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Omega Healthcare Investors Inc
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Good morning and welcome to the Fourth Quarter 2020 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now 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.
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 restructuring, 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 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 fourth quarter 2020 earnings conference call. Today, I will discuss the pandemic and the related government response and support our fourth quarter financial results, the vaccine rollout, and our new Brookdale relationship. I again want to thank our operating partners and their staff who have cared for the tens of thousands of residents within our facilities. I would also like to recognize and thank the federal government and the states for their support of the skilled nursing and assisted living communities. The allocation and distribution of additional government funding along with the communication and evolution of clinical protocols has been critical in protecting and saving lives as we combat this unprecedented deadly pandemic.
Continued federal and state government support will be critical for the skilled nursing and assisted living care settings. The latest round of CARES Act funding targeted operators that have been disproportionately impacted by the pandemic. We believe at least 23 billion of CARES Act funding under the Provider Relief Fund remains unallocated. We are hopeful that new legislation will add to Provider Relief Fund, and hopefully will support the industry through its 2021 recovery.
Turning to our financial results, we’re very pleased with our fourth quarter results. Our adjusted FFO of $0.81 per share, and our funds available for distribution of $0.77 per share allow us to maintain our quarterly dividend of $.67 per share. The payout ratio is 83% of adjusted FFO, and 87% of funds available for distribution. Additionally, for the fourth quarter, and in January, we collected virtually all of our contractual rents.
We continue to gather vaccine rollout data from our operators and can report the following: As of January 31, based on 92% of our facilities reporting in 95% of facilities have conducted or are scheduled within the next week for first dose clinics; The vaccination rate for residents is approximately 69%; The vaccination rate for staff is approximately 36%. For most facilities, the second dose clinic which occurs 21 days after the first dose will also incorporate a new day of first doses for those residents or staff who are not available or who were not prepared for the vaccination during the first round clinic.
Turning to Brookdale, we were very pleased to have established a relationship with Brookdale via the senior housing facilities and related master lease that we've acquired from Healthpeak. We believe that Brookdale is exceptionally well equipped to address the current COVID-19 environment and to prosper as we emerge from the pandemic.
They have an excellent leadership team, substantial liquidity to sustain and grow their operations, low rate long-dated secured debt tied to their own two assets, and valuable integrated home health and hospice companies. We look forward to working with the Brookdale team, and possibly identifying new opportunities where we might partner in the future.
I will now turn the call over to Bob.
Thanks Taylor, and good morning. I'd like to start by thanking our operators and their employees for their continued heroic efforts during this pandemic, as they were providing a central care to a portion of our elderly population. Turning to our financials for the fourth quarter, our NAREIT FFO on a diluted basis was $173 million or $0.73 per share for the quarter, as compared to $176 million, or $0.77 per diluted share for the fourth quarter of 2019.
Our adjusted FFO was $192 million or $0.81 per share for the quarter and exclude 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 fourth quarter was approximately $264 million before adjusting for the non-recurring write-down of straight line receivables, as well as other non-recurring favorable revenue items.
Revenue for the quarter included approximately $12 million of non-cash revenue. We collected over 99% of our contractual rent, mortgage, and interest payments for the fourth quarter and for January as well, excluding of course, rental payments due from daybreak, which is under a forbearance agreement and has not been making payments.
Our G&A expense was $10.4 million for the fourth quarter of 2020 in-line with our estimated quarterly G&A expense of between $9.5 million and $10.5 million. Interest expense for the quarter was $56 million, with the $4 million increase over the third quarter of 2020, primarily resulting from our October issuance of $700 million of 3.375% Senior Notes due February 2031.
Our note issuance was leveraged neutral as proceeds were used to repay LIBOR based borrowings, some of which were hedged. As a result of the repayments, we terminated $225 million of LIBOR based swaps and recorded approximately $12 million in early extinguishment of debt.
Our balance sheet remains strong. Throughout 2020, we continue to take steps to improve our liquidity. Our October bond issuance repaid $683 million of short-term LIBOR based borrowings. At December 31, 2020, we had only £74.0 million borrowings, equivalent to $101 million in U.S. borrowings outstanding on our $1.25 billion credit facility and had approximately $163 million in cash and cash equivalents. We have no bond maturities until August 2023.
In March 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of approximately 0.87%. These swaps expire in 2024, and provide us with significant cost certainty when we refinanced our 2023 bond maturity. In the fourth quarter, we issued 4.2 million shares of common stock through our ATM program, generating $151 million in net cash proceeds. But we believe our actions today provide us with flexibility to weather a potential prolonged impact of COVID-19 on our business.
It also provides significant liquidity to fund potential acquisitions. In 2021, we will continue to evaluate any additional steps that may be necessary to maintain adequate liquidity. At December 31, approximately 95% of our $5.2 billion in debt was fixed. And our funded debt to adjusted analyze EBITDA was 5 times; our fixed charge coverage ratio was 4.3 times.
When adjusting to include a full quarter of contractual revenue for new investments completed during the quarter, as well as eliminating revenue related to assets sold during the quarter, our pro forma leverage would be roughly 4.99 times. It's important to note, we have lowered our leverage five consecutive quarters with the goal of maintaining our leverage at less than 5 times.
As stated in our press release, due to the continued uncertainty related to the COVID-19 pandemic, its impact on the financial performance of our operators and the extent of future necessary government support to our operators we will not be providing 2021 earnings guidance.
I will now turn the call over to Dan.
Thanks Bob and good morning everyone. As of December 31, 2020 Omega had an operating asset portfolio of 949 facilities with over 95,000 operating beds. These facilities were spread across 69 third party operators and located within 39 States in the United Kingdom. Trailing 12 months operator EBITDARM and EBITDA coverage for our core portfolio increased during the third quarter of 2020 to 1.87 times and 1.51 times respectively, versus 1.84 times and 1.48 times respectively for the trailing 12-month period ended June 30, 2020.
These numbers were negatively impacted by a number of external factors as a direct result of COVID-19, including a significant drop in patient census, and a dramatic spike in operating expenses, particularly labor costs, and Personal Protective Equipment or PPE. These negative results were more than offset in the second and third quarters by the positive impact of federal stimulus funds, which were distributed in accordance with the CARES Act.
During the third quarter, our operators cumulatively recorded approximately $102 million in federal stimulus funds as compared to approximately $175 million recorded during the second quarter. Trailing 12-month operator EBITDARM and EBITDA coverage would have decreased during the third quarter of 2020 to 1.53 times and 1.18 times respectively, as compared to 1.61 times and 1.26 times respectively, for the second quarter when excluding the benefit of any federal stimulus funds.
EBITDA coverage for the standalone quarter ended September 30, 2020 for our core portfolio was 1.44 times, including federal stimulus funds, and 0.97 times, excluding the $102 million of federal stimulus funds versus 1.87 times and 1.05 times with and without the $175 million in federal stimulus funds, respectively for the second quarter.
Overall operator performance continued to be significantly affected in the third and fourth quarters of 2020, due to the ongoing impact of COVID-19, while the third quarter and the start of the fourth quarter of 2020 saw moderating of new COVID cases. The spike in outbreaks reported nationwide during the holiday season did not spare nursing home residents and employees [late] in the fourth quarter.
Cumulative occupancy percentage for our core portfolio were at a pre-COVID rate of 84% in January of 2020, flattened out to around 75% throughout the fall months, and subsequently dropped to 72.9% in December of 2020. Based upon what Omega has received in terms of occupancy reporting for January to date, occupancy has continued to decline slightly, averaging approximately 72.1%.
We are cautiously optimistic that the rollout of vaccines, which began in late December of 2020 and is continued in earnest throughout January 2021, will provide an important catalyst for improving occupancy statistics, as infection rates decline and visitation restrictions begin to ease.
In addition to COVID’s negative effect on occupancy, the virus has also caused a significant spike in operating expenses, particularly labor costs and PPE. Per patient day operating expenses for core portfolio, increased approximately $40 from pre-COVID levels in January 2020 to November 2020, the latest stats available.
Turning to new investments. On November 1, 2020, Omega completed a $78 million purchase lease transaction for seven skilled nursing facilities in Virginia. The facilities were added to an existing operator’s master lease for an initial cash yield of 9.5% with 2% annual escalators. New investments for the year ended December 31, 2020 totaled approximately $260 million, including $113 million in capital expenditures.
Turning to subsequent events. As mentioned by Taylor, on January 20, 2021 Omega closed on the purchase of 24 Senior Housing Facilities from Healthpeak for $510 million. The acquisition included the assumption of an in-place master lease with Brookdale Senior Living, the leading operator of senior living communities, throughout the United States.
The portfolio primarily consists of assisted living, independent living, and memory care facilities, with a total of 2,552 units located across 11 states. The facilities will generate approximately $43.5 million in contractual 2021 cash rent with annual escalators up 2.4%.
Turning to dispositions. During the fourth quarter of 2020, Omega divested 16 facilities for total proceeds of $64 million. For the year ended December 31, 2020, Omega strategically divested a total of 35 facilities for $181 million.
Last, but certainly not least, I would once again like to recognize and applaud our operators tireless, selfless efforts, particularly those employees on the frontline. Thank you for your unwavering commitment to the health and welfare of our nation's most frail and vulnerable elderly population.
I will now turn the call over to Megan.
Thanks, Dan and good morning, everyone. Since our last earnings call, the $175 billion Provider Relief Fund was increased by $3 billion as a result of the $900 billion stimulus package signed in December 2020. Of that fund, approximately $23 billion remains unallocated.
In terms of previously allocated funds still in the process of being paid out, as previously mentioned, on July 22, a Medicare certified nursing home targeted infection control fund of $5 billion was announced. $2.5 billion was paid out in August, and an additional $2 billion was set up as a quality incentive payment program with payments based on a facility's ability to maintain a rate of infection below the county infection rate, and a death rate below a national performance threshold for nursing home residents.
Payments were made based on monthly performance from September through December. The September payout was made in October at $330 million, with the October payout being made in December at 530 million, and the November payout just starting to go out last week.
With respect to the Phase 2 general distribution announced in September, due to the fact that HHS had previously tracked assisted living facilities, a lengthy tax identification process delayed the payout for many assisted living providers to December and early January. This allocation was an application process for up to 2% of 2019 patient revenues from Medicaid, Children's Health Insurance Program, and assisted living providers.
The $20 billion Phase 3 general distribution announced in October was increased to 24.5 billion once all applications were received and reviewed. Available to all healthcare providers previously eligible for payouts, both SNFs and ALFs were able to apply. $10 billion was paid out in December, but the remainder is expected to be paid out within the coming weeks.
Payouts are based on the change in net operating income related to patient care for the first half of 2020, as compared to the first half of 2019, with a stated payout of 88%. That said, all previous federal stimulus money received offset these numbers, bringing that percentage down substantially for many.
In addition to financial support, with COVID cases on the rise in the latter part of the year, and the corresponding increased testing requirements, the federal government's efforts to provide more cost effective testing capabilities through the distribution of rapid antigen test has been critical.
Supply is provided by the government coupled with easier and cheaper access to testing supply has provided for quicker turnaround of test results and therefore the ability to respond timely or to outbreaks. It cannot be stressed enough how crucial the government support thus far has been to the long-term care industry during this turbulent time.
However, even post-vaccine rollout, the effects of this pandemic will be long lasting. We are hopeful that the new administration will recognize the urgency of this matter and will quickly expand on support efforts to this vital industry.
I will now turn the call over to Steven.
Thanks, Megan. And thanks to everyone on the line today for joining. In conjunction with Maplewood Senior Living we have completed work on our ALF Memory Care high-rise at Second Avenue in 93rd Street in Manhattan. The opening of the project is pending licensure by the New York State Department of Health.
We are in ongoing communication with the [DOH] and understand that while they are conducting licensure surveys, and it is reasonable to expect our shortly. The challenges of the ongoing pandemic is understandably forcing a reallocation of resources. The final project cost is expected to be approximately $310 million.
The COVID-19 pandemic poses certain challenges unique to senior housing operators, including increased costs the challenges of managing COVID positive patients and meaningful practical limitations on admissions. While they very much appreciate the help they have received private pay senior housing operators have not seen the level of government support provided to other areas of senior care.
We saw challenges to our senior housing occupancy throughout the third quarter with variations tied to when and where COVID outbreaks were encountered. However, we have seen evidence of stabilization and strengthening of census in markets. By example, our Maplewood portfolio, which is concentrated in the early affected Metro New York and Boston markets saw meaningful census erosion early in the pandemic, with second quarter census hitting a low point of 80.4% in early June.
That said, their portfolio occupancy had returned to 84.5% at the end of August and increased further to 85.6% in the month of November. We find this resiliency in occupancy to be encouraging, but still have a way to go before the pandemic driven top and bottom line risk to our ALF operators is behind us. Including the land and CIP at the end of the fourth quarter, Omega senior housing portfolio totaled $1.6 billion of investment on our balance sheet. This total does not include our recent Brookdale investment, which closed after year-end.
All of our senior housing assets are in triple-net master leases. Excluding our 24 recently acquired Brookdale assets, our overall senior housing investment comprises 129 assisted living, independent living, and memory care assets in the U.S. and UK. As expected, this portfolio on a standalone basis had its trailing 12 months EBITDA lease coverage fall 4 basis points to 1.12 times in the third quarter of 2020.
With COVID outbreaks affecting different markets at different times, it is reasonable to think that coverage may see additional downward pressure during the course of the pandemic before we see a rebound. While we remain constructive about the prospects of senior housing, the COVID-19 outbreak has warranted a far more selective approach to ground up development.
While we make further progress on our existing ongoing developments, we continue to work with our operators on strategic reinvestments in our existing assets. We invested 19.4 million in the fourth quarter in new construction and strategic reinvestment. $12.8 million of this investment is predominantly rated to our active construction projects. The remaining $6.6 million of this investment was related to our ongoing portfolio CapEx reinvestment program.
I will now open the call up for questions.
[Operator Instructions] The first question comes from Conner Siversky with Berenberg. Please go ahead.
Good morning, everybody and thank you very much for having me on the call. Just to start curious about Brookdale, as it was the subject of some lease revisions with some of your peers this year. So, anecdotally, I'm just wondering how do those conversations progress with the operator as you near closing. Second to that, what does rent coverage look like currently? And then what kind of occupancy rebound, might you be expecting for this portfolio as we look forward the next couple of years?
So, most of our conversations took place, obviously with the seller Healthpeak concerning the Brookdale portfolio. We did have an opportunity to have a lengthy conference call with the management team, but we definitely became comfortable and are comfortable with the management team and the prospects for this portfolio going forward. The coverage ratios were, you know, looking at them as we look at our overall portfolio on a trailing 12-month basis.
Through September 30, the coverage was right around one-to-one with federal stimulus, and about 0.9, without as – once again, trailing 12-months September 30. We do expect that to improve the occupancy has taken a hit due to COVID. We expect that to turn around. So, I think in the latter part of 2021, we would think that this portfolio would rebound to pre-COVID performance. That's a guess at this point, but that's the sort of expectations.
Okay, thank you… go ahead.
I just want to make sure I covered everything Conner.
Okay, thanks for that. That's helpful in color. And then just double checking on pricing. So, 43 million in rents over 510 million acquisition policies about 8.5%, are there any sort of CapEx expectations that you're aware of for this portfolio?
Yeah, as part of the transaction, there was a $30 million capital improvement line, which, obviously we will spend it. It runs through 2025. So yeah, we expect to put that money to work and improve upon these physical plants.
Okay. And then one more from me, just anecdotally, I'm thinking about a read across from one of the hospital operators that reported earlier last week, seeing that admission have ticked up meaningfully for in-patient procedures. Now, I'm just wondering if there's any commentary from your operators in regards to referrals to SNFs, if that kind of dynamic is improving somewhat as we approach the end of the year?
Conner, it’s Taylor Pickett. I think it's just a little too early to talk about trends there, but obviously that's a good one. We haven't heard from our operators, you know any uptick in occupancy as a result of that, but I would be surprised if a month or two from now we don't know that. One quick thing I'd like to add, just to be clear on returns on the Brookdale portfolio, the $30 million of committed CapEx has a 7% yield attached to it.
Okay, great. That's all from me. [I’ll leave the floor]. Thank you.
Thank you.
The next question comes from Aaron Hecht with JMP Securities. Please go ahead.
Good morning guys. Thanks for taking my questions. Wondering on the Brookdale deal, if they offered you the opportunity to transition your idea, would you take that or would you have to think about it? Where would you stand on that opportunity if it was presented?
So, as you know, we don't have any idea in our portfolio. And it's a model that we're not necessarily uncomfortable with, but I think from our perspective, the triple net structure for this portfolio is the right one. So, I don't think you'll see us looking at any type of conversion there.
Got you. And what made this deal particularly interesting or what made you excited about it, given, you know, the operating difficulties that everyone's having? And you know, that, you know, coverage was around one times with, you know, occupancy being pressured in the fourth quarter? Is it just a recovery play on new normal? Is there something else within the portfolio that you saw is attractive? Any sort of insight on that would be helpful?
Sure. So, you hit on a couple of points, long-term, meaning two, three years out, we think this portfolio is going to do well, very well. And when you think about buying it, at an 8.5% yield, that's pretty favorable pricing that reflects any perceived risk long-term, which, frankly, we don't see. We think his portfolio has lots of opportunity to grow cash flow. It has been successful in the past. I think the CapEx will be helpful. And then on the short-term side of it, call that the next couple of years, Brookdale has a great balance sheet, ton of liquidity. They're receiving government support. And the facility portfolio that we've acquired has held up well through the pandemic. So, I think if you put those two things together, and the strategy from our perspective, is completely rational in terms of how you allocate capital.
Right. And then just bigger picture for Omega, does this deal kind of [mark a point] where there's a shift at all on your preference for senior housing over skilled nursing or did you just like the package too much to pass on it? Is there a change going on there fundamentally?
You know, the interesting thing is, we had very little senior housing in our portfolio seven years ago, and we've grown that side of the portfolio every year since then, and we continue to look. So, we haven't had a goal of becoming 50/50, but you know, we're now a little bit over 20% senior housing. And I think that just comes down to the model of finding the right folks to partner with and finding opportunities where our cost of capital isn't, doesn't make a deal dilutive, and we'll continue to pursue those. So, no shift in overall strategy, just a continuation of looking at that segment of the business and growing it with partners that that we want to grow within the future.
Appreciate that, guys. Nice quarter. I'll jump back in the queue.
Thank you.
The next question comes from Jonathan Hughes with Raymond James. Please go ahead.
Hey, good morning. I was hoping, you could walk us through the decision not to give guidance. You've already collected virtually all January rents. The Brookdale deal was already completed in finance, and we've had other sectors like office and apartments that are much more volatile, give first quarter and even full year guidance. So, I know your operators are dependent upon government support, but that's somewhat been the case for 20 years. So, I guess just – could you give us some more thoughts and color on what's holding you back from providing any guidance?
I think it's just an abundance of caution and what could be a highly volatile environment. And, you know, when you think about the government support in this business, there are certain operators that need more support soon. And if they don't get it in the near-term, they will have issues. And then I think the other thing that's important, Jonathan is, we still have for those operators that took advanced Medicare draw-downs, that payback starts April 1, and that payback is just an offset against your Medicare receipts otherwise.
So, you know, those two elements of volatility that, you know, we're very hopeful that the new administration acts quickly as it relates to those two issues. But if they don't, we could, we could see some issues before the end of the quarter. And so we're just very, very cautious about guidance. And frankly, it's, if you think about it, with the steady portfolio, and our earnings in Q4, Q1 isn't going to differ much if we collect all of our rest. So, I'm not sure that it's actually all that helpful when it's all said and done.
Okay. I guess, kind of bringing up the operators that maybe keep you up at night, I know we've got a couple of large ones that are on cash basis. Did you get any updates from operators where the auditors force them to kind of get the going concern language and flip from and would maybe lead you to flip from accrual to cash basis accounting? Are there any operators on the fringe?
Hey, Jonathan it’s Bob. So, during the quarter, we did move one additional operator who had a going concern opinion from straight line to a cash basis, immaterial [about 0.3%] of our annualized revenue. And you know, we did write off just [600,000] of straight line revenue related to that operator.
Okay, that's helpful. And then just one more for me then, you know, as we look at underwriting SNFs, you look at underwriting SNFs today, what's the most difficult thing there? Is it just lack of operators willing to take new buildings? Is it lack of sizeable portfolios, overall uncertainty with, you know, that ability to pay rent, you know given there's concerns and uncertainty about the administration.
You know, the three night stay rule has helped, obviously, support operators, but it's made underwriting and a normalized environment a little more difficult. And I know the Brookdale portfolio was a unique opportunity with someone you've bought from in the past. But just curious, what's the biggest hindrance to getting SNF acquisitions done in this environment?
Well, I think for starters, there's just not a lot of deals out there in the market. We've seen some and – but not a lot, and they've been pretty small trades. The other component of it is the ability to underwrite in this particular environment, right. You've got, you know, you have to add back stimulus, you've got occupancies that have gone down, you know, all the things that we've talked about. Operating expenses have gone up. So, you really have to look at either pre-COVID operating performance or projections going into 2021, and really now in just 22.
So, it makes the underwriting quite a bit more difficult. And also, anytime we're, you know, once you do get into the underwriting, and you have to go the next step, which is, you know, looking at your real estate, and having third party reports. That's a challenge. M&A type of third parties go and visit facilities and go through facilities, you know, with visitation rights of such as they are right now.
So, you know, underwriting SNFs in this market is challenging. I think the biggest thing is, just the financial underwriting of operating performance in 2020. You really have to do a lot of deep digging into the individual facility and the markets and where they were before COVID where we expect them to be post-COVID. So, it's just more challenging, I think. But, you know, we're still obviously looking at a lot of deals. We still continue looking at deals, and we'll still continuing to underwrite deals. Hopefully that picks up as we get a little bit more clarity on where occupancy rates are going to go.
Alright, thanks for the time.
Thanks, Jon.
The next question comes from Daniel Bernstein with Capital One. Please go ahead.
Hi, good morning. Just a follow up question there. How would you characterize the general state of distressed opportunities for maybe seniors versus skilled nursing? You just made some comments there, it's hard to underwrite, and there's not that many deals out there. But are you anticipating more distressed opportunities in seniors and skilled as the work goes on? Is it, you know, are you hearing some rumblings out there?
Really not as much as you might think, given the environment we're in, and I attribute a lot of that to substantial government support that we've seen today and are now seeing in the assisted living industry as well. So, will we see distress? I think at some point, we might Dan, but I don't think it's Q1 or Q2, I think it's probably further out in the year.
Okay. And I guess would you say it's probably more on the senior side than skilled nursing side, because, you made the acquisition of Brookdale assets, but then there's, you know, you had some comments there on the, you know, why you're not giving guidance, and it kind of gives me a sense that maybe there's some – yeah, maybe the [stress], always kind of thought maybe the distress on senior housing would lead for more opportunities there. But I guess I'm getting a little bit of a mixed message, maybe there'll be stress everywhere. Just trying to understand maybe where that tilt might be?
Yeah, I think it just comes down to government support. We still have – we still – the government still hasn’t completed a payout of the latest round of $24.5 billion. There's $14.5 billion that hasn't been allocated, and a good chunk of that is likely to go to assisted living providers. So, I think, you know, it's just the unknown of where does the government support fall? And then if it doesn't fall [sufficiently], how much distress comes out of that? I just don't think we see in Q1, for sure.
Okay. And then the other question I was thinking about here was the Ohio Governor was proposing to buy back, but I guess, [50 million] of licenses or beds to produce supply, given how low occupancy has gone in SNF space? And I don't know if you looked at that, or other governors considering that, but, you know, what does that do? I mean, if you reduced the supply out there, because I know you've put out some presentation showing, if you've got 5 or 10 years, it could actually be not enough supply for the demographics. So, you know, I don't know if you have any thoughts or you talked to operators about the possibility of selling beds back to the state?
Two comments around that. One is, beds in Ohio have traded for many, many years. You'll see beds move around county lines and where there's demand. So, there's been a market for beds in Ohio and with $10,000 a bed price tag, I think they were talking about is – a recent market trade that we've seen over a while period of time. But I will point out the one other thing that was mentioned in that article. And it's – the reality is, if Ohio were to do that, they are going to be very careful in terms of geographies, because there are counties where there's not sufficient supply or there are no excess beds.
And that's going to apply across all different geographies, and really isn't a new story. You think about Texas with 70% occupancy and rural Texas in many places is even lower. So, I don't know that that's particularly meaningful. To your point, you know you those out of service. It's very expensive and tough to put them back in service. So, I don't know that. We'll see that as a trend.
Okay. And then one last question, you know, you've been doing a great job of de-leveraging the balance sheet and improving the balance sheet. I guess the goal is to be sub-five, but is there a kind of a bottom on that goal? I mean, is it 4.5, is it 4.0? Just kind of trying to get a sense of where you ultimately really want to go on leverage?
Hey, Dan. We've always publicly stated to be between 4 or 5 times. The sweet spot, probably is about 4.75 times in that range. We don't get any credit for – at one time, we were below 4 times and we get no credit for that. So, and I think running with a risk profile is 4.75 in that range, plus or minus a little bit is the sweet spot.
Okay. I'll hop off. I appreciate the time guys. Good quarter.
Thanks Dan.
The next question comes from Joshua Dennerlein with Bank of America. Please go ahead.
Yeah. Good morning, guys. Just kind of curious on, how the Maplewood portfolio is weathering the pandemic, and maybe if there's any discussions around the [Upper East Side building] since it's been about a year, since they started paying rent on that, but it's still not open?
Sure. Steven, do you want to take that?
Yeah, sure. So, from our overall, what I call Upper East Side portfolio standpoint, census is creeping upward. As I mentioned, in my prepared remarks, and even through January, it's over 85%. Maplewood has done a particularly strong job managing census and has marketed through the pandemic. Obviously has cost pressures like everybody else does. Upper East Side, we've got reason to believe, from the communications with the Department of Health in State that it could be a couple of weeks before they are green lighting us.
I’m somewhat hesitant to be overly optimistic on timing. Well, that's probably the best case when they do final walkthrough surveys. If everything goes well, I think great. But there could always be, you know, like safety matter, too, that has to be remedied, which could delay a week or so. So, it's imminent. And hopefully, we will be talking about how many folks are living in the building come a quarter from now, if everything goes according to plan.
Yeah, thanks. It's a great building. I remember looking at it over a year ago. So, [indiscernible] before everything else was answered, Thanks guys.
Thank you.
The next question comes from Nick Yulico with Scotiabank. Please go ahead.
Thanks. Good morning, everyone. I guess going back to the cash basis tenants, can you just remind us at this point, you know what percentage of revenue is on a cash basis? And I guess if we relate that back to Page 6 in the supplement where you guys give the breakdown and coverage, is that also – are those tenants also then reflected in this page? Are they not reflected in this page?
Hey Nick, it’s Bob. So, on an annualized basis around 14% of our contractual would be on a cash basis. So, that's one additional operator since last quarter, but the percentage stayed about the same as I said, because it was only 0.3% was the new operator.
I apologize. Did you say 14%?
Correct.
Okay. And then as we relate this back to Page 6, right, and we see the, you know, the buckets of coverage, where, you know, certain operators have lower coverage, are those, you know is that 14% of the company reflected on this page or any of those get removed?
No. They're all reflected.
Okay, got it. Alright, got it. So, I guess, I mean, maybe if you can just kind of square away with us because, you know, I know you did talk about in relation to the guidance, you know, some worries about, you know, the reason why you didn't give guidance is because it could be, you know, maybe some operators having some problems if they – if you don't get additional government stimulus, but if you're already, I guess, if we look at this page, right. Page 6 is supplemental, where you have the two buckets that have lower coverage adds up to about 10% of the company. If you're saying 14% of that of tenants are already on a cash basis that would be more than these two buckets.
I'm just trying to understand if you face incremental pressure from tenants, you know, have you already – are you already accounting for that by virtue of the fact that those tenants are on a cash basis or is there some additional impact that we should think about that could happen?
Yes, so – and I'll have Dan jump in if he has any thoughts about this, but the interesting thing as you look at Genesis is one of the big tenants that went on a cash basis. We’re just a portion of the Genesis world. And our portfolio does reasonably well. So, as you think about coverage’s in those buckets, Genesis isn't in those lower two buckets. And I think the GMO might be the same. Dan is that right?
Correct.
So, the cash basis decision was driven by the accounting rules, where the accountants are looking forward and saying, but for government assistance, the next year could be troublesome for these operators. And that's a fact. They just happen to have audits where those are where the opinions come out. So, I don't know if that ties together where you're headed, Nick, but I mean…
There's not a correlation between those operators that got put on a cash basis in the low coverage bucket, it’s just not.
And Nick, just one other point there. Genesis and the GMO are 11% of the 14%. Those were the [bulk up].
Got it. Okay. And so, maybe the other way, yes this is, you know, right. So, obviously, moving tenants to cash basis, there's a straight line rent impact. But can you just remind us where, you know, for the tenants that are on a cash basis right now, where they are on, you know, payment on a cash basis, versus their contractual rents on just sort of a rough feel for that? Because that would obviously be the other incremental pressure I guess you could face, is that you just have lower cash collections on those things.
So, as we stated, we've been collecting over 99% of our contractual revenue each quarter in 2020. And if you look at our AR, you know, $10 million of contractual AR on our books, but that's really all mortgage interest, which is in a rare, so, less than I think it's only a couple hundred grand in total. It is true, normal AR.
Okay, got it. That's helpful. Just one other clarification question, when you're talking about the Brookdale coverage earlier, was that EBITDAR or EBITDARM coverage?
EBITDAR coverage.
Okay. All right. Thanks, everyone.
Thanks Nick.
The next question comes from Omotayo Okusanya with Mizuho. Please go ahead.
Yes, good morning, everyone. Two questions to me. First one around, Brookdale, again, appreciate all the color you've given. Could you talk about, you know the underwriting of the portfolio and kind of what kind of worst case scenario could, kind of occur that would still ensure that this transaction created value for shareholders?
Well I mean, we underwrote the portfolio obviously, on a pre-COVID operating performance basis. We looked at how they had done obviously throughout 202 and they had actually fared quite a bit better than the comparables. And of course, we look to 2021 and beyond. And you know, what it would take from a sensitivity standpoint for the occupancy what they would need to go up to bring this thing back to, you know, coverage is more consistent with our overall portfolio, and it wasn't material.
So, there wasn't a whole, we didn't feel there was a whole lot of downside to this acquisition. We felt that looking out 2021, and particularly into 2022 that there was quite a bit of upside, you throw on the fact that we've, as we mentioned, we've $30 million of capital committed, which we hope to put to work in the short-term, which will hopefully translate into higher senses.
So, again just kind of playing devil's advocate here, Dan, if we did have this scenario where all these variants become the dominant variants, the vaccine is not very good, versus, you know, all these variants, we kind of go back into sort of the lockdown, occupancies keep dropping. You know, you don't think there's any kind of downside risk at that point? Just kind of given the rent coverage is below one-time at this current moment.
Well, you know, the one thing to bear in mind Tayo is it's a, we've got Brookdale credit, and so I think, at that point, you have to look to their balance sheet, which has huge amount of liquidity, and a lot of long dated low rate, debt. They own a portfolio. So when we did our work from a credit perspective, and thinking about, I think it's highly unlikely, but you know, that downside scenario, there's very little likelihood that Brookdale, if Brookdale doesn't survive through this, then there's going to be a lot of other damage in the industry enormous amounts. I think they're really well suited. And that corporate guarantee is sitting behind all this is extremely valuable.
Got you. Okay, that’s helpful. Second question, if you don't mind, Megan comments earlier on just about what was going on from a regulatory perspective, what's comfortable, it's clear with the new administration with a lot of uncertainty. Could you just talk a little bit about, again, your lobbying, and exactly what they're trying to do and what they're trying to achieve on a going forward basis? And how they kind of see things possibly shaking out in regards to future support or further support for the skilled nursing and senior housing industry?
Megan, do you want to address that?
Sure. I mean, I think, you know, the American Health Care Association is still, you know, running the same agenda that they did with the prior administration, but it's really too soon to tell what's going to happen there only because, you know, folks are new into HHS. Provider Relief Fund folks haven't been picked yet. And so, they're still, you know, lining everything up. But it's a little too soon to tell, but they'll still continue pushing the agenda for the long-term care industry.
Got it. Anything in regards to, you know, a lot of the chatter we're hearing about home health, you know, like this administration, kind of, you know, preferring home health as the preferred post acute care setting. So, any of that stuff kind of come up, and what do you kind of hearing along those lines?
I mean, on the home health side, again, I think, you know, you've got a lot of folks going into home health who are, you know, COVID recovery patients. So, as COVID goes away, it'll just be something that we have to watch to see if there's, you know, continued increase there, I think it'll likely move back into the SNF industry.
Gotcha. All right. Thank you.
The next question comes from Nick Joseph with Citi. Please go ahead.
Hey, it’s Michael Bilerman here with Nick. So, I just want to come back on the Brookdale transaction, the 43 million of rents. What does that represent? Is that a re-straight lining of GAAP under for the next seven years? Is that current cash and if it’s current cash, what are the bumps that are in those leases between now and the end of the lease-term? And maybe you can talk about what the renewal options are that Brookdale has, at the end of the lease term?
So, the $43.5 million is the 2021 contractual rent. It's not straight line, it's cash. And it escalates through the terminal lease by [Technical Difficulty].
How much was that increase? Sorry, what was that increase?
2.4% per annum.
Okay.
And then Brookdale has two 10 year renewal options.
And what are those renewal options based on? Is that a market rent, is it a negotiation, what's [there right]?
No, it’s the – the current rent at that time escalated. So, there's no recent rights, and it's at their discretion.
And in terms of the increases in the coverage you're talking about, I think that coverage is a, probably a last 12 months coverage. And I think you talked about being at close to one times. I would imagine that Brookdale got a bunch of stimulus that probably positively impacted that number. In addition, you know, the fundamentals weakened throughout the year. The likelihood is, you know, that coverage is going to get a hell of a lot weaker this year. How do you think about how you're going to book the rents, in terms of this year and whether you would have to take a reserve, given the fact the coverage will be so low in the near-term?
We don't expect it to be that low in the near term. I think I quoted the coverage’s that were seeing, there wasn’t a lot of federal stimulus money going into ALFs through September 30. Actually, we anticipate more to come out with what's remaining in federal stimulus funds. So, that stimulus money should actually pick up for ALFs in general, and for Brookdale and the portfolio, specifically. So, we think that assistance will help. And then as we said, you know, the portfolio was not [indiscernible], as well as a lot of the comparables that we looked at in this market.
So, you know, we don't think they fell as far as many and we think so they don't have as far to climb back up to what was normal before. So, we don't see this portfolio diving into the [indiscernible].
Right. So, you’re 8.5 and you quoted is a current cash on that 43 million on a GAAP basis the yield is north of 9?
Yeah. It's about 9.2 and we will book this on a straight line basis currently.
And your auditors don't want you to take any reserve given where coverage or the trend line is on operating fundamentals?
Not this time, no.
Okay. Nick, do you have one as well?
Yeah, I just want to follow-up on the guidance question. So, fourth quarter run rate, I guess was $0.81, right. So that analyzes the [325]. I know there's some given takes with the transaction activity, and then obviously Brookdale, but there are assets sales and equity issuance. So, I was just wondering if $0.81 is the right run rate going forward, recognizing, of course, kind of the uncertainty around rent collections, and government stimulus going forward, but at least looking past fourth quarter how to think about that $0.81?
Well, I mean, you kind of said what the uncertainties are. You have timing of new deals. You had Brookdale pro forma. I also stated that, you know, we're looking to continue to produce our leverage. So, the additional shares, if we have any and will impact that as well. And then the asset sales. So, I wish I had the crystal ball to say exactly [indiscernible] lot of moving parts. We feel pretty good with the fourth quarter going into first quarter. And then beyond that it’s all those moving parts.
Thank you.
The next question comes from Rich Anderson with SMBC. Please go ahead.
Thanks. Good morning. So when you look at the Brookdale deal, is there an element of distress there in your opinion? I mean, if you put a [fixed cap] on that, you know, the rental rate, it’s 43.5 million, you get to $725 million value, how much of that play a role in your decision to pull a trigger on this one? And also, were you offered more? Could you have gotten more out of peak if you wanted it?
Sure. From our perspective, we think long-term that portfolio will have the kind of values that you've talked about in terms of six type cap rates and in the interim you've heard all the questions about the short-term and how you maneuver through the pandemic. And so, I think from our perspective, the timing was right in the cycle. And we appreciate the balance sheet that Brookdale has.
I guess I'm thinking, in terms of is it a trade? You know, you eventually saw value that you can trade in and out of over the course of the next couple of years.
No, from our perspective, it's long-term. But you know, like everything, there's always a potential for a trade, but that's not how we looked at this portfolio.
Could you [guide more]?
I don’t think so.
You mean, other – you know, additional sales that they were contemplating or talking to?
Yeah.
We didn't look, but most of them were shopping? We did not look at them.
Okay. Second question is, you know, when you think about this recovery, post pandemic, and skilled nursing versus senior housing, I imagine, you know, since you guys are triple net, that you're, you know, you think both will kind of have a recovery thesis, maybe equivalent to one another, but the fact of the matter is still got stimulus and senior housing, relatively speaking, did not and the perception will probably be that senior housing will be the winner among those two, in the recovery cycle of all this. Do you agree with that? And is that why you're kind of getting more in the way of senior housing exposure or do you disagree with that? Probably your answer. And, think that it'll be sort of equivalent on both sides in terms of the recovery?
Yeah, I think the one – recovery is going to be driven principally by occupancy. And so, to the extent that we have a big base of Medicaid residents in the skilled side of the house, you know, I think the recovery rates as it relates to Medicaid and senior housing, that those occupy – those pieces occupancy are likely to track along at a similar rate, you know, where you have a couple of new residents a month. And it takes a while to film. Then on the Medicare side of the equation, within skilled, which is a much smaller population with much bigger turnover, I think you could see a more rapid rebound. So, you know, when you correlate it all together, I would argue that skilled probably comes back a little bit faster because of the Medicare component, but that stable base of Medicaid probably tracks very similar to senior housing.
Okay. And then real quick, last one, the 36% vaccine rate for the health care service folks, is that because they refused largely, or just taking time to get to them?
You know, Megan's done some work around this. Do you want to talk about it Megan?
Yeah. I mean on the employee side, it's not that they're not having it offered to them in terms of these clinics that are happening, but I think you're seeing two things. One is, you know, refusal only because, you know, there's still a lot of education that's happening by our operators with the employees. And that's why there's a third clinic that was added on to continue that education effort. But the other piece is, you know, we had a large number of cases in December, and you can't get, you can't get the vaccine until 14 days post recovery.
So that is playing into some of that as well. So, we do expect and have been hearing anecdotally from operators that those numbers are starting to creep up with that second clinic coming in and people getting the first dose during the second clinic, but it is still off from, you know where I think everybody had hoped it would be.
Must be though frustrating, though. You want to see this people get vaccinated from your perspective? Probably like, come on, throw us a bone get vaccinated. But anyway, that’s my idea.
I think as long as you get, you know, most of the residents vaccinated, you're in a much better position. And we're seeing those numbers go up as well with the second clinic.
Yeah, I see that. Okay, great. Thanks very much, everyone.
Thank you.
The next question comes from Todd Stender with Wells Fargo. Please go ahead.
Hi, thanks for staying on. And most of my questions were on the Brookdale portfolio, have been answered, but just when it comes to the asset sales, Q4 activity and then I think you've completed some already in Q1, anything you can share about how it's impacting your Top 10 roster and any movement there, just as I look at tenant concentration, maybe coming down a little bit?
Nothing of any significance Todd.
Okay. And then when you lay, I guess for tenant-wise Brookdale now is going to be in your top roster, is that fair to say?
Yes.
All right, great. That's it for me. Thank you.
Thanks Todd.
The next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Thanks. Good morning. You touched on this a bit already, but I'd love to go a little bit deeper. The home health industry is really pounding the table that market share gains relative to SNFs are permitted and likely to continue to increase even post-COVID. And it sounds like you disagree and I just would love to go a little bit deeper on what your thoughts are around those comments from the home health industry?
Well. So my first comment would be this, this is nothing new. The trend of moving towards home health as much as possible has been going on for years. And so to the extent the pandemic perhaps accelerated some marginal patients, you know, that I don't think that's, I don't think that's problematic, because it's a trend that we've seen. And frankly, we need to see, given the demographic that's coming our way. And, you know, the idea when you look at our facilities and the activities of daily living, and the increase in acuity over the last decade, there are very few of those residents that you can pull out of that setting, and take care of in the home setting for less economics.
In fact, the costs will be meaningfully higher in the home setting. So, I appreciate the commentary around it. But I think it's all on the margin. And we've seen it for a long time. So, it does it – if it meant 1% of occupancy, and I have no clue what it means, you're going to get that back very rapidly with demographics that are already here.
That’s helpful. Thanks. And then it also looks like based on your comments earlier that there was pent-up demand for the Maplewood portfolio with the lease up from around 80 to well over 85% occupancy and a pretty short timeframe. So, I'm just curious, did you see that elsewhere in your portfolio, that's something you kind of expect in a post-COVID world of e-com and experience?
I think that has more to do with the highly desirable nature of the Maplewood assets, where they have had waiting lists and many assets. And so as residents got more comfortable with the setting, they moved in, but that is the good news that we saw folks who had the opportunity to move in, who did, because they had a need and they were on the waitlist. So, that's the good side of, we have not seen that in other parts of our portfolio. I would attribute it to Maplewood’s marketing efforts and [waiting less].
Great. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.
Thanks very much. Thanks for joining us today. Please direct any follow-up questions you may have to Bob or Matthew.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.