Greetings and welcome to the Omega Healthcare Investors Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Michele Reber. You may begin.

Thank you and good morning. With me today is Omega's CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; and Megan Krull, Senior Vice President of Operations. 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, decisions 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 identify 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 NAREIT FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com and in the case of NAREIT FFO and adjusted FFO and in our recently issued press release. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. I will now turn the call over to Taylor.

Thanks, Michele. Good morning and thank you for joining our third quarter 2023 earnings conference call. Today, I will discuss our third quarter financial results and certain key operating trends. The third quarter FAD, funds available for distribution of $0.68 per share was better than expected, modestly exceeding our $0.67 per share dividend. The FAD dividend payout ratio is 99%. The decrease in FAD from the second quarter is due to the reduced rent from cash basis operators with Levi as expected, paying $9 million less in cash rent in the third quarter compared to the second quarter. The November 1 Levi asset sales have significantly reduced our Levi exposure. The remaining Levi portfolio is expected to cover above 1.0x. And therefore, Levi should no longer be in the below 1.0x EBITDAR coverage bucket going forward. We continue to have a handful of cash-basis operators, including Maplewood that will impact our go-forward AFFO and FAD making fourth quarter 2023 and first quarter 2024 FAD difficult to predict. However, longer term, we believe all of these assets but in particular, Maplewood are well positioned to generate reliable and growing cash flows and related rent. Turning to the under 1.0x EBITDAR coverage operators which represent 27.5% of total rent. We can break the 27.5% into a handful of buckets. Operators representing 6.2% of the 27.5% are sitting on extremely strong balance sheets and therefore, payment of rent should not be an issue. Operators representing 6.2% have second quarter EBITDAR coverage above 1.0x and operators representing 1.3% are benefiting from July state rate increases that have resulted in above 1.0x coverage on a go-forward basis. 8.4% represents Levi which I have already discussed. Represents one operator that has already transitioned to a performing credit. That leaves operators representing 4.1%, of which operators representing 1.2% and are in active restructurings where were recently transitioned which leaves a balance of 2.9%, representing 8 small operating relationships. I will now turn the call over to Bob.

Thanks, Taylor and good morning. Turning to our financials for the third quarter. Revenue for the third quarter was $242 million, before adjusting for certain nonrecurring items compared to $239 million for the third quarter of 2022. The year-over-year increase is primarily the result of timing related to operator restructurings revenue from new investments completed in 2022 and '23 and short-term investment income, partially offset by asset sales completed during that same time period. Our NAREIT FFO and for the third quarter was $161 million or $0.63 per share as compared to $159 million or $0.65 per share for the third quarter of 2022. Our adjusted FFO was $182 million or $0.71 per share for the quarter and our FAD was $174 million or $0.68 per share and both exclude several items consistent with historical practices and outlined in our NAREIT FFO, adjusted FFO and FAD reconciliations to net income found in our earnings release, as well as our third quarter financial supplemental posted to our website. Our $0.68 of FAD was $0.02 less than our second quarter FAD of $0.70. As Taylor mentioned, the $0.02 decrease compared to the second quarter was primarily the result of Levi, cash-based operators and the impact of additional weighted average shares, partially offset by the incremental short-term investment income. Our fourth quarter FAD will be impacted by a number of items, including the timing of payments received from cash-based operators and the availability of security deposits. The full quarterly impact of rent and interest on new investments. The third quarter repayment of the $105 million seller's note and other asset sales, restructurings, or re-leasing of a few small cash-based portfolios, short term or overnight interest income earned on balance sheet cash. Interest expense related to the term loan, offset by bond and HUD…

Thanks, Bob and good morning, everyone. As of September 30, 2023, Omega had an operating asset portfolio of 883 facilities with approximately 86,000 operating beds. These facilities were spread across 65 third-party operators and located within 42 states and the United Kingdom. Trailing 12-month operator EBITDAR coverage for our core portfolio as of June 30, 2023, increased to 1.15x and versus 1.1x for the trailing 12-month period ended March 31, 2023. During the second quarter of 2023, our operators cumulatively recorded approximately $13.2 million in federal stimulus funds as compared to approximately $5.8 million recorded during the first quarter. Trailing 12-month operator EBITDAR coverage would have increased during the second quarter of 2023 and to 1.07x as compared to 1.02x for the first quarter when excluding the benefit of any federal stimulus funds. EBITDAR coverage for the stand-alone quarter ended June 30, 2023, for our core portfolio was 1.21x, including federal stimulus and 1.15x, excluding the $13.2 million of federal stimulus funds. This compares favorably to the stand-alone first quarter of 1.18x and 1.15x with and without the $5.8 million in federal stimulus funds, respectively. Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022, mostly located in the state of Florida. During the course of the restructure, Omega has transitioned 48 facilities, 46 through outright asset sales and through re-tenanting [ph], including 29 facilities that were sold on November 1, 2023, for gross proceeds of $305 million. We are now down to six remaining transition facilities, including two in Florida and four in Louisiana which we are hopeful to transition in the near term. Post these recent sales and in anticipation of closing our six remaining transition facilities, Omega's portfolio with Levi will include a total of 31 facilities which…

Thanks, Dan and good morning, everyone. From an occupancy perspective, the slow positive trends have continued with the number of core facilities now recovered at 37%, up slightly from the 35% reported in the first quarter. Additionally, 26% of core facilities that have not yet fully recovered are at or above 84% occupancy. While the staffing shortage situation continues to ease slowly, there's still large variation by market and occupancy is still believed to be impacted. As noted last quarter, in June, ACA released the results of a survey of 425 nursing home providers results of which showed that 52% are still limiting new admissions due to staffing shortages. Agency expense on a per patient day basis for our core portfolio for second quarter 2023, dropped to 4x where it was in 2019 in comparison to the 5x we reported last quarter. Despite the continued staffing limitations in the industry, as expected, CMS move forward releasing a proposed staffing mandate on September 6. And while it was not as onerous as it was believed it might be, it is certainly not palatable given the current state of play. Included in the proposal is a requirement for an RN to be on-site 24/7, along with required RN hours per resident day of 0.55 and required nursing aid hours per resident day of 2.45. And while the 24/7 RN requirement is a 2-year delayed implementation for urban facilities, 3 years for rural and the required hours per resident day for RNs and nursing aids is a delayed implementation of 3 years for urban facilities 5-year for rural. With the industry still in flux post pandemic, predicting out where the state of staffing will be at that time is difficult at best. The comment period for this proposal is open through November 6 and ACA has been bringing to light some of the difficulties of the proposed mandate, most importantly, the fact that it is currently unfunded. While it is too soon to tell what the ultimate outcome of this proposal will be, we hope that if a final mandate is indeed imposed that CMS will hear the voices of the industry and implement a fair, balanced mandate that is realistically achievable by whatever delayed time frame is ultimately set. I will now open the call up for questions.

[Operator Instructions] Our first question comes from the line of Jonathan Hughes with Raymond James.

Could you share some more details or background on what happened at Guardian and their decision to exit the skilled nursing business? I recall they had -- I think some issues last year and they were restructured. It seems like maybe operations got better and then worse. Is it may be a real estate issue there with that portfolio rather than an operator issue? Just any color that would be great.

Yes. The -- we've gone through a couple of repeat structures with Guardian over the last couple of years, the -- their decision to exit the industry in its entirety was quite a surprise. I think it's a mirror out of issues. But I think that the management there is decided to exit the business, quite frankly. They've got a lot more facilities than just ours. But yes, they've been struggling as of late. They were -- they had deep liquidity issues and they've decided to exit and we're looking to replace them as operators.

Okay. And then, Taylor, in your prepared remarks, you mentioned like 2.9%, almost 3% of operators are in the sub 1x EBITDAR coverage bucket and I don't think those have been restructured none individually or that impactful but together they're almost a top 10 tenant. What's the expectation for each of those? I understand the amount of strong balance sheets or other businesses to paying with rent but some are actually negative on EBITDAR coverage. I guess should we take a more conservative approach there in terms of rent forward?

I feel pretty comfortable with that profit [ph], Jonathan. It's -- every one of those 8 credits has a slightly different story. But in terms of looking at it as a whole, any type of discount will be minimal. So we're not particularly worried. And if you look historically, that's the type of percentage we've had in the underwind bucket for many, many years. Typically, those things work themselves out over long periods of time; I expect this to be exactly the same.

Okay. And then one more for me, if I can sneak one in. What's the investment pipeline look like today in terms of size and yields and I realize deals take time but when do you think we could see more robust fee simple, so owned versus loans, acquisition activity.

We could go back years and we could state that the pipeline is choppy. I would say that it's borderline robust at this point, still choppy. We're still seeing a lot of deals in the U.K. We're seeing fair amount of deals in the U.S. again, size is choppy. So I can't predict what we're going to see in '24 at this point but I think it would be similar to what we've seen so far in '23 which we just under, I guess, $0.5 billion in new investments in the year to date.

Our next question comes from the line of Vikram Malhotra with Mizuho.

This is Georgi [ph] on for Vikram. Just on Levi and Maplewood, like from a cash flow perspective, how should we think about the range of outcomes in 2024?

So I think for Levi, it's worth just taking a little half step back at that whole restructured. So to date, the 46 assets that have been sold have generated $515 million of proceeds. The six assets that still need to be transitioned a little bit of wood left to chop for Dan are likely to be sold and we're looking at a price point north of $40 million. So call it, $55 million, $56 million of sales proceeds from Levi, the two assets that were released were released for $2 million. And then we have the balance that Dan mentioned are in extremely strong states, North Carolina, Virginia, Mississippi, to a lesser extent, Pennsylvania. That will generate on their own an enormous amount of cash flow, supporting a lot of rent. But as we said, we're still chopping the wood with Levi. Where that ultimately falls is a positive timing, not predictable over the next couple of quarters. Then Maplewood is a little -- is more predictable. We'll have rate increases normal rate increases in January. That covers a big part of the gap but you could continue to have expense pressures in this industry. And we continue to look at the fill of Second Avenue which is hugely important on an incremental basis. And that's really the driver. But as Dan mentioned, we can map that out principally driven off of the occupancy fill-up in Second Avenue at some point in '24, maybe was going to have sufficient cash flow to pay the contractual rent but that timing is a little bit questionable as well. Longer term, we're really comfortable with both sets of assets.

That's helpful. And just a second question. Can you provide like more color what has seen on the labor side and how states are preparing for the minimum staffing? And if you can highlight any states that have the potential to increase Medicaid rates or like address minimum staffing with funding, that would be very helpful.

Yes. I mean, look, I don't know that any states are really addressing the minimum staffing at this point because it's a little too soon to tell what's going to happen there. Comment period is up next week. And so we're just waiting to see what ends up coming out of it. As you know, there's a delayed implementation for most of it. But certainly, the rural areas are going to be hit a little bit harder than the urban areas once it does kick in. In terms of rate setting, again, none of these rates are impacted by the staffing mandate at this point but we do watch especially our top 10 states really carefully and have seen positive things over the last several months, thinking in, in July and October; talked a little bit about Florida and Texas. Last quarter, we did hear from one of our operators that the California 10% FMAP increase is going to continue until they have a rebasing of that rate which typically happens in January but might be a little bit delayed. And North Carolina FMAP got put into their rate as well. So feeling decent on the reimbursement perspective but still too soon to tell what's happening with the staffing mandate.

Our next question comes from the line of Michael Griffin with Citi.

This is Avery [ph] on for Michael Griffin. A question on the Levi's sales. I'm wondering if you can give us a sense of the per bed valuation on those sales? And how many more of the Levi assets are targeted for sale, if any?

So as I mentioned, we've got six more assets targeted for either sale or release and the price per bed over the course of the 48 that we talked about is in a range of between 90 and 100 permits.

Great. And just a follow up, how are you guys thinking about future equity issuances to fund investment activity versus continue to tap the debt market? And I know you want to keep leverage below that 5x. So just how are you thinking about funding needs for investment opportunities.

Yes. We sit down and we take an 18-month approach looking at the capital markets and our needs. So as I said, we have over $2 billion of current liquidity with the combination of the $600 million of cash on our balance sheet as well as the untapped credit facility. We have access to the ATM and again, we don't look at it any day by day but we have a longer-term approach looking at that. We know we have two debt maturities coming up, one in April of 24 and early in '25. So we will be opportunistic if it calls for that.

Our next question comes from the line of Connor Siversky with Wells Fargo.

Thanks for having me on the call. Broadly speaking on acquisitions, external activities. So we've seen a lot of activity in the past 3 weeks or so. And some transactions have been received better than others. And at the same time, we're fielding a lot of questions for some REITs with the cost of capital on the margin of generating accretion of whether or not they kind of take the jump here and continue to invest. Whereas OHI doesn't have that problem, your cost of capital is very strong. I mean, do you look at the current environment as an opportunity to really get aggressive and chase acquisitions? Or do you look at something like the minimum staffing requirement and work on those parameters of risk in your underwriting framework and try to be more cautious given what you're seeing right now?

So it's a little bit of -- it's a great question. It's a little bit of both, right? We we're prepared to allocate as much capital as possible to our existing operators and opportunities. But the underwriting has to include some risk adjustment for a variety of things, including minimum staffing. But that from my perspective, we don't take our foot off the pedal. It's just incorporating those risks into how we think about allocating capital. As Dan mentioned, we're close to $0.5 billion year-to-date and the pipeline is pretty robust. So we'll continue to look at very opportunistically at what's out there.

Okay. And then just to follow up on that point. So earlier in the call, Megan mentioned that the labor environment remains more challenged in the rural areas versus the urban areas. I mean, does this also imply a willingness for OHI maybe to sell out of those rural assets in favor of concentration in urban areas?

Well, you've seen us sort the portfolio pretty actively for a number of years and obviously through COVID, we've done a lot of that. I would say that there's not a whole lot more to do but when you think about much of our disposition activity, it has followed that pathway, a little more, a little more labor challenged. So I don't have an expectation of big dispositions but we'll continue to sort the portfolio as we always have.

Our next question comes from the line of Juan Sanabria with BMO. Juan your line is live. Our next question comes from the line of Michael Carroll with RBC Capital Markets.

I just want to circle back on Guardian. I mean how much interest did you receive when those assets kind of came to the market? And I mean, did you it sounds like you have one specific operator you're pretty far along with right now. But did you run a process? Or did you target a few operators? I guess how did that initially work?

Yes. So we have existing operators in the state of Pennsylvania and then of course, we know other operators in the state. So -- and also in the state of West Virginia. So we reached out to operators that we know, first and foremost, that we do business with and also operators that we know are in the state of Pennsylvania and still doing business. So there's a pretty broad net that we grow out there looking for new operators. And it's just as a matter of narrowing it down to the right one.

And then I guess how much interest when you started offering up those assets to potential operators? How much interest were they in those properties? And then kind of off of that, I mean can you provide some color on how those assets are performing today? And will these new operators be willing to step in at a stabilized rent rate? Or do you need to have some type of ramp-up as operations kind of stabilize and improve?

Those are the discussions that we're having as we speak. It's a good question. Those facilities are not performing exceedingly well. And I would say there was interest but it wasn't an overwhelming amount of bids that were put in at the end of the day.

Our next question comes from the line of Nicholas Yulico with Scotiabank.

Bob, I guess maybe just going back to the cash on the balance sheet, trying to get a better feel for how we should think about how much of that could be earmarked for investments versus you did talk about the debt maturities you do have in April.

Yes. Nick, again, take a big picture approach to that. I mean because cash is fungible. We're sitting with $600 million today. If we could deploy that, the pipeline is choppy. It's robust but choppy. We can deploy it right away in acquisitions. That would be the first dollar spent, absolutely. But again, we'll sit down and look based on the pipeline and based on that, debt maturity coming up, how we want to fund it. I mean, right now, we have the cash and we have the availability and we do have the ATM.

Okay. And then second question is just going back to Levi. And if we think about, you've now moved through most of the transitions or asset sales, what -- do you have a sense for -- I know there's still, I guess, some reinvestment that could happen with proceeds. But as we think about prior rents on Levi when it was sort of fully paying versus now what you're going to get in terms of new rent equivalents. Is there any like percentage number you can give us on a rough feel about how that played out? Is it going to be 70%, 80%? I think you said 80% in the past about sort of the recapture rate on operators going through a transition and asset sales like this?

Yes. You're exactly right. We were pretty conservative in our thinking there. Nick, I think when this is a result, we'll be pushing 90% or north.

Our next question comes from the line of Alex [ph] with Robert W. Baird.

Just a question on the Guardian assets. What's the historical timing of releasing those senior housing assets?

Do you mean just in general or specific to Guardian.

In general.

In general, it could take anywhere from 3 to 12 months. It's a pretty wide range depending on whether it's a sale and the sale being financed or whether it's just re-tenanting.

And second one is have labor cost/shortages actually gotten better? Or has it just stopped getting worse?

I definitely think it's getting better from what we hear from our operators. I mean we are seeing agency come down quarter-over-quarter which is a good sign. And operators are definitely feeling less tension there but it still exists, right? So it's going to take some time before that rights itself. I definitely think it's improving.

And last one. And how much did you guys buy the Levi assets for? And what's the [indiscernible].

Some of those assets date back to 1995, I think, 1998, I don't know off the top of my head, the -- some of those assets are been on our balance sheet for over 20 years.

Our next question comes from the line of John Pawlowski with Green Street.

Megan, a question for you on just sector-wide occupancy. Just curious, why occupancy you think hasn't seen a bigger benefit from just the cumulative closures of facilities over the last several years.

I think -- look, we've seen a large percentage of our portfolio actually recover. So it is very specific to the region that you're in. And if you look at Florida, for instance, the staffing issues there, just so strong that, that's why the occupancy hasn't recovered. So I think when you look at different places, you're going to have a different story there.

As the months and years go along again with just supply being down, it would suggest kind of almost a structural change in demand if significant amount of regions aren't back to a pre coven occupancy which, again, should be adjusted higher for closure. So are you incrementally more concerned about it's broader than just labor issues delay in the recovery in occupancy.

No. I mean, look, I think it's going to get there. We've got demographics on our side that's coming into play. And quite frankly, at some point, as those demographics come back into play, we're going to have maybe a shortage of nursing homes in certain areas.

Okay. Last question for me. Just curious, whether you think Guardian could be a leading indicator for other operators that may just be fatigued and then staring out at a burdensome labor mandate? Do you see other operators? Do you see this is the beginning of a wave of additional operators back to the new business?

No. I think Guardian is really idiosyncratic, very unique. If you look through the rest of the portfolio, it just doesn't have similar issues. I will say that the state of Pennsylvania in general has been a little bit more difficult operating environment. And so there's a bit of that and we do have a decent presence in the State of Pennsylvania but most of that is with operators in big master leases where a little bit of pressure or feeling in Pennsylvania is offset by really good results in other geographies. So, now I don't -- it may be a little bit of an indicator in Pennsylvania for Pennsylvania-only operators but we really don't have that as an issue.

Our next question comes from the line of Juan Sanabria with BMO. Juan, your line is live. Our next question comes from the line of Ayo Okusanya with Deutsche Bank.

So the question I have is it sounds pretty much like fundamentals are kind of all moving in the right direction at this point. And I guess, again, there's still some tenants that on the margin are still having issues. So I'm trying to understand thematically where the pressure points still remain and whether indeed all this is slowly behind us and things will be hunky dory going forward? Or if there's still kind of issues out there that could still persist for longer than anticipated. It sounds like part of it is occupancy and just kind of labor constraints, making it very hard to drive occupancy higher. Curious if any of it is just as Medicare Advantage continues to grow, the pressure it's putting on profitability. I'm just kind of curious where else there could be some potential kind of fundamental issues one has to worry about in terms of just operator profitability?

Yes, Tayo, I think the short answer is what you said at the beginning. The fundamentals are all strong. And the residual clean-up that we have now is just that. We've been in the business for 3 decades and you're always going to have certain issues that come up in this business. But I think that's what we're going to be looking at in the back half of 2024, just a sort of normal way business. Medicare Advantage, it's been around forever. I don't see -- there's really no incremental pressure there. And I think the market's really sorted itself well in terms of operators that can provide the clinical care for the advantaged providers that works effectively and we're aligned with most of our big operators are already aligned with those organizations. So I feel good about all of that. And look, we've been pretty transparent. We've sold dozens of issues. We're down to a handful. And I think we have a lot of visibility around that.

That's helpful. And then just one other quick one. Did you discuss the cap rate or the NOI associated with the Levi sales in November to $205 million.

No. As Dan mentioned, really, it's per bed sale prices which cover that between 90,000 and 100,000 of bed is where Florida’s traded. Those facilities all have some turnaround component in them. So the cap rate is really -- really doesn't mean anything.

Give us a sense what NOI kind of disappears from you guys as a result of those sales?

Yes, it goes back to the last couple of -- the last part of the restructuring and Dan is working through that which is disposing of the six properties that remain two in Florida and four Louisiana and then the appropriate rent around the retained portfolio which -- that portfolio has a very substantial cash flow. So I think there'll be a lot of value there. But that is a TBD that Dan [ph].

There are no other questions in the queue. I'd like to hand the call back to Taylor Pickett for closing remarks.

Thanks, Doug. Thanks, everyone, for joining today. As always, please reach out to the team with any follow-up questions you may have. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.