 roughly equal to the rent - that's what it sounded like to me?

Well yes, that's a tough one to put a handle on -- our predictive range is low to mid $20m. But you're right, you got the facts lined up pretty well.

Well at least you're not. I mean in Sun's case, they have one or two, I think, leasers where the rents are a good deal more than the cash flow. At least in your case it's close to equal. Forgive me, I'm just trying to get a sense of some color on where -- how much of a -- I think the word is exposure, or how much wiggle room there is in this number? Your number is -- rent for a bad year is quite -- the rent from Sun is relevantly -- it seems to be awfully competitive. Well, I'm sorry, I'm trying to digest all of this. You've done a remarkable job of clearing away the wreckage, you have a few more problems, and I guess these really sort of snuck up on you. I'd better go back and look at the data some more, thank you.

Your next question comes from Rick Rubin with Legg Mason.

Good morning everyone.

Morning Rick.

Same types of questions. Can you give us a little more color on the Alterra portfolio, occupancies there, EBITDA and EBITDA-N coverages, and your thoughts?

Dan’s flipping a page and I’ll just give you the general sense, which is that the portfolio has eight facilities, and there's a group that perform fairly well in terms of occupancy and cash flow. And there's another group that just historically has not done well at all. And therein lies the reason they're back at the table with us. When we cut the deal with them a year ago there was a belief on their behalf that they could improve census and related cash flows, and that the contractual rents of $2.6m, which would have otherwise increased going into this year, was going to be achievable. And they haven’t be able to get it done. So with that, Dan, do you want to give a little bit color on it?

Sure. Once again it's a portfolio that's eight properties and they're all assisted living. They're spread out across seven states. As Taylor mentioned there is a little bit of a split. You've got four properties that have occupancies of approximately 60% or less, and the other four have occupancies of 60% or more. And it looks like 2003 projected EBITDA is just under $2.0m, versus a contractual rent amount for the fourth quarter of 2002 of approximately $2.6m. So without going into too much detail, there is a gap there.

On a positive perspective, though, on these facilities. I would be more worried if these properties were full. They're not, they have upside from a physical plan perspective, they're all very new. Construction was completed on all these probably within the last five years.

Are you seeing any positive trends as far as the lease up in the facilities? Can you give us an idea of how that's going?

Painfully slow.

How about security deposits from Alterra, what's the level there?

We have none.

And for Sun it's essentially not much left, it looks like a month or so?

$2.3m.

And how about, you were talking about the IHS assets that you're working on, seven properties there. Can you give an idea about -- I think you said it was in the documentation process?

I'd love to give you more details on that. It is in the documentation process, and we feel pretty confident that those properties will move in the very short term.

Okay. And you were saying there's probably a slightly lower rent level?

Yes. But keep in mind before they were mortgages, so IHS is actually deeding the properties over to us, so we will actually have ownership of the real estate and then we will lease it out. So the expected lease payments will be ever so slightly below what the former interest payments were.

Okay, but these aren't going to become O&O properties long term?

No. No, not at all.

And just, I guess, sort of an accounting question again for Sun and Alterra. In 2002 we were recording the full income on this. A) We were getting paid on all those properties in 2002 and were recording the full income and the run rate, especially in the fourth quarter?

Yes.

Okay. And do you have any expectations -- it sounds like all the O&O properties will basically be taken care of by the first quarter --?

I have one left that will carry into the second quarter.

Okay, and so will that be sort of diminimus on how they -- and you say that's cash flow, correct?

It does have positive cash flow.

Okay, so we can expect -- is it fair to say that sort of the recurring revenue from the O&O will be I guess a loss in the first quarter, and probably flat to a slight gain in the second?

Yes, that will be so small it will be infinitesimal.

Okay, I appreciate it, thank you.

Your next question comes from Bill Schroeder (ph) with GPB Capital (ph).

Hi guys, I have a couple of questions. Going back to some of the projections you made for EBITDA, with respect to Sun for their portfolio, are those projections that they gave you, or are those ones that you've come up with on your own?

It's a combination of that. We have got our own projections. We have Sun's projections. They align pretty well. What we thought these facilities would do, and what we thought Sun's budget would be, is very similar to what is being presented to us.

Okay. I've seen in some publications that Sun is basically talking about trying to get 25% rent concessions from most of their landlords. It looks like on a monthly basis that's about what they've dropped their rent, what they're paying you. Can you tell us -- it's still not clear to me at least from the questions you've answered, going forward you had $0.24 of what you call normalized FFO. That includes, I presume, $2.1m in monthly rent from Sun for the fourth quarter. Is it fair to say then that for the first quarter that that's going to be around $1.5m less, given the reduction in the Sun rent?

Actually for the first quarter -- well

Actually backing out January, but let's go on it normalized from here forward?

For January we were paid $2.1m, in February they paid cash of $1.6m, and we pulled down $500,000 security deposit. For accounting purposes for the months of January and February there consisted -- that we would report a number consistent with the fourth quarter. And I understand where you're headed. If we continue to receive $1.6m into the future, and we utilized all the security deposits in LC’s we'd be left with $1.6m a month as a run rate. I need to caution everyone on this call that we have no -- we just don't know where these negotiations are going to be. We want to give all the facts that we can give, and we're in the process with these guys.

Okay, well since you don't know or you don't have any idea where its going, is it fair to say then that it could actually be lower than $1.6m, or is this the low ball number for Sun?

I don't know. I really don't know where we end up.

Okay, thank you. On IHS clearly there still seems to be a little bit of confusion with respect to the mortgages. These properties were deeded back to you - correct?

Yes, but let me take a shot at that. IHS is still the owner of the properties today. But we have an agreement that they will be, they shall be, transitioned, and that transition involves deeding the property to us. And the timing for that is going to be driven by Omega. And it really is driven by our ability to identify a new operator, sign a lease, and then move the property in a cooperative transition. So we never take the keys of owned and operated, we become a lessor with a new operator. So as of today, we don't hold title, but in the very near term as these documents are signed and we finalize our deals for the seven properties that remain with IHS, we will be.

Okay. I recently spoke with IR in your offices. They mentioned that with respect to the IHS mortgages - and correct me if I'm wrong here - it's about $50m at face and they paid around $4m in interest on those mortgages last year.

They paid $452,000 a month.

$452,000 a month?

Right.

Okay, so $5.4m.

Right.

According to your IR department, if you don't come to some agreement -- they essentially had agreed to pay you the interest through February.

That's correct.

And after February you're not getting any more interest.

That's correct.

Okay, so in your normalized FFO number of $0.24 a share, on an annualized basis, that still includes $5.4m in interest?

That's correct.

So if you don't release these properties, they're going to go into owned and operated?

No. Actually what would happen is -- well that's possible, but the more probable outcome is, if we're you’re headed -- you know March 1 is some D-Day, it's really not. We won't receive interest from IHS on March 1 if we haven't transitioned the properties. But we're not going to take back the title on March 1, we're going to -- perhaps they all will transfer later in March or on April 1.

Okay --

So we will never --

You won't take but the title but really all I care about is cash, and what you're going to collect for the quarter. It sounds to me like IHS isn't going to be paying you after March 1.

Right, and to that point we are, as Dan says, we're in the final strokes of trying to finalize deals on the seven properties. And we're aggressively pointing to March 1, but we can't, today, commit to that date because we don't have the documentation signed.

And it's subject to various things beyond our control, such as change of ownership and licensure in these states.

Has anything come up recently that has put a snag in this? I know that on the last conference call you guys had mentioned that you were in the midst of three separate bidding processes where you intended to release five facilities in Florida, two in Georgia, one in Texas. Maybe you could give us a sense for what the markets like in Florida, for example? I mean obviously people know it's pretty tough there, I would think those five properties you'd have a tough time with?

We're in the process with one operator trying to finalize documentation in Florida. And the timing there is -- I mean we're down to a few items to clean up. But to predict whether it's March 1 or April 1, or some other event could arise, we're just not in a position to do that. Hopefully we'll be in a position to announce that we've got that done in the very near term.

By the way, the [inaudible] in Texas did go February 1.

A couple of other questions. The $7.0m charge with respect to the CMBS [inaudible], how much of that was paid to your current lenders? It seems like a very high dollar amount. You didn't say who it was paid to, essentially.

None went to the current lenders. And really the one issue with the CMBS deals is they're very, very highly structured. And they become either more complex when you're doing a deal that has collateral with multiple operators, versus for example, what Ventox (ph) was able to do with one operator. So the expenses are very high, and a great deal of that went to legal structuring issues. And then because it's a highly structured deal, there are separate appraisals and environmental reports for every single property in the collateral pool. Along with accounting diligence, that without calling it an audit, effectively equates to an audit at the facility level. So we have spent almost 12 months in this process, and we're at the point where we are getting ready to pull the trigger, and that's why we effectively have a fully loaded deal in terms of costs.

Okay. And who was the $7.0m paid to?

A variety of law firms. The auditor that was hired by the lead underwriter to perform the financial/ I'll call it audit diligence, although they would say it's not audit it's specified procedures. Appraisal firms, environmental firms, rating agencies.

Was Explorer involved in that at all?

No.

With respect to the REFI (ph) -- or the potential REFI, how much of the property at book value will be used to secure the lenders? And what do your covenants allow for with respect to the unsecured.

I think the first question it's too early to answer that question. The unsecured -- the $100m notes that we have out require that we keep double the amount of assets unsecured. So $200m of properties must be retained and not put up as part of a collateral package for a bank deal.

Keep double amount of the face value of the debt free and clear, essentially?

Yes.

Okay. Last question. With respect to the projected EBITDA coverage of the portfolio of 0.93 versus the actual out performance 1.14 times, I think you said. Is there any way you can provide maybe EBITDA coverage similar to what you did for Sun, where you said it was around one time? I guess your projection for '03 on an operator by operator basis -- some of your competitors or companies similar to you kind of do that for their portfolio, where they on an operator by operator basis, show what the occupancy and at least what the EBITDA coverage is?

It's something for us to consider. One of the big issues is, as we've diversified our portfolios it's become more and more of a privately held portfolio. And you have the issue with that type of portfolio where the operators for various reasons are concerned about reported cash flow coverages. But I understand you're not the first person to raise the issue. It's a logical question, and it’s something that we're going to need to visit as we move forward. Particularly as the portfolio stabilizes, you know, one thing that you will see is, many -- one thing that we see is that many of our released portfolios go out the door at less than one point up, sometimes substantially less. And then the operators improve that fairly quickly. So you have a real stewing of do you use 12-month data, 3-month data? And then you have the final piece which is, are the operators -- what is their feeling about having that type of information publicly reported? And again it's for various reasons, including how they deal with their constituents, their vendors, and their regulators within their state. So I understand the point. It's something that perhaps we can -- maybe we can address on a state-by-state basis, we just need to think about that.

Okay, thank you.

Your next question comes from Harry Velnik (ph) with River Run Financial.

good afternoon, gentlemen.

Hello.

I was curious, with regard to the refinancing that you're pursuing now, what has the reception been in terms of adequate equity? I guess equity being there in terms of supporting the refinancing, and has the -- I guess the question that goes along with that is, has thought been given to another round of equity financing as a means of stabilizing -- not stabilizing but as a means of giving the banks more collateral?

Our view today - and we're going to have to run the play over the next few weeks - but our view today is that we have ample collateral to do a debt financing. And given where the prices of our equity today, we really -- you know, we have not discussed internally or at the Board level, going back to the equity market in any form. I think we run the play on the debt side, just given our view that there's sufficient amount of collateral to do a deal at favorable terms, and deal with these issues now if we can.

When you say favorable terms, favorable enough to allow you to pay a dividend on the preferred and presumably at some later point on the common?

Hopefully. You know our goal is to refinance this balance sheet and be able, at the Board level, to have discussion about reinstating dividends, that is the goal. And we can't project forward, but I think you get through the refinancing, and that's the next discussion that you have as a company, what's the policy going to be? And our goal would be to reinstate dividends.

In the meantime, you're continuing to pay down your revolver, I take it, with your free cash flow?

We have been paying down a revolver, although if you look at our December 31 balance sheet you will see a fairly large cash balance that we've maintained for various reasons.

Sure. Do you expect to increase that cash amount, are do you expect to use the excess to pay down debt? I guess that's my --

Right now we have not paid down debt any further. Part of that has to do with the role -- the revolver roles and our view that we've taken fairly long roles, because [inaudible] rates are so low. And also if we're able to accomplish something on the refinance side, it is no reason to break a role to fund down the revolver. We would just look to try to get something done. Now as these roles come due, with these cash balances will we pay down the revolver? It all depends on where we are on the refinancing part.

Thank you very much.

You have a follow-up from Mike LeConey.

You gave us some color on the performance of the mix of Alterra, the Alterra portfolio. Could you give some general idea on the Sun portfolio? Obviously it's a lot larger, but frequently it's a relatively small percentage of facilities accounts are doing quite poorly, all the rest are okay. I was curious, is that the sort of performance you see on the Sun portfolio?

There are -- I'd rather not say a specific number, just because of where we are in terms of negotiating, but there are five to ten facilities that clearly under-perform or perform poorly from Sun's perspective, that are going to be the subject of discussion. Whether they stay in the portfolio or are they closed, do they come out, do they go to another operator?

Those underperforming facilities, do they tend to be singles in specific states? In other words, is there some -- I'm just trying to get at the economics of these facilities. Sometimes you've got one or two in a remote geographic area, where if you'd got an operator nearby --

That's the right question in the sense that several of those properties are in the high professional liability states, Florida and Texas. So you have massive [inaudible] allocations. And then a couple of the facilities are just pure outliers from Sun's management structure, i.e. they have one building in Indiana that just doesn't do that well.

I'll bet. It seems to a there are a lot of facilities in Indiana don't do well. So again, stepping back and looking at this thing, the economics, I continue to feel that there's - historically anyway - a substantial percentage of the portfolios financial problems, we're looking at a relatively small percentage of the facilities. And they're the function of many times, unique geographic problem, or some unique reimbursement or legal problem? Which seems to me what you're saying, I guess.

Yes, that's true. And you have overriding [inaudible] on California and the Medicaid issues that are presented there for the --

I'm sorry, you gave the number, what percentage of your portfolio with Sun is in California?

16 of Sun's 49 buildings are -- well 16 of Sun's 49 buildings are Sniffs in California, in addition they have two hospitals.

But L-TACs (ph).

A L-TAC and a Rehab, that do well.

Okay. It is not as bad as I thought it was actually on the California side. Alright, thanks very much.

You're welcome.

You have a follow up from Eban Stein.

You mentioned in the quarter there was a $1.2 million of one-time revenue that you backed out, could you just explain what that was?

Yes, there were a couple of items that made that up. One is we sold our interest in the Carney Post (ph) office in the quarter, and had some residual income. So we backed that out as a one-timer interest income. And then we had our Mariner amendment fee was the second large component, so those two made up primarily the $1.2m.

I'm sorry I missed that it was the Mariner --?

Amendment fee.

Okay.

Well we restructured our deal with Mariner a couple of years ago. There was an amendment fee that was contingent on certain events that actually turned out positively for us. So it's not periodic income that we would say, hey track this on a normalized basis. So we look at that $1.2m, which is two cents in the quarter, we want to make it clear that we don't have an expectation that that would be ongoing.

Okay, fair enough. Could you just tell me where in the income line, the revenue income line, those numbers are? I see miscellaneous and there's about a $1m, so that can't cover it all. Where would the other piece be, in the other investment income?

Yes.

Okay, fair enough. The next thing, with regard to interest expense, can we use this quarter as an annualized number going forward? It sounds like you're going to build the cash as opposed to paying down the debt. So I assume without any further debt pay down, is 5.6 a reasonable number going forward?

I think in terms of modeling in some range that that's probably a pretty good number. We obviously, if we build cash we're going to have some amount of revenue from that cash. But I think if you're projecting out in some relative range, that's a pretty good number to use.

Then lastly - and you mentioned this before - you said you sold the equity interest in the Post Office. Does that mean with regard -- I was just curious to the status on the Baltimore facility?

I want to make it real clear on the Post Office. We had two Post Offices; one in Baltimore that we still own that has a mortgage. We're actually actively marketing that, but nothing's happened with that facility. And then we had another Post Office in New Jersey, up in the Meadowlands, where we had a mortgage - actually a wrapped mortgage - that was paid off. And we also had a small equity interest via a very complex partnership, where we still have a little bit of a piece of that, but no earnings from it. It's kind of an option value now.

And then does that tie into -- I see when you had these other investments on the balance sheet the number dropped from about $41.7 to $36.9m. Could you just describe the drop of that $4.9m? Is that related to the sale of some of this equity interest? Or what else would it count for [inaudible]?

Yes, that's a piece of it, as well as -- the $36.9m is really made up of Baltimore Post Office, some notes, our interest in -- the remaining interest in our Australia operation [inaudible] OWWI, the last piece of it. But the drop there is some principal payments on the Madison note we have outstanding and the Carney Post Office.

The repayment of the Carney was the mortgage.

Then two other things; with regard to the $7.0m charge, could you just explain, that $7.0m of fees was obviously run through your P&L, I assume, I don't know how long, whether it's just this year, but I assume it had to be just this year. Could you just tie in how a $7.0m in charges over this year, why theoretically your costs on a pro forma basis don't drop $7.0m going forward? Obviously you have some legal costs for the refinance, but I can't imagine it will be $7.0m.

The $7.0m, just to be -- we didn't have any amount recorded as expense until the deal -- until we were advised that we couldn't sell the deal. So the $7.0m that we incurred was accrued in the balance sheet. And then when we were advised we couldn't complete a deal it was expensed. So then when we go to talk about normal -- so it's in our expenses, but we talk about normalizing FFO, we pull it out of expenses. So to the extent that you're looking at fourth quarter GAAP financial statements, it's in there and you need to pull it out. When we talk about normalized FFO, we've already pulled it out.

So when does the cash go out?

Most of it has gone out. We've spent - what is it about $5.6m

$5.6m.

So you've spent it on a cash basis, but you didn’t accrue [inaudible].

Right.

Then lastly, you bought this interest rate, whatever it was, cap or [inaudible] I forget exactly what it was?

Cap.

And you spent $10m for that. Could you just tie that in in terms of -- I was a little bit confused frankly that you went out and sort of put -- in my opinion it was putting the cart before the horse, you bought something for something you were expecting to happen, before it happened. Frankly I think you would have been better off just keeping the $10m cash and paying down the debt. But whatever, that's water under the bridge. Just tell me how that interacts to your benefit when you're going to refinance here, or if at some point you decided to cash it out, could you do that as well? What is it worth?

We can cash it out at any time. It's a highly volatile instrument that moves with the five-year LIBOR curve. So since we bought it in the fall the LIBOR curve has dropped. I honestly couldn't tell you today the value, but it's down, it's not $10m. But again, that's going to -- if LIBOR goes up 1% it's going to be up. So as it relates to the financing, I think that that cap is viewed as a major asset when you start to talk about debt coverages. And the lenders risk that LIBOR spikes when you have a cap in place. So we feel like that's one other attribute in addition to the collateral that goes in the pool, that makes it -- that makes lenders feel a lot more comfortable about the risk profile.

Okay. Can you just review, so I just know in case you announce some terms through, how it changes with the actual LIBOR rate you'll pay, on what dollar amount? The cap covers how much?

Oh, okay, I understand. The nominal amount is $200m, and it caps LIBOR at 3.5%.

Okay, so if you signed a deal today with the bank for $200m say LIBOR plus 350 basis points?

Our rate will never go over 7%.

Okay, so it would be -- okay, perfect. Okay, thank you.

You're welcome.

Your next question comes from Matt Rout (ph) with First Capital.

Good morning and congratulations on the progress you're making in the turnaround. A little clarification again on maybe some of the timing of the refinancing. You suggested that you have the collateral that you feel qualifies you in order to get it, and you've put the CMBS behind you. Going forward, you suggested that stock price is too cheap to do any kind of equity financing, and that was unnecessary. And somebody mentioned earlier in the call that it was difficult, or you still haven't lined up the entire bank group. Does that mean that Fleet is kind of inline with something that you have in mind? And then, as terms of the paying back to preferred, bring up the preferred in terms of the accrued, that would be your goal after refinancing. What do you think the timing is, because we don't want to wait until the fall or something along those lines as we run into a deadline like we did a couple of years ago?

On the financing question, we've had discussion with out current bank, both banks, with two bank groups, with both Provident Bank of Cincinnati and with Fleet. And we've got some preliminary feedback that seems to be favorable, although we need more feedback from them. And we've also talked to other lenders in healthcare, although I will tell you that's a small population today. So in terms of, are people lined up? The answer is no, but we've been in front of everybody and we've gotten some positive feedback. There's a lot of work between here and a deal. As it relates to the dividends, it's really going to be a Board call, subject to handling in one form or another the maturity that we're facing. That being said, obviously the sooner we get our financing done the sooner the Board can sit down and address it. I really cannot sit here today and speak for Omega's Board.

Are we motivated to get this done sooner rather than later? Because the stock price, as you pointed out, is falling quite a bit, and you felt like it's at a price that isn't worth raising any additional equity given its level. Obviously if we wait until later on it may be more of a reason for people to sell as opposed to buy. So are we motivated to get this done quickly?

When we look at our priorities this year, we have the financing, we have Sun, and to a much lesser extent Alterra and then the normal activities that we have in running the business. But right up on the front burner are those two big things.

Well next question. You mentioned Sun again. These have already been restructured of course once, when Sun went through their original restructuring. Can you put into perspective just in a general way, what type of rent reduction they got in the first go round when this happened?

I have to speak a little bit to history that I wasn't there for. But the first time around the rent reductions were very modest, if any. Really what happened is I believe the Sun portfolio at that time originally consisted of 54 buildings. And we took back four buildings or some number like that, restructured the allocated rent very modestly, and moved forward. And the reason was, as was pointed out earlier in the call, the rent on using a lot of different industry standards is not high. So I think what happened is, when Sun went into Bankruptcy the first time around, there was the belief, both from Omega's perspective and Sun's perspective, that Bankruptcy they were going to affirm anyway, and they wanted to go in knowing they had a deal. And they didn't want the chance of having those properties defaulted out and re-leased to other operators. Of course, that was history. And from a cash flow perspective, the operating cash flow of those properties has continued to be impacted by some of the changes in Medicare reimbursement and in certain instances, Medicaid.

Okay. Changing the subject a little bit, I got a question in terms of maintenance or rules regarding stock purchases or buyback by insiders of the company. Obviously the company can't do it, but in terms of insider activity there was quite a bit of buying over the last 6-8 months or so, including some purchases of preferred. How long have insiders been blacked out? Are the blacked out now? What are the -- and under what circumstances are they blacked out?

They are blacked out right now, and I can't speak for [inaudible] or any other insiders individual buying habits. But any time an insider has material, non-public information, which we did just release today, as you see we had quite a bit of it, but they are blacked out during that period of time.

Have they been blacked out since like November of last year, or December? Or is it just something that surrounds this earnings call?

They have been blacked out during that time period, yes.

They have been?

Yes.

So is there -- does this earnings call allow them to purchase again after it, or are there still the same potential issues or events that you're talking about that would encumber them from buying for some other period of time?

As of today, I believe we've disclosed all of the material non-public information that we have. So as part of our normal policy, there would be the ability for insiders to buy -- I will tell you that historically our windows - our recommended windows for buying have been rather short. So just to give you -- we're not in a position to kind of say, here's the standard policy, because it's so subjective. But we haven't had long and open windows of buying.

So they haven't been opened for some period of time, December or something, and it wouldn't be like 48 hours from today or something like that? I mean how is that information disseminated to the public?

This is considered the dissemination, and you're right, the general standard is two days, two business days.

Two days, so they technically could be able to be purchasing stock after two days?

Correct.

Okay. Then lastly, and I hate to pound on Sun again one more time. They mentioned in their own press release that they're looking at like a per diem, per bed decrease of like 450 to 400. Then are trying to, of course, negotiate some kind of a lower rent if possible, with you and others. Is that number at all something that we could use as some type of guideline to look at some worse case scenario in terms of your position, or is that just way out of line in terms of percentages?

I think the problem with that numbers is it maybe from Rick Matris’s (ph) perspective, that's a broad brush standard, but it's just -- every states going to be different. Your hospitals are different from sniffs. I think it's very dangerous, whether you're looking at our portfolio with Sun or anybody else's, to take that standard and apply it. It really is going to be driven much more off of the cash flow at the operating level, that's sustainable into the future. It just has to be.

We have a giant Master lease which gives us tremendous bargaining power, because they can't just decide to put a few properties back to us or something along those lines. And the rent guidelines that you talked about, the one-time coverage, just doesn't give them a lot of leeway to look for more decreases, does it not?

Well I think the issue is affirmation or rejection. And I don't know -- If Sun were to head towards a filing, that's where the play is going to be - do you want all or none?

Are you Sun's largest landlord?

I believe we are the largest landlord in terms of number of facilities. I know that we're not the larges landlord in terms of rent.

Are you going to be looked upon as the leader of this process to determine whether they can do this outside of bankruptcy? Because obviously outside of bankruptcy would be beneficial potentially. And everybody else is going to be looking out of the corner of their eye to see what everybody else is doing, so are you guys going to lead the process?

I think to some extent sure, but to some extent the management team at Sun is driving their negotiation. And right now they're the ones, they're making decisions to what they think makes sense. So we're obviously a big piece of the portfolio, and we think we'd be important to their portfolio, but I don't know that that means there's necessarily a deal there.

Last question, and this is just for my lack of understanding. You mentioned earlier that you got some positive effect with either your Mariner leases, or they gave you -- there was an amendment which qualified you for some type of bonus. Does that have to do with Mariner's performance being good, such that properties previously negotiated met some targets, why you're able to get some more money?

That's exactly right.

So as far as Mariner is going then, those properties there seem to be doing fine. They don't seem to be having the same problems at least that Sun is having.

Well I'll make an important point here. The Mariner structure is in a separate special purpose entity, that's distinct from the Mariner balance sheet. So we have properties in Michigan, nine in Michigan and three in North Carolina. In this special purpose entity, it has a lease rate and Mariner corporate entity manages into that SPE. And I only want to highlight that because we believe that that structure shields us from Mariner's big overall issue, which is exposure in Florida and Texas. That's the issue that company is going to face, it faces now, and it's going to face for a long time.

So operationally they're fine, it's more the liability side?

I believe so, yes. Operationally, for our portfolio, they've done a terrific job.

Okay, thank you very much.

You have a follow up from Rick Rubin.

Actually the last comment on Mariner took care of my question there. My one final question is what's the OWWI stake worth on market value basis?

The little Australia piece that we have, I think our book value -- what's our book --

$1.2m

$1.2m book and it is not a traded security. Our view is it's probably worth book value give or take. I mean I don't think you'd see a big gain or loss in a transaction there.

Okay, thanks, I was thinking it was larger than that.

Yes, it's pretty small.

You have a follow up from Bill Schroeder.

Yes, guys, another question regarding this $7.0m. Well I guess this is kind of two questions rolled up into one. As I calculated it, it appears as if the $7.0m payment or charge - I mean it is -- they were payments right, they've expenses associated with the potential CMBS REFI that fell through. That looks like it's about 25% of your annual FFO. If you look at it on a normalized basis going forward, if the IHS mortgages don't somehow get some new cash flow contribution from somebody that's going to pay rent, and the cuts that were made by Sun, it just seems like such a high dollar amount. Can you walk us through what some of the fees are for, how they're calculated? If they're calculated based on the size of the potential CMBS? And if there's any kind of recovery of services we're going to get if we go back to the table with a potential CMBS or other type of REFI?

The fees are direct expenses for services rendered. So there's no -- there's a modest fee related to the underwriter, but the reality is the bulk of that $7.0m was for specific services rendered. Even the field appraisals, even the field environmentals, accountants at every-- I'm sorry --

Oh sorry, sorry.

Accountants at every facility doing what I called before, audit procedures, but not technically audit. Extremely -- enormous amount of accounting work. And then legal structuring fees.

And there's a lot of real estate related cost as well. We did surveys on all these properties, updated surveys in every market, and the associated title work.

So when you talk about recovery, I mean I think there's two elements to that. One, all this work that was done, in particularly the appraisals and the environmentals, and to some extent the accounting work, are useful to us on an ongoing basis, irrespective of refinancing or otherwise. It was expensive, but it also updated in a very quick way most of what we know about our whole portfolio. And I think it will be useful and has been useful as we've thought about what direction we go with Sun. As it relates to our refinancing efforts, there may be an opportunity, but it's unknown today, but there may be an opportunity to recycle some of that work.

Okay. And last question here on the collateral or security for potential REFI. This would relate to the -- I believe it's what $170 some million in Bank debt?

Right, $177m in bank debt, plus --

You're unsecured require you to have twice the amount of debt free and clear, not acting as security for anything else. Will the banks require a similar level of security? Do you have any idea of the dollar amount or the multiple of the face value of your debt that will be required to act as security?

We've obviously had discussion with them and presented some collateral, but I think it would be to all of our benefits to see where that comes out rather than talking about it publicly. And I'd be happy to talk to you off line about that.

Okay, thank you.

You have a follow up from Eban Stein.

Yes, just once again on the refinancing. Could you tell me, are you trying to go back and refinance and get a package that's large enough that actually gives you the flexibility to make the dividend payment? Or at this point are just trying to extend and get a bank group on the current amount that’s out?

No, we're trying to get something that's sufficient to catch up with dividends, to give us the ability to catch up with dividends.

Okay, great. Thank you.

There are no further questions at this time.

Great, well thank you very much for participating in our call. If there are follow-up questions, Bob Stephenson, our CFO will be available today and next week. Thank you very much.

This concludes today's conference, you may now disconnect.