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Good day, ladies and gentlemen, and welcome to the Omega Healthcare Investors Incorporated Second Quarter Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Michele Reber. Ma'am, the floor is yours. I think you are on mute.

Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; Megan Krull, Senior Vice President of Operations. Comments made today on 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 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 on a 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, 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 second quarter 2023 earnings conference call. Today, I will discuss our second quarter financial results and certain key operating trends. Second quarter FAD, funds available for distribution of $0.70 per share significantly exceeded the first quarter of $0.60 per share, comfortably ahead of our $0.67 per share dividend. The FAD dividend payout ratio is 96%. The large increase in FAD is primarily due to the resumption or increase in rent from cash basis operators. One operator LaVie paid partial rent in April and full rent in May and June, which results in a $0.035 increase in FAD quarter-over-quarter. As Dan will discuss, LaVie is still being restructured and we have agreed to partial rent payments of 2.5 million per month for the third quarter, which will reduce FAD by $0.035 from Q2 to Q3. When the LaVierestructuring is completed, we expect a significant increase in cash rents from the current agreed upon partial rent payments. In addition, during the second quarter, we issued 6.6 million shares of common stock to fund our pipeline and delever. These additional shares will put some modest pressure on our future FAD per share. Turning to positive operating trends. First quarter EBITDAR coverage, excluding CARES Act support, continues to improve, increasing to 1.15x versus 1.09x in the prior quarter. This level of coverage reflects continued occupancy improvement, strong state reimbursement rates and moderation in the still difficult labor market. The under 1.0x EBITDAR operators represent 29.9% of total rent. We can break the 29.9% into a handful of buckets. Operators representing 6.2% of the 29.9% are sitting on extremely strong balance sheets and therefore payment of rent should not be an issue. Operators representing 8.1% at first quarter EBITDAR coverage above 1.0x, 9.5% represents with these first quarter EBITDAR coverage, when excluding the anticipated sale or transition of 23 facilities is also above 1.0x. That lease operators representing 6.1% of which operators representing 3.5% are in active restructurings where were recently conditioned, which sees the balance of $2.6 million representing a small operating relationships. I will now turn the call over to Bob.

Thanks, Taylor, and good morning. Turning to our financials for the second quarter. Revenue for the second quarter was $250 million before adjusting for certain nonrecurring items compared to $245 million for the second quarter of 2022. The year-over-year increase is primarily the results of timing related to operator restructurings, revenue from new investments completed in 2022 and 2023, partially offset by asset sales completed through that time, same timeframe for instance. Our NAREIT FFO for the second quarter was $155 million or $0.63 per share as compared to $161 million or $0.66 per share for the second quarter of 2022. Our adjusted FFO was $183 million or $0.74 per share for the quarter, and our FAD was $173 million or $0.70 per share and both excludes several items in systems with historical practices as outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release as well as our second quarter financial supplemental posted to our website. As Taylor mentioned, the $0.70 a FAD for the second quarter was $0.10 greater than our first quarter FAD. This increase was primarily driven by incremental revenue from LaVie. The completion of workout arrangements and timing of payments from other cash basis operators partially offset by additional weighted average shares. In the second quarter, we closed on $270 million in new investments. The second quarter new investments, the majority of which were completed in April are expected to produce incremental contractual rent and interest, or FAD, approximately $1.3 million in the third quarter. We have a number of operators on a cash basis for revenue recognition, including LaVie, which is projected at $2.5 million per month. We will only report FAD from our cash based operators to the extent payments are received or security deposits are applied. It's important to note that our third quarter FAD will also be impacted by the increase in the weighted average shares outstanding as we issued 6.6 million shares for proceeds of approximately $200 million in June. For every 6 million shares issued, our quarterly FAD is negatively impacted by approximately $0.105 per share until the cash is put back to work in new investments. In summary, consistent with the commentary provided last quarter, we still expect Q4 FAD payout ratio to approximately cover our 66% dividend with a FAD to return to a normalized payout ratio in the high 80s to low 90s in 2024. Our balance sheet continues to remain strong. In the second quarter, we issued 6.6 million shares for $200 million of equity, and we also terminated our $400 million in treasury locks, which generated $93 million of cash gain leaving us with $350 million in cash at June 30. On August 1, we used the balance -- we used the balance sheet cash to repay a $350 million bond maturity. Looking forward, based on the current capital markets, our active pipeline, in April 1, 2024, $400 million bond maturity. We expect to continue to be opportunistic in the equity capital markets while targeting leverage in the low 5s. At June 30, 99% of $5.3 billion in debt was at fixed revenues and our net funded debt to annualize adjusted normalized EBITDA of 5.1x and our fixed charge coverage ratio was 4.1x. I'll now hand over to Dan.

Thanks, Bob, and good morning, everyone. As of June 30, 2023, Omega had an operating asset portfolio of 893 facilities with approximately 88,000 operating beds. These facilities were spread across 66 third-party operators and located within 42 States in the United Kingdom. Trailing 12 month operator EBITDAR coverage for our core portfolio as of March 31, 2023 increased to 1.1x versus 1.04x for the trailing 12 month period ended December 31, 2022. During the first quarter of 2023, our operators cumulative have recorded approximately $5.8 million in federal stimulus funds, as compared to approximately $20 million recorded during the fourth quarter. Trailing 12 month operator EBITDAR coverage would have increased during the first quarter of 2023 to 1.02x, as compared to 0.92x for the fourth quarter, when excluding the benefit of any federal stimulus funds. EBITDAR coverage for the standalone core ended March 31, 2023 for our core portfolio was 1.8x including federal stimulus and 1.15x, excluding the $5.8 million of federal stimulus funds. This compares favorably to the standalone fourth quarter of 1.19x and 1.09x with and without the $20 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 to 79.6% as of mid-July of 2023 based on preliminary reporting from our operators. Turning to portfolio matters, LaVie, as previously mentioned, Omega and LaVie are in process of restructuring their portfolio by transitioning certain underperforming facilities, most located in the state of Florida. To date, 13 facilities have been divested. Currently, Omega is in the process of selling or releaseing an additional 23 facilities, most of which are expected to be transferred throughout the fourth quarter of 2023. During the second quarter of 2023, LaVie paid partial rent in April of $2.5 million and full contractual rent for May and June of $7.2 million each month. In anticipation of the future transition of 23 additional facilities, Omega has agreed to allow LaVie to short pay rent by approximately 66% during the third quarter of 2023. Maplewood, in the second quarter, Maplewood short paid its contractual June and July rent by $1 million per month. We currently are working with Maplewood and the state of Greg Smith to address these short falls. Based on Maplewood's latest cash flow projections, which incorporate anticipated January rate increases and improved census at the Second Avenue Facility in Manhattan, Maplewood believes there is a path forward to meet its full contractual rental obligations in the first quarter of 2024. In August, we drew on a $4.8 million security deposit and we'll be applying the security deposit to any rental shortfalls realized in the third quarter. In addition to the aforementioned restructurings and transitions, Omega is working with several other relatively small operators on various restructures. Turning to new investments, as previously announced on April 14, 2023, Omega closed on a $219 million transaction, which consisted of 114.8 million purchase lease transaction for four facilities in West Virginia and a $104.6 million in mezzanine financing. And currently with these acquisitions, Omega amended an existing operator's master lease to include the four facilities and an initial cash yield of 9.5% with 2.5% annual escalators. The mezzanine financing was given to the same existing operator bearing an interest rate of 12% and was part of the capital stack to purchase 13 additional facilities in West Virginia. Also, as previously announced, on May 1, 2023, Omega purchased one additional facility in West Virginia for $13.7 million. The facility was added to an existing operator's master lease with an initial cash yield of 10% with 2.5% annual escalators. Additionally, on June 30, 2023, Omega closed on $10 million mezzanine loan to an existing operator. The mezzanine loan bears an interest rate of 11% as a five-year term and was part of a capital stack to purchase 12 facilities in Pennsylvania. Omega closed on a total of $270 million in new investments in the second quarter of 2023, including 17 million in capital expenditures. Year-to-date, Omega has closed on $313 million of new investments, including $29 million in capital expenditures. Turning to dispositions during the second quarter of 2023, Omega divested 10 facilities for a total of $45 million in proceeds. Year-to-date, Omega has divested 12 facilities for a total of $62 million in proceeds. I'll now turn the call over to Megan.

Thanks, Dan, and good morning everyone. We continue to see slow positive momentum and occupancy with the number of core facilities now recovered at 35%, up slightly from the 33% reported in the fourth quarter. Additionally, 25% of core facilities that have not yet fully recovered are at or above 84% occupancy. Staffing shortages while continuing to moderate persist, delaying overall recovery and continuing to vary by markets. In June after released the results of the survey of 425 nursing home providers results of which showed that 52% are still limiting new admissions due to stocking shortages. Agency expense on a per patient day basis for our core portfolio for first quarter 2023 remained at 5x where it was in 2019, which while consistent with last quarter did show modest month over month improvement, helping to offset some of these persistent expense increases. On the rate setting for adjustment leak CMS issued its final 2024 payment rule resulting in a net increase of 4% or approximately $1.4 billion, which is slightly better than the 3.7% provided for in the proposed rule. This included a 6.4% net market basket update consisting of a 3% market basket increase plus a 3.6% market basket forecast error adjustment offset by a 0.2% productivity adjustment, as well as the remaining 2.3% PDPM parity adjustment recalibrations. And on the state side, while the magnitude of certain rate increases is not exactly what we had hoped for in certain areas, it is still moving in the right direction. Texas of note provided for at least the $19.63 COVID FMAP add-on to be included in its permanent rate setting starting September 1st in addition to a small increase above that and Florida provided for up to a 5% rate increase starting October 1st. While much the Florida rate is based on quality indicators, meaning that not all operators will see this large of an increase, it does represent somewhat of a trend in rate settings where more and more states are tying reimbursement increases to quality measures. Assuming this is done in a thoughtful manner, this is something that we welcome, however, it should never fully replace increases tied to the inflationary environment. I'll now open the call up for questions.

[Operator Instructions] Our first question is from Tao Qiu from Berenberg. Go ahead.

So, LaVie was a positive surprise this quarter, appreciate the cut on the $0.305 step down for the next quarter. I think there are a few additional puts and takes for the next quarter. I think Maplewood was below expectations and you still have security deposit to apply. I think there's one more month of rent coming from healthcare homes. The shared county is higher. I'm just wondering if you could help us reach to the third quarter on the FAD number?

It's Bob, I think the only other component to look at, I did mention the incremental revenue related to acquisitions completed in a quarter, and then also Taylor and I both mentioned that the shares issued or issued late in the quarter, so you're going to have some modest impact based on the weighted average shares.

And just one follow-up, we got the 4% Medicare we update earlier this week and thanks for the comments about Texas and Florida. I think California is also pretty well known. Just wondering if you could walk us through some of your other big markets, for example, Indiana, North Carolina, Pennsylvania statues, and what are you seeing those states in terms of the 2024 Medicaid reimbursement rates?

Yes, some of them are a little bit too early to tell. Indiana, I think that they're still hoping for, an inflationary increase somewhere in the 3% to 4% range, but I don't think that's been finalized quite yet. But remember in Indiana, we've got the UPL too, so that Medicaid rate setting doesn't necessarily impact our coverages the same way. Pennsylvania, I think, there was a little bit of a rate reduction actually in July. Just a small one due to the, there was a budget factor, rate decrease related to the January 1st increase. And they're hoping that gets reversed in January, but again, way too soon to tell. For Pennsylvania, they had that really large increase last year, so I think they're pretty well set for the moment. And then North Carolina, that's when we've really been watching and they were supposed to, they thought they would get their budget approved earlier, but they haven't yet. They have a $37 PPE FMAP add-on, which they've been trying to get into the rate. They think it's likely to happen. That's what the operators are pushing for at the moment, because the state has pushed that $37 or most of it out, at least through August right now, until they finalize the budget, but they're hopeful that they get that put in.

Thank you. As a reminder, please ask one and one follow-up question. Our next question comes from Jonathan Hughes from Raymond James. Go ahead, Jonathan.

I was was hoping you could dig a little deeper on LaVie. I know that restructuring has been ongoing for some time now and that they paid more rent than expected in May and June. But I guess, why did they pay more rent if they didn't necessarily have to?

It really boils down to cash on hand that they were a little bit more liquid in the second quarter than they anticipated. And so they were able to make the full rent out -- rent payment for May and June. We have got some transitions coming up. So, the expectation is that, their cash and their liquidity is going to go down until those transitions occur. Like with any transition that involves a sale, they take a while and there is a lot of lead time running up to that. There is a lot of third parties that we have no control over. So, the expectation at least for right now is that in third quarter, we will see that reduced rent amount.

Okay. And then maybe my follow-up is, and I realize we are still waiting on this. But any user or updated expectations just on the staffing mandate that we have all been waiting for a few months now. I think one of the operators said, hopefully, we can have it by the end of the month, but just any views there would be helpful. Thank you.

Honestly, we don't have that crystal ball at the moment. I mean, we hear the same things that I'm sure you guys here. I think we view the fact that this hasn't come out yet despite the fact that, it should have come out in April as a positive that hopefully CMS has gotten a ton of comments related to this, in terms of, don't have a one size this fall mandate, and hopefully push it out until there isn't a staffing crisis. And we are hopeful that, they will take a balanced approach based on how long they are keeping. But we still have to put any clarity as to when it will come out. But remember, as well that it's going to be come out of the proposed rule, right, there is going to be a comment period. And so, ACA has historically been very good at getting things more beneficial than what it first comes out of.

Thank you. And our next question comes from Connor Siversky from Wells Fargo. Go ahead.

Good morning. Thanks for having me on the call. I would like to dig into Maplewood and apologies if I missed this in Dan's remarks. But could you quantify at all what that cash flow ramp looks like from today through the end of 2023 between the lease up of Second Avenue? And potential rate increases at the end of the year? Or worded differently, I mean, how much EBITDA can we see from second half? How much from rate increases? And do you think that would cover the rent shortfall?

Yes. Just, I'm going to make this a relatively longer answer, Connor, just because I think the context is important. So, if you look at Maplewood as a whole, the core portfolio, excluding Second Avenue, is performing very well. Their occupancy is at pre-COVID levels. They have significant cash flow. And then you look at Second Avenue, which is in Philip 61% occupied. It has now positive cash flow pre-rent. So incremental occupancy is just going to add to that cash flow, and we expect another 10% of incremental occupancy so from 131 resins to 151 by year end. And obviously, that has a lot of power in terms of cash to the bottom-line. On the flip side, rate increases happen typically in January. So, you do have whatever inflationary impact between now and the end of the year that will cut into a little bit into that cash flow. So to get you precise numbers is difficult it probably doesn't change much from the million dollar deficit we're seeing today. But then just to close the loop on the rate increase piece of the puzzle, Maplewood's total revenue is about $200 million. So when you think about last year's rate increases, which were high-single, low-double-digit. With the expectation in the industry of something similar for high end properties, that's a really meaningful in terms of the amount of top-line revenue to overcome the cash deficit we have today. So long answer to your question, but I think that context is important.

Great. Appreciate the color Taylor. That's helpful. And then just as it relates to the line of credit and the building deferral balance, I mean, what does the total TAB to OHI look like currently? How big do you expect that to get? And then is there a threshold that you wouldn't want to cross?

So, we're at $270 million round numbers, and we don't expect to fund any additional cash into that line. Remember, we have interest that we're on a cash basis with Omega. So, we continue to accrue interest that obligation continue to run to Maplewood. But from a cash perspective, we're done funding that one.

And our next question comes from Michael Griffin from Citi. Go ahead, Michael.

Just maybe circling up on labor availability, in Conversations with your operators, do you have a sense of kind of where agency labor utilization is trending expectations for the back half of the year? And kind of where do you need to see occupancy to get to really ease a lot of those labor pressures?

I mean, from an agency perspective, it's definitely improving. That's what we're hearing anecdotally from our operators. And certain operators are able to get out of it completely, but it's really geographically based. I mean, Florida tends to be one of the states, that's having severe staffing shortages. So it really just depends on where you are. And in terms of occupancy, we always talk about that national 84% and getting back up close to there. I mean, we're close to that 80%, but with agencies still high, we just need to work through some of the staffing issues to solve all those problems.

Great. That's helpful. And then maybe switching to external growth opportunities. Can you give us a sense of what the forward pipeline is looking like? You've done a number of investments year-to-date. Just kind of can you quantify maybe that opportunity set and where relative to where they might have been previously?

So I don't want to naturally quantify, but I will say it's quite active. We're looking at a fair number of deals about here in the states and abroad in the U.K. I'd say the U.K. is particularly active. We're seeing some opportunistic transactions here in the states, and we're going to try to take advantage of some of those I think what we've done year-to-date is a pretty good proxy for what we hope to do in the next latter half of the year. As far as rates go, yes, we're seeing cap rates move up, we're starting to bid our deals, as you've seen high 9 low 10.

Thank you. And our next question comes from Joshua Dennerlein from Bank of America. Go ahead, Joshua.

In the opening remarks, you mentioned there was a certain subset of the portfolio still covering low 1x, I didn't hear them out. But just curious, is there any kind of big picture theme that's causing that part of the portfolio to lag versus like the overall at 1.15?

I don't know that there's necessarily a theme. When you break down those buckets, LaVie, the big piece, obviously, when we talk about that, we're fixing that. But then you have another significant piece of that we'll know that we have pretty good visibility that's going to, that they'll climb out of that below one bucket. And then you get back to the handful of operators where there's not a lot of visibility. They're small. It's under 3%, and that's where we've run historically for many, many years. So, I think there's a pathway, honestly, to look at that below net bucket, and it's going to take a little while, where we climb for that bucket and get back into less than 5% of our portfolio there. It's not going to be next quarter, but we have visibility. It's pretty good.

And maybe just the part of the bucket that you expect to climb out of that, any kind of timeframe on that, is it -- or -- yes, I guess, maybe just time frame, just I'm trying to think through it.

Well, I think I'll give you the big two examples. LaVie is just subject to finishing the restructuring. And as Dan mentioned, it's taking longer than any of us on either side of structuring table, but it will happen this year. And then you have 8.1% that are running currently above 1x. So that's just a question in terms of how we report, waiting for the trailing 12 to catch up. So, you've got almost -- you've got almost 18% right there in those two buckets. And then you have the restructuring activity. So, I think a lot of this will have reporting visibility going into Q1 that will make a lot of people more comfortable.

And our next question comes from Steve Valiquette from Barclays. Go ahead, Steve.

This is [indiscernible] on for Steve Valiquette. First question would be, I just wanted to kind of get a sense of how the ending of the PHE back in May has affected the business in June and July or most recently, let's say, just to kind of quantify a better sense of how that's been impacted? And then just also wanted to kind of on the previous question, assuming LaVie is the operator that's closest to completion. Would you still say that it's in line with reducing the number of operators with an EBITDAR coverage ratio below 1x, down to that 20% range? And just like confirm that LaVie is the operator closest to being fully restructured?

So the public health emergency, I would say there hasn't been a very large impact. Obviously, the filing in place that's gone, but a lot of that was kind of tapered off anyway. It's not a huge impact. The other piece of it is really the FMAP piece, which we've gone over some of these states that have large FMAP increases in most like California put that through the end of the year. Hopefully, next year, that will get added on permanently. Texas is going to have their FMAP rate in their permanent rate as well. So most of these states have either deal with it or at scale with it. So I would say not much of an impact at this point.

And then the second half of the question, yes, LaVie, the 9. 5% of the 29.9, so one LaVie restructured at, call it 20%. And then you have the two buckets of operators with strong, very, very strong balance sheet to 6.2%. And then you have an 8.1% bucket of operators target had Q1 EBITDAR above one-time. So that's another 14%. And I think we will have visibility around, all of that. Again, not next quarter, but in the -- by the time we roll into 2024, I think we will have very visibility, that gets you down to 6% and we are working, a big chunk of that 6%. So,, the number should get down to historical levels, sub 5, if things continue as they are trending today.

All right. And super quickly, do you still intend on being net acquirers for the year?

That would be the expectation given what we have held for sale, which is de minimis and what we're restructuring which other than the restructuring around LaVie, we don't have anything big out there.

[Operator Instructions] Our next question comes from Vikram Malhotra from Mizuho. Go ahead.

Thanks for taking the questions. Maybe just first one, I wanted to clarify. You mentioned the share count impacting, maybe the 3Q FAD run rate. I just wanted to clarify. It remind me last quarter I thought you had said, you were hoping for to hit sort of a $0.70-ish FAD number by 4Q. And I think now you are saying you are probably more approximating to the dividend. Is it just the shares? I just want to clarify. It's just the capital raise and nothing else on the tenant front that you are baking in to get to that 80% coverage now in 2024?

The shares absolutely have an impact. But I think -- and again, getting in 2024, it's also getting LaVie restructures the big piece of that as well.

Okay. That's helpful. And just thinking about the outcome eventually of sort of the minimum staffing rule, whenever it comes, I'm just wondering if you sort of looked at a couple of scenarios where they require sort of the 4.1 hours, but the time line is maybe sooner anticipated versus a relatively long period to a year to the standard in call it, negative scenario, is there an assessment you've done on how coverages maybe impacted for operators?

We haven't just because it's way too soon, given that nothing has come out yet and we think -- look, you're probably -- if this comes out from post rule tomorrow, you probably wouldn't have it come into place next year, right? And so, but, we are hopeful to get pushed out until the staffing shortages improved. But there is really no good way to drill down into that. [indiscernible] has put out something like 4.1 it would cost the industry something like $10 billion. But to get there, I mean, it's really difficult to figure out how that would affect the operators on a daily basis. They can't do something so draconian that it puts everybody out of business.

And our next question comes from Wes Gollady from Baird. Go ahead, Wes.

A quick question on the staffing. I guess what is the dynamic there? Is there -- are you lower turnover? Or is there still a lot of churn, a lot of new hires and a lot of people quitting?

I think folks are doing a better job at lowering the turnover certainly and finding folks out there. I think the turnover is getting better and I think there's also some operators who've been successful with bringing folks in from international areas to help bolster that as well.

And then you mentioned the $93 million gain. Can you remind us like what is the plan, I guess from a financing perspective, is there a certain time period where you, if you were to roll that gain into a new offering, it could reduce your interest expense and maybe the accounting behind that?

Yes. Basically, we have mid-2025 to roll that in a debt offering of at least five years or longer, and then we'll amortize it over the new offering from a P&L standpoint.

Thank you. That is the last question for today. At this time, I would like to turn the call back over to Taylor Pickett for any closing remarks.

Thanks everybody for joining us today. As always, we're available for any follow-up questions. Have a great day.