Good morning. And welcome to the Omega Healthcare Q1 2018 Earnings Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I now would like to turn the conference over to Michele Reber. Ms. Reber, please go ahead.

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 Web site at www.omegahealthcare.com and in the case of FFO and adjusted FFO, in our press release issued yesterday. I will now turn the call over to Taylor.

Thanks, Michele. Good morning. And thank you for joining our first quarter 2018 earnings conference call. Today, I will discuss our strategic asset repositioning and portfolio workouts, our dividend and 2018 guidance, macro industry trends and our data analysis effort. As part of our strategic positioning, in the first quarter of 2018, we disposed of $98 million in assets. And including assets held for sale, we’re evaluating over $250 million in additional asset sales in 2018. The revenue reduction related to our $98 million of first quarter assets disposed is $10 million, while the trailing 12 month cash flow in these assets is $4 million. The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equates to rent yields of approximately 10%. Our strong sales results today reflect the continued appetite for SNF assets by local market private buyers. We’ve made great progress addressing the operators; Orianna is in the middle of a controlled Chapter 11 Bankruptcy process; Signature is being resolved outside of bankruptcy; and Daybreak is paying current rent obligations timeline. Later in the call, Dan will provide more detail regarding portfolio workouts. Turning to our dividend and 2018 guidance. Our quarterly dividend of $0.66 per share reflects the payout ratio of 85% of adjusted FFO, and 96% of funds available for distribution. As we discussed during our February call, our dividend payout ratio and related FFO guidance will be dependent on the timing of assets sales versus the redeployment of capital along with the timing of Orianna portfolio workout. We have maintained our adjusted FFO guidance range of $2.96 to $3.06 per share, while our FAD guidance remains $2.64 to $2.74 per share. Again timing will play a big role in our guidance as asset sales…

Thank you, Taylor and good morning. Our reportable FFO on a dilutive basis was $148 million or $0.71 per share for the quarter as compared to $181 million or $0.88 per share for the first quarter of 2017. Our adjusted FFO was $161 million or $0.78 per share for the quarter, and exclude the impact of approximately $7.8 million in provisions for uncollectable accounts, $2 million purchase option buy up, $581,000 related to unrealized gains on Genesis common stock and $4.1 million of non-cash stock-based compensation expense. Operating revenue for the quarter was approximately $220 million versus $232 million for the first quarter of 2017. The decrease was primarily a result of $16 million of reduced revenue as we’ve placed Orianna on a cash basis, effective July 1, 2017 and do not record any lease revenue in Q1 2018, and $4 million of reduced revenue related to Daybreak and Preferred Care that were also placed on a cash basis in 2017. The decrease in revenue was partially offset by incremental revenue from a combination of over $415 million of new investments completed, and capital improvements made to our facilities since the first quarter of 2017, as well as lease amendments made during that same time period. The $220 million of revenue for the quarter includes $17 million of non-cash revenue, $16 million of Signature revenue, $4.1 million of Daybreak revenue, $1.5 million of preferred care revenue and as I mentioned earlier, no revenue related to the Orianna lease facilities. Our G&A expense was $12.4 million for the quarter, which is $3.6 million above our first quarter 2017 G&A expense. The increase is primarily result of a $2 million buy up of an in-the-money purchase option and $1.5 million in increased legal expenses related to operator workouts and restructuring. When eliminating…

Thanks, Bob and good morning, everyone. Since the February 9th Bipartisan Budget Act, which permanently repealed outpatient therapy caps, Congress has not engaged in any significant legislative activity impacting SNF. On the regulatory front, on April 27th, CMS issued its annual proposed SNF payment rule, which included three significant components; the annual of market basket Medicare rate increase, effective October 1, 2018; the commencement of the value base purchasing discount to those Medicare rates, effective the same date; and the announcement of the new Medicare patient driven payment model or PDPM effective October 1, 2019, to replace the current Web based system and the previously proposed resident classification system or RCS. Both the proposed rate increase and the proposed PDPM are subject to 60 day common period with a final rule expected by August 1. As part of the Bipartisan Budget Act, Congress fixed the October 1, 2018 SNF market basket rate increase at 2.4%, representing an increase of $850 million to the industry. Without this legislation, the rate increase would have been only 1.9% under the market basket methodology or about $180 million left. As such, this 2.4% rate increase is viewed as a significant positive development for SNF, especially considering the legislatively mandated increase of only 1% last October 1. Offsetting this rate increase is the value based purchasing, or VBP discount, that was initiated by the 2014 protecting access to Medicare act. The VBP program was design to incentivize SNF to reduce their rates of patient re-hospitalization to reduce overall Medicare costs. Effective October 1, 2018 and across the board, 2% rate decrease will be applied to the market basket inflated rates but each facility will realize a positive adjustment against that decrease based on its comparative performance on re-hospitalization metrics. CMS estimates an average net decrease…

Thanks, Jeff and good morning everyone. As of March 31, 2018, Omega had an operating asset portfolio of 963 facilities with approximately 96,000 operating beds. These facilities were spread across 70 third party operators and located within 40 states in the United Kingdom. Trailing 12 month operator EBITDARM and EBITDARM coverage for our core portfolio was effectively flat during the fourth quarter of 2017 at 1.71 and 1.63 times respectively versus 1.72 and 1.35 times respectively for the trailing 12 month period ended September 30, 2017. Turning to portfolio matters, as noted on previous calls, Omega is currently in ongoing restructuring efforts with three of our larger operators, Orianna, Signature, and Preferred Care. As noted in Omega’s press release issued on March 7, 2018, Orianna, also known as Four West Holdings, voluntarily filed Chapter 11 in US Bankruptcy Court in Dallas, Texas. At that time, Omega entered into a Restructuring Support Agreement or RSA that will form the basis for Orianna’s restructuring. While subject to bankruptcy court approval, the RSA provides for the orderly transition to new operators of 23 of the 42 facilities Orianna currently leases from Omega. The RSA also provides for the sale of the remaining 19 facilities pursuant to a plan of reorganization to be confirmed by the bankruptcy court. The RSA contemplates that the planned confirmation will occur in 110 days, and that such sale will be concluded by the end of 2018. In addition to the RSA and in order to provide liquidity to Orianna during their Chapter 11 proceedings, Omega has provided a commitment for up to $30 million in debtor-in-possession financing. On day one of the bankruptcy, the debt facility was used to pay in full Orianna’s current working capital lender. Subject to bankruptcy court approval, the DIP facility will also be…

Thanks, Dan. And thanks to everyone in the line for joining today. In conjunction with Maplewood Senior Living, we continue to work on our plans 215,000 square foot ALF Memory Care High Rise at Second Avenue at 93rd Street in Manhattan. The project is expected to cost approximately $250 million, and is scheduled to open in the second half of 2019. In addition, in the first quarter of 2018, we bought out impart for $50 million the in the money purchase options on 13 of the 16 Maplewood senior living properties. In conjunction with the partial purchase option buyout, we extended the leases on all of the Maplewood properties in addition to pushing out and staggering the dates of the remainder of the purchase options. We structured the $15 million buyout investment in the manner to not only minimize the tax leakage to Maplewood and its principals, but also to maximize the amount of operator capital to fund future growth. Including the land and CPI of our New York City project at the end of the fourth quarter, Omega Senior Housing portfolio totaled $1.5 billion of investments in our balance sheet, anchored by our growing relationship with Maplewood senior living and their best-in- class properties, as well as healthcare homes and Gold Care in the United Kingdom. Our overall senior housing investment now comprises 127, assisted independent living in memory care assets in the U.S. and UK. On the standalone basis, this portfolio not only covers its lease obligations at 1.22 times, but also represents one of the larger senior housing portfolios amongst the publicly listed healthcare REITs. Our ability to successfully continue to grow this important component of our portfolio is highlighted by our 13 Maplewood facilities, and the related pipeline is predicated on coupling our tenants operating capabilities with our commitment to having in-house design and construction expertise. Through this same capability, we invested $38 million in the first quarter in new construction and strategic reinvestment. $19.5 million of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500 million inclusive of Manhattan. The remaining $18.5 million of this investment was related to our ongoing portfolio CapEx reinvestment program. This concludes our prepared comments. And we will now open the call for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And this morning’s first question comes from Chad Vanacore with Stifel.

So just touching on Signature restructuring plan details. Am I right that rent concessions are about 11% of what the prior rent was? And that seems better to me, especially considering that they’re willing to paying about 75% of contractual rents and leading up to this. So how does that compare with your expectations? And then how would you expect coverage to improve over time given the funding and CapEx involved?

Chad, your numbers are right. It was about 11% discount it is better than improved over what they have been paying for last 12 months, which was more of 25% discount. And then the coverage up the gate is about 1.3 times and obviously if Signature meets its budgets on a go forward basis, we’d expect that to slowly go up over time.

And was at 1.3 times, is that cash EBITDAR or what is that based on?

That's after the deferred rent taking it into account the deferred rent, correct.

And then also on Orianna, you mentioned receiving some rent in the first quarter and that was ahead of schedule, we weren’t picking anything to your fourth quarter. So does that in any way change your perceptions?

Chad, that’s part of the restructuring support agreement. It’s a million dollar of rent a month but it's not being recorded in income, which being offset against the balance sheet item. But we're happy to have the cash and we're hoping to accelerate the process with Orianna. We'll know more this week. We have bankruptcy hearings towards the end of the week.

Then you mentioned in your prepared remarks, occupancy seems pretty stable. Would you say that that would be -- when I think throughout your portfolio what you’re seeing or is that just on the top end of the portfolio?

It's pretty consistent. We haven't seen occupancy moves in any particular geography. It's been fairly steady across the portfolio. And we feel great about that, because we know it’s an history. There's still some pressure on the occupancy side

And the next question comes from Juan Sanabria with Bank of America.

This is Kevin on for Juan. I just had a question on Preferred Care. On those communities, what is the coverage that the new operators will be -- I guess operating those assets at?

So as Dan mentioned, that portfolio continues to struggle with very little cash flow on a consolidated basis, but each state is a little bit different. As an example, Arizona continues to perform well. So we’ll achieve a decent rent return there. As we’ve mentioned in the past, the current preferred care rants about $11 million, our expectation is we'll end up at $5 million to $7 million with the transition properties. The coverages on a nominal basis based on historic cash flow are very less, but each one of these assets is going to go into a bigger master lease relationship with the expectation of significantly improved cash flow where we think post-transition once the operator has stabilized, the assets we’ll be looking at 1.3 times plus. But today based on historical results, it's very less, essentially zero on a consolidated basis.

And then secondly on Maplewood, you paid out with $50 million on in the purchase options, if the buyout 13, that was 16. I guess what is the potential remaining amount that could be paid out as those purchase options hit?

The in-money value of Maplewood’s purchase option based on the marketing effort we did is approximately $150 million. So we effectively thought out it would be equivalent of the third of their in-money value. That purchase option value does not include New York City project, a development in South Port Connecticut that just opened on Cape Cod for 13 to 16 projects.

Thank you. And the next question comes from Nick Yulico with UBS.

I just wanted to go back to Signature and make sure I understood a couple of things here. So you said that you were booking, I think you said you were booking 75 of the rent -- they paid 75% of the rent in the first quarter. And then did you actually then book 100% of the rent as GAAP revenue?

We did. We book $16 million of revenue in the first quarter even though they paid 75% of that in cash.

And I guess why are you comfortable that -- I think you said there’s $15 receivable outstanding for them. Why are you comfortable that you're going to collect that since the ultimate rent here is going down, and on top of that you're also lending them, agreeing to lend them up to $25 million. So I mean how is that situation where that receivable is recoverable?

As Bob mention, we look some of the credit support that exists, which includes nearly $10 million letter of credit, which is undrawn personal guarantees, which are very substantial. And argue that have one three coverage with the prospects for further improvement of that coverage from our perspective that they're going to put themselves in a position to be able to repay. Now it's going to take a period of time and we'll have to monitor their operating results as we go forward. But based on the credit support, their current coverage and the fact that they'll deal with the liabilities that otherwise would've been hanging in at balance sheet, we feel comfortable. So that's not to say we won't be monitoring Signature on a go forward basis. And our expectation is they'll continue to perform and we’ll continue to record. But that's something that we’ll look at every quarter.

But I guess I don’t quite understand this. I mean, your lending you’re agreeing to lend them $25 million, which helps them pay off their working capital lenders. How does that help you in terms of your ability to get the rent back?

The lending against collateral fully collateralized lending that provides them with liquidity. It’s not being drawn day one but it gives them the flexibility to deal with liquidity issues, which is their problem. It's liquidity to pay the government, to pay the Med mal claims that have been settled and some other vendor issues that are part of the restructure. So the thing we didn't want to do is have them go off without enough liquidity to manage a very, very large enterprise.

And then how long are you able to under the accounting rules book 100% of the rent if you’re not collecting all the rents and of this judgment of whether or not you think you can collect back rent. How does that work from the current standpoint?

We’ll monitor every quarter, Nick. But you’re getting into the real details of that and we’ll call you offline on that. But big Picture, every quarter we'll look at the future collectibility based on what Dan had already talked about their coverage but payer anticipate coverage. And again, we go through and look at the collectability of Signature in its entirety.

I guess I'm just trying to understand like what's the risk here of some future write-off to accounts receivable, some earnings charge related to Signature and as well as scenario of understand what’s working on a prepackaged bankruptcy solution. Is this totally avoid then going into bankruptcy, and If they were to go into bankruptcy, does that then trigger an issue with regards to accounting for revenue similar to how you have to shut off revenue at Orianna?

Well, this absolutely avoids in court restructuring, I mean that’s the whole purpose of this restructuring agreement to begin with. The whole thing was centered around restructures with not only just the two primary landlords but also with other constituents. There was a new working capital lender came in and took out the old working capital lender. There was an enormous amount of settlements with Med now claimants in a number of discussions with some of their vendors. So this took care of a whole host of different issues that Signature face. And we think at this point in time, yes, that takes care of any bankruptcy risk but on over Signature.

And Nick the second part of your question, absolutely with any vendor if there's a bankruptcy that impacts what we can record, absolutely.

Just one last question, I mean if I look at your operating cash flow versus your FAD that you report, pretty big variance. Even if you add back the lease inducements in the first quarter with I guess there was with Maplewood, still looks like you're in your operating cash flow with $85 million, and your FAD was $144 million. So there's almost $60 million difference there. I mean what else is the difference there besides what's going on with Signature and a couple other operators? And how should we think about -- you talked about earlier, Taylor, that your -- I think you sad your FAD or FFO was going to be going down in the second quarter. How does your operating cash flow -- does it eventually approve, because right now it doesn't look like you're covering a dividend with operating cash flow instead looks like you've covered it by borrowing on the line of credit in the first quarter.

Let me start and then I’ll let Taylor jump in, Nick. So we had roughly $53 million of cash flow from operations but you add that $50 million that that once through that number on the Maplewood section and then we have about $22 million to $23 million of interest payment timing. January and July, we pay the majority of our senior unsecured note interest. So the other quarters, it's an accrual base. When you add those factors plus the $2 million our purchase and we pay down all these other timing related items, I think you get back to that 96% pay out.

I mean the only comment I’d add is FAD when you do it on a per share basis, about $0.69 and that's a solid cash number. Bob can walk you through all the interest that you see to the cash flow but there's no accounting item in there, that's just timing lease inducement as Bob mentioned. And I think when we look at it -- again, it's all timing during the next sales versus redeployment of capital and timing of Orianna. And we know that Orianna is very valuable in terms of cash flow even at the low end of our projected range of rent or rent equivalents of $32 million that’s significant, that’s $0.04 a share per quarter, which provides a lot more cushion in our payout. So we’re comfortable with where we are. But we want to be clear that timing will affect us quarter-to-quarter. And that’s just part of what we have to go through this year as we reposition.

Just be clear though that $0.69 that you report on FAD is not totally a cash number, right, because it doesn’t include the fact that Signature hasn’t paid all their rent and you’re booking 100% of that as revenue, right?

That is also not a cash flow measure as well, just to be clear.

I was just wanted to be clear on that. Thank you.

Thank you. And the next question is from Tayo Okusanya with Jeffries.

First of all, the increased provisioning expense in the quarter, the $7.8 million. Could you just talk a little bit about what that was whether that will lead to a particular tenant or all host of tenants?

We saw some properties that were transitioned and we get to write-off the straight line receivable.

And then second of all, in your -- during the quarter, when I think of this, I guess statement of cash there was some portion of your interest income that was paid in time. Could you just talk a little bit about that whether they’re getting payment in cash whether why you’re -- why is the interest income was hit?

So it is approximately $1.9 million of paid in time and that’s related to the Genesis -- that was Genesis roll down, there were pieces of cash and that pieces paid in time.

And then Orianna again, I think there’s been some media reports out there about CMS challenging that bankruptcy and the restructuring. Could you just talk a little bit about what CMS is challenging there, the changes, how you about the resolution of that bankruptcy.

Actually, Tayo, what CMS -- they’re not challenging the bankruptcy at all, so good question. What CMS is -- what they went to court for was the fact that at one point, there was a motion where the properties would be transitioned without, literally without CMS’s approval, which is unusual and all CMS is doing is protecting the government’s right to ensure that if there are any call back obligations with the government is picked. Since the objection that the government made, the motions were modified to make it clear that the government in fact has the right to look back and make sure that there are no obligations owed to the government. The expectation is if there are any, they are modest, there is nothing that anyone is aware off today. So it was a little bit of noise that was created procedurally that’s been resolved that we don’t pick that will impact this on a forward basis.

And you don’t think that changes the mind of any potential bidders for those assets?

No, not at all. This is normal at any transition that we engage in, forget about bankruptcy, any transition that Dan is working through. We have to go to the government and make sure there are no obligations that need to be resolved. And frankly, those numbers typically are small. But procedural -- the government was absolutely correct, and we've corrected the motions to conform with their position.

Thank you. And the next question comes from Daniel Bernstein with Capital One.

I just want to go back over and make sure I understood with Signature. When you resetting the rent to 1.3 coverage, that’s 1.3 coverage immediately after the restructuring of the new, or is that at some sale wise point like 12, 24 months down the road? I just want to understand precisely what that service is going to be?

That’s 3.31 actual results.

And is there some rent reset mechanism where you guys to get any of that deferred rent back or some -- if they meet certain hurdles, they start paying back some of that AR that's on the books?

So they’re both. There is a recent reset in three years there's also a waterfall provision whereby we're entitled to a majority of the excess cash flow.

Is there I guess certain -- are there certain hurdle that you have to hit at 1.5 coverage or how does that hurdle work?

No, there's certain things that are -- that have taken out that of reserved if you will. But no, it's not -- it’s a pure cash flow with certain reserves built in. And the first thing that really comes out in the excess cash flow waterfall is deferred rent.

What are the lease bumps that are there, if there are any? Just trying to understand -- how do they -- if some of the rent, if somebody going to get some of that rent back and then excess bumps, or do higher than normal bumps maybe put them at risk to become distressed again and just trying to understand the risk there?

So we didn't change the escalators, they remained 2.5% and they continue on, on a go forward basis.

And then one of your peers is, should be well buying HCR and real estate along with side of hospital system. Have you -- what are your thoughts about hospital systems, managed care systems, owning operating assets. Have you approached any hospital systems to take over assets, have they purchased to you? Just it seems like it changes the dynamic -- certainly from the credit side, it's an improved credit if hospital system or managed care system is owning operating skilled nursing and assisted living versus the current operators?

I think this is the first big entrée of a hospital system into the -- it’s the facility based business and we’ve seen them in hospice and home care, the nurse level delivery part of the system. It's interesting. Look, you're asking the right question in terms of monitoring where things head over the next decade, and we may see more of it. We pay attention to it. Our board is engaged in discussions about it. So we think it's interesting. It'll be interesting to see how it plays out.

You’re not sure it’s a trend yet, one-off not quarter trend yet?

Sure, this question makes it…

Thank you. And as there are no questions at present time, I would like to return call to Taylor Pickett for any closing comments.

Thank you everybody for joining our call today. Bob and the team will be available for any follow ups that you may have.