Omega Healthcare Investors, Inc. (OHI) Q4 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Omega Healthcare Fourth Quarter Earnings Conference Call and Webcast for 2015. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Ms. Michelle Reiber. Ms. Reiber, the floor is yours ma'am.

Thank you and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; and our Chief Corporate Development Officer, Steven Insoft. 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 restructuring, rent payments, financial condition or prospects of our operators, contemplated acquisitions 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 limitations 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 Web site at www.omegahealthcare.com, and in the case of FFO and adjusted FFO, in our press release issued today. I will now turn the call over to Taylor.

Thanks, Michelle. Good morning and thank you joining Omega's fourth quarter 2015 earnings conference call. Adjusted FFO for the quarter is $.081 per share; adjusted funds available for distribution FAD for the quarter is $0.72 per share. We increased our quarterly common dividend rate to $0.57 per share, this is a 2% increase from last quarter and an 8% increase from the fourth quarter 2014. We have now increased the dividend to 14 consecutive quarters. The dividend payout ratio remains very conservative at 70% of adjusted FFO and 79% of FAD. Our full year 2015 FAD was $2.79 per share. Our full year 2015 adjusted FFO was $3.08 per share ahead of our original guidance range of $2.98 to $3.04 per share and an 8% increase over 2014 adjusted FFO of $2.85 per share. We have announced our 2016 adjusted FFO guidance range of $3.25 to $3.30 per share and 2016 FAD guidance range of $2.95 to $3 per share. Our guidance includes $650 million in new investments including the $186 million closed today in 2016. As a result of the recent Genesis and Manor Care earnings announcements, we have been asked about a number of specific items. First, as it relates to our modest impairments and write-downs, we have normal asset redistribution from one operator to another resulting in accounting write-downs of a previously recorded straight-line rent. And very modest write-downs related to a couple of Aviv legacy assets. Second, we evaluate our capital costs and our related acquisition opportunities weekly. Given our current cost of capital and leverage, we have sufficient capital to support our operators near-term capital needs. Our conservative balance sheet management with no maturities in the next three years and over 1 billion in liquidity puts us in an extremely strong position with respect to capital allocation decisions. Lastly, [indiscernible] shift from Medicare Part A the various forms of capitation and insurance products is a) not a new trend, b) has been managed by CMS in an organized and powerful way and see has created a slow, but manageable shift in how providers meet residents needs. Furthermore, it's important to remember that there are over 900,000 Medicaid residents occupying less than 1.6 million total skilled nursing facility beds. The obvious point being that we cannot ignore the stable pair source for the majority of patients that occupy a typical skilled nursing facility. In summary, we position our portfolio via well-structured leases and strong coverages to withstand the challenges that our operators are facing today. And we have partnered with operators who have been aggressively addressing the issues facing our industry for many years. I'm confident that Omega is the best position capital provider to manage through the ongoing shift to more efficiently reimbursement system and to identify opportunities as less efficient and less sophisticated providers continue to exit the market. Bob will now review our fourth quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis is $127.4 million or $0.65 per share for the quarter as compared to $87.4 million or $0.68 per share for the fourth quarter of 2014. Our adjusted FFO was $159.4 million or $.81 per share for the quarter and excludes the impact of $20.5 million in interest refinancing expense, $7.6 million in provisions for uncollectible mortgages notes and straight-line receivables, $4.5 million of non-cash stock-based compensation expense, $2.8 million of interest carry and $2 million of acquisition and merger-related costs. This was partially offset by a reduction of $5.4 million for in-place lease revenue amortization catch-up in connection with assumed Aviv leases. Turning to revenue and expenses, operating revenue for the quarter was $210.5 million versus $131.3 million for the fourth quarter of 2014. The increase was primarily a result of incremental revenue from a combination of the Aviv acquisition and other new investments completed in 2015, capital improvements made to our facilities and lease amendments made during that same time period. The $211 million of revenue for the quarter includes approximately $17 million of non-cash revenue. Operating expense for the fourth quarter of 2015 when excluding acquisition related costs, stock-based compensation expense, impairments and provisions for uncollectible accounts receivable was $33 million greater than our fourth quarter 2014 due to the Aviv merger and over $500 million in new investments. During the quarter, we recorded approximately $7.6 million in provisions for uncollectible mortgages, notes and straight-line receivables. The non-cash charge included $4.7 million resulting from the transition of 7 seven facilities from an existing operator to another operator in our portfolio requiring the write-off of straight-line receivables and $2.9 million resulting from reporting a reserve of one Aviv legacy note. In addition, during the quarter, we recorded a $3 million real estate impairment charge to the reduce the net book value of one asset held for sale to its estimated selling price. Our G&A was $7.6 million for the quarter and we project our quarterly G&A expense for 2016 to be approximately $7.5 million to $8 million per quarter. In addition, we expect our non-cash stock-based compensation expense will be approximately $3.7 million for the quarter. Interest expense for the quarter when excluding non-cash deferred financing cost and refinancing cost was $38.6 million versus $32 million for the same period in 2014. This $6.6 million increase in interest expense resulted from higher debt balances associated with financings related to our 2015 investments including the Aviv acquisition on April 1, 2015. Turning to the balance sheet for the quarter, in December we repaid $25.1 million on two mortgage loans guaranteed by HUD, the $25.1 million of HUD [debt had] [ph] a blended interest rate of 5.45% as a result of the repayment of the HUD debt, in the fourth quarter we recorded a $900,000 gain due or the extinguishment of the debt due to the write-off of $2.1 million in fair value adjustments recorded at the time of the acquisition offset by a prepayment fee of approximately $1.2 million. In December, we entered into a new $250 million, seven year term priced at LIBOR plus 180 basis points. Upon completion of the term loan, we entered into a forward starting interest rate swap agreement effective December 30, 2016. In September, we issued $600 million, 5.25% senior unsecured notes due 2026. Proceeds from that offering reduced to redeem our $575 million, 6.75% senior notes due in 2022. On September 25, we deposited about approximately $615 million with a trustee of the 2022 notes. That amount included a redemption premium, semi-annual interest and additional accrued interest to the redemption date of October 26, 2015. The $615 million was classified as other assets on our September balance sheet. The company had adjusted FFO or added back $.28 million representing 26 days of interest at 6.75% resulting for the requirement to deposit with the trustee, the principal balance and accrued interest in September. In addition, during 2015, under our dividend reinvestment account and stock purchase plan, we issued 4.2 million shares of common stock generating gross cash proceeds of $151 million. For the three months ended December 31, 2015, our funded net debt to adjusted pro forma annualized EBITDA was 4.4x and our adjusted cash-based charge coverage ratio was 4.8x. I will now turn the call over to Dan.

Thanks Bob, and good morning, everyone. As of the end of the fourth quarter 2015, Omega had a core asset portfolio of 932 facilities with approximately 93,000 operating beds distributed among 83 third-party operators located within 41 states in the United Kingdom. Trailing 12-month operator EBITDARM for our portfolio remains stable during the third quarter at 1.8x as of September 30 versus 1.8x as of June 30. Correspondingly trailing 12-month operator EBITDAR coverage also remained stable at 1.4x as of September 30 versus 1.4x as of June 30. Turning to new investments. During the fourth quarter ending December 31, 2015, Omega completed $39 million of new investments, which included a $5 million acquisition and $34 million of capital expenditures. Not including the Aviv merger, Omega closed on $507 million of new investments and capital expenditure projects during the 12 months ended December 31. Subsequently in the first part of Q1 2016, Omega closed on $186 million of new investments in three separate transactions. In January, Omega closed on a $9 million purchase leased transaction for one care home in the United Kingdom with 52 operating beds and was added to the existing master lease with Healthcare Homes Omega's current U.K. operator and there's an initial cash yield of 7%. Also in January, Omega funded a $6.8 million mezzanine loan that there's an interest rate of 11% per annum. In February, Omega closed on a $170 million purchase leased transaction for 10 facilities located in Ohio, Michigan and Virginia with 985 operating beds. The facilities released to affiliates of Ciena Healthcare, an existing Omega operator pursuant to a 10-year master lease with an initial cash yield of 8.5%. Omega continues to invest capital in both major renovation projects and new development projects with our existing operators. As of today, Omega currently have approximately $358 million committed for the development of new [steps and house] [ph] and to reinvest capital in our existing portfolio. Omega currently has approximately $1.1 billion of cash and availability to fund new investments. Turning to our existing portfolio. As of December 31, 2015, Genesis healthcare was our largest single tenant in terms of revenue and just over 7% and our fifth largest investment over all. We currently leased 58 facilities in 13 states with annualized fourth quarter rent of approximately $51.5 million. EBITDARM and EBITDAR coverage for the 12-month period ended December 31 was 1.72x and 1.26x. This calculation does not include any top site adjustments for any rehab margins. We currently have agreement with Genesis to either sell or release six of their existing facilities on or before March 2017. It is expected that Genesis' coverage will ultimately improve with these dispositions, however, we do not expect Omega's revenue to be materially altered. I'll now turn the call over to Steven.

Thanks Dan. Thanks everybody for joining. As discussed last quarter, we remain active in the senior housing space, but do so on a very selective basis. Our operator Maplewood opened two properties in Q1 in their core markets of Cape Cod, Massachusetts in Metro Cleveland Ohio. They received strong market response to both of these facilities on their opening, there were 134 unit facility in Brewster, Mass and Cape Cod has a 34 unit dedicated memory care program in addition to its traditional assisted-living focus in the 48 unit facility in Cuyahoga Falls, Ohio is dedicated solely to varying levels of memory care. We in conjunction with Maplewood continue to finalize the permitting of our plant approximately 200,000 square-foot ALF and memory care high-rise on Second Avenue in 93rd Street in Manhattan. We anticipate construction commencing according to plan in Q3 of this year. In addition, we purchased two parcels of land in Q4 of 2015 in the Metro Richmond, Virginia market, in Metro Greenville, South Carolina market and are constructing 48 unit dedicated memory care facilities to be operated by our current operated Phoenix Senior living. The investments are structured as construction loans and bear an interest rate of 8.75%, the transaction provides Omega an option to purchase the properties upon stabilization and at a discount to market. Furthermore, our commitment to reinvesting in our assets continues to be a primary part of our overall investment thesis. In the fourth quarter, we invested $34 million in strategic renovations and new construction and $96 million for the year ended 12/31/2015. This excludes amounts invested by Aviv REIT in the first quarter of 2015. We currently have over 90 projects in process at year end. This ongoing effort is made possible by the commitment we have made to have a dedicated team of the eight real estate professionals led by Steve Levin whose sole focus is maximizing the quality and market competitiveness of our portfolio while allowing our operators to better allocate their resources to the successful operations of the facilities. This commitment to programmatic reinvestment in our portfolio provides a superior risk-adjusted returns both in the short and long run as we position our assets and operators to be leaders in their respective markets.

Thanks Steve and that concludes our prepared remarks. We will now open the call up for questions.

Thank you Sir. [Operator Instructions] The first question we have comes from Juan Sanabria, Bank of America/Merrill Lynch. Please go ahead.

Hi. Good morning guys. First question -- it was a pretty good decline in the amount of rents sub-one-time EBITDA coverage quarter-over-quarter, can you just comment on what drove that, was there any assets sales and/or CapEx invested in those asset to turn around the coverage?

Actually no. I think that will drive changes in that metrics going forward, but for quarter-over-quarter it was really the result of three operators who were sort of all at 0.9 or above shifted over to one-to-one. So it was really just improvements in operations of sort of the upper three operators that were in that lower tier.

And consistent with our discussions in the past that we have operators in that lower tier that have assets that we planned on cash flow growing and turnaround so that is just happening.

And what drove the turnaround? Anything specific or --?

It wasn't anything specific other than just improved margins. I mean you're talking about operators that were just below one-to-one to begin with. So it wasn't a whole lot to tip them over, but it was improved margins. It was improved occupancy, was improved cost containment. It was all of the above.

Okay. Got it. You guys mentioned a fairly sizable development in redevelopment pipeline. What's included in the 16 budget and what's your [indiscernible] for the Manhattan development and how much should be spent for the Manhattan project in 2016?

As Steven said we are going to put a shovel in the ground in Q3. So I don't know that it will be a dramatic spent in the back half of 2016. Our cap ex-budget for the year is -- what is it?

$100 million.

$100 million. It's likely given what we have going on that we will exceed that budget. That's part of the $650 million that we're going to spend in new investments.

And then last but not least we are also awarded a number of CONs in the state of Florida to build new skilled facilities. And we've broken ground on one and over the course of the next several months we will break ground on several others. So I don't know the exact numbers that are going into Florida's SNF newbuilds but it's something less than 100 and probably more than 50.

Okay. And then what kind of yields are you guys budgeting for those developments? Just a quick follow up to that.

On the SNF it's 9%.

Okay.

On the SNF rebuilds or newbuilds.

On the Manhattan Project so to speak, we are looking at 8% stabilized plus 3% escalators.

Okay. And just a quick one on -- can you just give a little background on that Aviv sort of one time rent increase that you noted in the release?

You mean the write-off?

The $5.4 million catch up?

Thank you.

It's part of the merger acquisition of Aviv we have purchase accounting, you have one year of a true-up. We assumed in place leased asset that we bought the leases so we had a third party -- we went out and evaluated them in late December and we got the reevaluation and we had to adjust our in place lease liability which means we should have booked slightly more in place leased non-cash revenue in the second and third quarter. So we called it out.

So Q2 and Q3 revenue that would have otherwise been recognized in those quarters, one for the fourth quarter and we just pulled out of it. It's just an FFO because it doesn't represent our run rate.

Okay. And that $5.4 million will go away in the first quarter of 2016?

Well, the in-place lease accounting is part of our run rate and part of the non-cash straight-line rents that gets recognized. But, I think the best way to think about it is, our run rate for the fourth quarter is pretty clean on a forward basis.

Okay. That's it for me. Thanks guys.

Thank you.

The next question we have comes from Nick Yulico of UBS.

Thanks. Sorry -- I don't know if I missed this, but can you just talk about, I mean all the coverage you report here on Page 6 of the supplemental as of the third quarter, trailing 12 months and the public operators talked about a tough fourth quarter so how should we think about how this coverage moved or if it got worse in the fourth quarter?

Yes. We have always reported coverages kind of on a trailing quarter basis is just the nature of the beast and when our financial statements come in. Genesis has a public company did report or didn't -- yet reported but was able to give a facility financial level information so that's why we were able to give you trailing 12-month coverage ratios for Genesis. But other than Genesis, we really don't have any public entities of any significance other than Diversicare and a little bit of revenue with AdCare. So I don't expect them to materially change our coverage ratios. And at this point in time, it's too early to predict where we come out in the fourth quarter. We have got information for October and November but most of your adjustments are made in the month of December.

We haven't seen anything that indicates a trend that's concerning.

Okay. Then on that same page, you have the 32 operators that are in that 12 to 18 grant debt service coverage bucket, how I mean that's a pretty wide range to have. I mean it's your biggest bar on that chart. Could we get some sensitivity to what -- how many are 12, 13, 14 versus --

Fair question. I think the best way to think about it is, our average is 1.4. And so almost by definition, it's going to skew towards that average and frankly the deviations away from that average aren't that big. So you are going to have most of our top 10 operators bunched around that 1.4 and then you will have folks that are kind of either side of that number obviously the operators up near 1.8 tend to be a little bit smaller and I would say will drive the average. But we think about our -- look at our top 10, they cluster around that 1.4 pretty tightly.

Okay. And then, just going back to that same chart, if you have the 13 operators below one time coverage and then the nine 1 to 1.2, why should we think that you are not going to have to cut the rents for those operators?

Well, because they had -- they continue to pass. They have maintained their coverages in these ranges. We haven't seen -- if what we're talking about is this sense that the industry is shifting downward, we are not seeing it with these operators.

Okay. But we should just -- I mean it sound like the message is, we are not concerned about these operators paying their rents and until they are not able to pay our rent, than we may cut the rent? So this process may happen at some point in the future, but it's not something that you guys are going to give some sort of visibility on potential for cutting rents for these operators today.

I don't think there is any -- there is nothing from a business perspective where we look forward to saying there is meaningful rent reductions in our portfolio.

Okay. And then just on the acquisitions, can you talk about what your guidance assumes about how you're going to fund those acquisitions?

Well, we've got over $1 billion of availability on the line, so part of our plan -- as it's been for 12 years and doing acquisitions, we will put those acquisitions on our line and then we will look at the markets in terms of permanent financing. But we have so much flexibility, we will put it online and just step back and say does the part of market look appealing? Does our stock price recover? Is that appealing? We will make a capital decision when we get the line into the $500 million, $600 million, $700 million range. And frankly, if the capital markets don't get better and cap rates don't change, then the acquisition activity slows down.

Okay. But it sounds like for the guidance you are pretty committed to doing those acquisitions even if you have to put it all on the line and not be able to raise equity in the market? Or would you not to -- okay.

While most of the acquisitions that we talk about are truly in the pipeline. I mean they are deals that have come a ways. A lot of them were teed up in the fourth quarter. So yes I think those -- for the most part we are all in on those transactions that we have talked about in terms of guidance.

And it really goes back to capital partner for our tenants and having capital available and having a balance sheet that you constantly keep flexible enough that you are not saying no to those important transactions for our tenants. So the 650, we feel confident about and there's really no reason for us to turn that off. Additional acquisitions is going to be driven as I said, cost to capital, cap rates, we will make the decisions as we move forward.

And opportunity.

Yes.

Okay. Thanks. That's all I had.

John Roberts, Hilliard Lyons.

First, let's get a little more color on the dividends. I know in the past you have discussed sort of 80% to 85% payout ratio. You're obviously significantly below that at this point. So any thoughts on that front?

A couple. To the extent that we retain cash and invested in the business, we think that's a pretty good use of internal equity. But the second point being, where we are today at 79% of FAD and continuing our $0.01 per quarter, which is a trend we want to continue. At some point, there is a chance that we run into a taxable income issue in terms of how much we distribute. So we like the trend of $0.01 a quarter. We love having available cash as equity capital to reinvest in the business. We think that's the right decision today. But at some point, I don't know if it is this year, but at some point we may have to actually increase the dividend a little bit more just to maintain our -- to meet the tax requirements.

All right. That's very helpful. And following up on the last question, what do you, I mean, obviously, at this point with stock where it is at, in the market where it is at, you are not going to issue equity other than probably what you're doing on the DRIP. So what's the top end of the leverage ratio, you look comfortable with at this point?

We have always maintained our debt to EBITDA in the four or five times range. In our plan with $650 million of acquisitions we will continue to maintain in that range. The question then becomes, are there opportunities that we find to support our tenants where we think it makes sense to go beyond that leverage point and as a board we have not made a decision about that, but it might become a discussion in June if the world doesn't that change but as of now we continue to maintain a four or five times debt to EBITDA as our principal metric.

Super. And finally, obviously, because of the compression and stock prices here, that maybe have been impact on the acquisition environment down the road. Have seen any change -- I know it's early, I mean obviously this decline of share prices only happen in the very near past, but have you seen any change in the acquisition environment given the change in capital conditions?

Know you said it. It's just too early to know. I will tell you internally for us, our mindset has changed in terms of cap rates. It's not attractive to think about new deals. I'm not talking about the pipeline that we have coming because we're not going to re-trade our deals that we are negotiating today but new deals are tough to think about.

All right. Very good. Thanks a lot guys.

Thank you.

The next question we have comes from Tayo Okusanya of Jefferies.

Yes. Good morning, everyone. Just a couple of quick things. The $650 million of new investments in guidance, I just want to make sure I understand that number relatively 2015. You have the $186 million of deals you did in 1Q in there, you have about $100 million of CapEx as you mentioned earlier in there -- is the balance really the development commitments you have of about $350 million -- am I missing something?

The balance is acquisition activity that's in the pipeline for the most part.

Okay. So what is this $350 million of development commitment that you have that I think was mentioned earlier on?

Well, a big chunk of that is Second Avenue and as we mentioned earlier shoveling the ground in Q3. It is not likely that a whole lot is going to be spent on Second Avenue this year. And then you have the weird timing related to the stuff coming out of the ground in Florida. It is hard to predict that. So I would say as I mentioned earlier the $100 million that we budgeted for CapEx could easily be $150 million and our total investments could be $700 million, but I wouldn't get too caught up in that -- you have $186 million we have done, we have $100 million budgeted in CapEx so by definition the Delta for us is acquisition activities.

Okay. So it doesn't include any other development activity, that's helpful.

In the development because the timing is hard to predict.

Okay. But, how confident do you get with that number because if I do an apples-to-apples comparison versus last year, it is a higher number versus last year were you lower stock price today and you still have a pretty aggressive acquisition market with extremely low cap rates on the asset side that you guys target?

Our confidence level is based on the existing pipeline that we are negotiating right now. So we feel pretty confident.

Okay. Are you comfortable with the idea of kind of doing everything on the line and just waiting things out?

I think that is the way we have to do it. And seeing where as an example, obviously, Treasuries are way down but spreads on bonds are we up, but you know day-to-day as we work stopped on the line we will look at the bond market. There is an opportunity to do a seven or an add-on to an existing bond we will take advantage of it quickly.

Okay. How do we think about the idea of you guys increasing leverage going forward versus utilizing your APM to kind of do deals on a leverage neutral basis?

I think it goes back to a comment I made earlier that the Board, we have not made a decision as a Board to go beyond 5x debt to EBITDA and our existing plan does not take us beyond that. That being said, if we need to meet the needs of our tenant operators and their opportunities, I'm sure there will be a Board level discussion as to whether we move that metric to call it 5.5. But that decision hasn't been made and we're living within our budget today. And I think that's really the discussion for our next call in all likelihood.

Okay.

If we think the market -- if the market is still as horrible and our equity still trades where it trades today then I think that's a Board discussion of -- if we want to meet our tenant operator needs and their opportunities maybe we're slightly beyond that, but I want to make it clear, that decision hasn't been made as a company.

That's helpful. Last one for me -- a lot of use of term loans of late, just wondering how you kind of thinking about that a source of capital versus doing more unsecured deals out there just kind of given the asset liability match between the length of your leases and the duration of these shorter term, term loans.

Well, the term loans were unsecured and at the time we were looking into and the bond market did dry up. And on a cost basis, they were much cheaper from a rate standpoint to do the seven-year term loan versus the seven-year bond at the time.

Look from our perspective, it fits into the capital stack. They are not large maturities. They are easy for us to handle. Obviously, not our preferred piece of paper. We would rather go long but given where the market was in the pipeline we saw it coming towards us. We wanted to go into 2016 with our line fully available.

Okay. That's fair enough. Thank you very much.

Thanks Tayo.

Kevin Tyler of Green Street Advisors.

Yes. Thanks guys. Going back to CapEx for a second, I think there was about $16 million in true CapEx in the fourth quarter, so if you analyze that pace, it seems like a very high run rate for tripling that owners something like 10% plus of NOI. And then, I think when you were just answering Tayo's question, you said $100 million was the guidance for 2016 on the CapEx front which would be kind of 20% plus or minus. How do you think about allocating these investments and then just -- how should we think about return profile on that spending?

All that CapEx has nine plus percent of returns attached to it. So Steve?

Yes. Kevin as we have said on ongoing basis our CapEx program is really proactive way of helping our operators strategically repositioning our assets or position your assets to be market competitive. These are not deferred CapEx programs -- maintenance CapEx Programs are funded by the operators and have been on an ongoing basis. So as the number gets larger, it's partly by product that was dedicated to human resources in the organization to deploy capital. I think over the long run we will end up with far better quality assets on a relative basis to our peer group. We have already seen the result of that in the -- the results of our -- financial results. So again, it is proactive. It is not a reactive part of the process.

Yes. And frankly, we will spend as much as we can in CapEx. That's a preferred use of capital for where we set because of the enhancement of the portfolio.

Right. So you're thinking more about redevelopment anything maintenance related, it's all --

Yes a lot of that is newbuilds.

You're not talking about just paint and powder. It is a lot of newbuilds.

Okay. That's helpful thanks. And Taylor you pointed earlier in the call, the Medicare -- Medicaid revenue stream certainly seems to be more consistent as of late. But, on the Medicare side, the more regionally focused operators in your portfolio -- do those folks become more of a focal point for or less of focal point for private insurers as they see out Medicare advantage provider. So the smaller guys, are they lessen focus for [indiscernible] when they're looking to shift people over from Medicare to Medicare advantage?

I don't think so. Well, I think you have to define the size of the operator. We have regional operators that are the biggest operators in the states they operate in. The communiqué cares of the world, Sabers and Ciena, so they are dominating these markets. And typically you are looking at not even state markets, you are looking at the Cleveland market as an example, we have a big presence there. You are the folks that the insurers are going to be talking to. So we have to be careful to in terms of how you think about that versus a mom-and-pop that has five facilities. That's a little different gain. Maybe they don't get the attention of the hospitals or the insurers or whoever is controlling the payment system. But that is also the catalyst for what we see for a long time and I think we are going to see more of discontinued consolidation from the folks that can't fly.

Okay. That's helpful color. I appreciate the time.

Thank you.

The next question we have comes from Chad Vanacore of Stifel.

Good morning all.

Good morning, Chad.

So Genesis is your largest operator but that's only about 67% or so revenues and you don't have any exposure to Manor Care or Kindred, but are there any takeaways or differences from those public operators performance that you think apply to the smaller private operators in your portfolio?

Maybe the only take away would be the Manor Care as an example, we know for years, their focus was Medicare patients. They had an extreme focus on that. And obviously to the extent that payment stream changes, it affects them more than someone that has got a little more balanced approach to a market. So there is a little bit of that that is going to play through. I don't think Genesis is -- it may not be as extreme as a Manor Care example. But Genesis is in urban markets where there tends to be a little more push toward the advantage plans. Our portfolio is spread out. We are in our urban markets but it tends to be spread out among a lots of different market. So you don't see the impact quite as dramatically that they are seeing. And I will say also, when you listen to George Hager and he talks about the impact of an example as -- Medicare advantage in the fourth quarter, it was $5 million of revenue on a $5 billion million revenue portfolio so was 0.1% of this revenue was impacted from the censes change that we see. And so when I think about that in our coverages that's the reason we look at coverage to say 1.4x -- you have a lot.

All right. Thanks. And then just thinking about the M&A market in the past six months. Have you seen in changes? I noticed that you pushed a few investments from the fourth to first quarter anything to take away from there?

No, just really all about timing. Some of these deals just have taken longer to do. There are some of the bigger deals they are three party deals. So you got a seller and then you bring in a separate tenant and also the capital providers, so they just become a little bit more complicated than they take a little bit more time and one would hope. So but as far as what today's market looks like once as Taylor said, it is little early to predict.

Okay. All right. Thanks Dan. Thanks all.

Thank you.

Next we have Eric Fleming of SunTrust.

Hey, guys. Other than the six Genesis properties that you are talking about selling, are there any other divestiture expectations in 2016?

We have -- we are always looking at the portfolio. We just sort of calling it to the extent that their facilities that don't work for a given operator or so I think that's an ongoing thing that we look at. And there will be more divestitures. There will be more releasing activities. We have a handful of close Billings that we will be selling so yes, that activity is ongoing.

Yes. It would be bigger than it has been in the past, but it is all part of our plan and really most of it doesn't move the dial at all.

Okay. Thanks.

Thank you.

Next we have a follow-up from Juan Sanabria, Bank of America/Merrill Lynch.

Hi, guys, just -- thanks for taking the extra question. On acquisitions, what should we be thinking in terms of cap rates for the balance of what's left to meet your budget for the 650 of acquisitions and has your hurdle rate moved any higher? Are you trying to reprice anything given were, you're treating on an implied basis?

This is a great question. We won't retrade deals that we negotiate with our tenants. We just think that's the wrong thing to do. So you will see cap rates on stuff that is in the existing pipeline. There are still 8.5. But to your point, as we think about new deals, they all start with a nine or higher on this side.

Okay. And what are you underwriting from an EBITDA coverage on the transactions?

For SNFs easily 1.35% to 1.4% in terms of coverage.

Yes. And then just back to sort of this Medicare advantage question or topic -- do you have any sense of the percentage of revenues for Medicare advantage comparing Genesis to the rest of the portfolio? And how that may be transitioned over time?

I don't have a very good sense -- I will tell you that George Hager made some prepared comments at a conference a month ago and he said that his Medicare census was divided two-thirds Part A and one-third Advantage and other insurance type of products. So that's a pretty good indicator -- that's somebody who is fairly heavily weighted in that direction. I would say in general our operators are probably less weighted than that.

Okay. Great. Thanks guys.

Thank you.

Next we have Michael Gorman of Cowen Group. Please go ahead.

Yes. Thanks. Good morning. Could you provide just a little bit more color on the sixth leases that were transitioned and were part of that provision front collectible during the quarter? What drove the change and how maybe the new lease terms compared to the old lease terms?

Yes. What we had is -- we had what I will term a mom-and-pop who just decide to effectively get out of the business and sell their operations. And we put them together with one of our existing operators who happen to be in that same state. So really the transition didn't change from an economic perspective. We just moved six buildings over from an operator who was really getting out of the business into an operator who is growing the business. And the write-off was an accounting charge that's associated with the straight-line rent. So from our perspective that was a good transition and a good deal and we got an operator that didn't really want to be in the business anymore and got those facilities in the hands of an operator who did.

Okay. And then just recognizing it's a small sample size. I'm curious, did they provide any color on why they were looking to get out of the business? Were they operating closer to your average coverage ratios were they a little more challenged?

I would say they were just ever so -- I mean they were below the 1.4, but they were certainly providing an adequate coverage. I think it was just a matter of -- they were a smaller mom-and-pop operator who when confronted with the changes and the perception of changes in the industry decided they didn't want to be it in anymore. I mean it is -- what's created opportunity for us for 15 years.

Yes. A great example of what Dan is talking about with this operator specifically is, they installed all the equipment for electronic medical records, but didn't have the staff capability to train up their staff throughout their six facilities so they weren't using that. That is the mom-and-pop just didn't have the skill set and looked at that and said, I need to move on.

Okay. Great. Thanks. And then on the acquisition side, we talked a little bit on the target coverage ratios when you underwrite the acquisition. I'm curious have you changed at all? Or what are you targeting for escalators kind of on average when you look at new acquisitions at this point?

2.5%.

2.5%, okay.

That's consistent with the past. I mean that is where we have been for a long time.

Okay. Great. And then, just one last one -- understanding you kind of monitor the investments weekly to keep an eye on collectibles and things like that. Do you have a set criteria or a threshold of something where it would trigger a reserve against the straight-line rent or is just kind of a case-by-case basis depending on what you are seeing out of the operators or is it a coverage breakpoint or how do you think about the straight-line receivables as you look at it from a week-to-week basis whether you reserve or don't reserve?

It is a case-by-case basis.

Step one, obviously, if you have rent that's not paid or it's been delayed and you're looking back at the credit and making a decision about the reasons why. And whether it's temporary or more potentially permanent and it just because the credit discussion.

Yes. But it would be shocking for us to not receive a rent payment and have us otherwise not be paying very close attention to the operator. It's really never happened before. So we look first at the coverage. And then, the underlying credit is sometimes equally important. And thirdly, kind of what they're doing to rectify the situation if they do have coverage that's below 1 to 1 or it's falling or trending downward.

Okay. Great. Thanks guys.

Thank you.

Next we have a follow up from Nick Yulico of UBS.

Hey, guys. Good morning. It's actually Ross Nussbaum here with Nick. Two questions, first, just a clarification -- in your guidance for 2016, I believe you said there was no capital transaction in there. Are you going to leave the DRIP program turned on or are you going to shut that off at that current level?

Right now we're going to leave it turned on.

Off?

On.

Okay, on.

We will leave it on.

O-N?

Yes, on. Sorry.

Okay. Can you maybe help me understand I guess why is it appropriate to issue equity through the DRIP but not in an equity offering to the market what's the inherent difference between those two?

While the DRIP plan -- well, you want to go and talk --

Yes. What we are talking about leaving the DRIP on is, is that really is dividend reinvestment and that runs $5 million to $6 million a quarter. The part I think you are thinking -- when we issue equity through it there is an optional cash component that what we don't have one right now.

Got it. Okay. So it's just the dividend reinvestment $5 million, $6 million a quarter, okay.

Correct. And our view is turning that off -- our shareholders have supported us for a long time. We turned it off once many years ago when our stock price, when our dividend yield was trading north of 10%. At some point the yield get so high you have to think about whether you want issuance for the DRIP but to the extent that it's dividends being reinvested and our stockholders want that. It's something we prefer not to turn off.

Understood. The second question is, if you turned the clock ahead a year and I think about your EBITDA rent brand coverage for your tenants, if I incorporate a tough December of last year -- a couple of headwinds on bundling and potential therapy reimbursement changes, I mean, if you just had to guess where we are a year from now, is your EBITDA rent coverage the same, higher or lower than it is today and factoring in contractual running?

Our operators have been nimble and they have been able to maintain the 1.4. And so I think the answer to that is, we haven't seen in our portfolio any indication that that 1.4 won't be sustained. You have lots of moving parts in a portfolio as big as our, so that doesn't mean that one operator goes up and the other one goes down and it's just driven by variety of issues. But as we sit here today, we think the 1.4 that's been stable probably remains stable for the near-term.

Okay. I guess you might understand that the market here is that and it says, while on the one hand, okay, that's good, on the other hand, they look at Genesis, Manor Care, the stock prices and then they say, how is Omega doing so well when other big entities in industry just aren't, right? I think that's the big disconnect that maybe folks are struggling with today. Is there any --that's what I'm struggling with a little bit and that's what the market is trying to get its arms around?

So you have Manor Care and Genesis that are big entities that have had some issues, but Ensign isn't an inconsequential company and they are -- they seem to be handling this quite well. And they happen be a modest tenant of ours.

Appreciate the thoughts. Thanks guys.

Okay.

[Operator Instructions] At this time, it appears that we have no further questions. We will go ahead and conclude today's question-and-answer session. I'd now like to turn the conference back over to management for any closing remarks.

Thanks Mike and thank you everyone for joining our call today.

We thank you, sir and to the rest of the management team for your time also today. The conference call has now concluded. At this time you may disconnect your lines. Thank you, take care and have a great day everyone.