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Tickers in this article: OHI

Pickett: Omega will continue to expand by allocating capital to our existing tenants and, to a lesser extent, allocating capital to new tenant relationships. Omega will also look to strengthen market positions in our existing geography.

Thomas: Your largest operators are Communicare (11.4%), Sun (11.1%) and Airamid (7.9%). Do you believe these three operators will be impacted with revenue cuts? Do you see any operators in your portfolio that are concerning?

Pickett: All of our large operators continue to perform well. Assuming rate cuts, if any, are not draconian, then all of our operators should continue to do well. As I mentioned earlier, there is a large portion of the SNF industry that would not be viable if rates were significantly reduced.

Thomas: Your company's occupancy rate is around 84% and it has been fairly stable. Do you expect to maintain that number, or potentially increase it next year?

Pickett: We expect our operator's occupancy to remain stable.

Thomas: I consider rent coverage to be the most important metric for your sub-sector. Today Omega has an enviable coverage ratio of 1.58 EBITDA. Is that sustainable?

Pickett: We expect that our cash flow to rent coverage ratio will remain above 1.5, assuming no Medicaid or Medicare rate cuts. I mentioned earlier that a 2% Medicare rate cut reduces coverage by 0.06.

Thomas: Omega has sound financial fundamentals (leverage at 4.8 times). How do you intend to utilize your balance sheet in the future?

Pickett: We expect that Omega will continue to maintain a conservative balance sheet with debt to EBITDA leverage of 4 times to 5 times.

Thomas: Omega has the highest dividend yield (7.7%) in the healthcare sector. In my opinion, partly due to under-valuation and also due to higher risk assets. How would you describe your company's value proposition?

Pickett: I believe that our equity is undervalued. However, the SNF industry is very cyclical, with cycles typically driven by investor views on reimbursement risk. We happen to be in a cycle of high perceived reimbursement risk.

Thomas: Omega has increased its dividend by 14.2% in 2010, 13.1% in 2011, and 9.3% in 2012. Is this growth sustainable?

Pickett: Our investment strategy has remained the same for the last 9 years and we have delivered great financial results. The strategy has not changed and there are many industry opportunities. We are optimistic about our future growth prospects.

Thomas: Do you see trends of skilled nursing customers to transition into in-home services? If so, could this be problematic for your tenants/operators in the future?

Pickett: In-home services have grown dramatically over the last decade. During the decade, SNF occupancy has remained stable, while patient acuity in SNFs has gone up. Our view is that the care delivered in the SNF setting cannot be delivered less expensively in the home. We believe in-home services and SNF care are compatible versus competitive settings.