Omega Healthcare Investors Inc (OHI) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Omega Healthcare Investors' Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.

Good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; and Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio 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 in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the Financial Information section of our website at www.omegahealthcare.com, and in the case of FFO and adjusted FFO, in our press release issued on Friday.

I will now turn the call over to Taylor.

Thanks, Michele. Good morning, and thank you for joining our second quarter 2018 earnings conference call. Today, I will discuss our strategic asset repositioning and portfolio restructuring, our dividend outlook and guidance for the remainder of 2018 and updates on Medicare and Medicaid reimbursement.

We have made considerable progress in strategic asset repositioning and portfolio restructurings. In the first two quarters of 2018, we disposed of 64 facilities for total consideration of $311 million. The revenue reduction related to these sales was $34 million, while the trailing 12-month cash flow on these assets was $25 million.

The cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds which equate to a cash flow yield of 8%. We believe we're going to be able to redeploy these proceeds into higher-quality assets with good rent coverage, while experiencing minimal revenue impact.

Our strong sales results today reflect the continued appetite for SNF assets by local market private buyers. We will likely sell 15 to 20 additional facilities, but the bulk of our asset sales are now complete, excluding the ultimate outcome of the Orianna portfolio, not already slated for transition.

Orianna is now the only material portfolio that is being restructured. On July 1, 13 Mississippi facilities with annual contractual rent of $12 million were transitioned to an existing Omega operator. On August 1, one Indiana facility with annual contractual rent of $450,000 was transitioned to an existing Omega operator.

In the next few months, we're scheduled to transition 9 facilities in North Carolina, Virginia, Georgia and Tennessee. The combined new annual contractual rent of $4.3 million comes from 3 existing Omega operators and is in line with our expectations and previous disclosures.

The Orianna restructuring support agreement relating to the remaining 19 Orianna facilities was terminated on July 25.

Omega, the unsecured creditors and the debtors have all filed various motions with respect to the next steps in bankruptcy. We have had conversations with various potential new operators and continue to feel comfortable with our previously estimated Orianna portfolio rent or rent equivalent range of $32 million to $38 million.

Given that Orianna is an ongoing legal matter, we will not be commenting further or answer questions about these proceedings on this call.

Turning to our dividend outlook and guidance for the remainder of 2018. Our second quarter dividend of $0.66 per share reflects a payout ratio of 87% of adjusted FFO and 98% of funds available for distribution. While these ratios are high from a historical perspective, we feel comfortable with the payout ratio, given that we incurred abnormally high second quarter Orianna legal fees of $2 million. And in fact, we project Orianna asset rent or rent equivalent of $8 million to $9.5 million per quarter.

After normalizing the effect of Orianna, the pro forma dividend payout ratios go down to approximately 81% of adjusted FFO and 91% of FAD. We have tightened our adjusted FFO guidance to a range of $3.03 to $3.06 per share and our FAD guidance to a range of $2.67 to $2.74 per share.

Our tightened guidance reflects the completion of the bulk of our asset sales, the completion of our larger restructurings and the partial completion of the Orianna restructuring.

On the reimbursement front, on July 31, CMS issued its final SNF Medicare payment rule for fiscal year 2019. The provisions of this final rule are effectively unchanged from the proposed rule issued on April 27. The market basket increase in Medicare fee-for-service rates is set at 2.4% effective October 1, 2018. The value-based purchasing program discounts to those rates are expected to average 0.6%, net of rehospitalization rebates, also commencing October 1, 2018.

Most importantly, the new Patient-Driven Payment Model, or PDPM, will replace the current RUG-IV payment methodology for Medicare fee-for-service rates effective October 1, 2019.

PDPM is expected to be budget-neutral for the SNF industry, eliminates therapy minutes as the principal driver of rates in favor of patient clinical characteristics, and creates opportunities for service efficiencies via group and concurrent therapy protocols without sacrificing outcomes. We are optimistic that PDPM will positively impact both facility performance and patient care with its focus on the needs of patients rather than the volume of services provided.

As to Medicaid rates, federal matching subsidies continue to sustain reimbursement increases near inflation levels as threats of block granting or capped per capita federal Medicaid funding have failed to materialize in Congress, subject to the outcome of the upcoming midterm elections and their impact on the balance of power in Congress.

I will now turn the call over to Bob.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $155 million or $0.75 per share for the quarter as compared to $151 million or $0.73 per share for the second quarter of 2017.

Our adjusted FFO was $159 million or $0.76 per share for the quarter and excludes the impact of $564,000 in provisions for uncollectible accounts, $1 million related to unrealized gains on our Genesis common stock warrants and $4.1 million of noncash stock-based compensation expense.

Operating revenue for the quarter was approximately $220 million versus $236 million for the second quarter of 2017. The decrease was primarily a result of approximately $16 million of reduced revenue as we place Orianna on a cash basis effective July 1, 2017, and accordingly, did not record any lease revenue in the second quarter of 2018 and reduced revenue as a result of asset sales that occurred since the second quarter of 2017.

The decrease in revenue resulting from the asset sales was offset by incremental revenue from a combination of new investments completed, capital improvements made to our facilities, asset transitions and lease amendments made during that same time period.

The $220 million of revenue for the quarter includes: $18 million of noncash revenue; $15.7 million of Signature rent and interest, of which $13 million was contractual cash received; we did not and will not be recording the Signature deferred revenue until it's received; $7.8 million of Daybreak's full contractual revenue, which includes no straight-line revenue; $300,000 of preferred care revenue; $3.6 million related to assets sold during the second quarter; and no revenue related to the Orianna leased facilities.

For revenue modeling purposes, we project our noncash quarterly revenue will continue at $18 million to $19 million. We expect to record revenue from Signature and Daybreak at their full contractual amounts consistent with the second quarter.

We expect to transition to Preferred Care portfolio and generate annual revenue between $5 million to $6 million starting in late 2018 or early 2019. We expect the Orianna facilities to generate annual rent or rent equivalents of $32 million to $38 million, when restructuring is complete. $3 million per quarter of that restructuring will be recorded in the third quarter of 2018 related to the Orianna Mississippi portfolio that transitioned earlier this quarter.

Our G&A expense was $11.1 million for the quarter, which was $3.3 million greater than our second quarter 2007 (sic) [2017] G&A expense and $700,000 greater than our first quarter 2018, when eliminating the $2 million purchase option buyout that occurred in the first quarter of 2018. These increases were primarily due to legal expenses related to operator workouts and restructurings.

For modeling purposes, we project our G&A run rate for the remainder of 2018 to be consistent or slightly greater than our second quarter G&A, as a result of legal expenses related to operator workouts and transitions and then returning to our traditional $8 million to $9 million of quarterly run rate.

In addition, we expect 2018 noncash stock-based compensation expense to be approximately $4 million per quarter, consistent with both the first and second quarters of 2018.

Interest expense for the quarter, when excluding noncash deferred financing cost, was $48 million or the same as the second quarter of 2017, as lower debt balances were offset by a higher blended cost of debt, primarily as a result of higher LIBOR rates.

In the second quarter, we sold 47 assets for consideration of $138 million in net cash proceeds, a $25 million seller note and $53 million in buyer assumed HUD debt, recognizing a loss of approximately $3 million.

As I mentioned earlier, in the second quarter, we recorded approximately $3.6 million in revenue related to those 47 dispositions. During the quarter, we received $5.2 million in insurance proceeds related to a facility destroyed by a fire in 2017 and recorded a recovery of an asset previously impaired. We expect to receive additional insurance proceeds in the second half of 2018.

The recovery offset impairment charges of approximately $4.1 million, primarily related to reducing the net book values on 5 facilities to their estimated fair values or expected selling prices for a net recovery on real estate properties of $1.1 million.

Turning to the balance sheet. At June 30, we had 3 facilities valued at approximately $4 million classified as assets held-for-sale. And we are still evaluating approximately $90 million in potential asset disposition opportunities, which could occur over the next several quarters.

Our balance sheet remains strong. For the 3 months ended June 30, our net debt to annualized EBITDA was 5.49x and our fixed charge coverage ratio was 4x. It's important to note EBITDA in these calculations has no annual revenue related to Orianna or construction in process related to new builds. When adjusting for the likely range of expected rental outcomes from Orianna, the known revenue on the new builds and removing revenue related to our second quarter asset sales, our pro forma leverage would be roughly 5x.

I will now turn the call over to Dan Booth.

Thanks, Bob, and good morning, everyone. As of June 30, 2018, Omega had an operating asset portfolio of 923 facilities with approximately 93,000 operating beds. These facilities were spread across 67 third-party operators and located within 40 states and the United Kingdom.

Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio was slightly down during the first quarter of 2018 at 1.69x and 1.33x, respectively, versus 1.71x and 1.34x, respectively, for the trailing 12-month period ended December 31, 2017.

Turning to portfolio matters. In addition to the Orianna situation, which Taylor spoke about earlier and as we have discussed on previous calls, one of our non-top 10 operators, Preferred Care, filed for Chapter 11 bankruptcy as a result of a $28 million jury award in the State of Kentucky. While Omega has no exposure to Preferred Care in Kentucky, we currently lease 14 facilities to their subsidiaries in New Mexico, Arizona and Oklahoma, all of which are in the process of being transitioned to new operators per Omega's agreement with Preferred Care.

Two facilities in Texas previously leased to Preferred Care transitioned to an existing Omega operator effective June 1 of this year. Omega expects the remaining 14 facilities to be re-leased during the fourth quarter of 2018.

In previous calls, we have discussed our restructuring agreements with both Signature and Daybreak. As an update, Omega is pleased to report that both operators are fully compliant with their respective restructuring agreements and operational performance is in line with or exceeding budgeted levels. At this time, we have no other material restructuring agreements in process.

Turning to new investments. During the second quarter of 2018, Omega completed 3 separate transactions totaling $77 million plus an additional $54 million in capital expenditures. The transactions included the purchase lease of 5 skilled nursing facilities in Texas for $23 million, a $44 million mortgage loan for 5 skilled nursing facilities in Michigan and a $10 million mezzanine loan. All of the transactions were with existing Omega operators. These transactions bring our year-to-date investment total through June 30 to approximately $200 million, including capital expenditures.

Turning to Omega's repositioning activities. During the second quarter of 2018, Omega sold 47 facilities for approximately $216 million with an additional 5 facilities sold so far in the third quarter of 2018. This brings the year-to-date dispositions to 69 facilities, inclusive of 3 mortgage loan payouts for total proceeds of approximately $335 million.

In addition to facilities sales, Omega has re-leased 43 facilities year-to-date, which includes the 12 Mississippi facilities mentioned earlier by Taylor. We're currently evaluating approximately 15 additional facilities to sell and 28 facilities to re-lease in the coming quarters.

Omega continues to review our portfolio and discuss strategic repositioning opportunities with each of our operators.

I will now turn the call over to Steven.

Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our planned ALF memory care high-rise at Second Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $285 million, including accrued rent, and is scheduled to open in the second half of 2019.

The current estimate constitutes a $35 million cost increase. The increase in project cost is materially driven by the decision to purchase available air rights from the New York City MTA, resulting in a larger building combined with incremental accrued rent resulting from our partial option buyout on January 3, 2018, and as discussed on last quarter's call. Prior to the partial option buyout, our tenant Maplewood was paying rent currently on the land value of the project.

Our conviction around expanding the project in our investment was supported by (technical difficulty) market comp strengthening since our original underwriting. The increase in project size will not have an impact on the timing of the opening, and furthermore, our anticipated yield will remain the same as our lease payments rise proportionally with cost.

Including the land and CIP of our New York City project, at the end of the second quarter, Omega Senior Housing portfolio totaled $1.5 billion of investment in our balance sheet, anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties as well as Healthcare Homes and Gold Care in the U.K. Our overall senior housing investment now comprises 120 assisted living, independent living and memory care assets in the U.S. and U.K.

On a stand-alone basis, this portfolio not only covers its lease obligations at 1.21x, but also represents one of the larger senior housing portfolios amongst the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio, as highlighted by our 13 Maplewood facilities and the related pipeline, is predicated on coupling our tenants' operating capabilities with our commitment to having in-house design and construction expertise.

Through this same capability, we invested $54.1 million in the first quarter in new construction and strategic reinvestment. $38.7 million of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $15.4 million of this investment was related to our ongoing portfolio CapEx reinvestment program.

I will now turn the call over to Taylor for some final comments.

Thanks, Steven. As we look back on the first half of 2018, we're pleased with what we've been able to accomplish. We've completed the majority of our asset sales at compelling valuations, we've concluded our larger restructurings, and we've begun receiving rents on our Orianna transition assets. While near-term labor cost pressures continue, we feel good about the future of the industry with improving demographics at the beginning of a multi-decade cycle and a considered and thoughtful new reimbursement model next October.

With an improved portfolio of assets and the majority of our dispositions behind us, we can start focusing on redeploying the proceeds and growing the business again.

And with that, I'll open up to questions.

(Operator Instructions) Our first question comes from Jonathan Hughes with Raymond James.

So you mentioned plans to focus on redeploying proceeds and returning to growing the business. And I recall, in the past and maybe few months ago, you said it was tough to find deals that meet your underwriting criteria. But one of the smaller players in the skilled space last week said they expect more deals with attractive pricing coming to market in the back half of the year.

So my question is, what are you seeing out there in the acquisition market? Have seller pricing expectations become more rational as the operating environment remains tough and a bit uncertain for some of those kind of less sophisticated operators with a PDPM on the horizon?

Yes, we're not seeing the acquisition activity increase at any real significance at this point. It's mostly we're seeing sort of a smaller size transactions and most of them are with our existing operators. There just haven't been any large trades come to market. And I don't really anticipate seeing any of those in the latter half of 2018, at least where we sit today. 2019 could be a whole new ballgame, but at this point, it's a fairly quiet investment environment.

Okay. Interesting. And then, I guess, kind of sticking with investments, how do you look at replacement costs versus stabilized acquisitions? I'm looking at the development pipeline, excluding Maplewood in New York, which you just talked about. But the cost on SNF developments are around, say, $80,000 per bed, recent acquisitions were about $84,000. Is it fair to say that future development commitments will take a backseat to acquisitions? Was pricing similar there? And no construction risk?

We still look to develop as much as possible. The fact of the matter is it's difficult particularly with skilled nursing facilities to find deals that make sense from a development perspective. So we'll do as much of that as we can because the returns tend to be very high in terms of coverage and credit improvement. So -- but I think your view is correct.

In terms of growth, it's going to be predominantly existing properties. As Dan said, today, it's not particularly active, but I concur with our peer that talked about last week, the possibility of seeing more product come out as PDPM becomes a reality.

Okay. And then just one more, and I'll jump off, but could you give us an update on the Signature portfolio in terms of how operations are progressing there? I realize that restructuring is only a few months behind us and Dan mentioned in line, but can you just talk about the CapEx earmarked for that portfolio? Those upgrades have begun. Operationally, how have things gone now that they don't have to devote all their time and effort to fixing the cap structure?

Yes. I mean, now that the restructuring is behind them, it is a big sort of monkey off their back. They are being able to focus on operations. Operations, as I indicated, are performing according to plan, actually slightly above. So I think things look good. I mean, the CapEx that we're deploying is more maintenance CapEx than it is any new projects so that's kind of an ongoing outlay. But overall, things are going well with Signature.

Any update in terms of like admissions or maybe employee retention? Anything more specific you can give us?

Through the process, they really didn't have any major blips in admissions or census or payer mix. Everybody is battling labor costs, and they continue to battle it. It's an ongoing fight. I think if you were to talk generally with our operators, I'd say that it's still a challenge, but it's less of a challenge than it was.

A lot of these folks have been on the front end of the labor issues and have tried to retain focus on the front end by providing higher wages and better benefits. So I don't think, while it's still probably the biggest challenge in the sector, at least from our operators' perspective it's not getting worse.

Our next question comes from Juan Sanabria with Bank of America.

Just hoping we could talk about the noncore, nonstabilized bucket that you break out in your rent coverage disclosure in the supp. And how and when is that going to reduce in size? You've completed a lot of sales, you said, and some of the restructurings are nearing an end. If you could just break down what's in that other bucket and when that should come down.

Yes, the -- so you have 15% in that bucket, it's come down from 17%. And there are 3 components of that. The biggest is Orianna, which is 6% of that bucket. So as Orianna transition facilities move and we finish out that restructuring, you'll see that 6% go away over time.

And then you have 6% that's transitioned in sale assets. And Dan mentioned, we have a number of assets that we're looking at transitioning and we have additional sale assets. And those will move, again, over time. It's -- you're probably talking about 6 months for the bulk of that.

And then the balance is 3% or the nonstabilized assets are in fill up, and the best example of that is a Maplewood new build that takes time to fill or a skilled nursing facility that's open that's filling. So that bucket can take up to a year, just because it takes a long time to fill some of those buildings. But I think the bulk of it, Juan, you're going to see Orianna move and then the sales and transitions will move and that's all relatively near term.

Okay, great. And then just on the incremental $90 million bucks that you're now looking to, maybe, sell at some point, what drove that decision? Was it anything operator specific or coverage levels coming down and kind of losing faith in those assets or just markets you don't want to be? Any color on what drove that incremental disposition guidance would be great.

Actually, you've answered the question for us. It really is a combination of all those. It's either operator-driven, market-driven or physical plant driven and -- or a combination of all the above or some of the above. So -- and then they're different in each situation, they're unique for each operator and market.

And just to be clear, that extra $90 million is now included in that 15% bucket?

That's part of that bucket, correct.

Okay. And then just a last question from me. You mentioned that you do expect more acquisition opportunities in the second half of this year related to PDPM, like your peer said, is that just because -- why is that? Are people worried about requirements under PDPM and just a transition or uncertainty of it? Or if you could just elaborate on how those 2 tie together?

Yes. Just to clarify, I don't think we see -- our view is the back half of '18; we're not going to see a lot of new activity. But we think going into '19, a, we'll start to see the cycle, which has been kind of slow in skilled pick up. Forget about PDPM.

But I think anytime -- we've seen historically, any time there are changes in reimbursement, there are a group of operators that look at that. Each iteration of more sophistication in this business has driven the consolidation that's been the model that we've run forever.

So it's just another iteration of what has caused the consolidation of this industry over the last decade. So I think if history holds true, we'll see some of these local operators to say, "Okay, I've had enough. You know, I'm not going to go through this next change." It's just another step of consolidation that we've seen for a very long time.

Our next question comes from Chad Vanacore with Stifel.

So last quarter, you gave us the update on Daybreak, they are paying 75% of rent. Now I think you said that they are back to full rent. Was there any back rent collected? And then what's the balance of accounts receivable owed now?

Chad, I think you're referring to Signature? The Signature was taking 75% last quarter.

Okay. So...

It's basically what I said -- go ahead, Chad, sorry.

Was Daybreak up to date as of last quarter?

Daybreak is up to date this quarter. They were shy by a couple million dollars and because we had to apply cash that was paid to old AR. This quarter, they are paying the full contractual. And as I said in my prepared remarks that -- that's what we're recording going forward.

Okay. But Bob, does that mean they've already caught up so there is no outstanding AR associated with the rent earlier this year?

They had to catch up the -- they paid what was recorded last year, so they caught that piece up. Both -- remember, we weren't recording because they were on a cash basis a piece of it, so that's being caught up over time.

All right. And -- so you expect them to get back to full current and repaid by sometime this year?

Yes. Just to be clear, so they're paying 100% of contractual cash amount this quarter, actually paid that amount last quarter and caught up AR that we have recorded. So the one thing -- what you're getting at, Chad, and I understand it is, they have back rent. It's not -- it's recorded on our books as fully reserved that they'll begin to pay, we think it will be the back half of this year.

But in the meantime, we're going to receive 100% of the contractual amount on cash basis. And then as they continue to improve their operations, they'll start to pay down that previously unpaid rent, but we fully reserved it. So when they do that, we're going to recognize incremental income.

All right. And then just that the same-store pools changed a bit. I know, Juan asked about coverage, but I'm curious about occupancy, how that's trended across the portfolio outside of your -- just your stabilized portfolio?

So occupancy has been pretty consistently stable over the last -- if you go back in our supplemental last 5 quarters, but you can go back further than that, and it's stayed pretty stable. Mix jumps around a little bit, with seasonality. You can see that it went up in the first quarter, but it was up at that same level the previous first quarter of '17. So I consider both occupancy and mix to be overall very stable in our portfolio, not much movement.

Our next question comes from Daniel Bernstein with Capital One.

I guess, my question is kind of more theoretical. When you look at major changes in reimbursement, when do operators start preparing or changing their patient mix to prepare for the change in reimbursement, like when you went from RUG-III to RUG-IV? Did they start changing their patient mix a quarter or 2 early or right when the regs hit? I'm just trying to think about when we should start to see, maybe, operators change the way they operate and prepare for PDPM?

Having talked to a number of our bigger operators, I don't think you'll see much of a change in terms of patients that are admitted into skilled nursing facilities. You may see new patients admitted with more serious clinical conditions, but I think the current patients that are being admitted will continue.

That's been the general sense from all of our operators, and it goes to something that we all know. We've seen occupancy -- occupancies decline in the business. And so frankly, most of our operators are looking for any patient they can get. They may expand their offerings.

And just to add one other note, Dan, that was interesting, we've done analysis around the existing patient base and the conversion from the existing RUG-IV payment model to PDPM, and we agree with CMS that, based on the rules, the regulations, that the revenue impact will be neutral.

Okay. How are your operators, and maybe you guys, thinking about what the margin impact might be -- as you move from maybe more rehab to more complex care and there's some concurrent and group therapy or? Again, where are your long time 10-year lows in operating margin in the space? I mean, is PDPM going to help operating margins come back up, even if it's revenue-neutral? Or is it just too early to tell?

Well, I think operating margins are likely to improve just because of the ability to do 25% group and concurrent therapy. So we'll see therapy costs drop and revenue remain relatively neutral. We think most people will benefit ultimately.

Okay. And then just turning to the acquisitions in the pipeline. I know you said that there is not a lot coming on for the second half of the year and who knows for next -- '19 yet. But in general, are you looking to add new operators? Or do you think the opportunities might be to grow with your existing operators?

Are your existing operators starting to bring you any opportunities that you might want to expand with them? Again, thinking like the have and have nots, there's -- like you said earlier in your comments, there's clearly going to be some consolidation in the space going forward? And do you want to find new operators? Do you want to grow with your existing operators?

Both. We continue to look for new relationships with sophisticated folks. And I think we'll continue to find them at the rate of 2, 3 a year. And I think we will do a lot of -- we'll have a lot of activity with our existing group of operators, not just the top 10, but go all the way down to the top 30.

But they haven't started really bringing you a robust amount to do at this point?

No, they are the largest source of the deals that we actually do, that end up -- that we end up booking. So they -- most of the deals that we've done in 2018 back into '17, those all have come from our existing operators. Now there has been no large transactions. They have been smaller, right, so they don't move the needle as much, but the lion's share of those transactions have all come from our existing operators.

Our next question comes from Lukas Hartwich with Green Street Advisors.

Looking at Page 6 of the supplemental, it looks like your distribution of coverage improved a bit. Is there any color you can provide on that?

It's a lot of operators that are just on one side of that coverage range or the other. In this particular quarter, you just had some folks that were just below the 1, 2 bump up into the 1, 2 and also with the below 1 that bumped up into the over 1x coverage. It's -- there was no -- it's not a dramatic movement, but a lot of operators -- but it's a little bit more subtle, it's just crossing over from 1 bucket to another. And in this particular quarter, they went the right way.

Okay. So you think that's just kind of quarterly noise? Or do you think the trend kind of points to that improvement and -- kind of continuing?

Overall, our coverage has been pretty flat for quite a few quarters. And I think at least in the short run, we expect it to stay pretty flat.

Our next question comes from Todd Stender with Wells Fargo.

Just looking at the loan book, you've got a $23 million loan coming due this year. How is that looking as far as being paid back and any timing you could add?

You might have stumped us on this one. I'm not sure, which $23 million loan?

(inaudible). Yes, we're...

If I read it right, yes.

Yes, we're actually in the middle of discussions to convert that mortgage into a simple ownership. So we don't expect those dollars to come back at all.

Okay. Who's that with? Have you disclosed who the tenant is or borrower?

We haven't disclosed the tenant, but it's a top 5 tenant.

Okay. And then any more details on the $44 million mortgage you made? And then also with the mezz loan you added to that, any details, terms, tenants, anything like that?

The $44 million mortgage or mortgages that we put on were on facilities in Michigan where it's beneficial to have interest expense as opposed to rent expense. It looks and smells just like a lease in terms of its term and its rate, which was 9.5%. And then the 10% of the mezz loan was just additive to an existing mezz loan that we had and it was at 12% and the term, I believe, was extended out several years.

Okay. And then how about the tenant for the 5 SNFs in Texas you had, did I miss that? And any coverage that it was underwritten at?

It was underwritten at our normal underwriting. So it's somewhere on the 1 3 to 1 4 range, and once again, it yielded a 9.5% rate.

And who was that leased to?

One of our existing operators, one of our top 10.

Our next question comes from Tayo Okusanya with Jefferies.

Couple from me. First of all, just given your comments on the acquisition outlook, is it reasonable to expect that maybe you focus more on the deck book near-term, building that business since you're still getting pretty good return there in your higher -- in the capital structure?

I don't know that, from our perspective, Tayo, the debt deals we've done are all relationship driven, so it's really not building the debt book per se. And as Dan mentioned, the one Michigan deal is essentially a lease in terms of its form. So we're going to continue to focus on fee simples and leases. And to the extent we have debt deals that are relationship-driven and are somewhat opportunistic, we will do them.

Okay. That's helpful. And then could you also talk a little bit about just your tenant base and your watch list at this point, again, had stabilized -- stable coverage this quarter. But again, taking a look at your tenant list, again, companies like Diversicare that are public entities that, again, the stock seems to be struggling a little bit. Just kind of walk us through again some of the -- your top 10 tenants, public and private, and kind of what you're thinking at this point about the overall health.

Overall, our top 10 have tracked our overall portfolio, and that they've been pretty stable for the last 5, 6, 7 quarters. Diversicare, it's a public company, we've had some of those assets in our portfolio for 20 plus years. It's arguably one of the more stable group of assets in our portfolio and has been for a very, very long time. Its coverage is right around our mean. And so -- at least, with our portfolio, it's been very stable and it has continued to be very stable over a long period of time.

And then as far as our other top 10, I mean, we've addressed some issues that we had with those guys, obviously the Signatures, Daybreaks, and Oriannas. And so we think we're sort of on the other side of those restructures, and we hope to see some improvement in the coming quarters.

Okay, that's helpful. Last one from me. Just around the dividend, again, first half of the year, I think when people take a look at cash flow from operations, it is below your current dividend coverage ratio. I think, again, this year, you're doing a lot of sales, so you do have a lot of possible gains that are impacting the taxable income that may not be there next year.

So just kind of curious how you're thinking about the dividend on a going forward basis kind of given taxable income may be somewhat inflated this year because of gains and there's still not coverage from a cash flow from operations perspective?

We've actually done a lot of work around taxable income, and there is no issue there. In terms of payout, you have gains, but it's offset by depreciation and other costs. So we're comfortable there with no issue as it relates to distributions and taxable income.

And then as we think about the dividend on a go forward basis, and the reason I spent a little time talking about pro forma for Orianna, once you put those assets back to work, let alone other assets that we have in the construction pipeline, Second Avenue and the SNFs. We think we're going to be in a very comfortable spot in terms of payout ratios in the next 6 to 9 months.

So I would expect that the dividend would be -- it will remain at $0.66 a share, and you will see the coverage ratio improve pretty significantly with the hope being that we get back to our get back to our [OMOP] of being able to grow the balance sheet and grow the revenue streams and have a recurring increase in dividends. That model worked well for 5.5 years.

Our next question is a follow-up question from Jonathan Hughes with Raymond James.

I misspoke on the cost to build SNFs earlier. Looks like it's about $160,000 per bed to build and you're buying about half that. I assume your answer is the same though. I mean, acquisitions look more attractive than building, right?

There is just going to be more opportunity from an acquisition perspective. If we had more opportunity to build, we would. I just don't -- even if we had the desire to put 20 shovels in the ground, it would be -- we wouldn't be able to find that many opportunities.

So I think from our perspective, you're right. We're going to be focused more on acquisitions in terms of capital allocation just because of opportunities. And you're also right on the cost per bed. Now a lot of those assets are being built in very desirable, densely populated markets, where the resulting cash flow at the SOI levels are quite strong.

Yes. Okay. And then just one more. But what was the IRR on the $300 million of dispositions completed this year? And sorry if this has been mentioned before, but were those legacy Omega assets, Aviv assets, a mix of both?

Yes. In my prepared comments, I talked about the underlying cash flow, the SOI level was $25 million on $311 million of sales. So 8% yield-type assets. It's pretty attractive pricing. And the second most -- second half of this question...

It was a mix of Omega and legacy Aviv.

Our next question is another follow-up from Juan Sanabria with Bank of America.

Just wanted to follow up on Tayo's question. You talked about kind of feeling comfortable with the coverage, but are there any other issues, whether it's cash flow generation or litigation to where there could be another watch list tenant or rent restructuring discussion going on, not because of the underlying coverage but by, but because of litigation or other cash flow issues?

Well, I mean, litigation sort of comes out of the blue, right? But from sort of corporate overhang issue or other liquidity issues, we don't see any on the horizon of any size at this point.

(Operator Instructions) At this time, I'm seeing no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thanks, Brandon. And thank you, everyone, for joining our call today. Bob Stephenson and Matt Gourmand will be available for any questions you may have.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.