Q2 2022 Omega Healthcare Investors Inc Earnings Call
Good morning, and welcome to the Omega healthcare investors second quarter 2022 earnings call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
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 CEO Taylor Pickett C O O Dan Booth, CFO , Bob Stephenson, and Megan Kroll Senior Vice President of operations.
It's 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 identifies specific factors that may cause actual results or events to differ materially from those described.
Forward looking statements during the call today, we will refer to some non-GAAP financial measures such as NAREIT F. F O adjusted F O 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 Dot Omega health care Dot com and in the case of NAREIT SFO and adjusted F. F O 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.
I'll now turn the call over to Taylor.
Thanks, Michele good morning, and thank you for joining our second quarter 2022 earnings Conference call.
Today, I will discuss our second quarter financial results skilled nursing facility industry trends and operator restructurings.
Our first quarter adjusted <unk> was 76 cents per share and funds available for distribution or something one cents per share.
We have maintained our quarterly dividend of 67 per share.
Dividend payout ratio is 88% of adjusted <unk> and 94% of funds available for distribution.
As we discussed last quarter, the ability to put restructuring portfolios back to work improved the fad payout ratio by 7%.
We expect over time to put additional portfolios back to work further improving our fad payout ratio and liquidity.
Turning to skilled nursing facility industry trends.
Occupancy continues to trend upward, while staffing availability slowly improving.
Wages for full time staff are significantly higher than pre COVID-19 wages. We believe this is a permanent shift in cost structure for our facilities.
Fortunately a number of states have announced significant increases in Medicaid rates, reflecting the need to fund these higher costs.
Turning to operator restructurings.
The strength of our portfolio of assets generally allows us to work through operator restructurings with limited long term cash flow downside.
We've completed all of the restructuring work related to Gulf Coast, we're well down the restructuring pathway with a GMO portfolio, which represents approximately 6% of contractual rent.
None of which was recognized in the second quarter.
And the other portfolios with liquidity issues have generally committed to pay contractual rent obligations, while we worked through various asset sales our transitions to new operators.
Finally again, thank our operating partners and in particular, the frontline caregivers and stuff of care for tens of thousands of residents within our facilities.
I'll now turn the call over to Bob.
Thanks, Taylor and good morning, turning to our financials for the second quarter.
Our NAREIT S F O for the second quarter was $161 million.
We're 66 cents per share as compared to $181 million or 74 cents per share for the second quarter of 2021.
Our adjusted <unk> was $185 million or <unk> 76 per share for the quarter and excludes several items as outlined in our adjusted that's that's a reconciliation to net income found in our second quarter earnings release.
As well as our second quarter financial supplemental.
Revenue for the second quarter was approximately $245 million before adjusting for the nonrecurring items compared to $257 million for the second quarter of 2021.
Year over year decrease is primarily the result of asset sales completed in 2021 and 'twenty two.
Operator, restructurings and revenue recorded in the second quarter of 2021 related to a gmail.
The $245 million of revenue in the quarter included $11.7 million in revenue reductions primarily related to the write off of straight line receivables associated with two operators transition to cash basis for revenue recognition and includes $1.3 million one time revenue.
Both of which are excluded from adjusted <unk> and Fad calculations.
In our last earnings call I provided revenue adjusted <unk> and Fad commentary when a GMO Guardian and two additional operators.
I want to provide an update at revenue status as of the end of July for these operators.
Dan will provide contractual and operational updates when these tenants in his prepared talking points.
First regarding at Gmail as stated in our press release at Gmail continue to not pay its contractual rent or interest payments.
No payments were made in July in Q3, 2022, contractual rent and interest of $16 million will only be recognized to the extent, it's email makes any payments.
Turning to Guardian in Q1 Guardian was placed on a cash basis, and we did not record any revenue as we did not receive any cash during the quarter.
In the second quarter Guardian, resume making contractual rent and interest payments in accordance with the agreed upon terms.
In the second quarter, we recorded $5 $2 million in income related to the guardian, consisting of $3.8 million of contractual rent payments received and $1.4 million in interest payments received.
Additionally, starting July 1st Guardians rent and interest was reset to an aggregate $24 million per year.
Guardian is current on rent and interest through July .
As discussed last quarter, and operator, representing three 4% of Q1 annualized contractual rent and mortgage interest revenue did not pay any of its Q1 contractual rent and.
And asked for a short term forbearance.
This operator remains on a straight line basis for revenue recognition based on our conclusion that the contractual rent is fully collectible over the term of the lease.
During the second quarter, the operator paid its full Q2 rent and interest obligations of $8 $8 million.
In the second quarter. The operator also borrowed the remaining $4 million when it's $20 million credit facility with Omega.
July contractual rent and interest of $2 $9 million was paid in full.
Also as discussed last quarter, an additional operator, representing two 4% of Q1 contractual annualized rent and mortgage interest revenue did not pay its march contractual amounts due under its lease agreement.
In April the lease with this operator was amended to allow the operator to apply its $2 million security deposit to its March 2022, contractual rent payment and to allow for a short term rent deferral for April with regular rental payments required to resume in may.
In the first quarter, we recorded $5 $9 million for both adjusted at that though and Fad purposes.
This operator did pay contractual rent in May. However, this operator failed to make full contractual rent payments in June .
We placed this operator on a cash basis revenue recognition during the second quarter and wrote off the $8.3 million of straight line rent receivables through rental income in.
In the second quarter, we recorded the cash received of $2.5 million for both adjusted <unk> and Fad purposes of the $2 million in contractual rent owed for the month of July only $1.5 million was collected during July and we will only recognize revenue adjusted F F O and fed into third.
Water to the extent cashes received from the operator.
Finally in the press release, we discussed an operator, representing 2.2% of our second quarter 2022.
Large contractual rent and mortgage interest that underpaid, the contractual rent due under rich lease agreement.
$550000.
On June 30th we held a $5.4 million letter of credit as collateral from this operator and in July we drew the full amount of the letter of credit and applied $550000 of the proceeds to pay the underpaid portion of june's rent.
This operator remains when a straight line basis for recognizing revenue as we expect the operator will continue to pay contractual rent with any unpaid portions in the short term being covered by the remaining collateral.
In the second quarter, we recognized $5 $5 million of contractual rent related to the operator in July the operator paid $1 million of rent and we applied $800000 in security deposits to fund the underpaid portion of July rent.
Moving to our balance sheet. It remains strong thanks to the steps we've taken throughout 2021 and the first half of 2022 to further improve our liquidity capital stacked maturity ladder and overall cost of debt.
In the second quarter, we repurchased 4.2 million shares of our common stock for $115 million, while maintaining our first quarter leverage ratio.
At June 30th we had $38 million of outstanding borrowings on our revolving credit facility. We also had $165 million in cash.
At June 30th 98% of a $5 $4 billion in debt was fixed and our net funded debt to adjusted annualized EBITDA was five three times the same as our first quarter.
And our fixed charge coverage ratio was four two times, it's important to note similar to NAREIT F. F. L. Adjusted <unk> and Fad EBITDA in these liquidity calculations includes our ability to apply collateral and recognized revenue related to operator not payments previously discussed however, if the call.
Lateral is exhausted a decrease in EBITDA will impact our liquidity ratios.
Now I'll turn the call over to Dan.
Thanks, Bob and good morning, everyone.
From June 30 of 2022.
Mega had an operating asset portfolio of 921 facilities with approximately 92000 operating beds. These facilities were spread across 63 third party operators.
And located within 42 states and the United Kingdom.
Trailing 12 month, operator, EBITDAR and EBITDAR coverage for our core portfolio as of March 31, 2022 decreased to 1.44, and 1.1 O times, respectively versus 1.48, and 1.14 times, respectively for the trailing 12 month period ended this.
30, <unk> 2021.
During the first quarter of 2022, our operators cumulatively reported approximately $39 million and federal stimulus funds as compared to approximately $47 million recorded during the fourth quarter.
Trailing 12 month, operator, or EBIT dawn and EBITDAR coverage would've decreased during the first quarter of 2022.
One point to 4.92 times, respectively, as compared to 1.26 and point 93 times, respectively for the fourth quarter when excluding the benefit of entering federal stimulus funds.
EBITDAR coverage for the stand alone quarter ended March 31, 2022 for our core portfolio was 0.93 times, including federal stimulus and 0.76 times, excluding a $39 million of federal stimulus funds.
This compares to the Standalone fourth quarter of 1.19 times, and 0.98 times with and without $47 million in federal stimulus funds respectively.
Occupancy for our overall core portfolio had slowly trended upward throughout 2021, reaching a high of 75, 8% in December up from a low in January of 2021 of 72, 3%.
In January of 2022, the portfolio saw a dip in occupancy to 74, 6% due to the omicron Serge.
Since trended up based upon preliminary results increasing to 77, 7% as of mid July .
Turning to our senior housing portfolio today, our overall senior housing investment comprises 181 assisted living independent living and memory care assets in the United States and the United Kingdom.
This portfolio on a pure play basis had its trailing 12 month EBITDAR lease coverage decreased to <unk> 93 times at the end of the first quarter.
As compared to the end of the fourth quarter of 2021, which covered at <unk> 94 times.
Based upon preliminary results occupancy for this portfolio has recovered to 87, 9% as of mid July 2022 versus 83% in January of 2022.
Turning to portfolio matters Guardian as previously reported on April 8th 2022 Omega entered into a restructuring agreement with Guardian health care as.
As part of that restructuring plan Omega sold 12 facilities and released eight facilities as anticipated.
Beginning in April of 2022, Guardian, resume making contractual rent and interest payments.
A GMO, we continue to be an ongoing discussions with a G. My own a restructure of agreement, which is expected to involve the sale of a material portion of a dream of existing Omega portfolio. We will continue to provide updates as discussions progress.
Other operators.
As of today Omega had two other operators that we're unable to make their full contractual rent payments in the second quarter and subsequently in July of 2022.
As it relates to operator number one on April 29, 2022, Omega entered into a fourth amendment to an existing master lease.
Thereby we agreed to use an existing security deposit to pay March rent and agreed to defer April rent.
While rent was paid in full for the month of May June and July rents were only partially paid.
The other $2 million of monthly contractual rent due Omega received 500000 in June and $1.5 million in July .
We are in ongoing discussions with this operator to rectify this situation, which may include future deferrals and or asset sales or releases to other unrelated third parties.
As it relates to operator number two in the months of June and July . This operator also made only partial rent payments.
The shortfall of 550000 and 800000 for the months of June and July respectively were covered by using a portion of an existing $5.4 million security deposit.
The security deposit, which was in the form of a letter of credit was drawn in full in July .
We currently hold approximately $4 million of the remaining security deposit in cash.
Similar to operator number one we are in ongoing discussions with this operator, which will likely include future offsets to this remaining secured deposit and potential asset sales and re leases.
Turning to new investments on June 2nd 20, twenty-two Omega completed a $20 million preferred equity investment and a joint venture which acquired in acute care hospitals located in New York City.
This preferred equity investments there is a cash yield of 12% and is structured to be redeemed within a five year term additions.
Additionally, on October 28, 2022, Omega closed on a $36 million Mezz loan investment and.
And at $90 million working capital loan commitment both doing existing operator, the mezz loan bears a cash yield of 12% and is a three year term and the working capital loan bears a blended cash yield of 11% and as a one year term.
Omega is new investments in capital expenditures for the quarter totaled $73 million year to date as of June 32022, Omega as new investments and capital expenditures totaled $214 million the amounts exclude the $90 million working capital loan commitment.
Turning to dispositions during the second quarter of 2022, Omega divested 13 facilities for total proceeds of $54 million.
I will now turn the call over to Megan.
Thanks, Dan and good morning, everyone.
The spread of Covid continues to be a leading indicator of the case third within the long term care industry.
Following that trend theres airports and the resurgence of cases of late.
We continue to hear from operators that clinical outcomes are much improved from where they had been in the past.
That said any strain on an already tenuous staffing situation is concerning as it has the potential to delay an already slow occupancy recovery.
Occupancy continues to improve with 27% of core facilities now having recovered.
An additional 21% recovered to within 5% of pre COVID-19 levels.
Seeing shortages, which can be exacerbated by quarantine requirements are continuing to have an impact.
Sure I can release the results of the survey of 759 nursing home providers results showed that 61% are still limiting new admissions due to stocking limitation.
And at the same time expenses continued to be elevated from pre COVID-19 levels.
Particular, as it relates to staffing and other stocking related items.
Agency expense on a per patient day basis for our core portfolio for first quarter 2022 continues to be elevated at six times, what it was in 2019.
Last week CMS issued its final 'twenty 'twenty, three payment rule, which while inclusive of the 5.1% rate increase beginning October 1st set that increase by a cut of 2.3% related to bringing P. D. P N back to budget neutrality.
Our net increase of 2.7% or $904 million.
Well this is an improvement over the proposed rule, which incorporated the full 4.6% cut so the 'twenty to 'twenty three rate setting here with the final rule spreading that over two years.
It's still disappointing in light of the current environment.
Firstly as Taylor mentioned earlier, a limited number of our larger states appear with strong lobbying efforts from the industry to be reacting appropriately to the inflationary environment as well as the increased cost structure that operators are operating under currently while also balancing that with the desire for additional regulatory requirement.
These states, such as Florida, and Pennsylvania to name a few have required such things as increases in wages and a minimum staffing levels.
I'll also increasing reimbursement.
More than defray these additional costs.
Additionally, other states have provided for continued COVID-19 related ethnarch rate increases post public health emergency either on a permanent or phase out basis.
Given that the long term care industry is still deeply entrenched in the recovery phase of this pandemic, we hope that the federal government takes note of some of these more balanced state action and see is clear to provide funding for any mandates that it may impose.
I will now open the call up for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad excusing. The speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Our first question will come from Connor Seversky with Wehrenberg you May now go ahead.
Good morning out there thanks for having me on the call I'm going to lump a couple together here pertaining to Guardian. So is the restructuring effort effectively complete are there any other moving pieces that you were taking into consideration here and then for the master lease agreement revised to $24 million in annual rents to be paid to OE Shai could you quantify at all what.
Kind of haircut, you would be taking on the remaining facilities as.
Compared to a more normalized or pre pandemic environment.
So the Guardian restructure.
You suggested is complete.
We have sold or re leased all of the facilities that we intend to do as part of that restructure and we did reset the rent.
That number is down I would say modestly.
Our pre pandemic.
Contractual rent rates.
But it's not it wasn't a meaningful or significant when you look at.
The new rent plus the rent equivalents from what we either sold or released.
Okay understood and then similarly as it relates to a GMO.
It sort of stands out, but there's been less disclosure on paper compared to Guardian, and obviously, it's a limitation to how much you can speak on the subject, but would you be willing to take a similar or are you looking to take a similar strategy that you took with restructuring the guardian portfolio and understanding that a GMO operates in a number of different markets is there any kind of rhyme or reason youre looking at.
As to which assets you would potentially be looking to keep versus what would be sold or REIT or repositioned.
So, yes, theres a lot more details on guardian, because the restructuring.
No because the restructuring has been completed.
It has not been completed it's still we're still working through it.
It does involve asset sales and we really can't lay out the details until that's.
Really done.
And then give you obviously.
Details about what we earn and then what kind of if we took it.
But it is similar to the Guardian situation in terms of that we are selling into a re leasing it.
There are a number of facilities.
Expect any cuts to the pre construction went to be modest at best.
Okay understood. Thank you.
Okay.
Our next question will come from Jonathan Hughes with Raymond James You May now go ahead.
Hey, good morning.
It's a question for Bob and I asked a similar one last quarter, but just to simplify for listening could you give us the expected change from second quarter to third quarter.
Driven by revenues from operators, either resuming paying rent or no longer paying rent I think last quarter that that I'm always kind of $11 5 million or so and we did see.
F N D up about this.
This corner this is Pat.
Second quarter versus first quarter, but I, just think that'd be helpful.
You get a simplified sense of how third quarter could shake out.
Yeah, let's do quite a bit of detail I apologize, but I don't think my prepared talking points, but.
No.
At Gmail was easy way.
We don't expect that right now I can't go in negotiation and then as you go through we said Guardian.
Cash basis.
We're keeping we're keeping an eye on them.
July so right now we expect that to be at that $24 million.
Annual run rate of $6 million of border.
The three 4% operator, they paid July so no change from second quarter two.
Two 4% operator of our Sam to purchase operator number one.
As Dan mentioned, a short paid they're on a cash basis placement second quarter, a short pay July .
To the extent they pay us what will record.
They reported two five in the second quarter. So far we were at a $1 5 million there.
Last one we call last time, we talked about the two 2% operator over there on a straight line basis.
They did short pay as Dan mentioned.
June and July .
While we have letters of credit that support that.
Would expect that one little tagging to the extent, they're short will apply to letters of credit.
It's about $5 5 million during the second quarter and lastly, we talked about just there are some and you'll see it on page 19 of our.
Our supplemental we sold some assets and we've put in there how much revenue in the quarter that represented and then we also put on there the pro forma amount.
The two new loans that entered into what that additional revenue would be a quite a few in the third quarter.
Yeah.
Okay.
Alright, I'll go have to go back in and pieces together, but I mean, it sounds like it should trend maybe there's some puts and takes but perhaps what oh.
It would be against the rough number if we put all those items together.
Yes.
Again, we had some on a cash basis, so it's going to be based on what they tell you, but yes.
Yep Okay.
That's helpful. Thanks, and then my follow up would be on.
Demand for skilled nursing assets in the private market that's been incredibly strong evidenced by the dispositions completed year to date has there been any change in that demand given.
Given the higher interest rate backdrop, and the uncertain macroeconomic picture over the past kind of three months or so.
Yeah.
We haven't.
<unk> really been in the market believe it or not for the last quarter or two.
Terms of putting things for sale, so I'm not sure what the.
Buyer universe is thinking about the interest rate increases obviously the effects.
Pricing in the way people think about the future.
But most of these folks most of these current buyers are looking out over the long term.
And long term deals really haven't gone up that much so.
I think there is still pretty pretty strong buyer universe out there looking to buy assets.
And that's what we're seeing right now and it really hasnt waned much just because of the rising interest rate.
Okay.
Okay. That's.
That's it for me thanks for the time.
Our next question will come from Dave Rodgers with Baird. You May now go ahead.
Yes. Good morning, everybody wanted to just ask about the broader restructuring and some of the leases that you were talking about as well as some of the asset sales.
But maybe before I get to that Bob in terms of the letter of credit that you had taken.
<unk> taken down in the quarter. When you look at your entirety of your tenant base how much of your rent is coming from letters of credit on a straight line side is that just that youre, giving us the largest tenants.
That are having problems or is there an overall number that we can look at to kind of get a better sense for the total portfolio.
What I outlined with the majority of it.
Theres not much on the smaller tenants okay.
Helpful.
And then I guess I did want to go back to the idea of kind of the timing on some of the restructuring of these leases when do you think you'd get through all of this is there is there a major issue now that we're through CMS, you're starting to see some of the Medicaid plans come out does this accelerate the timing of the GMO and some other things I mean, I guess at what point do we get to the hinge.
Point, where some of the news starts to get a little bit better in these tenant issues start to dry up or are we getting closer to that or do we think that that's going to continue throughout much of the year.
So a GMO, which is obviously the big one.
We currently are targeting early early fourth quarter event to be completed there.
So that's the big one and none of the news that you've heard either from the federal government or the state reimbursements.
It's going to affect that that's just that's just the restructuring in due course.
And then some of these other ones.
It's just a process that you have to work through is lengthy.
Sometimes it's quicker, but it involves either sales or re leases. There is a fair amount of lead time associated with that.
And many of our restructure is doing all of that so to.
To the extent that that comes up with some of these other operators that we're discussing.
That takes a while to work through.
There's a there's a lot of.
There's a lot of regulatory involvement and it all takes time.
And the other part of that question I, just wanted to get to what you.
You guys had mentioned in the past that you had anticipated maybe there was additional issues coming up are you still at a point today, where you believe that youll see additional issues arising with tenants or was this what you had anticipated and you would expect that they start to abate at this point.
Hum.
I think we still have to be cautious about the possibility of additional issues, but.
I will point out something that you talked about last quarter, which is that the issues that are coming up now.
Not as significant in terms of economic risk as we've seen in the last few months. So you think about the smaller operators that we're talking about now for two 2% revenue operator.
Well, we'll work through that those assets are strong.
I don't see significant risk there but.
Our headline that's tough for investors.
I will point out.
At Gmail is the one where you look at that it's very big it's fairly complicated.
But if you put 6% of revenue back which is it's our goal and where we think we end up.
It changes the metrics for everything.
All right.
Leverage.
Whole bunch of other issues the things we're seeing today.
Just on the margin relative to something like a cheap.
That's really helpful. Thank you Joe.
Our next question will come from Michael Griffin with Citi. You May now go ahead.
Hey, Thanks for taking the question maybe back to be a GMO restructuring and potential asset sales would the goal be you know a similar sales relative to say you know the golf course foot for Gulf Coast portfolio earlier. This year in terms of buyers and kind of expected disposition cap rates on those.
Yeah, it would be similar.
That's a good comparison.
Okay, and then maybe just on the the phased into the CMS budget cuts and you mentioned it a little bit in your prepared remarks, but I'd just be curious to know maybe what you'd like to see greater from the federal government to be doing in order to support the industry.
Yeah. So obviously it was great that they faced in that.
We would've liked to have seen that not.
Kicks in at all this time around given the environment.
And I think you know Medicare Cmos and start talking about certain unfunded mandates that we'd like them, if they're going to do mandate Cherokee have some funding mechanism for the.
Like we're starting to see in the state.
So where we're really concentrating a lot more on the states.
Largest payer source for our operators if you think about.
Where we are with our top 15 states, we started to see some real good traction there.
In Florida, with a seven 8% rate increase.
Dan will kick in in October .
Got four of those states that had double digit rate increases coming up later this year or early next year.
Three of them have done.
On the Covid Asmat funds pose public health emergency funding goes away.
And then we're watching several other states as well, particularly taxes, but I think it's really the state side that we're looking at right now.
Okay. That's it for me appreciate the time.
Our next question will come from Daniel Bernstein with capital. One you May now go ahead.
Good morning.
I just wanted to.
On a chemo.
Right.
Do you have an expectation of getting recording.
A recording cash rents in the fourth quarter.
With the restructuring.
I think you were a little hard to hear but I think I heard your question are we expecting cash rent.
Quarter.
The answer is no not as part of the current restructuring discussions.
Okay.
And then the other question I had was.
Sorry go ahead.
No I'm, just going to say, we hope to complete it and therefore, there will be a potentially.
Potentially proceeds from asset sales or releases, but.
But but not.
Cash rent coming out in the fourth quarter, just want to make that.
Okay No I appreciate that.
And then the other question I had was on the the hiring within the industry the sniff industry in your portfolio.
One does it take for a new hire to actually contribute to staffing to maybe.
Maybe oh Wow operators to.
The increase occupancy and new admits.
I mean, I think this is an industry where people come in on a regular basis. When you think about agency during Covid times right I mean, they get acclimated pretty quickly and up and running pretty quickly on the first day. They are in the door.
So that helps with occupancy.
Again, that's where the.
It comes in.
The bigger concern is making sure that someone gets more involved in the culture.
From an agency perspective.
Have concerns over any potential survey.
But in terms of new hires.
That's pretty quick.
Okay.
And then one last question for me just kind of going back to the investment side of the business have you seen any indications that.
Cap rates can move up or are maybe leading indicators such as re trades or.
Deals that you've looked at you got outbid and now Theyre coming back to you just trying to kind of get affordable consents for where pricing might go.
Uh huh.
Not a lot of good data there Dan.
Maybe just for the margin you see it a little bit, but I would tell you that.
There's just not enough out there to say theres a trend yet.
Okay.
Alright I appreciate all the color. Thank you that's all for me.
Yeah.
Our next question will come from Nick <unk> with Scotiabank you May now go ahead.
Thank you.
First question was just going back to the three 4% operator, I just want to make sure that I'm understanding this correctly.
In terms of you know the the operators paying rent again I think you said, it's also a bit paid in July but at the same time you know you described in the release, how they pretty much maxed out there one of credit facility.
And so I'm just I just want to make sure that threat that operator that you know well we should be fully confident that they are to continue to pay rent or was there a chance that you know some of the drawing on the credit facility was actually being used to help pay rent.
I think we were working with that operator as we indicated.
You know.
They put their own cash basis, so we won't record renovate them.
So, but right now I mean, the expectations that will continue to pay rent going forward.
We have some discussions around potentially selling.
Selling off some of the underperforming assets.
Okay, but the way you're describing earlier I just want to make sure I'm clear on this what was there you know from the beginning of the year since when they weren't paying rent to June 30th when they were fully paying rent how much did they draw on the credit facility with you get with your company.
They grew 4 million since the beginning of the year. Nick If you look at paid $8 8 million in the second quarter and he paid another.
Under $3 million in July .
Got it okay. Thanks, that's helpful Bob.
So the other question I had was in terms of the new investments you made the mezz loan and the preferred equity investment.
Investment are those both fully cash paying loans.
Yes, they are.
Okay, and then the Mezz and then just following up on the Mezz loan the working capital loan I mean, what can you just describe sort of the health of the operator that you you helped fund there I mean is this or is this a troubled operator that needed capital and we need to worry about you know, it's an operator that maybe we don't that hasnt.
Gone through any sort of nonpayment of rent yet.
So just the opposite is a very very strong.
Clients have been with us for a very long time, we assisted them not a capital stock as part of an acquisition.
So it had nothing to do with the restructuring.
Okay, great. Thanks, and just one last question I guess is on the dividend you know how we should think about that you know it's pretty much a paying out most of assets. All right. Now if you look at your cash flow statement and you're paying out more than your dividends and your are you getting an operating cash flow. So you know I mean whats the board thinking.
In terms of the ability to keep the dividend as it is yeah. So as you know the cash.
Cash flows will have certain timing things will show up in the quarter.
Welcome to that but I think the metric one that really look at is sad so cash per share versus a dividend.
And we're paying out 94% of Fad today.
But when you think about putting cimo back to work you get into the eights.
Yeah.
Highly confident that the GMO is going to get put back to work in these other issues to start.
That's significant in terms of moving the needle so it's a fair point and as we said in the past is.
That perspective changes then we will re look at our dividend policy, but I think to the extent, we still see things the way we're talking about today youll.
Youll see us maintain our dividend because remember pre all of this.
We were paying out close to our minimum payout.
With these as we resolve these things pushed back into the Eighty's.
Would be in that same spot.
Okay. Thanks helpful.
Yeah.
Our next.
Question will come from Tayo Okusanya with credit Suisse. You May now go ahead.
Yes. Good morning, everyone. So I just wanted to pivot to something a little bit different in the quarter.
What are you guys kind of disclose a legal reserve.
I'm just kind of curious what what that may have been in in regards to.
Yeah Tayo.
Theres a law suit that we inherited in a deal that we completed several years ago, and we think it's going to be settled and that's what that preserves for.
Gotcha Okay.
And then Taylor.
Some of the comments you've made I mean, I guess I'm kind of reading cautious optimism from you and the rest of the team in regards to you know there could still be some near term challenges, but the worst is over.
Is that is that what you're really kind of want us to kind of take away from the call or should we still.
Kind of you know.
Still be concerned about you know.
Potential for things to get worse before they get better.
Yeah.
I am relatively optimistic Walter.
But I think the short term issue and Megan mentioned it.
Is that the state level, where we've seen some really great reaction from a number of states.
Big Big Medicaid rate increases.
To offset the labor cost that aren't going to go with.
That being said there we're in the state of Texas, which right now with the public health emergency you have the $20 Medicaid.
When the public health emergency adds whether that's mid October .
Extended into 'twenty three we.
We still need to see how Texas reacts from a Medicaid rate perspective. So there is an example, where.
I'm hopeful, but we just don't know so I would say.
Optimistic long term cautiously optimistic short term, but with one of the big highlights being where the state Medicaid rates come in over the next nine months.
Okay.
Texas being the biggest wildcard for you guys well just because it's one of our biggest states.
Yeah.
Great. Thank you.
Thank you.
Yeah.
Our next question will come from Rich Anderson with with F. N B C.
No go ahead.
Good morning.
So I'm on the on the 2.4% tenant.
You know paid paid in May then kind of flipped on you and didn't paid June or did pay fully in June what what.
What do you think that the rationale was for that that change of heart was it a was it of course, you know a labor issue or something else that you know maybe.
It's not as obvious.
And.
How would you characterize the quality of the portfolio in terms of your ability to sell assets there to the extent that you go that route.
So I think this operator like most operator.
To the extent that they have the cash on hand to pay rent they pay rent I think.
They found themselves coming up short and and so we ended up getting short paid.
And that's going to change from month to month it depends theres. Some months three payrolls are some months, where Medicaid permits are slow.
Don't come in until the following month, there's a whole host of different things that can affect.
The cash flow.
The assets in this portfolio are very very high.
Connie.
Okay.
Yeah.
Our west Coast I think.
Oh.
Yes, no comment on that.
Alright.
The the broader question is you know when you think about what you're going through today and how you're restructuring leases. How does this sort of manifest itself when you're thinking about escalators because in my view.
Investors and people like me care, a lot more about coverage and coverage improving rather than any growth that you might get here or there and have a triple net structure. So do you agree with that statement that this is more about coverage than it is about growth you get your growth from external sources and if that is the case are you.
Dialing down escalators.
When you're restructuring such that you don't you know running or you lowered the risk of running into some more problems in the future.
Philosophically.
We still think escalators that are a proxy for inflation.
Is the right model now I've heard plenty of people argue that it's not the right model.
After going through.
Extended period of very low inflation, and we know rates typically follow inflation.
Rather than focusing on the handful of struggling operators I'd point you to.
The majority of operators to continue to perform.
They're able to handle escalators.
I think that economic proposition to that model is something that we're not prepared to give away because we don't think that's.
The right way to look at it from an industry perspective.
I guess the alternative argument, but.
Thats our view as we sit here today.
And then last question you mentioned, Texas being your biggest states also a big state.
How would you approach, Texas right now Youre getting all these good reads on on Medicaid from some several states around the country, but you know you're kind of in a.
Holding pattern with Texas until sometime next year.
Would you would there be any situation, where you'd be willing to make an investment of a scale and in Texas at this point or is it almost impossible for you to underwriting at this juncture because you just don't know where it's going.
Okay.
<unk>.
We haven't had an opportunity to look at anything in Texas, and we obviously would.
The right operating partner if somebody that's already in our portfolio, where we understand the credits and perhaps the credits.
Enhanced by the existing master lease.
That being said, it's a fair point you'd have to be able to look at Texas to say if I assume many.
Minimal or no rate increases, but what does that portfolio of that pro forma out to look like.
Part of the analysis and so I think transacting in Texas is a bit of a wildcard until we see what the legislature does in 2023.
And as I think you know they'd be every other year. So Fortunately, we're in a legislative year coming up in 'twenty three.
Okay fair enough thanks very much.
Our next question will come from Steven Valiquette with Barclays.
Oh go ahead.
Hi, Thanks, good morning, everybody.
So I just wanted to touch on.
From your prepared remarks, you alluded to a large survey with some 60% plus of sniffs in that survey still having to.
Turning away some patient volume due to staffing shortages.
Obviously, it's probably incredibly difficult to quantify this but I guess just based on feedback from your own operators.
What do you think the magnitude of impact is just on your portfolio occupancy are.
Solely related to just the dynamic of your sniff operators, having to turn away patient volume due to staffing shortages.
Talking tens of basis points, or you know hundreds of basis points.
Any thoughts on that would be helpful. And also what do you think that volume go. It just is it just the front of the home health.
Curious, where you think that volume goes if sniff, they're not capturing it.
I think.
To that last point I don't know that it's necessarily home health I do know that you know hospital, sometimes those patients they can get.
Dropped in the hospital.
Can't be moved up the business because there's not an a certain particular area. There are events for them to go to.
Hum I don't know what the number is from an occupancy perspective, but it is having a significant impact on our occupancy.
If you think about that August survey being a proxy for where we would be 60% of buildings at any given time would have.
Would have.
[noise] limited capacity because of staffing issues I mean, I think that.
Cause for concern in the industry in general I will say anecdotally I think our operators feel like they're getting a little bit better as they China working through their staffing issues.
Wage increases in various different things, including.
Some of our operators have had some success with getting international nurses.
We're just starting to help as well.
Okay got it okay I appreciate the color. Thanks.
Our next question will come from Vikram Malhotra with Mizuho you May now go ahead.
Thanks for taking the question just on.
On the point about investments just maybe broadly capital allocation how are you thinking about.
Buy backs at this level versus investments and then within investment is there an opportunity.
To maybe look at so called value add given the trajectory you may contemplate long term or what what type of assets are you are focused on the investment side.
In terms of stock buyback I think if you look at where we want the stock over the last couple of quarters. That's a pretty good indication of how we think about stock buybacks versus our current price.
And then in terms of.
Capital allocation and value add.
We're always looking at value and thinking about it but frankly, the best capital allocation, we can do with our existing operators.
If I say, if I, just contrast U S versus the U K.
The UK pipeline access.
Really active and we have a number of operators in the U K and then that I think reflects almost a complete recovery from COVID-19 in the U K in terms of occupancy operating model and that contrast, it to the U S. We're obviously, we're not there yet.
The level of activity is lower but.
We are seeing some of R. R.
Bigger operators become a little bit more acquisitive, which is why we participated as an example in the one deal that Dan mentioned what's possible.
Yeah.
Okay and could you maybe just expand upon specific to your thoughts around taking on more senior housing.
Assets in the RIDEA structure and maybe behavior.
So.
We don't have any idea.
We really haven't found any opportunities where that seems attractive to us.
Behavioral we have a number of behavioral assets, it's just in our other bucket.
So couple of Geri psych hospitals bunch of substance use disorder assets, we continue to look at the asset class and we like it it's.
It's gotten a little bit expensive on a relative basis, but.
We know it well.
We're interested in we will continue to look.
Okay, Great and then just last clarification I think you mentioned, we've obviously seen Florida and Pennsylvania I.
I think you know Virginia.
<unk> has a double digit rate are the other two states, Mississippi in Kentucky are there any I'm missing and just to clarify on the on the Texas side.
And the way. It works is there a proposal and a common period or is it just they meet in early next year and we just get to know what that what that rate is.
So the other double digit state that you're missing in Washington.
Which you remember was Washington State was the largest at the beginning of Covid right now.
Really really long way.
And also have continued their COVID-19.
Covid, that's not public health emergency.
And then in terms of Texas and the rates that it won't be until sometime next year around April or may where they start having their legislative session.
But what we have heard is that governor Abbott has said that he thinks are skilled nursing facilities do need rate increases, but what.
Comes of that we're not really sure at this point. That's the Big question is is it at the very least for the 1963 ethanol to continue post health public health emergency, but it's too soon to say where that goes but the governors behind it. That's you know at least a good step in the right direction.
Makes sense. Thank you.
Our next question will come from Joshua <unk> with Bank of America, You May now go ahead.
Hey, guys hope everyone's well.
On a Gino I guess I'm, just kind of curious on maybe what's taking so much time to kind of come to an agreement just trying to figure out what the sticking points are.
Maybe a better idea of when it might actually go through.
So it's not necessarily the agreement, it's what goes into that agreement and what is part of it which as we've indicated the multiple quarters now involves.
Some significant asset sales. So you have to take that into account that that is unlike the process.
Is it like mining up buyers or just trying to sort out with the GMO, what were selling or where how it is going to be sold.
No. It's more working out you know its first you Gotta do obviously, a marketing them you got to select the right buyers you got Nick.
Negotiate your contract.
You got to submit chows, they gotta do their due diligence they got to get regulatory approval I mean cause list goes on and on.
And it is a lengthy process.
Okay.
And then maybe just one last one are there any common themes on what drove the underpayments for the two tenants that I didn't forget I think June or July .
Underpinning in June and July .
I don't think Theres any common themes none of these operators do business in different states I think it was just up there.
Their cash flow as you stand at the moment.
Alright, thank you.
Again, if you have a question. Please press Star then one.
Okay.
It appears there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Taylor Pickett for any closing remarks.
Thank you thanks, everybody for joining us this morning I appreciate it as always.
Did you have any follow ups.
Please reach out to Matthew where Bob.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.