Omega Healthcare Investors’ (OHI) CEO Taylor Pickett on Q4 2017 Results – Earnings Call Transcript

KeepHealthCare.ORG – Omega Healthcare Investors’ (OHI) CEO Taylor Pickett on Q4 2017 Results – Earnings Call Transcript

Omega Healthcare Investors, Inc. (NYSE:OHI) Q4 2017 Earnings Conference Call February 14, 2018 10:00 AM ET

Executives

Michele Reber – Investor Relations

Taylor Pickett – Chief Executive Officer

Robert Stephenson – Chief Financial Officer

Jeff Marshall – Senior Vice President Operations

Daniel Booth – Chief Operating Officer

Steven Insoft – Chief Corporate Development Officer

Analysts

Chad Vanacore – Stifel

Nick Yulico – UBS

Juan Sanabria – Bank of America

Michael Knott – Green Street Advisors

Tayo Okusanya – Jeffries

Daniel Bernstein – Capital One Securities

Eric Fleming – Sun Trust

Todd Stender – Wells Fargo

Operator

Good morning, and welcome to the Omega Healthcare Investors Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded.

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

Michele Reber

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

Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, transitions or dispositions and our business and portfolio outlook, generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially.

Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures, such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the Financial Information section of our website at www.omegahealthcare.com and in the case of FFO and adjusted FFO, in our press release issued yesterday.

I will now turn the call over to Taylor.

Taylor Pickett

Thanks, Michele. Good morning and thank you for joining our fourth quarter 2017 earnings conference call. Today I’ll discuss five topics. Our strategic asset repositioning; second, the sustainability of our dividend; third, our 2018 guidance; fourth, the reimbursement and expense environment and fifth, our internal resources, external resources and unique business attributes for future success.

Strategic asset repositioning, as healthcare delivery continues to evolve we continuously evaluate our assets, our operators and our markets to position our portfolio for success, not just in the near term, but over the next decade. Our strategy includes selling and transitioning assets that do not meet on operator, real estate or market criteria. We expect resulting portfolio to have improved coverage and provide significant growth opportunities and long term durability.

As part of our strategic repositioning during the fourth quarter and year-to-date 2018, we disposed 224 million assets and we’re evaluating over 300 million in potential assets to sell in 2018. The revenue reduction related to our 224 million in assets disposed is $24 million, while the trailing 12 months cash flow on these assets was only $19 million. The cash flow on these assets did not cover the underlying the rent, yet we were able achieve sale proceeds to equate to radials of 10.7%. Our strong sales results to date reflect the continued appetite for SNFs assets by local market private buyers.

The second topic is dividend sustainability. We’re proud of our unprecedented streak of 22 straight quarterly dividend increases, wherein we increased the dividend from $0.43 per share to $0.66 per share, 53% over five and a half years. Our quarterly dividend growth was predicated on and driven by our consistent FFO and fast growth. As a result of our strategic repositioning activities, 2018 will not be a growth year and therefore we do not expect to increase the dividend during 2018.

However, I want to be very clear that we are very confident in the payout percentage coverage and the sustainability of our current dividend of $0.66 per share per quarter. With the current yield of 10% and our strong beliefs with the headwinds we’ve been battling are beginning to subside. We believe we’re well positioned to deliver substantial shareholder returns over the next five years.

Turning to our guidance, our adjusted FFO guidance is $2.96 to $3.06 per share, while our FAD guidance is $2.64 to $2.74 per share. Timing will play a big role on our guidance as asset sales reduce adjusted funds from operations and the longer it takes to redeploy capital the longer it takes to restore this AFFO in our quarterly run rate. In addition, the timing and ultimate outcome of Orianna and to a lesser extent Signature, may also impact our guidance. We expect that our quarterly AFFO results will trend upwards throughout 2018, providing us with a solid baseline run rate as we head into 2019. Specifically, we expect asset sales of 300 million or more during 2018 with $35 million already completed year-to-date.

We expect of our sale proceeds capital by year end, but the related timing in AFFO offside could be delayed. Furthermore, the ultimate outcome of our global resolution with Orianna will likely occur in the later part of 2018. However, we believe we are closed an agreement to restructure the Orianna portfolio in an organized way. The acquisition market remains choppy and to date is not particularly robust. However, as we’ve seen through several cycles in the SNFs industry, there tends to be a significant uptick in mergers and acquisitions as down cycles come to an end. I would expect to see meaningful growth opportunities later in 2018 and moving into 2019.

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

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

My final topic is the significant internal resources, external resources and unique business attributes that Omega has that positions us for success. Internal resources include, one, an extremely experienced management team that has navigated through several industry cycles including the late 1990s. The current environment although not favorable is not remotely close to the problems that we faced and solved in the late 1990s and early 2000s.

Our staff is incredibly deep and now ultimately led by Dan Booth, Steven Insoft, Bob Stephenson, Mike Ritz and the dozens of employees that support them. Two, we have a significant in house operating reimbursement and regulatory expertise led by Jeff Marshall and three, we have significant in house construction and development expertise led by Steve Levin that supports our strategic position of holding our core assets for the long term.

From an external resource perspective, we have partnered with two leading consulting firms to gather an extremely comprehensive and detailed analysis of the demographics that will drive demand for skilled nursing facilities throughout the next decade. With literally thousands of hours dedicated to this analysis, we believe we’ll begin to feel the demographic demand wave going into 2019. And finally we have unique business attributes that set us apart from our competitors. We have the most SNF operator relationships.

We own the most SNF properties. We have the most geographic diversity. We have the best decision making data. We have the best in class high end assisted living operator in Maplewood with a significant growth trajectory. And we have significant growth opportunities in the UK. And lastly, we have a deeply experienced and engaged board and management team committed to capitalize on these advantages with a view to long term shareholder value creation.

I’ll now turn the call over to Bob.

Robert Stephenson

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $159 million or $0.77 per share for the quarter, as compared to $172 million or $0.84 per share for the fourth quarter of 2016.

Our adjusted FFO was $164 million or $0.79 per share for the quarter and excludes the impact of approximately $3.9 million of non-cash stock based compensation expense, $900,000 in provision for uncollectible accounts, $500,000 of one time revenue and $200,000 in impairments on direct financing leases.

Operating revenue for the quarter was approximately $221 million versus $235 million for the fourth quarter of 2016. The decrease was primarily a result of placing Orianna and Daybreak on a cash basis in the third quarter and therefore recording no Orianna or Daybreak revenue in the fourth quarter.

The decrease in revenue was partially offset by incremental revenue from over $375 million of new investments completed in 2017. The $221 million of revenue for the quarter includes approximately $15 of non-cash revenue.

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

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

As Taylor mentioned, we continue to work with our operators to identify opportunity to improve portfolios via asset repositioning, including sales and asset transfers. As a result, in the fourth quarter we sold 34 facilities for approximately $189 million in net cash proceeds, recognizing a gain of approximately $46 million. We also received $100,000 for final payment on one facility mortgage. For modeling purposes, in the fourth quarter we recorded slightly over $5 million in revenue related to these 35 facility dispositions.

During the quarter, we recorded approximately $64 million in real estate impairments to reduce the net book value of 32 facilities to an estimated fair value or expected selling price. The $64 million includes, a charge of $13 million related to one facility destroyed in the fire. We expect to receive proceeds from the insurance carrier in 2018. We recorded approximately $900,000 in provisions for uncollectable accounts related to the write off of straight line receivables resulting from 2018 expected sales.

Dan will provide an update of our ongoing negotiations with Signature in his remarks. However, from an accounting standpoint, we would note that Signature is currently paying approximately 75% of its monthly contractual rent, as a result its receivables balance continues to grow. As of December 31, we had approximately $21 million in contractual receivables outstanding, which is partially offset by $9.3 million letter of credit as well as significant personal guarantees.

While we remain optimistic that a resolution will be reached with Signature if the net receivable balance continues to increase and a resolution is not reached on timely basis. From an accounting standpoint only we will have to analyze the collectability of both the outstanding AR and future rental payments and maybe required to place them on cash basis of accounting. Our accounting decision has no impact on the negotiations or ultimate final resolution.

Turning to the balance sheet, at December 31, we had 22 facilities valued at $87 million classified held for sale and we’re evaluating over $300 million in potential asset disposition opportunities which could occur over the next several quarters. Our balance sheet remains strong. For the three months ended December 31, our net debt to annualized EBITDA was 5.87 times and fixed charge coverage ratio was 4.1 times.

It’s important to note EBITDA in these calculations has no annual revenue related to Orianna or Daybreak. When adjusting for the likely range of expected rental outcome from Orianna, including expected cash received from Daybreak in addition to a moving revenue related to our Q4 sales, our pro forma leverage will return to its normal range of less than 5 times.

I’ll now turn the call over to Jeff.

Jeff Marshall

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

In congress the risk to SNF funding through Medicaid reform has lessened with the reduction in the Republican senate majority from the Alabama election. Looking ahead to 2018, the concern for SNFs is the potential that a cut to Medicaid provider tax funding could be used as an offset to any ACA modification legislation, though the opposition in 2017 from several Republican senators to Medicaid reform legislation indicates a low risk of such a cut in the coming year.

Anticipated legislation to permanently repeal outpatient therapy caps finally passed with a budget bill attached to the February 9, continuing resolution to fund the federal government. This permanent repeal effective January 1, 2018, restores approximately 811 million in annual SNF Medicare Part B funding and eliminates annual legislative process to restore a therapy cap exceptions program that frequently resulted in SNF payment cuts.

The repeal legislation is partially paid for with an October 1, 2018 cut to the SNF Medicare per day market basket increase of approximately 0.3%, estimated by the congressional budget office to total 1.9 billion in reduced funding over the next 10 years or 190 million annually. Most importantly there are 1 million Medicare Part B beneficiaries impacted by the caps will no longer be limited in receiving outpatient therapy service necessary to maintain or improve of their quality of life.

Regulatory pressure with the required November 28 implementation of the extensive Phase II requirements of participation was reduced as CMS delayed compliance enforcement for 18 months on the most significant aspects of those operating provisions. Further, to allow sufficient time for state SNF surveyors to train on the new provisions, CMS announced that inspection star ratings would be frozen for the 2018 year.

The industry awaits CMS’s decision in the spring as to whether the previously proposed resident classification system will be implemented effective October 2018 to replace the existing perspective payment system for SNF Medicare fee for service claims. CMS previously announced intent to maintain the overall level of Medicare pay for service SNF funding with such a system change, which would reallocate funding from the current heavy emphasis on therapy services to a more balanced approach on resident acuity characteristic.

Continuing its trend away from mandatory bundling programs, CNS announced in January, a voluntary risk based episode payment bundling model Bundle Payment for care improvement advanced initiative for BPCIA to begin in October 2018 and run for five years, covering up to 32 diagnostic categories down from 48 under the existing BPCIA. Notably, SNFs will not be eligible to initiate episode bundles under this model as they could under the existing BPCIA models, but can participate in bundles initiated by hospitals of physician groups.

As such, BPCIA is not expected to have a significant impact on SNF revenues. On January 24, the senate confirmed the appointment of Alex Azar to lead the Health and Human Services Department with over side of CMS. Azar’s confirmation provides assurance that the SNF friendly regulatory policies to date under the Trump administration are likely to continue, especially with the continued leadership of CMS by Seema Verma.

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

I will now turn the call over to Dan.

Daniel Booth

Thanks, Jeff, and good morning, everyone. As of December 31, 2017, Omega had an operating asset portfolio of 973 facilities with approximately 98,000 operating beds. These facilities were spread across 74 third-party operators and located within 40 states in the United Kingdom.

Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio increased during the third quarter of 2017 to 1.72 and 1.35 times, respectively, versus 1.71 and 1.34 times, respectively, for the trailing 12 months period ended June 30, 2017.

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

Moving on to Signature Healthcare, since our last earnings call, considerable progress has been made toward finalizing a comprehensive agreement among Signature and Signature’s three primary landlords, which will effectively bifurcate each of the three portfolios into three distinct legal Xilo’s and separate virtually all legal obligations.

As part of those agreements, Omega has agreed to differ certain rent payment obligations, improvise our working capital move, while we remain cautiously optimistic that a satisfactory global restructuring with all constituents will be finalized in the near future. Such restructuring remains contingent upon Signature’s successful resolution of its material PLGL claims.

In addition to the ongoing discussions with both Orianna and Signature, Omega entered into a settlement on full balance agreement during the fourth quarter with another sizable operator Daybreak, which as mentioned on the last call resulted in rent payments in the fourth quarter paying approximately 77% of contractual rent. As documented we bring in January, rental return to the full contractual amount and as expected rent payments have been made in accordance with that agreement.

We anticipate pass through amounts to begin to be repaid in the latter half of 2018. Daybreak had made considerable operational improvements over the last six plus months, including increase in the average Medicaid rate, reducing their corporate overhead by nearly a four percentage point and entering 14 of their Omega facilities into the Texas quick program, federally backed program similar in nature to the UPL program instituted in our space. We have also agreed to eight facility sales and several facility consolidations in an effort to part out underperforming assets in over bedded markets.

In addition to the three operators just mentioned, another one of our top 10 operators, Preferred Care, a Texas based operator and certain of its affiliated operators in the states of Kentucky and New Mexico filed to Chapter 11 bankruptcy as a result of $28 million jury award in the state of Kentucky and the overwhelming number of personal under suit’s initiated against such operators in both states. While Omega has no exposure to Preferred Care in Kentucky, we currently lease 16 facilities to Preferred Care in New Mexico, Texas, Arizona and Oklahoma.

In November of 2017, Omega and Preferred Care entered into a transition agreement related to all 16 facilities. We have identified operators for each state and separate transition processes are currently underway. Historically this portfolio has operated at less than one times EBITDA coverage with trailing 12-months 9/30/17 results at 0.26 times. And it is currently expected that all 16 facilities will be released to current Omega operators under longer term leases with enhanced credit profiles.

Turning to new investments, during the fourth quarter of 2017 Omega completed $71 million in new investments consisting of $40 million purchase lease transaction for six Skilled Nursing facilities in Texas and $31 million in CapEx spending. New investments for all of 2017 inclusive of CapEx funding of 145 million totaled 530 million. The acquisitions consisted of the 45 facilities with 4,320 operating beds.

As Taylor mentioned earlier, during the fourth quarter of 2017, Omega disposed 35 facilities for approximately $189 million in net proceeds. Year-to-date in 2018, Omega has disposed of six facilities for approximately 35 million in net proceeds. Throughout 2017, we worked with our operators to aggressively reposition our portfolios through divestitures, releases and/or closure of facilities. Accordingly starting early in 2017, had an escalating pace throughout the year, we disposed a in a total of 62 facilities for net proceeds of 291 million.

The majority of these sales were driven by either poor store cooperative performance, obsolete or poor physical plans, deteriorating market conditions and of our weak operator relationships which Omega sort to exit. We are currently evaluating approximately 50 additional facilities to sell in the coming quarters. While we believe we have identified the majority of dispositions for the near future, Omega will continue to review our portfolio and discuss strategic repositioning with our operators. Based upon our pending dispositions, we believe dispositions will likely outpace acquisitions for most if not all of 2018.

I’ll now turn the call over to Steven

Steven Insoft

Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue to work on our planned 215,000 square foot ALF memory care high rise, at Second Avenue, 93rd street, Manhattan. The project is expected to cost approximately $250 million and is scheduled to open in mid-2019. We’re very pleased with the progress of the New York City project, including the land and CIP of out New York City project at the end of the fourth quarter, Omega senior housing portfolio totaled $1.48 billion of investments on our balance sheet.

While anchored by our growing relationship with Maplewood Senior Living and your best in class properties as well as healthcare homes both here and UK, our overall senior housing investment now comprises 133 assisted living, independent living and memory care assets in the US and UK. On a standalone basis this portfolio not only covers the fleet obligations of 1.12 times, but also represents one of the largest senior housing portfolios amongst the publicly listed healthcare REITs.

Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 13 Maplewood facilities in the related is predicated on coupling our tenants operating capabilities with our commitment to having in house design and construction expertise. Through the same capability, we invested 31.1 million in the second quarter in new construction and strategic reinvestment. We currently have over 85 active capital reinvestment projects at the end of Q4, 14 of these projects represent new construction with a total budget of approximately $500 million inclusive of Manhattan and are actively being funded.

We have $228 million of construction in progress on our balance sheet as of December 31, 2017. The remaining projects encompass approximately $197 million of committed capital, 135 million of which has been funded through 12/31/17.

Taylor Pickett

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

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore

Good morning all. So based on your 2018 FAD guidance, the expected dividend pair ratio that’s approaching about 100%, what gives you confidence in this peculiar of the current dividend and then what gets you back to more normalized pair ratio, in mind with historical?

Taylor Pickett

Yeah when we think about the dividend but I mentioned it earlier in our prepared comments that we look at our preferred throughout 2018 as early, as we couldn’t put our recycled share proceeds back to work, and eventually get the Orianna assets working. So, we look at our fourth quarter FSL in a sad run rate of this year fourth quarter ’17. And we expect they are going in at the end of ’18 and going into ’19 their quarterly run rate is going to be at or above the current fourth quarter ’17 run rate. And that’s re pulling the assets proceeds that we are selling and then putting Orianna to work. So, although it looks high, in the near term I think because we have the assets on the sideline that we know are going to be working by the end of the year.

Chad Vanacore

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

Taylor Pickett

Because, we likely will and then place it overtime, so that’s the point as we think about our guidance through this year, the run rate quarter-by-quarter is going to increase as the year moves on. It’s always restoring ourselves, at or above the existing run rates.

Chad Vanacore

Okay. And then Taylor you mentioned in your prepared remarks that you expect improved strength-to-strength in the main markets in 2019. So what signals are you looking at that point you toward the trend reversal and you may mention that demographic study that you did?

Taylor Pickett

Yes, it is that, we’ve done an incredibly comprehensive study by individual age group and clinical condition in all of our major markets. And we still are highly confident that in trying to predict whatever will be possible when the demographic waves actually come through vision. And, it’s very clear to us that going into ’19 we will start to see the demographic waves in a meaningful way. And a little bit later, in the next month or so, we’ll provide some high level guidance in our Investor Presentation that shows the detail of when that goes into taking. But, we are confident and that’s the picture we are looking at.

Chad Vanacore

Alright, any hint to as to how aggressively that moves over time?

Taylor Pickett

It’s consistent, it’s not – there’s not a spike, so if you look from this point forward it’s in the 2% to 3% range and its annual, it’s just a consistent push on the of demand on the pipeline supplies business.

Chad Vanacore

Alright and then just one more from me, last quarter, roughly 45 million of your total rent was below one time’s coverage, this quarter that’s down to 21 million. Can you talk about what changes that you’ve seen in portfolio that helped to pull that metric?

Taylor Pickett

Chad can you come again on line one?

Chad Vanacore

Oh, I’m sorry, so, in your supplement on your breakout the percentage of rent under one time’s coverage, it looks like it improved this quarter, I just wondered what was driving that?

Taylor Pickett

It was a couple of portfolio’s that were just 9 or above that crossed over into the higher buckets, and then a couple property were either sold or we leased to somebody else so we got it out of there.

Chad Vanacore

Alright thanks for taking the questions.

Operator

Our next question comes from Nick Yulico with UBS. Please go ahead.

Nick Yulico

Oh thanks. Just going to the guidance, I wanted to understand what’s actually assumed in the guidance for some of the larger operators Signature, Daybreak, Orianna is a little bit more clear preferred care. In terms of rent that’s in FFO versus FAD?

Taylor Pickett

Yeah, for Daybreak Nick, as Dan mentioned they maintained their payment plan. So, once they caught up on the past DAR which is going to happen at or around at the end of this quarter. We’ll begin this book Daybreak on a contractual basis which is a $7 million quarter run rate. Orianna you mentioned, with that it’s likely to be towards the backend of 2018 and frankly that’s conservative in terms of timing. I will think about guidance and if that changes and we get a little better results, to update that in our guidance. Preferred care as again mentioned, during the process of transitioning those 16 assets the preferred care contractual the $11 million, we are not going with those negotiations as it awaits the transition of those assets. But, it’s likely that’s under the contractual under period in the $6 million qualified for 7 range. And then Signature is really just a question of getting into the finished line in terms of those negotiations. So, our expectation is Signature will never change.

Nick Yulico

Okay, and then just to be clear on Signature, I think you said their paying 75% of their rent today, is that right?

Taylor Pickett

That’s correct.

Nick Yulico

Okay, so from an FFO stand point you guys are still booking the full rent and it’s also assumed that full rent is in for the guidance FFO for the year?

Taylor Pickett

We are recording the full rent and part for that is the significant credit sitting behind that are billed-to-date and part of our restructuring is a detailed plan. It has waterfall where we will look to recover that overtime. So, yes, the answer is yes.

Nick Yulico

Okay, but you said at some point you may under an agreement you may be deferring rents, I guess which would be on top what is already, what they are not paying right now on rent?

Taylor Pickett

No, no that’s not the case. You were able to reach our optimal agreement with them, that the program would be deferred out of our full contractual rent and as we disclosing our supplemental contractual rent which is close to $60 million. So, the deferred rent, out of that soon we get to an answer of approximately 10%.

Nick Yulico

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

Taylor Pickett

Yes, it factors that in and our expectation for Signature.

Nick Yulico

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

Taylor Pickett

I think that’s probably a reason, to call it under 11% on yield basis Nick and I’m sure you’ve done the math. From what I’ve talked about it, if we go really good about the cap rates that we see in the market we have, cash on the assets we sold of 19 million at total 24 million of proceeds which implies a 8.5% cap rate. As you know, we don’t talk about cap rates that much, we typically look at red yields, but you have the math right. So, I would think about it as 10% to 11% range so, from hard perspective to redeployment of those sales proceeds results in a very little slippage in terms of run rate.

Nick Yulico

And, then sorry just one more question if I may, you gave a detail on – I didn’t catch it all on the numbers for construction budgets, it will be helpful to have this in the supplemental broken down somewhere, but what is the balance of what you sold of the fund altogether on the Maplewood near city project and some of these other various projects. And then how do you plan to fund that, sounds like your dispositions are going to be used for acquisitions thanks?

Taylor Pickett

Yeah, just that it takes out of the supplemental a lot of the information, so, if you look at page7 in the supplemental second half and the remaining commitments just over a $100 million. And then you can see the clearance for the other properties that we have coming out of the ground, so, just short of total including other CapEx besides new built Cheshire 300 million. And, really this reflects our normal pacing of CapEx where we spend somewhere between 25 million and 40 million a quarter. As second half accelerates and bring it up a little bit, so, from our perspective that’s part of our normal stand and we think about recycling of sale asset proceeds, the deployment of those is part of that. And a lot of this as you can see, runs into 2019, so it’s not obvious that they are shipped.

Nick Yulico

Thank you.

Operator

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

Juan Sanabria

Hi, just with regards to your rent coverage disclosed in your sub, will you exclude seems like 17% of your rent. What is the coverage on that 17%?

Taylor Pickett

I mean I’d be able to well south of 1-1.

Juan Sanabria

Why is that excluded, because it seems like the pressure is building on some your operators. We’ve talked about a number of them, but here you’re disclosing that the rent coverage below one point two times has decreased quarter-over-quarter. But, that other bucket is growing, what is included in that bucket? Is it like Orianna, Daybreak, Signature, are those in that bucket?

Taylor Pickett

Juan, Orianna is, you know we are all pretty consistent about the core versus total is right around 93% for quite a few quarters. And, if you remember last quarter, it dropped down to 87% which was the inclusion of Orianna because we went on a cash basis. And, I think if you know, you have that Orianna, it includes the needle a little bit, our coverage would go from 135 to 133 given or taken in. in this quarter we went from 87% of our accepted code to 83%. So, that’s the 17% you’re talking about, that’s really three additional portfolio’s that we put into, two referred portfolio helped ourself as we assigned first payments on them. And then the other portfolio’s the preferred care portfolio that we mentioned which are ultra-vision probably. I mean they’ll be ultimately more ended up in the hands of our other operators, because they are either there is a personal sales agreement signed up or we have transition agreements that are in the works that sort of pull up our quarter. And that’s been considerable with how we look at it, connected a long, long time, Juan I’m sorry.

Juan Sanabria

It looks like on Communicare you had lowered your exposure there, either through asset sales or transition. What’s going with that Taylor, is there any issues that we should be aware and can you give us a of sense of the coverage?

Taylor Pickett

Yeah, sure, we actually did a pretty sizable deal with Communicare , we took on 15 facilities Indiana. But as part of that arrangement we also did a deal with them where we allow them to sell at our buybacks certain or higher assets, which the overall portfolio have been the one set have been struggling. And so, we have reduced our total Communicare, those were the under performers of the facility. Overall Communicare is been doing quite well there, slightly below the mean – but actually in the last quarter they recorded a bit above the mean. And so, they are performing quite well, and to the extent we got few more of higher assets that will decline on is forcing up their current portfolio when we get back.

Juan Sanabria

And then on, the asset sales 300 million, what’s the rank coverage on that pull of assets that corresponds to that 10% to 11% cap rate that you just talked about?

Taylor Pickett

I can tell you, it’s significantly below 1-1.

Juan Sanabria

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

Taylor Pickett

I’d have to calculate that, I don’t have that on top of my head.

Juan Sanabria

Okay, thank you.

Operator

Our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Michael Knott

Hi guys. On Signature can you still help us understand how if you did take a deferred rental obligation, how that would fit with booking the full rent in adjusted FFO, I just didn’t quite understand that. And then sort of related to that, sounds like going to the cash accounting and that situation is a non-zero probability but, the guidance seems to assume a 100% probability of statistical work. Can you help us understand us that a little bit more?

Taylor Pickett

On the guidance Juan it’s here in spatial factor circumstances right now, right now we fully believe and are confident that that resolution would be reached and basically what I was saying that if for some reason they keep sliding, and we put it on a cap, and it would be required to put it on a cash basis. Again, that is only an account, I guess when passed on negotiates to the final account. We would then stop recording revenue until the cash to AR is gone out to sort of a great place that has no doubt. So, given the bad circumstance today, there is no need to do that, so it is in our guidance. And from the second part of that guidance standpoint, we have factored in what we anticipate for that final outcome with what little place, that’s part of our guidance.

Michael Knott

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

Taylor Pickett

That’s correct. They are kind of bad as well.

Michael Knott

Okay, that’s helpful thanks. And then on the assets sales, when you say evaluating the plus 300 million just, how far long are you on deciding on the amount and what is the timing, what should we expect, to expect most of that in the first half of the year or?

Taylor Pickett

It’s definitely going to be earlier in the year. The evaluation includes evaluating whether there are potential sellers out there and some of these potential sales had moved far enough longer. We have purchase agreements and at present like Michael signing a purchase agreement is definitely a closing. So, I would expect from a timing perspective that you see a significant amount of this within the next three, four months.

Michael Knott

And then Taylor can you give us little more color on your M&A comments in your prepared remarks, is that more the operator level or real estate level or just any more color would be helpful on that?

Taylor Pickett

The real estate level, I think it’s just hard what we’ve seen a number of times, when we go through these cycles, there’s a fair amount of uncertainty, the assets that are out in the market place for us generally aren’t that attractive but I think as this cycle begins to end, what we typically see is an uplift in real estate sale activity and I would expect that occur again backend of ’18 into’19.

Michael Knott

And when you say that, you mean more sort of the fragmented part of the market, you know smaller owners and those type of owners?

Taylor Pickett

Yep, that’s what we would typically focus on in terms of consolidating, yes.

Michael Knott

Okay and then last one for me in a hopbox. Can you comment on Genesis and whether the performance there is still as you said before pretty good and if it is can you just may be comment on why the performance there seems to be different than what other owners continue to expect?

Taylor Pickett

Yeah, the Genesis or portfolio performances continue to do well, it has been and continued to be about for me. I can’t comment on why it does better than other portfolio’s, other than obviously there are different assets in different states. A lot of our assets are legacy fund facilities. We continue to support the management team, we think they are doing a good job, they have done a good job and we will remain supported. But, on our portfolio once again it’s been consistent and it continues to perform.

Michael Knott

Thank you.

Operator

Our next question comes from Tayo Okusanya with Jeffries. Please go ahead.

Tayo Okusanya

Hi, yes good morning everyone. Thanks a lot for the comments year ending intro, I thought that was really helpful. A couple of quick ones for me, in regards to the acquisitions and sales planned for the year, could you just talk a little bit about timing, I think for the sales you’ve kind of given us the strength to level range on pricing. But curious what kind of pricing you are expecting on acquisitions as well?

Taylor Pickett

In terms of timing, from our perspective given what we’ve seen in our pipeline is pretty clear that our sales are going to be in front of the re payment of cash into acquisitions. In the acquisition market, the SNF assets are still in the 9’s call it 9.5% type yields out of the norm. I wouldn’t be surprised, I haven’t seen that may be creepy and a little bit more. And, on the outside we don’t look at a lot of the products but I will say on the UK front, the yields are 8.5%.

Tayo Okusanya

Got it and the disposition regarding, so we all be assuming that like a one three event for the whole thing, or it’s like the first half event?

Taylor Pickett

I wouldn’t call it a first half event from a moving perspective, but, you know as we indicated we have it done much earlier, we have had full of half purchase credits that depending on how things go could be fruitful for us.

Tayo Okusanya

Okay, that’s helpful. Then going to Preferred Care, are you actually booking revenue for today in BK?

Taylor Pickett

As of today for preferred care, yeah they are on a cash basis suite; whenever they pay we book them.

Tayo Okusanya

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

Taylor Pickett

It’s likely to be more helpful, that’s the first quarter of that. They are moving through a dimension, that’s bankruptcy, so we have to deal with that element of it. But are obvious, we’ll move over the first quarter because we are moving on to existing tenants that have really strong credit profiles so we feel very good about, we also feel good about the client, although we knew that portfolio would get remarked eventually. This was otherwise expired in 2023, now it is accelerated because of the effects that occurred but the credits going to be incredibly well enhanced.

Tayo Okusanya

Got it and then Signature again, I think I can understand what’s going on there, but I guess I’m curious if they are only paying 75% of their rent today, why is the expectation that the rent deferral will be 10%?

Taylor Pickett

They are going through a process Tayo, so they get engaged professionals, they are expensive. They are working through a variety of other things, but it’s principally going through this process at professional costs and pay downs of other obligations as only through the data of Signature. I stand here, because of the resolution, you know once it’s hopefully 8 is less of the discount and this 75% is miserably less. So, the ends will deficit.

Tayo Okusanya

Okay and then last one for me again, I appreciate your patience. We kind of talked a lot about the tenant where the kind of non-problems that you’ve disclosed with the past year quarters. Could you just talk a little bit more about some of the other tenants we have not discussed again names like Communicare, Maplewood, HHC, Guardian, Diversicare. What’s the status of your other top tenants, what’s happening with them?

Taylor Pickett

All the names you just mentioned including all the other top ten, are have been pretty steady over the last couple of quarters. Everybody has been on labor pressures, everybody is dealing with issues at different given markets but the most part, the coverage is on top ten excluding Signature and Orianna, they’ve really held up. We don’t have any outlines there, and in fact some instances we’ve got portfolios that have actually crept up a little bit.

Tayo Okusanya

Got it, helpful. Thank you.

Operator

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

Daniel Bernstein

Hi good morning, I just want to go back to preferred care, just want to understand to see a 11 million contractual rent that’s in Q4, and then it’s going to drop to that 5% in million range in Q1. Is that how you are going to model that, just to understand?

Taylor Pickett

Yeah, if you model just like that it’s good.

Daniel Bernstein

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

Taylor Pickett

Most probably, it’s existing operators and it’s the same model that we talked about which is the regional players will continue to get bigger. You know firms that have 20, 30, 40 facilities that have the capacity to go to 50, 60, 70 that continues to be the strategy. So, I don’t think, I think it’s really just the regional consolidation which has been a big part of our strategy for a long time, and that’s where these properties will go.

Daniel Bernstein

I don’t know if you can do this, but are you able to bifurcate some of the lease coverages work between Senior’s housing skilled nursing and may be the rental lease coverage versus the rent covered versus the interest coverage on your mortgage debit? It’s a little hard to understand, you know, which of those buckets are doing well or worse and if you can detail that a little bit more or not, but that’s the question.

Taylor Pickett

We don’t have that by bucket today, but I can tell you just generally speaking our SNF three’s an oncologist that’s been consistent forever. But we could – we thought one point of it, if it got – our portfolio got material enough then we would start to segregate how we are going to roll. But today once again, the out portion is filling around 10% or 12% of which we could break that out, I suppose in the future.

Daniel Bernstein

Okay, now just trying to figure out the trends of the interest coverage versus the SNF coverage versus the senior’s coverage and it may make a difference in as how we view your safety of business versus the off leases, which obviously near lower coverage? That’s all I have, appreciate your time thanks guys.

Operator

Our next question comes from Eric Fleming with Sun Trust. Please go ahead.

Eric Fleming

Hey a quick question, the insurance proceeds, is that in the guidance, is that in that timing, will that be second half?

Taylor Pickett

That’s not in the guidance. People get, that’s just the tax that comes in and we are used to re-built the facility preferred. Yeah, we thought about it Eric, the cash will come in likely as a re-build so, we’ll be able to read the player but it’s going to take a period of time.

Operator

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender

Hi thanks, may be just wanted to get a sense of current under rating on an EBITDA rent coverage standpoint. And maybe you can point to what the preferred care leases would go to once they are transitioned and then what you’re current underrating is on new acquisitions?

Taylor Pickett

Well our current underrating on new acquisitions is held up, I mean it’s the 13 to 14 range and it’s really growing quickly in the last year or so closer to the 14 range. We are not doing the Preferred Care releasing, so, I don’t really want to telegraph what we are ultimately shooting for. It’s going to be below that, with the expectation that the cash flow will be somewhere inspired by putting these facilities into master leases of existing operators that have shared equipments on rent covered dispositions, so they can upload , you know a period time where they take on these underperformed results.

Todd Stender

Okay, and how about just going back to Genesis, are there any Genesis facilities included in the 300 million of asset sale expectations?

Taylor Pickett

No.

Todd Stender

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

Taylor Pickett

48 million.

Todd Stender

And then just lastly, I guess on the balance sheet, you guys were talking about, the net debt to EBITDA, I didn’t quite catch the pro forma expectations, it sounds like it was getting closer to five to be a pretty good debt?

Taylor Pickett

Yes, but that’s also post the completion of the Orianna transaction.

Todd Stender

Okay, so a year end number that is timing for the pro forma that’s couple of quarters out you would say?

Taylor Pickett

Absolutely, again it’s close to that and you’ll see that in the first notice on the website.

Todd Stender

Okay, great, thank you.

Operator

The next question is a follow-up from Tayo Okusanya with Jeffries. Please go ahead.

Tayo Okusanya

Yeah, just a quick one. Dan you gave some really good color just about the overall reverse story outlook of some of the proposed cuts coming up, some of the changes to the therapy caps are positive. Will you talk to your tenants and they kind of juggle all this stuff, including potential RCH changes. What in general turn, you will kind of follow the net impact of all this stuff will be slightly positive, slightly negative, neutral. Now that depends on the tenants and what their overall business mixes today? Just trying to get a scent of over the next year or two, what the regulatory changes could mean for the possibility of the tenant?

Daniel Booth

Yeah, it absolutely depends on the tenant, but the overall general segment from everything everyone knows that this point where it’s neutral to slightly positive.

Tayo Okusanya

Okay, that’s helpful. And then one more form me, the insurance proceeds, again they are not in the numbers you said guidance, but when you do get this proceeds do you book it as revenue or what is it booked as?

Taylor Pickett

It is booked as income because we are taking a parameter first that’s not in numbers.

Tayo Okusanya

That’s a bit offsite to your AFFO if you do get the proceeds?

Taylor Pickett

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

Tayo Okusanya

Got it, understood. Thank you.

Operator

The next question is a follow-up from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria

Hi, just a follow-up on types of question I believe on the Genesis loan? So, what’s assumed there in terms of accruing for interesting in-commemorate $48 million loan, and that too it’s like a temporary forgiveness to the, and if you can give us a sense of kind of , how that re-structuring for Genesis is playing out when you are expecting interest continued to be repaid again?

Taylor Pickett

So, we continue to accrue the interest upon that lower one, that’s our one significant confession that will work out, it’s really driven by another two big landlords. And just to give you a little bit of color on that loan, because that loan is fully collateralized, very sophistically collateralized including accrued interests. So, we feel very comfortable about that loan in any scenario. In terms of where Genesis headed, we’ll leave that to damp but the pieces we know we forget about the products.

Juan Sanabria

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

Taylor Pickett

My understanding was a bit big, they haven’t started making any payments on that one. There was a bifurcation between the cash component and the optic component. So the full balance is in February, so we would expect that to come back in March in large sum. There’s been no discussion rate, but the expectation will be March unless we have some change between now and then.

Juan Sanabria

Okay, and then just on your demographic comment, what’s the average entry age of skilled nursing customer?

Taylor Pickett

Yes, it’s very interesting Juan, the utilization rates for skilled If you look at each age from 65 through 75, the curve is very gradual, and it moves up obviously. And then it’s the 75 to 76 year old age group that end up each year, it starts to increase very significantly as you’d expect only into the 80s and 90s and it increases each year of age, so, it records 76 years old as an interesting point where you start to accelerate utilization and you think about birth rates beginning to increase in 1940. So, a couple of years ago, we started to see those 1940 year olds first year 76 now 77, and 78 years old and they are progressing up and we have a lot behind them from mentality perspective from 1949 and 45, obviously it explodes. But, from 40 on you had birth rate going up and that’s part of the driver in this demographic and part of the detail analysis that Steven Insoft and Mathew Cormorant [ph] will work on to provide high level information to our investors.

Juan Sanabria

The average age of skilled nursing patient is in the mid 70’s ,so more or less ten years younger than seniors housing? Is that what you guys are saying?

Taylor Pickett

If you look at and we’ll provide the utilization curve that we’ve designed as part of our information on every financial basis to provide it. The mid 70s utilization rates that’s where you really start to see a kick up in a mean for way, so I haven’t taken this in average but because if 80s are more heavily as you get out on the curve but I think it is fair to think about it as mid 70s and beyond driving book of admissions and top our facilities.

Juan Sanabria

Okay, thank you.

Operator

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

Taylor Pickett

Alright thank you very much for joining our call today. We will be available for any follow-ups that anyone may have. Have a great day.

Operator

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

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