Good day and welcome to Omega Healthcare Investors’ Second Quarter 2021 Earnings Call. Today, all participants will be in a listen-only mode. Please note that this event is being recorded. At this time, I would like to turn the conference over to Michele Reber. Please go ahead..

Thank you, and good morning. With me today are Omega’s CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; Chief Corporate Development Officer, Steven Insoft; and Megan Krull, Senior Vice President of Operations..

Thanks, Michelle. Good morning and thank you for joining our second quarter 2021 earnings conference call. Today, I will discuss our second quarter financial results and industry occupancy and labor trends.

We continue to post strong quarterly results with second quarter adjusted FFO of $0.85 per share and funds available for distribution of $0.81 per share. We have maintained our quarterly dividend of $0.67 per share, and the dividend payout ratio remains conservative at 79% of adjusted FFO and 83% of funds available for distribution.

Our liquidity and debt maturity ladder have never been stronger as our operators face the uncertain timing of occupancy recovery and widespread labor shortages.

As we have discussed in previous calls and investor presentations, the combination of significant occupancy declines and a tight labor market with increasing wages and a shortage of staff has started creating liquidity issues for certain operators.

In June, we had an operator representing 3% of annual revenue inform Omega that they would be unable to pay rent due to both occupancy and labor issues. It is possible that additional operators could experience similar cashflow stress..

Thanks, Taylor, and good morning, turning to our financials for the second quarter. Our NAREIT FFO for the quarter is $181 million or $0.74 per share on a diluted basis as compared to $186 million or $0. 80 per diluted share for the second quarter of 2020.

Our adjusted FFO was $207 million or $0.85 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release and our supplemental and also on our website. Revenue for the second quarter was approximately $257 million before adjusting for the non-recurring items.

As previously disclosed, in June an operator informed us, it would be unable to make its contractual rental payments for the foreseeable future. As such we revised our revenue recognition treatment for that operator to cash basis rather than straight line accounting methods.

As a result, we recorded a $17.4 million reduction to rental income related to the write down of straight line receivables..

Thanks Bob. Good morning, everyone. As of June 30, 2021, Omega had an operating asset portfolio of 949 facilities with over 96,000 operating beds. These facilities were spread across 65 third-party operators and located within 42 states in the United Kingdom.

Trailing 12-months operator, EBITDARM and EBITDAR coverage for our core portfolio as of March 31, 2021, decreased to 1.8 and 1.44 times respectively, versus 1.86 and 1.5 times respectively for the trailing 12-months period ended December 31, 2020..

Thanks Dan, and good morning, everyone. In positive news last week, CMS issued it is final payment rule, which includes a 1.2% rate increase beginning October 1st. But more importantly, delays the proposed 5% cut related to PDPM.

In the proposed rule issued earlier this year, CMS had a highlighted the fact that PDPM rather than being budget neutral instead led to an unintended 5% payment increase and that a rate cut would need to occur.

That rate cut in the final rule has been pushed out one year, which is welcome news to the industry as a whole, especially as it continues to recover from a pandemic. Moving on to COVID.

Last quarter, we highlighted the fact that, there was approximately $24.5 billion of unallocated funds left in the provider release fund, which number excludes money returned by providers, which we believe could be substantial.

Since then, none of those funds have been allocated and we are still in a wait-and-see mode as to what benefits the long-term care industry will receive. Thankfully, a handful of states have announced new continue for increased stimulus for the long-term care industry, such as Michigan and Pennsylvania.

However, states work through how they plan spend funds received from the American Rescue Act. It is still too soon to tell what the ultimate impact will be on our operators or the industry as a whole.

What we do now is that, the industry continues to need government support, especially in light of the Delta variant and the potential impact that it could have on what was already expected to be a slow long-term recovery.

While the overall impact of the vaccine has been strong with cases at the end of June at less than 250, resident and employees across 125 of our buildings, we did see an uptick as of last week’s monthly reporting at slightly less than 500 cases across approximately 153 of our building.

Operators are preparing themselves to deal with the potential rise in cases that could lead to increase visitation restrictions, and with vaccination rates for employees still running low at less than 60% at best, the staffing shortages and self-imposed admissions spans that Taylor mentioned earlier, could be exacerbated should large employee outbreaks occur.

Both of these have the potential to slow, but hopefully not stall, the occupancy progress that is being made..

Thanks, Megan. And thanks to everyone on the line for joining today. In spite of New York, our ALS Memory Care high rise at Second Avenue and 93rd Street in Manhattan leased to an operated by Maplewood Senior Living opened at the end of March. And is in the midst of lease up.

Lease up momentum has been solid in-line with our underwriting and expectations. The COVID-19 pandemic poses certain challenges unique to senior housing operators, including increased costs, the challenges of managing COVID positive patients in meaningful practical limitations on admissions.

While they very much appreciate the help we have received private pay senior housing operators have not seen the level of government support provided to other areas of senior care. Along with continued pandemic related challenges, we saw small but measured occupancy improvements to our senior housing portfolio throughout the second quarter.

We have seen evidence of stabilization strengthening of census in certain markets. Our Maplewood portfolio which is concentrated in the early effective Metro New York and Boston markets saw meaningful census erosion early in the pandemic, with second quarter 2020 census hitting a low point of 80.4% in early June of 2020.

That said their portfolio occupancy level has returned to 87.6% in June of 2021. Including the land in CIT, at the end of the first quarter Omega’s senior housing portfolio total 2.2 billion of investment on our balance sheet. All of our senior housing assets are in triple net master leases. Including our 24 recently acquired Brookdale assets.

Our overall senior housing investment comprises 155 assisted living, independent living in memory care assets in the U.S. and UK. This portfolio, excluding the 24 Brookdale properties on a standalone basis had its trailing 12-months EBITDAR lease coverage for six basis points to 1.02 times at the end of the first quarter.

With COVID outbreaks having affected different markets at various times this decreasing performance was to be expected. Rising vaccination rates among residents and staff are a critical step to restoring occupancy performance.

While we remain constructive about the prospects of senior housing, the COVID-19 outbreak has warranted a far more selective approach to development. While we make further progress on our existing ongoing developments, we continue to work with our operators on strategically investment and our existing assets.

We invested 31.1 million in the second quarter in new construction and strategically investment. 19.5 million of this investment is predominantly related to our active construction projects. The remaining 11.6 million of this investment was related to our ongoing portfolio CapEx reinvestment program. I will now open the call for questions..

We will now begin the question-and-answer session. Today’s first question comes from Jonathan Hughes with Raymond James. Please proceed..

Hi there. Good morning. A question on kind of operator in news disclosure.

If you do have more operators come to you in the future saying, they are having issues with paying rent and say within your top 15 operator lists, how will you disclose that going forward? Will you kind of wait until the quarterly earnings releases or do press releases inter quarter, like we saw in June ahead of NAREIT? I’m just trying to get a better sense of, and understand how we can monitor operator health and new development, hopefully on a more real-time basis..

Yes. Fair enough, John. As you know, it is pretty nuanced when you start to have discussions with operators. And so, some of the timing is you just have to work through some of those issues. But I will tell you the one thing, we will be certain of is that we don’t have selective disclosure.

So to the extent that, we are talking to investors about any potential issues, you will see disclosures before we have those conversations, as we are talking to investors all the time. So, I would think it would be relatively timely from our perspective..

Okay. That is great. And then maybe talk about Florida and Texas. Those are your two largest states in terms of exposure. They are also two states that have not seen as much. I think government support as maybe others during the pandemic and even pre-pandemic.

Can you just talk about the reimbursement rate and government support outlook for those two states and then maybe also update us on the daybreak transitions in Texas..

So Texas early on in the pandemic actually had an add-on to its Medicaid rate of $19 per day, and it is continued to - that add-on has continued. They have recently extended and again, I believe it runs through October of this year. So, that has been hugely helpful and attracts kind of the federal emergency plan.

So, we would hope that if the federal emergency plan continues, the Federal Act - the Texas Medicaid add-on would continue as well. The State of Florida has offered no such systems. They have not added anything to the Medicaid rate. They have not offered any supplemental payments.

So, that has produced a situation in Florida that is becoming increasingly dire, I would say, because there has been no add-on and now we are seeing patients spikes with the health -. Daybreak, we finalize re-leasing or selling all those assets in the second quarter, I believe most of them were on in the first quarter.

So, there is no more daybreak as far as we are concerned, all those assets have been distributed the most, other operators either existing or new and/or sold to third parties..

Okay. And daybreak transitions, that was converted at some events to where daybreak was before..

No, but they were in line with what we had projected..

That is right. Okay. What is it going to take for Florida to kind of realize maybe they do need to give some more support? I guess I could drive to Tallahassee. But, just curious if there has been any discussions among both the lobbying organizations, and just if there is any progress on that or if it is still pretty quiet..

No it has been quite, that is for sure. There has been a huge push from the operators, lobbyist, et cetera for some labor even in Florida. And there is no eminent expectation, but I think that continues to gain momentum and we are hopeful that we see something out of state of -..

Okay. Last one for me. There was an announcement, you announced the addition of a new Director to your Board yesterday. Can you just provide some additional details around this? Thanks..

Yes Jonathan, I will ask Matthew to cover that..

Hey Jonathan. So, Ed Lowenthal is retiring as a Board member at the end of his current term. While we have added the Board member for a number of more months, this is probably a good opportunity to publicly thank him for his over 25-years of exceptional service as a Board member. While we are sad to be losing Ed, we are also very happy that Dr.

Lisa Egbuonu-Davis has agreed to join our Board. For those of you who didn’t see the 8-K filing, a little additional background. Dr. Egbuonu-Davis has literally decades of healthcare experience as both a physician and as a healthcare executive, where she is primarily focused on patient centric businesses.

So, as you can imagine, her experience and her nuance understanding of the healthcare continuum will be extremely helpful for Omega as we continue to navigate the evolving landscape. So, we are excited that she has joined the Board, and we look forward to many years of working with them..

Alright. Thanks very much. I appreciate the time..

Thanks Jon..

Our next question comes from Connor Siversky with Berenberg. Please proceed..

Good morning, everybody. I appreciate the prepared remarks. Wow Matthew appearance on the call today. First question on acquisitions, I mean, it seems relatively quiet on the essentially - yet some publications, some of the industry journals are suggesting even an acceleration of activity, maybe from private investors.

So, I’m wondering is, from Omega’s perspective, is this a cost of capital issue or are they just not really attractive opportunities in the space or is there a new kind of competitive element floating around out there that may not have been present prior?.

Yes, I mean, I hate to sound like a broken record, but the acquisition environment just remains choppy, I mean, we are still seeing some deals, a fair amount of deals, we are actually seeing activity pick up in the UK, but once again, it is choppy, we continue to partner with our operators to do transactions.

There hasn’t been a lot of distress situations that have presented themselves that haven’t gone in distress prices. There has been distressed real estate out there. But actually, it stood up, I think we are seeing stuff out there. But it is not like there is a whole landslide of new opportunities to start..

Okay, appreciate the color there. And then more of a broader question on operations in general. So, there is some commentary out there that certain operators are looking to take on higher acuity patients. So, I’m wondering at a high level, maybe Megan can jump in here, how that affects the cost structure on a per patient basis.

And then if this dynamic is to turn into a trend across the whole industry, I mean, how could this look, in terms of the rate changes in years to come?.

I mean, there has been a push for higher acuity patients, obviously, right that has been going on for decades. Relatively healthy folks are being treated at home or in assisted living settings or otherwise generally, other settings. So that has been ongoing. I haven’t seen any dramatic change in that as of late.

It has just been a very, very, very slow evolution and we don’t see anything material in that respect..

Okay, thanks for that. And last one from me, I apologize, if I missed the detail here. But on the dividend it seems like the payout ratio remains relatively comfortable even with the degree of lost trend.

So I’m wondering how you guys feel about it at a high level and maybe what are the payout ratio bands you are looking to work in the near future and whether or not you would be willing to let that climb above a 100% for the short-term, if necessary..

Yes. Unfortunately Conner we have never had to deal with the above a 100% from a Board perspective. Several years ago, we got it to the 90% range, and we are comfortable with that because we can look forward and know we are going to get back into a more normalized range as we transitioned properties like Daybreak, we spoke about earlier.

So I think for us, it really comes down to what is the outlook, and a good example would be the operator we are talking about that start pay us in June, part of the issue for them is the payback of the Medicare advanced payments, which has created some liquidity concerns but those assets are really desirable.

So, as we look long-term, we don’t think there will be any meaningful impact on our cash flow streams. So, that is an example of the type of thing we look at and say on a core basis do we need to do anything with the dividend, but we know ultimately we are going to be in good shape. Hopefully that is enough color..

Yes. That is very helpful. I will leave it there. Thank you..

Thank you..

The next question comes from Joshua Dennerlein with Bank of America. Please proceed..

Yes. Good morning everyone. I hope you are doing well. I guess just curious on the operator who came to you in June about having trouble paying the rent.

Just any kind of additional color you can provide on like maybe what was going on operationally, was it unique to that tenant or maybe something within that broader region that we should be watching?.

No. I don’t think there is anything specific. I think the general items that Taylor mentioned, it is stress on occupancy and huge stress on labor, which is compounding the occupancy issue, they can’t staff a facility adequately to provide the clinical needs of the residents. So it is really built from clearly the combination of those two events.

And then they had also seen - through COVID, they have seen a fairly high rate of folks take a deal. So, that compounded the situation. But beyond that, there was nothing else specific..

Okay.

And by taking out, you mean the staff or the residents?.

It is both..

Both. Okay. And then speaking of staff, I guess, just kind of curious, are operators starting to kind of incentivize their employees to get vaccinated that 60% uptakes seems pretty disappointing. And then how are you guys thinking about expiration of the extended UI benefits? I think it rolls off everywhere in September.

Should that be a help at all?.

Yes. I mean, from a vaccination standpoint, the employees, it is still relatively low and our operators have been trying to incentivize them from the beginning. So that is monetary incentivizing, and also trying to educate them with local leaders within the community.

So, we are starting to see some uptick, but I don’t know that we are going to be anything substantial. That said, with the Delta variant, we are hearing that, more staff are interested in taking the vaccine. So, that might help it to pick up a bit as well.

In terms of the unemployment benefits, I think that will be a big help at the unemployment benefits go away, and we can get people back to where - help with the staffing shortages. Definitely..

Okay. Awesome. Thanks for the color..

Your next question comes from Nick Joseph with Citi. Please proceed..

Thanks.

I was hoping to get more color on the potential watch list for any other tenants that are getting close to having issues paying rent?.

So I mean, I don’t think our watch list has changed much. We have got those operators who are under one times coverage, but usually there is a secondary source of repayment associated with those operators. So those are mitigated, the federal stimulus money certainly is running out.

So I think it is a little bit operator, but it is a little bit of geography too in states that are - they have another, huge rebound of the Delta variance, those are the ones that are going to get hit hardest, and the ones that are probably most susceptible, liquidity issues.

So, we are keeping an eye on that, the incidence rates of the viruses followed, the incidence rates in counties or the communities in which they are in so it hasn’t necessarily transferred over into the nursing home side yet.

But we are watching those communities, particularly in Florida, in the south, where we are seeing pretty quick upward trends and the virus, and looking to see whether that, in fact, wasted the nursing homes having to pick up the virus. So those kind of things are what we keep a close eye on..

Thanks, I appreciate it.

And then as you think about the pressures on labor, obviously COVID has kind of wrecked havoc on margins, but when you think about pre-COVID, how much ability was there for labor costs to rise before there would really cause an issue from a margin perspective?.

There is a fair amount of room, Nick. I think the best way to think about it is 2% or 3% wage inflation, would move coverage, a few basis points. Now, we are seeing areas where the wage inflation is far greater than 7% to 8%. So that is, obviously some additional basis points.

But in terms of general coverage at a one three, if we are not going to see a scenario where labor takes them to one or one, one that would be really meaningful changes in labor.

That being said, the big drivers we have talked about the past is getting occupancy because each incremental resident provides pretty substantial cash flow that is really where the focus needs to be.

So operators will find labor and they will pay what the market needs to clear labor and that will impact coverages, but it won’t change the viability of the vast majority operators to pair around..

Thanks..

The next question comes from Daniel Bernstein with Capital One. Please proceed..

Thanks. Good morning. Just wanted to go back to Florida, I mean are there any occupancy trends that you have seen so far with the surge in the COVID virus down there? I mean, you are about six weeks into the Delta virus, I guess surge in Florida, it sounded like cases have gone up a little bit within facilities.

But has there been any kind of occupancy trend impact thus far?.

I don’t think we have seen anything from a state perspective. But certainly, buildings that have smaller outbreaks are going to have occupancy trending down, but we haven’t seen anything yet overall in this scene..

Okay.

And then the labor shortages and wage pressure across the spectrum within the labor pool for facilities, nursing, caretakers, just all levels of labor within the facility or is it concentrated more in the caretaker side or concentrating more on the labor shortage on the nursing side? Just trying to understand whether, I guess the nuance of where the labor issues are..

You know it is interesting. We have had operators point out in particular, nursing assistants and dietary staff. So, do they tend to point out that level of worker where it is $14 or $15 an hour wage rates versus nursing necessarily and I think that is one of the big pressure points right now.

Workers who have mobility into other jobs, non-healthcare type jobs..

Okay. And then, going back to the tenant that is not paying rent.

Is that tenant within the pool that turn to EBITDAR is that in addition to the disclosure you have in your supplemental?.

It would be in addition to what is in the supplemental..

Okay. Okay. Just wanted to make sure about that.

And one last question for me here, just on the acquisition side is there a - I just wanted to understand the comments that there is I guess not a landslide of opportunities? Is it more of a pricing issue where you have - there is this distressed operators that the pricing of the real estate is not really distressed at this point? I just want to understand where the disconnect there is between, the stress we have seen in the industry versus maybe consolidation opportunities that you would think would arise from this kind of distress situation..

I think some bargain of ours is still very aggressive in terms of picking up real estate, so they have been willing to pay up for it despite the fact that the operations might be distressed..

Okay. Alright I will hop off. Thanks..

Our next question comes from Richard Anderson with SMBC Nikko. Please proceed..

Thanks. Good morning team. So on the, back to the tenant that gave you notice they did.

Is there a - can you quantify a kind of a watch list of percentage of revenue that you are looking at? You said 3% here, but is there a number out there that you are kind of keeping an eye on that you can share?.

Not specifically now. I mean, since the virus came out, we have been in constant contact with virtually all of our operators. I think that is the best way to keep my eye on is just with communication with our operators, and we have done that and continue to do that.

So I think we look at everybody and we have to sort of gauge the level of risk of each and every operator and what their challenges are..

I guess, what is the over under on this time next quarter, you will have another - see the high probability or nothing is jumping out at you right now?.

I think part of the answer to that question is, we have been waiting on the last tranche of federal money. Some of it is going to be timing related to that. Remember, there is $24.5 billion, Megan mentioned in her prepared comments.

And we heard, I don’t know if this came from , that there is another 20 billion - and another $20 billion has been pushed back into that fund, principally from a hospital. So, there might be $44.5 billion dollars to be distributed, and it is going to be unique space. So, that happens in a reasonably timely way.

I think the handicap, any other is impossible. And another good example would be Florida, there has been a big push in the lobby side we get some money released in the state of Florida. And if that happens, it dials down the risk that we see a lot. The last comment I would make, and again, I’m just trying to get as much color as I can.

We haven’t had the type of conversations with any operator that we have with the one that we talked to at June, as of now. So that is the early indicator on from a watch list perspective, for us that hasn’t happened.

If there is no money forthcoming for the government, or it is not timely, sooner or later, the occupancy rebound is going - isn’t going to be quick enough to prevent some other liquidity issues or what has happened- tackle them when they arise..

Okay. So, what maybe a broader question, anything about what you have been through, that is informing you about the future of OHI, I know you have spent some time expanding into senior housing, with help peaks deal.

But do you do you see yourself as a more diversified story in the years to come and not hang your hat as much as you are in skilled nursing or do sort of continue the course and muscle through whatever has to come?.

Well, the franchise of operators that are our partners are fantastic and we will continue to deploy capital there. But the trend you have seen in terms of senior housing and other assets, now about a fifth of the portfolio, I think that continues.

And part of that is just supporting the operators in those property types, whether it is Maplewood or our UK operators or otherwise, I think you will see that percentage climb overtime, just as it has over the last five-years..

Yes, okay. And then lastly, for me, I think Steve said Maplewood, specifically occupancy, dropped to 80 year ago in May and is now at 87.

Did I get that right?.

Yes, correct..

That is really good. Right.

I mean, is there anything about that 87% number you are seeing today that is apples to oranges to what other people reporting or is there something special going on that you are kind of already back into the high 80s occupancy wise?.

Sure. The one thing that we know to be the case although it may not account for all of the difference between Maplewood and other operators. As Maplewood made a concerted effort never to let off the marketing investment during the COVID pandemic and still isn’t. And I think in certain local markets, they were rewarded for that..

Okay. Great. Well, thanks very much. I appreciate it..

. The next question comes from the Lukas Hartwich with Green Street Advisors. Please proceed..

Good morning.

I suppose inflation fear are receding, but on lease escalators I think most of those are fixed, but are there any inflation protections built in or are they purely fixed for the length that leased?.

Hey Lukas. About 97%, 98% of our leases are fixed escalators..

Okay.

And then can you provide some color on the $3.5 million credit loss provision during the quarter?.

Yes. So, as you know there are a lot of components that go into the fee or credit loss component. So, we have to go look at each one of our loans and you are required regardless that you have to have some reserves on those loans.

So just kind of the normal - when I look at kind of normal occurrence, we are going to have something every quarter from a loss standpoint..

Got it. All my other questions are answered. Thank you..

Thank you..

At this time, we are showing no further questioners in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Taylor Pickett for any closing remarks..

Thank you all for joining us this morning. As always we will be available for any thoughts you may have. Good day..

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect..