Q3 2022 Omega Healthcare Investors Inc Earnings Call
Good morning, and welcome to the Omega Health Investors' third quarter 2022 earnings Conference call all participants will be in listen only mode.
Assistance, please speak into the conference specialist by passing on to Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question Omi Press Star then one on your telephone keypad.
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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 Dam 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 restructurings 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 <unk> 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 <unk> and adjusted <unk> in our recent.
Yes, you would 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 third quarter 2022 earnings conference call today, I will discuss our third quarter financial results, operator, restructurings and our results over the course of the Covid pandemic.
Our third quarter adjusted <unk> 76 per share.
Funds available for distribution or <unk> 71 per share we have maintained our quarterly dividend of <unk> 67 per share.
The dividend payout ratio is 88% of adjusted <unk> and 94% of funds available for distribution.
The adjusted <unk> per share fad per share and dividend payout ratios are all exactly the same as the second quarter.
Year to date Fad is $2 seven per share while our year to date dividend paid is $2 <unk> per share.
We expect that our full year fad per share will exceed our full year dividend per share payout.
Turning to operator restructurings, we continue to successfully work through operator restructurings.
Generally, resulting in little or no diminishing in value of our assets and our long term cash flows the.
The most recent example of our successful restructuring work is the sale of 21 at Gmail assets generating gross proceeds of $359 million.
Early in 2023, we expect the GMO to begin paying rent and interest on the balance of the 29 facilities that they retained in the restructuring and anticipate the rent and interest on the GMO retained portfolio will add nearly <unk> <unk> per share to quarterly fat.
In addition, the redeployment of the GMO asset sale proceeds are expected to add another three <unk> per share to quarterly fad.
Unfortunately, we expect that we will continue to have ongoing restructuring discussions with certain operators due to inflationary costs, including dramatic increases in UK utility costs in Medicaid reimbursement and occupancy challenges. These.
These ongoing restructurings will likely include asset sales, operator transitions and rent deferrals.
Turning to our Covid Euro results. This is our 11th Covid Euro earnings call.
As a result of our active asset balance sheet and risk management. We currently have a pathway to potentially exit the pandemic with limited financial damage.
Our current quarter Fad per share of <unk> 71 says compares favorably to our pre Covid first quarter 2020, fad per share of <unk> 74 cents.
Particularly when you consider the fad per share upside from the nearly complete GMO restructuring.
Specific actions taken to protect long term shareholder value over the last 32 months include one the sale of $1 $6 billion in assets, which generally strengthened our operator future credit metrics by exiting underperforming facilities within master leases and in some cases resulted in completely.
Exiting the operator relationship.
Two while we harvested $1 6 billion of capital we have deployed an equivalent amount $1 $6 billion via asset purchases construction loans and leveraged neutral stock buybacks three.
Three in addition to acquiring and disposing assets, we have transitioned dozens of facilities to new or existing operators.
Net result of our active asset management is a stronger operator platform as we narrowed our operator base from 70 operators in Q1, 2022 63 operators today for.
Before turning to the balance sheet, the issuance of $1 $4 billion in long dated sub three 4% unsecured bonds.
<unk> the issuance of $400 million in common equity.
Six the extension of our $1 5 billion dollar revolving credit agreement through 2025, and seven turning to risk management, our hedges of interest rates and foreign currency combined with our debt maturity stack, which is virtually all fixed rate debt.
Significantly minimizes the risk from increased short term interest rates and near term maturities.
We believe that we will continue to grapple with ongoing covert related operator issues for the next 12 to 16 months.
<unk>, a rock solid balance sheet and resilient operator franchise, along with our active day to day portfolio management, which includes supporting our operators with best practice communication and industry lobbying efforts have put us in a relatively solid position to continue to return capital to our shareholders via our dividend.
And to continue deploying growth capital to our operators.
I will now turn the call over to Bob.
Thanks, Taylor and good morning, turning to our financials for the third quarter.
Our NAREIT <unk> for the third quarter was $159 million or <unk> 65 per share as compared to $181 million or <unk> 73 per share for the third quarter of 2021.
Our adjusted <unk> was $185 million or <unk> 76 per share for the quarter and our fad was $173 million or <unk> 71 per share and both excludes several items as outlined in our adjusted <unk> and Fad reconciliation to net income found in our earnings release as well as our third quarter financials.
Supplemental.
Revenue for the third quarter was approximately $239 million before adjusting for certain nonrecurring items compared to $282 million for the third quarter of 2021 the.
The year over year decrease is primarily the result of asset sales completed throughout 2021, and 'twenty two operator restructurings and revenue recorded in the third quarter of 2021 related to a gmail.
The $239 million of revenue in the quarter.
<unk> $13 $8 million in revenue reductions primarily related to the write off of straight line receivables associated with three operators transitioned to cash basis for revenue recognition and included $2 $6 million of one time revenue.
Both of which are excluded from adjusted <unk> and fed calculations.
In our last earnings call I provided revenue adjusted F F O and bad commentary when a GMO Guardian and three additional operators.
I want to provide an updated revenue status as of the end of October for these operators.
Dan will provide contractual and operational updates on these operators in his prepare talking points.
First regarding at Gmail as stated in our press release, the GMO continue to not pay gets contractual rent or interest payments and no payments were made in October .
At September 30th 20th GMO facilities were moved to assets held for sale and so far in Q4, we sold 19 of the 20th GMO facilities for $316 million, bringing the total of GMO assets sold to 21 facilities for $359 million.
And both our first and second quarter earnings releases and conference calls, we discussed Guardian, and an operator, representing three 4% of Q1 annualized contractual rent and mortgage interest. We did not mentioned either of these two operators in yesterday's press release as both operators paid all contractual rent and <unk>.
Interest due in Q3 and remain current through October .
Also as discussed in both our first and second quarter earnings releases and conference calls and operator, representing two 4% of our first quarter contractual annualized rent and mortgage interest revenue was placed on a cash basis in the second quarter, we recorded only the $2 $5 million of cash received.
In the second quarter for both prior quarter, adjusted <unk> and Fad purposes.
In the third quarter, the operator continue to Underpay rent and paid only $2 $5 million, which was recorded for both adjusted <unk> and Fad purposes.
The $2 million in October contractual rent owed from this operator $500000 was collected and we will only recognize revenue adjusted at that though in fact in Q4 to the extent cashes received from the operator.
Finally last quarter, we discussed an operator, representing two 2% of our second quarter of 2022 annualized contractual rent and mortgage interest that underpaid contractual rent due under its lease agreement by $550000 on June 32022, we held a $5 $4 million.
A letter of credit as collateral from this operator and in July we drew the full amount of the letter of credit and applied to $550000 of proceeds to pay underpaid portion of june's rent in the third quarter of 2022. This operator continued to short pay its contractual rent and the company applied three.
$3 million of cash collateral against the unpaid rent for Q3.
Replace this operate on a cash basis of revenue recognition in Q3 and wrote off approximately $10 $5 million of straight line rent receivables and lease inducement through rental income.
As the operators on a cash basis, we recognized the cash received and the cash collateral applied in rent in the third quarter totaling $5 $5 million for revenue adjusted <unk> and Fad purposes in October the operator pay to $749000 in rent and we applied <unk>.
$974000 in security deposits to fund the underpaid portion of October right.
At October 31, $555000 remains as collateral to the master lease.
As highlighted by Taylor, our balance sheet remains strong thanks to the steps we've taken since the start of the pandemic to further improve our liquidity capital stack maturity ladder and help protect our overall cost of debt.
At September 30, we had $18 million in outstanding borrowings under our revolving credit facility and we also had $135 million in cash as of today, we have $435 million in cash which includes the proceeds received from the <unk> asset sales completed in the fourth quarter.
Our next debt maturity is $350 million of four and three 8% notes due August of 2023, and 2020, we entered into $400 million of 10 year interest rate swaps at an average swap rate.
80, 675% leased.
These swaps expire in 2024 and provide us with significant cost certainty when we refinance our remaining 2023 bonds. The swaps are valued at $100 million as of October 31.
At September 30th 98% of our $5 3 billion and debt was at fixed rates and our net funded debt to annualized adjusted EBITDA was five three times the same as both our first and second quarter.
And our fixed charge coverage ratio was four one times it's.
It is important to note similar to NAREIT <unk> adjusted <unk> and Fad EBITDA in these liquidity calculations includes our ability to apply collateral and recognize revenue related to the operator nonpayment as previously discussed.
To the extent that collateral becomes exhausted a decrease in EBITDA will impact our liquidity ratios.
I will now turn the call over to Dan.
Thanks, Bob and good morning, everyone.
As of September 32022, Omega had an operating asset portfolio of 916 facilities with approximately 92000 operating beds. These.
These facilities were spread across 63 third party operators and located within 42 states and the United Kingdom.
I only 12 month, operator, EBITDAR and EBITDAR coverage for our core portfolio as of June 32022 decreased to $1, three nine and $1 six times, respectively versus $1 44, and $1 one times, respectively for the trailing 12 month period ended March 31.
2022.
During the second quarter of 2022, our operators cumulatively recorded of approximately $29 million and federal stimulus funds as compared to approximately $39 million recorded during the first quarter.
Trailing 12 month, operator, EBIT dorm and EBITDAR coverage would've decreased during the second quarter of 2022 to one to three and <unk> nine times, respectively as compared to $1 two four and <unk> 92 times, respectively for the first quarter when excluding the benefit of any federal stimulus upon.
<unk>.
EBITDAR coverage for the stand alone quarter ended June 30th 2022 for our core portfolio was <unk> 96 times, including federal stimulus and eight four times, excluding the $29 million of federal stimulus funds.
This compares favorably to the Standalone first quarter, or <unk>, 93 times, and <unk>, 76 times with and without $39 million and federal stimulus funds respectively.
Occupancy for our overall core portfolio has steadily turned it up in 2022 from a low of 74, 6% in January to 78% as of mid October based upon preliminary reporting from our operators.
Turning to our senior housing portfolio today, our overall senior housing investment comprises of 183 assisted living independent living and memory care assets in the U S and the United Kingdom.
This portfolio on a pure play basis had its trailing 12 month EBITDAR lease coverage increased to <unk> 94 times at the end of the second quarter as compared to the end of the first quarter, which covenant 0.93 times.
Based upon preliminary results occupancy for this portfolio has recovered to 85, 8% as of mid October 2022 versus 83% in January of 2022.
Turning to portfolio matters.
At Gmail as previously reported we have been in ongoing discussions with the GMO for quite some time.
As a result during the third quarter and subsequently in the fourth quarter Omega divested 21 facilities, formerly leased to a GMO and a series of separate transactions to unrelated third parties.
The gross proceeds from the sales totaled $359 million and involve 17 facilities in Florida, two facilities in Georgia and two facilities in Maryland.
A total of 2000 and 522 operating beds.
It is anticipated that one additional facility in Florida would be sold in the coming weeks.
The remaining of GMI portfolio will consist of 18 facilities in Tennessee, and 11 facilities in Kentucky with a restated initial annual rent of approximately $23 million in annual interest of approximately $4 7 million beginning in the second quarter of 2023.
Other operators as previously mentioned in the first quarter of 2020 to an existing Omega operator, representing approximately two 4% of total rent gander experienced liquidity issues.
Accordingly. This operator has failed to pay full contractual rent since March and as such Omega has utilized a security deposit and the amount of approximately $2 million to offset a portion of this rent shortfall.
Omega is currently in discussions with this operator, which may include future rent deferrals asset sales <unk> releases to unrelated third parties.
At this point it is too early to predict the outcome of these discussions.
Subsequently in the second quarter of 2020 to another Omega operator, representing approximately two 2% of Omega total rent began making only partial monthly rent payments, thus, causing them eager to begin utilizing an existing $5 $4 million security deposit to offset shortfalls through.
October of 2022 partial rent payments combined with the utilization of a majority of the existing security deposit.
As resulted in Omega recognizing full rent as revenue during the quarter.
In the meantime, Omega and this operator have begun to discuss potential sales <unk> releases of certain facilities.
To that end in October of 2022, Omega released three facilities with 455 operating beds to an unrelated third party for an initial annual rent of $1 $6 million, which is materially similar to the previously allocated brand for those same facilities.
It is anticipated that future sales and are re leases will occur throughout the first half of 2023.
Turning to new investments.
September one 2022.
<unk> closed on a $40 million mezz loan investment to a new operator for the purchased a 43 facilities in Texas.
The Mezz loan bears a cash yield of 12% and has a five year term.
<unk> on September 32022, Omega closed on a $28 million purchase leaseback transaction for four care homes in the United Kingdom.
Concurrently with the acquisition of Omega entered into a master lease for the care homes with a new operator with an initial cash yield of 8% with two 5% escalators.
Omega is new investments in capital expenditures for the quarter totaled $87 million.
Year to date as of September 32022, Omega as new investments and capital expenditures totaled $301 million.
Turning to dispositions during the third quarter of 2022 Omega divested four facilities for total net proceeds of $51 million subsequently in the fourth quarter Omega sold an additional 19 facilities for net proceeds of $309 million.
These sales numbers include the 'twenty, one at GMO facilities that I mentioned earlier.
Year to date inclusive of the fourth quarter sales to date Omega has sold 63 facilities for approximately $748 million.
I will now turn the call over to Megan.
Thanks, Dan and good morning, everyone well operators continue to be diligent about managing COVID-19 within facilities. The worst of cover it appears from a clinical perspective to be behind them.
However, the pressures exacerbated by the pandemic continue to take their toll.
Currency continues to recover and extremely slow pace that said, 29% of core facilities to now recovered from an occupancy perspective with an additional 25% recovered to within 5% of pre COVID-19 levels.
Total of 54%, which compares favorably to last quarter at 48%.
Occupancy recovery continues to be hindered by self imposed admission bans due to staffing shortages.
And also an attempt by operators to eradicate agency usage altogether.
Based on the July 2022 jobs report for long term care aka reported that nursing homes are still down 14, 1% of their workforce as compared to February 2020, with assisted living facilities Fang somewhat better at a loss of three 9%.
However, there started to be a slight positive momentum with an average of 4600 nursing home jobs per month added from March 2022 through July 2022.
Anecdotally, we have also started hearing from many operators in the last several months that staffing is easing very modestly.
Expenses continued to be elevated from pre COVID-19 levels in particular as it relates to staffing and other staffing related items.
While agency expense on a per patient day basis for our core portfolio for second quarter 2022 continues to be elevated at six times. What it was in 2019, there was a per patient day decrease of slightly more than $1 PPD in second quarter versus first quarter.
But it's very slow positive movement in the fundamentals as promising.
Similar to what we saw with the ethanol distribution to nursing homes during the pandemic as it relates to Medicaid rate setting keeping pace with inflation. There is certainly the have and have nots from a state perspective.
As mentioned last quarter, we saw many states give quite substantial increases to help defray inflationary with staffing costs.
However, we are also seeing other states, either not keep pace or even make cuts to reimbursement.
Where we're seeing the most strain in the portfolio tends to be in those states that either didn't get asked Matt funds or at least not in any meaningful way and are having kept our rates heading up the completion.
For instance, you will note the sale of some of our facilities in the state of Florida recently.
Florida is a state we mentioned last quarter is having a seven 8% rate increase somewhat keeping pace with inflation.
That said Earthnut funds from the state, we're very limited and only released in late 2021, which put a strain on certain portfolios.
While we are cautiously encouraged by some of the positive momentum we are seeing albeit in an extremely slow pace. It is very evident that the industry is still deeply entrenched in the recovery phase of this pandemic and will be for quite a long time.
We can only hope that the states, even if on a lag basis, well rates that commensurate with increased costs.
And that the federal government will see fit not to impose costly mandates without funding mechanisms to help support such mandates.
I will now open the call up for questions.
Okay.
Thank you ladies and gentlemen, we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Jonathan Hughes with Raymond James.
Hey, good morning.
I was hoping you would be able to talk about the investments you've made in the UK This year.
I think 8% lease yield on the portfolio of care homes that were acquired this past quarter.
It was the same as those in the first quarter, but obviously interest rates have increased meaningfully throughout the year. So are you starting to see any upward movement in the UK acquisition yields or any impact on pricing from higher cost of capital.
Yes, so a lot of the 8% was our traditional over the course of the last several years.
In the UK.
The deals that we did in both the first quarter in the second quarter were deals that were actually cut previously several quarters before so we held to our original quote.
Those yields but.
Going forward.
There are no deal or two in the pipeline, where we continue to hold with that but really going forward is weak transactions.
Transactions are yields will go up from 8%.
Okay.
And then I think you said cash balance today, and or Bob said cash balance today is $435 million. How quickly can you swing back to offense and be a net acquirer of properties. They realize the private market <unk> here in the states is really competitive evidenced by the GMO sale, but.
Maybe the longer this period of uncertainty continues that could change.
Yes.
Well for starters.
Our pipeline is pretty pretty much the same it has been over the last several quarters actually probably the last year or so.
The lion's share of our transactions are still in the UK that we're looking at today.
And a little bit more movement in the U S. But as you said a lot of them are very very competitive.
We do expect that to change obviously interest rates have gone up significantly.
And our cost of capital and the way we fund our deals is different than everybody else or most of it or the acquired stores using a combination of.
Bank debt or bridge to HUD et cetera.
So I think that will change over the course of time.
But once again the pipeline is not materially changed so.
There is an expectation.
Pick up in the future, but right now it's the same.
Okay.
And then my last one on an EBITDAR coverage you talked about how it did.
It did tick down a little bit from last quarter and I saw that.
One times coverage bucket.
On increase.
Can you just talk about the expected trajectory on coverage in that sub one times coverage bucket going forward. Thanks, Jonathan one of the interesting things is.
We always talk about trailing 12 months and you saw that average go down a little bit.
But it is pretty interesting that quarter to quarter. We saw the coverage go up a little bit from Q1 to Q2.
Hello, with occupancy so I think thats.
A good trends.
The other thing to keep in mind is.
A number of states in Florida is a Great example, you had the new rates kicking in.
In October we see the impact of that coming through coverage.
That being said liquidity is still tight vacancy comments, 100% valid we have some more ground to cover.
Particularly the below one operators.
But we feel pretty good about.
It's not just math to restrike rent number when we think about scenarios where.
We need to do some level of restructuring I think we've shown that there are a lot of different avenues and restructuring pathways.
Your future cash flows the meaningful way so.
Bob.
We see a little bit of positive momentum quarter to quarter and I think when we.
Identify that group of operators, it's in the below one bucket and think about it.
We don't think about long term problems.
Alright, I appreciate the time.
Thank you.
Yeah.
Yeah.
Thank you. Your next question comes from John Pawlowski with Green Street.
Good morning, Thanks for taking the question.
Could you give us a sense in the U K what type of margin margin degradation. The operators have seen in recent months given the just a shaky macro environment and then are you seeing any demand related softness in the UK.
So.
I'll do the first question first which is.
We haven't seen a lot of elimination of results in the UK, we are expecting some as it relates to as Taylor mentioned.
<unk>.
There is provisions that could increase utility rates significantly we've heard as much as four four.
Utilities are generally not a big component of an operator's expense, but when you're talking about some of them.
Increased by four fold. It is it is material and it will run through all of our operators.
That being said the recovery in occupancy quicker in the U K.
Obviously inflation is starting to hit them now but.
Yeah.
All things being equal to date, we haven't seen any real determination.
Okay.
I'm, sorry, I didn't catch the second question.
Yes, sorry for the Multipart question just in terms of actually you know I know expenses are an issue, but actually demand coming in the door has there been any softening in recent quarters from just occupancy.
No there's not.
Okay.
And then Taylor.
Back to your comments on the percent of operators below one.
Point's well taken on just there's a lot of old news in the trailing 12 month figures, but there's been a substantial amount around below one for for a while so can you just give us a sense for what type of conversations you're having with this with.
With this cohort of operators had conversations picked up in terms of people starting I think are starting to ask about rent deferrals.
And then the other types of restructuring.
Yeah, I think it's.
We've had a little bit of conversation around rent deferrals, but it's more around.
Moving assets to new operators so transitions.
And to some extent.
Incremental sales.
I think in both those scenarios.
Looking about lease enhancing.
Transitions, our sales and so thats the expectation from my perspective for the vast majority of what's in there and frankly, the bulk of them continued to pay other than a couple bigger operators.
Bob talked about.
Okay. Thanks for the time.
Yeah.
Thank you.
Our next question comes from Michael Griffin with CD.
Great. Thanks, maybe we can go back to the <unk> transaction can you give us any sense of sort of what the cap rate was on that.
How it was marketed than anything kind of changed over the marketing process and was the buyer pool similar to the Gulf Coast and Guardian sales any additional commentary there would be great.
So we did hire an outside third party to broker the GMO assets.
It was well received I would say there was a number of.
Interested parties on a number of active bids.
It was in some sense similar to the Gulf Coast.
Transaction and how that laid out.
I'm sorry, what was the second part.
And then just in terms of like pricing expectations. When you were first marketing of the deal versus kind of when it ended up coming in.
I would say that we've met and potentially even exceeded price expectations in that transaction.
And then do you have a sense of you know on a cap rate basis, what it what it might have translated to.
Well.
It's a fair question.
If you looked at historical cash flow cap rates would be.
Extremely low I get very aggressive.
Most of the buyers look at this on.
A pro forma perspective.
And.
I'd say, it's consistent with historical cap rates pre pandemic.
They are thinking about cash flows returning to pre pandemic levels on the underwriting.
Got you I appreciate the color on that.
I'd be curious your thoughts on potential extension of the ph D. I think it is expected to expire here in January I know states do you have exposure in like Texas, North Carolina, and Kentucky have add ons, but they haven't made a permanent do you think there's any expectation that these additional reimbursement levels will will stay permanent.
Well that I'm talking about that in terms of the public health emergency Theres no way to know whether that will get pushed out of them started depend on what's going on with Covid.
In terms of those particular states, Texas for instance, I know Theres, a big push by the operators to try to get that 1963 permanent and the rate the rate setting.
In 2023 that will happen around April or may that determination will be made and they're pushing for more of an increase in that as well.
Hard with Texas, I mean, we watch it every two years when they go through rates setting and we think theyre going to do something.
But.
And we're cautiously optimistic news coming out of operators right now in terms of taxes.
North Carolina, Youre, correct me I'm, a pretty large.
Not increase.
Haven't done much on the.
Starting in 2022, we're just hopeful that in 2023.
The rate setting that either includes that increased or tied to timing of inflation a little bit better.
And then Kentucky also has a rather large asset map.
$29 PPD increase.
Actually I believe I have to confirm and I believe that actually got extended through June 32024.
At least that was the proposal in the Governor's budget.
And so we don't really have concerns on the Kentucky front.
Okay. That's it for me thanks for the time.
Yes.
Thank you <unk>.
Next question comes from Dave Rodgers with Baird.
Yes, good morning.
Four 5% of tenants are so that not fully paying today do you guys have a preference based on location, whether you re tenant those or sell them and then maybe the broader question is you'll sell $750 million or so this year does that number just accelerate much more into kind of 'twenty three 'twenty four based on your comments.
Based upon the geography of those tenants.
Think that we would we would see more releases than sales. So I don't think that number is going up.
Okay. Thank you and then maybe Meg and one for you on the recovery at the operator level you talked about the jobs that have been added.
And skilled nursing.
Can you give us maybe more of a sense of what's been added from a nursing side versus kind of back of the house and are there additional challenges I guess as we kind of look into the next quarter or two.
In one component or the other of continuing to grow occupancy for the operators.
Unfortunately, I don't have that level of detail from an archive report that that was from.
Thank you think on the nursing side and what our operators are talking about getting a little bit better. So we're hoping over the next few quarters when you start seeing that.
Folks are having a little bit more traction.
Getting international nurses coming in.
Just seeing things improve a little bit in general.
Alright, great. Thank you.
Thank you. The next question comes from Joe short tenor line with Merrill Lynch.
Yes, good morning, everyone.
Please correct me, if I'm wrong, but it looks like the top operator, your top operator slipped below one times coverage.
Could you just remind us where this operator has.
Has geographic exposure.
And.
Kind of walk through some of those states, but what are the kind of positive and negatives on the funding in those states in the year ahead.
So.
This particular, operator, its biggest exposures in the state of Florida, which as.
As you know has been probably that along with Texas has been one of our really challenging states.
They really didn't.
Help during the pandemic.
I will say they recently did pass for the first time.
Here is a 7% increase in Medicaid rates in Florida, which go effective on October one.
So we won't see that running through.
Yeah.
The latter part of the fourth quarter, but.
But that is a big.
A big help to that particular operator.
Sure.
Thanks for the East coast.
And those are faring much better than Florida.
Okay.
With that Medicare rate will that with that increase kind of get them back above one times, one time coverage, where we're going to see that kind of stay below one one time for a while.
So it's a Medicaid rate increase.
Theres a lot of moving parts. So it's.
It's hard to forecast that in.
But it certainly moves much closer that in conjunction with the other efforts that they're undertaking including obviously trying to.
Get occupancy reducing agencies.
Et cetera, we hope that they will be above one to one.
Okay, and then you mentioned UK power cost are impacting your operators over there I'm just curious if there's any kind of government support that's going to help people out over there or if it's just kind of on the operators.
So.
It hasn't impacted them, yet, but we do believe that it will and as of right now we have not seen any intervention by the government.
To help assist.
Okay, Alright, I appreciate the color. Thank you.
Thank you. Your next question comes from Tayo Okusanya with credit Suisse.
Hi, Yes, good morning, everyone.
Talk a little bit about just from.
The lobby group perspective.
Whats happening.
And any chances that you could.
Could kind of help.
With managing with helping operators as kind of manage through some of the challenges that they're having now and specifically I'm curious if.
Are there any initiatives around maybe trying to get more federal help maybe trying to get.
Certain federal benefits extend it even if phe is kind of called in January of 2023.
Curious what the lobby group is doing at this point just given that a lot of operators are still facing challenges right now even with all the help that they are getting.
So I guess, it's not necessarily spending as much time on trying to get federal money, because I think that pretty much dried up at this point.
But they are concentrating their efforts.
And particularly those dates you have some increases.
Increases in trying to get those into the rate setting.
So that's where they've been concentrating their efforts in terms of you know that.
Federal government when they are concentrating on it's really you know looking at some of these mandates.
It has been talking about and making sure that any mandates that come through them come.
Come through with you.
You come through with money along with it to pay for those mandates. So that's that's where they're sort of concentrating our efforts right now.
Gotcha Alright.
And then also on the tenant side.
I mean are there any tenants.
That we should be thinking about that may have a meaningful amount of debt maturities or something like that coming due over the next six to 12 months that may end up with additional challenges apart from just.
The free cash flow at this point.
The lion's share of our operators really don't have third party debt other than working capital lines of credit.
Sure.
Usually come up every one or two years, they are fairly short term, but other than those coming up and they are generally just automatically renewed no there would not be any big components.
That our operators are saddled with on their balance sheet.
Alright, thank you.
Okay.
Thank you. Your next question comes from Nick <unk> with Scotiabank.
Hi, good morning, everyone. So I want to make sure I'm looking at this correctly. So on page six of the Sup, where you give the.
The operator coverage below one it looks like there is various small tenants on that page that are new this quarter theyre not current on their rent adds up to two 2% of the portfolio, which is I think above and beyond the ones that you are referencing in the.
Earnings release, where you're calling out specific operator, so I just wanted to be clear on that and then also.
I understand if you have a number.
For the whole portfolio, maybe putting aside the <unk>.
<unk> Mo.
What percent of rent in the portfolio right now.
Our operators are just not current on rent.
Hey, Nick it's Bob here, So, yes, youre right looking at that.
So.
Output at Gmail waited till we get back them up so right right back them out so roughly 24% of our operators are drilling on a cash basis, and we have six operators that aren't current GMO being the largest that they need to pay it all of the other five and you still see.
Listed on page six there they all paid a portion just not the full amount during the third quarter. So that's important and then up to 24% that are on a cash basis. If you go through what you have you have the GMO you had the two 4% to two 2% and Guardian, Dan has already talked about.
<unk> ended the next big one there is genesis, whose tanks. So you take those five operators they represent 18% to 19% of the 25 up to 24%.
I don't know if that color helps.
Is helpful and I guess just to be clear then theres nothing I mean, as we think about other operators.
Are there any that wouldn't be on this page six that are not current on rent.
The only one like I said, it's not on there is.
Uh huh.
As at Gmail GMO, Okay question, which you already highlight you got it okay. Thanks Thats helpful.
So the other question I had was.
How I guess, you know and I know you talked about earlier that youre going to get you expected GMO rent some portion of that rent coming back next year on a retained assets you talk about the redeployment of.
The proceeds and getting some benefit there, but I guess I mean, if you just look at nine months.
Sad as you guys calculate it it's it's kind of barely covering the existing dividend and you look at the cash flow from ops on the cash flow statement, it's not covering the dividend. So there is some sort of delta there between those two.
I guess I'm, just trying to understand because it's sort of going forward. It sounds like he might have a little bit of <unk>.
Incremental pressure on.
On cash flow from as you're getting further along with these tenants.
Having already use letters of credit et cetera.
There is some timing element on the redeployment of.
Proceeds so I'm just trying to understand how I guess, how the board is thinking about this from a dividend standpoint.
Heading into next year.
Higher than normal payout ratio and then at the same Tom I guess, if theres any just to be clear. If there is any taxable income issues that you know of next year versus this year that would let's say pressure your taxable income down that would also perhaps be considered with the dividend. Thanks.
Yes.
I think from our perspective, the reason I've provided that color around <unk> as we look forward.
Do you think about our fad run rate of 71.
Just the GMO alone.
The redeployment.
GMO sale proceeds to get you to 77% fat.
Without fixing some of these other things that you're going to get fixed.
So I think from the board's perspective.
It's still let's look out beyond one or two quarters and think about where we're going to fall as we resolve these issues.
And then on the tax side.
We're really pretty steady state from our tax perspective, a bunch of these sales gains.
So dividend shelters that to some extent.
Likely you'll have some additional sales in 'twenty three they'll likely have games. So we will be thinking about the tax planning around that but frankly, we have lots of levers we can pull that.
To manage that.
Not necessarily be the dividend, but we have upward pressure on taxable income not downward.
Okay. Appreciate it that's helpful. Thanks Todd.
Yeah.
Yeah.
Thank you. Your next question comes from Tokyo with Stifel.
Hey, good morning, everyone.
Just trying to get an idea of next year on the sniff side I think you mentioned that we are getting some healthy rate in some states.
Two 7% increase on Medicare So I guess, the blended rate is probably around 46%.
And then you add another 200 basis points.
Occupancy growth and see some normalization of the skill mix I think revenue is probably running at 6% to 8% slightly above where the labor is at.
Today I'm, probably over generalizing this but you mentioned a positive trading spot coverage. It does suggest that coverage will improve modestly next year, but maybe not a great deal. So I'm curious to the extent we.
Look at the Snip operators bottom line, if they don't improve meaningfully over the next 12 months when we look at the least it under one times coverage today and the steel current you know how many of those do you.
You think we'll need more restructuring of some sort of particularly those larger leases my list.
You have another trustworthy.
You've identified all the moving parts.
So.
It's an incredibly complex puzzle.
I think from our perspective.
It's fine.
Cautious we talk about the next 12 months, we're going to continue to see things, but I will tell you.
Going through this whole lift we're engaged with these operators a nearly daily basis.
There's nothing I would highlight where you would say I've got.
An issue that's going to take them extremely well time to resolve or one that's going to be extremely meaningful based on all the things, we see today and what you've talked about.
Slow, but improving occupancy stayed.
States reacting positively from a rate perspective, and inflation environment, that's difficult, but seems relatively predictable.
When we think about all of those things that we look at our coverages.
As Dan mentioned for the <unk>.
Our biggest operator this fall into that bucket, there's a pathway for them to get it in or above that one times area and frankly, we'll continue to have discussions about them are there certain assets that.
That if we were to sell or re leased to another party or actually improve that credit.
Theres lots of toggles and levers we can pull so we felt pretty good.
About our outcome in terms of predicting what those coverages would be just too many moving parts.
Yes got you so just to pull out from that point.
We're thinking of doing more transitioning what is the access bandwidth that some of the back office operators have maybe you could take over a larger portfolio or is it more challenging now to do larger portfolio transition now or maybe it takes longer to ramp up operation I think I heard you say.
Do you expect similar rent levels.
To clarify how quickly you think you can.
You can transition them.
Short term shortfall in the revenue that we might not we might need to think about.
I think that's going to be limited I mean, you can always have gaps in time, where you out.
And operator Thats not currently paying you in moving assets, just sort of a regulatory front it takes three or four months.
That alone creates gaps.
But we're not talking about transitions of portfolios.
The type of size that would be a deterrent in terms of speed.
We're talking about things that are more or less bite size for the type of operators, who can take them.
Okay and one last from me on Brookdale do you have any change of control language in the currencies that require Omega can say, if there's a sale.
Yes.
We're all looking around.
I'm going to tell you I don't think we.
I doubt, we do well we're happy to go take a look and provide you that answer that would not be normal in a lease was above the top of the pulp.
Okay. That's helpful. Thank you.
Thank you.
Your next question comes from the criminal Electra with Mizuho.
Hi, Thanks for taking the question maybe just first on the on.
On the asset sales you did I may have missed missed this but what was it around like 170.
$80, a bed and can you just walk us through today.
How deep is that market. If you were looking to sell additional assets.
What sort of buyers are there and do you expect pricing to remain intact, given what's going on in the debt markets.
So as it relates to the <unk> sale.
Specifically, it's about 140000 a bed.
That's a little bit of a plant because remember it's three states, but the lion's share of those but as always we are in the state of Florida.
I do.
Those numbers as a whole I think you've seen interest rates climb up significantly everybody has seen that we were happy with the fact that our buyer group held to the original price that was set for months and months ago.
I'm not sure if we were to go back out to the market today that we would see those same type of fed rates.
I would expect them to go down.
Got it Okay, and then could you clarify you you you had mentioned.
Debt to do it swapped last year.
And I just want to make sure I heard it correctly was that pertaining to the.
The debt coming due next year.
In that sentence, you referenced something about liquidity ratios being.
Being impacted could you just flesh that out for us.
Yes, it's two separate topics there so on the first one.
The pandemic first started we did go lock the treasury for them because they were self one and we really like Treasury sub one which most companies do so we did $400 million of Treasury lock it wasn't tied to a particular, but majority but tied to a date on it just happens to coincide with a maturity.
We have a 'twenty three maturity in August , but our treasury locks go through.
Firstly, they go into the first quarter of 2000 and for giving us the ability to unwind those if we choose to and apply to 'twenty, three or hold them and apply them to a different debt maturity.
And then what I was saying on the liquidity ratios debt to.
The EBITDA calculation. So it does EBITDA calculations for this quarter, we do have some security deposits that we applied to.
Rent.
Because we're allowed to and hence that's an EBITDA if they don't want sort of excited the security deposit and to the extent. We're not paid then we have left EBITDA and the calculations.
But again this okay.
It's really a small builder.
Those are the those ratios I mean, you're well.
Above or in compliance with those back you'll comment.
They'll be infected.
Well, we have a ton of cushion no impact no fun for debt covenant impact Sierra Okay. Okay. Thanks, Thanks for clarifying and then just last one on the.
Just I want to go back to the the the 10-Q disclosed in terms of either not being rent or had been converted to cash being in the disclosure with your your chalk well you have to.
The rent coverages the band.
Just to be totally clear you called out you've convinced me called on all of the tenants that have had issues or noncash being over and above what you have disclosed what we can see there are no I'm assuming there is always some like <unk>, 2% then it every quarter that has an issue, but it's not worth it.
You may not have to call it out because it happened every quarter, even pre COVID-19, but over and above that there is no.
The other thing and that is buried in there that we do not know about.
That's correct.
I told you. It was six of them five are listed here. The six was a gmail we've talked about.
And then just to clarify so the tenants that are below one.
Or in general can you just describe for us the in the lease agreements is it is it fair or is there a lot of variability between maybe letters of credit or security deposits that you may have in the need for you to draw them in the future is it is it fairly even very varied across tenants.
It is very varied yes, and then also there is not only that it varies amongst what type of credit card secondary credit support you have in terms of either corporate or personal guarantees.
Got it okay. Thank you.
Thank you. The next question comes from Steven Valiquette with Barclays.
Great. Thanks.
Good morning, everybody. So a couple of questions here you know somebody brought up Brookdale earlier I guess, maybe just go through the quick scenario analysis about what would happen for Omega with your Brookdale Master lease and the amount of a change of control there because they still do show up as a top 10, operator for you guys in terms of the percent of rent.
And then one other just kind of housekeeping one I might have missed this but you had that $350 million of senior notes due in August of 'twenty three what's the expected source of funds to pay down the principal on that tranche.
Some time, obviously, but just curious what the thought pattern is right now around that tranche.
Yes, I'll address the latter question first.
<unk> hundred 50, where currently sit with $435 million of cash on the balance sheet, we have that hedge or sort of treasury locks worth $100 million.
And so there are two primary sources.
And then Brookdale I think we've partially yesterday because.
We need to go respond to the prior question around.
What our rights are the event of a change of control, but as Dan mentioned.
A typical public company lease scenario, where we would have rights to stop something like that so.
If there was a transaction we would have.
So the equity holders.
Okay. So in the event, it's acquired by you know, let's say private equity probably went a matter in the event. It would be theoretically is all hypothetical obviously, but that was acquired by another REIT.
Some things probably starting to get.
No more messy under that sort of scenarios that just at a high level.
Way to think about it.
Now are you I'm just curious how much that has your attention I guess I will just ask it that way as well depending on the readout probably be really happy with the credit.
Okay, maybe I'll follow up offline I could talk more about it offline might be helpful. Sure.
Thank you. Your next question comes from Daniel Bernstein with capital one.
Hi, Good morning, a lot's been asked did you provide any seller financing for GMO asset sale.
No.
Okay.
And then I guess kind of related question to that so just trying to understand the.
I guess aggressiveness of potential buyers for assets.
Came out of the Nic conference thinking that maybe lending was tightening up significantly, especially for skilled nursing.
Yes.
Are there buyers are using a lot of leverage and are they finding financing available.
Just trying to understand maybe some of the outside of interest rates going up.
Trying to understand maybe some of the.
The lending and investing environment, that's out there and how much cash is available.
From buyers to continue to be aggressive on buying scripts for the future.
So as I indicated our latest trade, which was a sizable along with the GMO.
From the start where we set the price to the yen, which was really in a matter of days and weeks ago.
That number held firm.
The buyers were able to come up with the appropriate financing now.
The specifics of that financing I'm not privy to.
[noise] underwrite their financing for them so as long as they come to the closing table with their money we're good.
And we have we don't have anything in the market today of any size. So I'm not sure what issues are being encountered other than we know that.
Interest rates have moved up significantly so.
Extent that we have to put something on the market of any sizable will be wary of that and that's very likely could affect pricing.
Okay.
And then you really haven't spoken too much about the senior housing fundamentals.
So I was trying to get your thoughts on maybe.
The trends there in seniors housing versus skilled nursing, which seems to be trending up incrementally slightly but.
Just trying to understand maybe kind of your thoughts on seniors going forward as well.
Well, it's interesting because we have the perspective from our portfolio, which is.
Maplewood High Ed just just at pre Covid, occupancies and going up.
Our piece of the Brookdale portfolio performs pretty well in the UK has recovered. So when you think about those three big pockets for us.
It looks pretty good now we obviously here.
What's going on in the industry.
And you see that but but.
Honestly, that's just what we're reading so from our perspective, when we look at our portfolio.
It appears to be a pretty good shape and obviously the real issue for everybody.
The labor costs.
Inflation around everything.
Everything else.
Alright, I appreciate the color that's all I have thanks.
Yeah.
Thank you, ladies and gentlemen, again, if you'd like to ask a question. Please press Star then one.
Your next question comes from Rich Anderson with Hudson BC Nico.
Thanks.
Good.
Morning, I've been sitting in a fly on the wall here, but I do have one question and I apologize if.
It's been said, but for the 19 remaining GMO assets in Tennessee and Kentucky.
You gave rent of 23 and interest of $4 7 million starting in the second quarter.
Did you also provide what that presumes from a coverage standpoint.
So it's actually 29 facilities, just so that you know and we didn't indicate what the coverage would be but.
It's.
We think at or above arm.
What we would normally underwrite a new credit for.
So yes.
We've made sure that what's left is credit worthy.
Okay. So.
Yeah.
In a highly comfortable spot from a from a credit perspective.
Based on those numbers.
Coverage perspective, that's correct okay. Thank you.
Yeah.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Taylor Pickett for any closing remarks.
Yes, no I appreciate it thanks, everyone for joining us. This morning, I know there were a couple of follow up items, please feel free to reach out to Matthew or Bob.
We'll get your answers have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
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