Good morning and welcome to the Omega Healthcare Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead ma'am.

Thank you and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth and 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 restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission including without limitation our most recent report on Form 10-K, which 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 to 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 recently issued press release. I will now turn the call over to Taylor.

Thanks, Michele. Good morning and thank you for joining our fourth quarter 2018 earnings conference call. Today, I will discuss the completion of our strategic asset repositioning and portfolio restructuring, the status of MedEquities acquisition, our fourth quarter results and our expectations for 2019. We have completed our strategic asset repositioning and portfolio restructurings. In 2018, we disposed of 86 facilities for total consideration of $409 million. The revenue reduction related to these assets was $47.4 million, while the trailing 12-month cash flow on these assets was $28 million. Cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to a cash flow yield of 7%. We will redeploy these proceeds into higher quality assets with good rent coverage while experiencing minimal revenue impacts. In addition to the facilities that we disposed, we transitioned 63 facilities to 12 existing and new operators, which should improve facility level results and typically has resulted in better overall credit strength. All of the 42 Orianna facilities have been transitioned or sold. 26 facilities have been released to six existing Omega operators with related annual rent of $19.1 million. One facility in Tennessee was sold for $4 million. 15 facilities in South Carolina and Georgia were sold. We expect to receive $116 million from the estate liquidation and have received a note with a face value of $30 million and a GAAP value of $20 million, which generates $1.8 million in annual cash interest. Consistent with all of our prior estimates, final rent and rent equivalent received from the Orianna portfolio is approximately $33 million. Final transitions and sales resulted in a non-cash accounting impairment of $27.2 million. That has no effect on our future cash flow run rate related to the former…

Thank you, Taylor and good morning. Our reportable FFO on a dilutive basis is $125 million or $0.59 per share for the quarter as compared to $159 million or $0.77 per diluted share in the fourth quarter of 2017. Our adjusted FFO was $155 million or $0.73 per share for the quarter and excludes the impact of the $27.2 million provision for impairment on direct financing leases, $3.9 million of non-cash stock based compensation expense. $1.1 million of one time revenue, $400,000 of merger related cost, $300,000 in provisions for uncollectable accounts, and a $200,000 mark-to-market loss on our Genesis warrants. Operating revenue for the quarter was approximately $220 million versus $221 million for the fourth quarter of 2017. The decrease was primarily a result of reduced revenue related to asset sales, transitions and loans paid off that occurred throughout 2018 and the timing of cash receipts related to operator on a cash basis. The decrease in revenue was partially offset by incremental revenue from a combination of $471 million of new investments completed and capital renovations made to our facilities in 2018 as well as lease amendments made during that same time period. And also revenue related to the Orianna facilities that were transitioned to existing Omega operators in the third and fourth quarters of 2018. The $220 million of revenue for the quarter includes approximately $16 million of non-cash revenue. Our G&A expense was $13.7 million for the fourth quarter of 2018 with the growth over the fourth quarter of 2017 due to the continued legal expenses related to operator workouts and restructurings, which is primarily related to Orianna as well as bonus accruals. Interest expense for the quarter when excluding non-cash deferred financing costs was $49 million or roughly the same as the fourth quarter of 2017,…

Thanks Bob and good morning everyone. As of December 31, 2018, Omega had an operating asset portfolio of 909 facilities with approximately 91,000 operating beds. These facilities were spread across 68 third party operators and located within 40 states in the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our core portfolio, was down slightly during the third quarter of 2018, at 1.67 and 1.32 times respectively, versus 1.7 and 1.34 times respectively form the trailing 12-month period ended June 30, 2018. Just as a reminder, our core portfolio represents facilities that are deemed stabilized. Excluded from our core portfolio are new development projects, projects which are open, but not yet stabilized, facilities slated for sale or closure, and facilities expected to be or that have recently been transitioned to a new operator. As we have executed on our strategic repositioning, the amount of rent reported as core has consistently increased over the last four quarters, improving from 83% in the fourth quarter of 2017 to 85% in the first quarter of 2018, 87% in the second quarter of 2018, and up further in the third quarter of 2018 to 91%. Turning to portfolio matters. As Taylor mentioned, the operating environment for skilled nursing facilities in the state of Texas has gotten increasingly more challenging over the last several years. Recent headlines have reported that several operators including the largest operator in the state have sought protection under the U.S. bankruptcy code. While none of Omega's operators have reached that point, many are experiencing shrinking margins as a result of woefully low state Medicaid rates, a slow but steady erosion in occupancy and a robust labor market causing virtually across the board labor pressures. As a direct result of these challenges, one Omega operator Daybreak, has requested…

Thanks Dan and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our ALF, memory care high rise at Second Avenue, 93rd Street, Manhattan. The project is expected to cost approximately $285 million including accrued rent and is scheduled to open in late 2019. Including the land and CIP of our New York City project. At the end of the fourth quarter, Omega Senior Housing portfolio totaled $1.5 billion of investments on our balance sheet, anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties as well as health care homes and Gold Care in the UK. Our overall senior housing investment now comprises 124 assisted living independent living and memory care assets in the U.S. and UK. On a standalone basis, the core portfolio not only covers its lease obligations at 1.19 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 components of our portfolio, is highlighted by our 14 Maplewood facilities in the related pipeline 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 $45.2 million in the fourth quarter in new construction and strategic reinvestment. $37.2 million of this investment is predominately related to 13 active new construction projects with a total budget of approximately $500 million inclusive of Manhattan. The remaining $8 million of this investment was related to our ongoing portfolio CapEx reinvestment program. I will now turn the call over to Taylor, for some final comments.

Thanks Steven. We look forward to 2019 and returning to our historical net acquisition profile, which should drive FFO growth going forward. In addition, our operators are preparing for and are excited about the October 1 patient-driven payment model, which should improve both patient outcomes and operator profitability. And with that, I'll open up to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Daniel Bernstein of Capital One. Please go ahead.

Hi, good morning.

Good morning, Dan.

I actually just wanted to ask a little bit more about the operating environment in Texas and then maybe overall – if you look at Medicaid mix, it's gone up for you and the industry so try to get some confidence that, Daybreak will recover that the assets you're picking up at MRT are going to do well and so trying to understand how you're thinking about that increase in Medicaid mix how is it change the risk profile or operating profile of skilled nursing assets and how maybe you're thinking about underwriting within that context as well?

Yes. So we did see a little decline in the quality mix. I mean – ever so slowly eroding occupancy for the portfolio and for most of our operators specifically, it's been flat for at least the last five quarters. Texas specifically we talked about the challenges there, I don't want to go back through that again. But there remain challenges. We think that there is some upside in the future that we've got, as Taylor mentioned, the PDPM coming online on October 1, which we think is going to be a pick up or a benefit for virtually all of our operators in Texas specifically, you've got additional quick money is coming online for certain operators that would like to enter into that program. You've got the potential of the NFRA bill, the nursing facility reinvestment allowance act that we talked about. So – and then again, the operators are just having a block and tackle in terms of keeping their occupancy level, trying to pick up a percentage point here and there and keeping the quality mix at least at this point the same until PDPM comes on. So, that's kind of overall the operating environment that we're dealing with.

Okay. Does it change your underwriting at all that Medicaid mix is increasing?

I think you have to look at it on a case-by-case basis as you underwrite.

Okay. And then one more question trying again not look so much as the past, but future and it seems like a lot of the upside is predicated upon your acquisitions, are you seeing bid-ask spreads, what are the opportunities you're seeing within skilled nursing or senior housing, that makes you optimistic that you can continue to acquire assets at reasonable underwriting and reasonable yields at this point?

Dan, the pipeline is more active today than it was in 2018. And I think the discipline in pricing that we saw throughout 2018 has benefited us coming into 2019 where we're seeing yields in the nines for assets of medium to high quality and I think we'll see more as the year progresses. So we feel good about that. Some of our operators that had been a little less acquisitive at the end of 2017 and into 2018 have more of an appetite. We did a little bit in Q4, which was the beginning of that from our perspective. So we feel good about the environment and I think there's a reasonable amount of clarity among the more sophisticated operators around the impact of PDPM. So, from an underwriting perspective, that's – that visibility is helpful.

Understood. The operators are bringing you a lot of transactions and I think this is the way to read that?

We’re seeing more. We’re seeing more.

We’re seeing more. Okay, I'll hop off. I'm sure there's plenty of questions behind me here.

Thanks.

And our next question comes from Trent Trujillo of Scotiabank. Please go ahead.

Hi, good morning and thanks for taking the question. If you don't mind just sticking with Daybreak for a little bit, it seemed like up until the release last night, things were trending positively. Yes, they were on a cash basis, but rent was being collected. There was no indication that they weren't collecting – that you weren't collecting, operations were improving. And then this announcement happens and this is the second time the last year you've had to work out a situation on an arrangement with them. So how can you – I appreciate the prepared comments earlier, but how can you get confident with them as an operator that something like this won't happen. And are you having any more recent conversations with other Texas-based operators about rent adjustments?

As we said, the Daybreak happens to operate in a very difficult environment right now for all the reasons that we stated. But we do see some upside as we said they have showed some recent operating improvement trends in terms of both occupancy and their payer mix, which is clearly falls to the bottom line. We have them expanding in the Quick program. We have, once again PDPM and once again the NFRA bill that's going to come through Texas in the next two or three months. We see those all as upside and some or any combination of those, we think will vastly help Daybreak. And that's why we're buying ourselves a little time here with what we did for the first two quarters of 2019 and kind of see where we end up because we'll have a lot more clarity on a lot of these issues that we brought up and where Daybreak will land.

Okay. Do you happen to have – I know you do a break out of your EBITDAR coverage. Do you happen to have that just for your Texas portfolio – for your Texas exposure?

I don't have it on my fingertips, but we can certainly do that.

Okay. And maybe just one more if you don't mind. So for the EBITDAR coverage bucket below one times cover, it looks like that deteriorated quarter-over-quarter. Can you talk about how you're addressing that portion of your contractual rent?

A lot of it – there's some folks that sort of go back and forth between the under one times and over and depending on any given quarter, they'll float back and forth. But it's mostly the same group and almost to every one of them, they have a strong credit support in the form of a corporate or individual guarantor, which is why we haven't continue to collect rent from all of those below one to one operators in that bucket.

Okay. Thanks for the time. I'll hop back in the queue and yield the floor. Thank you.

And our next question today comes from Chad Vanacore of Stifel. Please go ahead.

Good morning. Hello?

Good morning, Chad.

Good morning, Chad.

Okay. So I'm going to take a minute and just beat a dead horse on Daybreak. So, Daybreak had been an issue earlier in 2019. You deferred some rent, but they caught up by mid-year. Now they're back in the red. So what changed in operations or liquidity that allowed them to catch up the first time and then what changed from mid-year to now?

I don't think they necessarily caught up. They just started back on paying their contractual rent throughout really all of 2018 and with the exception of the fourth quarter. The third quarter was a difficult one and had expectations of improving certain operational things a little bit quicker than they came to fruition. We are starting to see that pay off now. But it was slower than expected and once again the third quarter was a rough one not just for Daybreak, but for a lot of our operators.

So Dan, is it really a matter of census and rate or were there some excess expenses that were accumulated in the back half of the year for them?

Well, it's all the above really. I mean, they've got labor issues, right, that’s running for everybody's operating performance, you've got, not a good rate and obviously the State of Texas. So, those are consistent of what was new was – blip in occupancy and a blip in the quality mix and they do have residual expenses that are running through their P&L. Obviously, they have to keep their vendors relatively current basis so.

All right. And then just thinking about your MRT acquisition coming up mid-year. MRT had some hospitals especially a hospital that's kind of outside your core. What do you think you'll do with those? And what do you think you'll earn?

We're actually anxious. We've met – we're anxious to be part of – to add that to our asset pool. We've met all of the operators in the MRT world. And we're excited about growing with them and when you think about the hospitals, the big anchor is, is Baylor's, you have a seller credit. And we'll look to continue to communicate with Baylor if they've got pretty deep pockets. So, we'll see what happens there and then on the LTAC side, we are in that business in a small way. So we understand it and we're excited about the relationship there as well.

All right. Taylor, I mean is that something that you'd look to expand on or just keep the door open?

We’ll continue to grow those relationships. We're looking forward. We like the relationships that we're picking up as part of the merger.

Got it. All right, then just one last one for me. So last quarter you mentioned you're evaluating about $60 million asset dispositions. You disposed a little bit more than that in the fourth quarter. How should we think about dispositions going forward or almost all materially done or you're just taking the time to reevaluate where you stand?

We're done from a repositioning perspective. I think there might be scenarios where you'll see dispositions that are strategic for different reasons, not driven from asset quality or operator quality, but just driven from repositioning and discussions with operators. But we don't – we're for sure we're going to be net acquirers in a meaningful way in 2019.

All right. Thanks for taking the questions.

Yes.

And our next question comes from Michael Lewis of SunTrust. Please go ahead.

Great, thank you. Chad thought he was beating a dead horse on Daybreak. So I guess, I'm really going to beat it with one more question. Just to be 100% clear, you expect to recover this $9 million with $4 million from 1Q, $5 million from the first half of this year, and by the back half of this year they should be running kind of business as usual. And is that dependent you think on this legislation passing or do you think just time that a little bit of relief gets this back on track?

Actually the deferral for the $9 million give or take is deferred out till 2020. It's not the back half of this year. And the legislation would be hugely helpful, but we also think that the other components that we've laid out will be very helpful, even without the legislation.

Okay. I have a bigger picture question, you may have seen this by George Hager of Genesis, yesterday speaking at a conference. He said, I'll quote him here, I would argue that the traditional restructuring still nursing has been proven to be a failure, I might argue that your stock performance over the last year argues against that statement. But I think as far as the model of 1.3 times coverage, 2% escalators – do you think that's a sustainable model given all the uncertainty, it seems like quarter-after-quarter there's an operator here or there. What do you think from a big picture perspective about that model and the sustainability of that?

We have a big relationship with Genesis and we like the Genesis management team and George in particular. And he's been through the last couple of years which have been a struggle and I think he's reflecting on that. One of the things I would note that he talked about was demographics and occupancy challenges. And one of the – in the face of occupancy and demographic challenges and a tight reimbursement environment, then there are restructures that can catch up to you and that's happened within the Genesis portfolio. But our view is long-term 2% escalators, which reflect inflation and tie basically to rates if you look at all of our rate analysis over the last decade, it tracks to inflation. We don't think that model is broken. And frankly, all the demographic work that we've done which we know is here, is going to be a big driver in the right direction. So from our perspective, we look at the model and we think it makes sense. 1.3 cover isn't where we underwrite today. And we underwrite at 13.5, 1.4. So when you get into the 1.3 world that's a little bit tighter than any of us would like to be. But we build the cushion and knowing that you're going to have ups and downs in this business. So I think the model works fine. I think the broken models were the ones where you saw escalators at 4% and 4.5% that lay outpaced inflation and that does begin to cover. So there's no way to get around that.

Okay. And I'll sneak in just one more, if I can. I thought you said $9 million to $10 million quarterly G&A run rate. I thought that was $8 million to $9 million a quarter ago and maybe MedEquities changes that – is that kind of the correct run rate for the G&A?

$9 million to $10 million is the correct run rate. MedEquities is a piece of that $9 million to $10 million. You also had normal inflation year-over-year as well so.

Okay, got it. Perfect, thanks a lot.

And our next question today comes from Tayo Okusanya of Jefferies. Please go ahead.

Hey good morning. This is Austin Caito on for Tayo. Just a quick question so Daybreak, Texas focused skilled nursing facility. They're kind of – you're seeing some headwinds now. Can you talk a little bit about the decision to buy MRT, like what's different about that portfolio versus Daybreak? Thank you.

Do you mean – well, I guess, you mean the SNF component in Texas. Fortunately, MRT did a lot of work on that and they basically resolve that issue before we even announced our transaction. There was a portfolio of 10 facilities in Texas that they released to a new operator and reset the coverage and reduce the rent by approximately $5.5 million. So we think that portfolio is fixed. We think it's with a good operating partner and so that one does not trouble us.

All right, great. That's it for me. Thank you.

Thank you.

[Operator Instructions] And this includes our question-and-answer session. I'd like to turn the conference back over to Taylor Pickett for any final remarks.

Thank you and thanks everyone for joining our call this morning.

Thank you, sir. This conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.