Omega Healthcare Investors - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Omega Healthcare Investors Incorporated Second Quarter Earnings Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Michele Reber. Ma'am, the floor is yours. I think you're on mute.

Michele Reber (Managing Director of Operations)

Thank you. Good morning. With me today are Omega CEO Taylor Pickett, COO Dan Booth, CFO Bob Stephenson, and Megan Krull, Senior Vice President of Operations. Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructuring, rent payments, financial condition, or prospects of our operators, contemplated acquisitions, dispositions, or transitions, and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which 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 NAREIT FFO, adjusted FFO, FAD, and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the Financial Information section of our website at www.omegahealthcare.com, and in the case of NAREIT FFO and adjusted FFO, in our recently issued press release. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. I will now turn the call over to Taylor.

Taylor Pickett (CEO)

Thanks, Michelle. Good morning, thank you for joining our second quarter 2023 earnings conference call. Today, I'll discuss our second quarter financial results and certain key operating trends. Second quarter FAD, funds available for distribution, of $0.70 per share, significantly exceeded the first quarter FAD of $0.60 per share, comfortably ahead of our $0.67 per share dividend. The FAD dividend payout ratio is 96%. The large increase in FAD is primarily due to the resumption or increase in rent from cash basis operators. One operator, LaVie, paid partial rent in April and full rent in May and June, which resulted in a $0.035 increase in FAD quarter-over-quarter.

As Dan will discuss, La Vie is still being restructured, and we have agreed to partial rent payments of $2.5 million per month for the 3rd quarter, which will reduce FAD by $0.035 from Q2 to Q3. When the La Vie restructuring is completed, we expect a significant increase in cash rents from the current agreed-upon partial rent payments. In addition, during the 2nd quarter, we issued 6.6 million shares of common stock to fund our pipeline and delever. These additional shares will put some modest pressure on our future FAD per share. Turning to positive operating trends. 1st quarter EBITDAR coverage, excluding CARES Act support, continues to improve, increasing to 1.15 times versus 1.09 times in the prior quarter.

This level of coverage reflects continued occupancy improvement, strong state reimbursement rates, and some moderation in the still difficult labor market. The under 1.0 times EBITDAR operators represent 29.9% of total rent. We can break the 29.9% into a handful of buckets. Operators representing 6.2% of the 29.9% are sitting on extremely strong balance sheets, therefore, payment of rent should not be an issue. Operators representing 8.1% have first quarter EBITDAR coverage above 1.0 times. 9.5% represents La Vie. La Vie's first quarter EBITDAR coverage, when excluding the anticipated sale or transition of 23 facilities, is also above 1.0 times.

That leaves operators representing 6.1%, of which operators representing 3.5% are in active restructurings or were recently transitioned, which leaves a balance of 2.6, representing eight small operating relationships. I'll now turn the call over to Bob.

Bob Stephenson (CFO)

Thanks, Taylor. Good morning. Turning to our financials for the second quarter. Revenue for the second quarter was $250 million, before adjusting for certain non-recurring items, compared to $245 million for the second quarter of 2022. The year-over-year increase is primarily the result of timing related to operator restructurings, revenue from new investments completed in 2022 and 2023, partially offset by same time frame, excuse me. Our NAREIT FFO for the second quarter was $155 million, or $0.63 per share, as compared to $161 million or $0.66 per share for the second quarter of 2022.

Our adjusted FFO was $183 million, or $0.74 per share for the quarter, and our FAD was $173 million or $0.70 per share. Both exclude several items consistent with historical practices and outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release, as well as our second quarter financial supplemental posted to our website. As Taylor mentioned, the $0.70 of FAD for the second quarter was $0.10 greater than our first quarter FAD. This increase was primarily driven by incremental revenue from LaVie, the completion of workout arrangements, and timing of payments from other cash basis operators, partially offset by additional weighted average shares. In the second quarter, we closed on $270 million in new investments.

These second quarter new investments, the majority of which were completed in April, are expected to produce incremental contractual rent and interest or FAD of approximately $1.3 million in the third quarter. We have a number of operators on a cash basis for revenue recognition, including LaVie, which is projected at $2.5 million per month. We will only report FAD from our cash-based operators to the extent payments are received or security deposits are applied. It's important to note that our third quarter FAD will also be impacted by the increase in the weighted average shares outstanding, as we issued 6.6 million shares for proceeds of approximately $200 million in June.

For every 6 million shares issued, our quarterly FAD is negatively impacted by approximately $0.015 per share until the cash is put back to work in new investments. In summary, consistent with the commentary provided last quarter, we still expect Q4 FAD payout ratio to approximately cover our $0.67 dividend, with a path to return to a normalized payout ratio in the high 80s to low 90s in 2024. Our balance sheet continues to remain strong. In the second quarter, we issued 6.6 million shares or $200 million of equity. We also terminated our $400 million in treasury locks, which generated $93 million of cash gain, leaving us with $350 million in cash at June 30th.

On August 1st, we used the balance sheet cash to repay a $350 million bond maturity. Looking forward, based on the current capital markets, our active pipeline in an April 1st, 2024, $400 million bond maturity, we expect to continue to be opportunistic in the equity capital markets while targeting leverage in the low 5s. At June 30th, 99% of our $5.3 billion in debt was at fixed rates, our net funded debt to annualize adjusted normalized EBITDA was 5.1 times, and our fixed charge coverage ratio was 4.1 times. I'll now turn the call over to Dan.

Dan Booth (COO)

Thanks, Bob, and good morning, everyone. As of June 30, 2023, Omega had an operating asset portfolio of 893 facilities with approximately 88,000 operating beds. These facilities were spread across 66 third-party operators and located within 42 states and the United Kingdom. Trailing twelve-month operator EBITDA coverage for our core portfolio as of March 31, 2023, increased to 1.1 times versus 1.04 times for the trailing twelve-month period ended December 31, 2022. During the first quarter of 2023, our operators cumulatively recorded approximately $5.8 million in federal stimulus funds, as compared to approximately $20 million recorded during the fourth quarter.

Trailing twelve-month operator EBITDA coverage would have increased during the first quarter of 2023 to 1.02 times, as compared to 0.92 times for the fourth quarter, when excluding the benefit of any federal stimulus funds. EBITDA coverage for the standalone quarter ended March 31, 2023 for our core portfolio was 1.8 times, including federal stimulus, and 1.15 times, excluding the $5.8 million of federal stimulus funds. This compares favorably to the standalone fourth quarter of 1.19 times and 1.09 times, with and without the $20 million in federal stimulus funds, respectively.

Occupancy for our overall core portfolio has continued to recover from a low of 74.6% in January of 2022 to 79.6% as of mid-July of 2023, based on preliminary reporting from our operators. Turning to portfolio matters. LaVie, as previously mentioned, Omega and LaVie are in the process of restructuring their portfolio by transitioning certain underperforming facilities, most located in the state of Florida. To date, 13 facilities have been divested. Currently, Omega is in the process of selling or releasing an additional 23 facilities, most of which are expected to be transferred throughout the fourth quarter of 2023. During the second quarter of 2023, LaVie paid partial rent in April of $2.5 million and full contractual rent for May and June of $7.2 million each month.

In anticipation of the future transition of 23 additional facilities, Omega has agreed to allow LaVie to short pay rent. approximately 66% during the third quarter of 2023. Maplewood. In the second quarter, Maplewood short paid its contractual June and July rent by $1 million per month. We currently are working with Maplewood and the estate of Greg Smith to address these shortfalls. Based on Maplewood's latest cash flow projections, which incorporate anticipated January rate increases and improved census at the Second Avenue facility in Manhattan, Maplewood believes there is a path forward to meet its full contractual rental obligations in the first quarter of 2024. In August, we drew on a $4.8 million security deposit and will be applying the security deposit to any rental shortfalls realized in the third quarter.

In addition to the aforementioned restructurings and transitions, Omega is working with several other relatively small operators on various restructurings. Turning to new investments. As previously announced, on April 14th, 2023, Omega closed on a $219 million transaction, which consisted of a $114.8 million purchase lease transaction for 4 facilities in West Virginia and a $104.6 million in mezzanine financing. Concurrently with these acquisitions, Omega amended an existing operator's master lease to include the 4 facilities at an initial cash yield of 9.5%, with 2.5% annual escalators. The mezzanine financing was given to the same existing operator, bearing an interest rate of 12%, and was part of the capital stack to purchase 13 additional facilities in West Virginia.

As previously announced, on May 1st, 2023, Omega purchased 1 additional facility in West Virginia for $13.7 million. The facility was added to an existing operator's master lease with an initial cash yield of 10%, with 2.5% annual escalators. Additionally, on June 30th, 2023, Omega closed on a $10 million mezzanine loan to an existing operator. The mezzanine loan bears an interest rate of 11%, has a 5-year term, and was part of a capital stack to purchase 12 facilities in Pennsylvania. Omega closed on a total of $270 million in new investments in the second quarter of 2023, including $17 million in CapEx. Year to date, Omega has closed on $313 million of new investments, including $29 million in CapEx.

Turning to dispositions. During the second quarter of 2023, Omega divested 10 facilities for a total of $45 million in proceeds. Year to date, Omega has divested 12 facilities for a total of $62 million in proceeds. I will now turn the call over to Megan.

Megan Krull (SVP of Operations)

Thanks, Dan, good morning, everyone. We continue to see slow, positive momentum in occupancy, with the number of core facilities now recovered at 35%, up slightly from the 33% reported in the fourth quarter. Additionally, 25% of core facilities that have not yet fully recovered are at or above 84% occupancy. Staffing shortages, while continuing to moderate, persist, delaying overall recovery and continuing to vary by market. In June, AHRQ released the results of a survey of 425 nursing home providers, results of which showed that 52% are still limiting new admissions due to staffing shortages. Agency expense on a per-patient day basis for our core portfolio for first quarter 2023 remained at 5 times where it was in 2019, which, while consistent with last quarter, did show modest month-over-month improvement.

Helping to offset some of these persistent expense increases, on the rate setting front, just this week, CMS issued its final 2024 payment rule, resulting in a net increase of 4%, or approximately $1.4 million, which is slightly better than the 3.7% provided for in the proposed rule. This included a 6.4% net market basket update, consisting of a 3% market basket increase, plus a 3.6% market basket forecast error adjustment, offset by a 0.2% productivity adjustment, as well as the remaining 2.3% PDPM parity adjustment recalibration. On the state side, while the magnitude of certain states, certain rate increases is not exactly what we had hoped for in certain areas, it is still moving in the right direction.

Texas, of note, provided for at least a $19.63 COVID FMAP add-on to be included in its permanent rate setting starting September 1st, in addition to a small increase above that. Florida provided for up to a 5% rate increase starting October 1st. While much of the Florida rate is based on quality indicators, meaning that not all operators will see this large of an increase, it does represent somewhat of a trend in rate setting, where more and more states are tying reimbursement increases to quality measures. Assuming this is done in a thoughtful manner, this is something that we welcome. However, it should never fully replace increases tied to the inflationary environment. I will now open the call up for questions.

Dan Booth (COO)

Thank you. The floor is now open for questions. If you do have a question, you may press star one on your telephone keypad at this time. If your question has been answered, you can remove yourself from the queue by pressing one. Again, ladies and gentlemen, it's star one. Our first question is from Tao Qiu from Berenberg. Go ahead.

Tao Qiu (Equity Research Analyst)

Good morning, everyone. La Vie was a positive surprise this quarter. Appreciate the color on the $0.035 step down for the next quarter. I think there are a few additional puts and takes for the next quarter. I think Maplewood was below expectations, and you still have security deposit to apply.

... I think there's one more month of rent coming from Healthcare Homes. The share count is higher. I'm just wondering if you could help us bridge to the third quarter on the FAD number.

Taylor Pickett (CEO)

I, I think, it's Paul. I think you hit them. The, the only other component to look at, I didn't. I did mention the incremental revenue related to acquisitions completed in a quarter, and then also, Taylor and I both mentioned that the shares issued were issued late in the quarter, so you're gonna have some modest impact based on the weighted average shares.

Tao Qiu (Equity Research Analyst)

Okay. Just one follow-up. You know, we got the 4% Medicare re-update earlier this week, and thanks for the comments about, you know, Texas and, you know, Florida. I think California is also pretty well known. I'm just wondering if you could walk us through some of your other big markets, for example, Indiana, North Carolina, Pennsylvania, staturals, and what are you seeing in those states in terms of the 2024 Medicaid reimbursement rates?

Megan Krull (SVP of Operations)

Yeah, some of them are a little bit too early to tell. Indiana, I think that they're still hoping for, you know, an inflationary increase somewhere in the 3%-4% range, but I don't think that's been finalized quite yet. Remember, in Indiana, we've got the UPL, too, so that Medicaid rate setting doesn't necessarily impact our, our coverages the same way. Pennsylvania, I think, you know, there was a little bit of a rate reduction, actually, in July. Just a small one due to the There was a budget factor, rate decrease related to the January 1st increase. They're hoping that gets reversed in January, again, way too soon to tell for Pennsylvania. They had that really large increase last year, I think they're, they're pretty well set for the moment.

North Carolina, you know, that's one we've really been watching, and, and they were supposed to, they thought they would get their budget approved earlier, but they haven't yet. They have a $37 PPD FMAP add-on, so they've been trying to get into the rate. We think it's likely to happen. That's what the operators are pushing for at the moment, since the state has pushed that $37 or most of it out, at least through August, right now, until they finalize the budget, but they're hopeful that they get that put in.

Operator (participant)

Thank you. As a reminder, please ask one question and one follow-up question. Our next question comes from Jonathan Hughes from Raymond James. Go ahead, Jonathan.

Jonathan Hughes (Equity Research Analyst)

Hi, good morning. Thank you for the time. I was hoping you could dig a little deeper on La Vie. I know that restructuring has been ongoing for some time now and that they paid more rent than expected in May and June, but I guess, why did they pay more rent if they didn't necessarily have to?

Taylor Pickett (CEO)

You know, it really boils down to, you know, cash on hand. That they were a little bit more liquid in the second quarter than they anticipated, and so they were able to make the full rent out, rent payments for May and June. You know, we've got some transitions coming up, so the expectation is that the, their, their cash and their liquidity is gonna go down until those transitions occur. Like with any transition that involves a sale, they, they take a while. There's a lot of lead time running up to that. There's a lot of third parties that we have no control over. The expectation is, for, for at least for right now, is that third quarter, we'll see that reduced rent amount.

Jonathan Hughes (Equity Research Analyst)

Okay. Maybe my follow-up, and, and I, I realize we're still waiting on this, but any views or updated expectations just on the staffing mandate that we've all been, you know, waiting for, for a few months now? I think one of the operators said, hopefully, we can have it by the end of the month, but just any, any views there would be helpful. Thank you.

Megan Krull (SVP of Operations)

You know, honestly, we don't have that crystal ball at the moment. I mean, we hear the same things that I'm sure you guys hear. I think, you know, we view the fact that this hasn't come out yet, despite the fact that it should have come out in April, as a positive. That hopefully, you know, CMS has gotten a ton of comments related to this in terms of, you know, don't have a one-size-fits-all mandate and, hopefully, push it out until there isn't a staffing crisis. We're hopeful that they'll take a balanced approach, you know, based on how long they're taking. We still don't have any clarity as to when it will come out. Remember, as well, that it's gonna be come out as a proposed rule, right?

There's gonna be a comment period, and so AHCA has historically been very good at getting things more beneficial than what it first comes out as.

Operator (participant)

Thank you. Our next question comes from Connor Siversky, from Wells Fargo. Go ahead.

Connor Siversky (Director and Senior Equity Research Analyst of REITs)

Good morning. Thanks for having me on the call. Would like to dig into Maplewood. Apologies if I missed this in Dan's remarks, but could you quantify at all what that cash flow ramp looks like from today through the end of 2023, between the lease up of Second Avenue and potential rate increases at the end of the year? Word it differently, I mean, how much EBITDA can we see from Second Ave? How much from rate increases, and do you think that would cover the rent shortfall?

Taylor Pickett (CEO)

Yeah, just, I'm gonna make this a relatively longer answer, Connor, just because I think the context is important. If you look at Maplewood as a whole, the core portfolio, excluding Second Avenue, is performing very well. Their occupancy is at pre-COVID levels. They have significant cash flow. Then you look at Second Avenue, which is in fill up. It's 61% occupied. It has now positive cash flow pre-rent. Incremental occupancy is just gonna add to that cash flow, and we expect another 10% of incremental occupancy, so from 131 residents to 151 by year-end. Increases happen typically in January. You do have whatever inflationary impact between now and the end of the year, that will cut into, a little bit into that cash flow. To get you a precise number is difficult.

It probably doesn't change much from the $1 million deficit we're seeing today. Just to close the loop on the rate increase piece of the puzzle, Maplewood's total revenue is about $200 million. When you think about last year's rate increases, which were high single, low double digit, with the expectation in the industry of something similar for high-end properties, that's a really meaningful in terms of the amount of top-line revenue to overcome the cash deficit we have today. Long answer to your question, I think that context is important.

Connor Siversky (Director and Senior Equity Research Analyst of REITs)

Great. Appreciate the color, Taylor. That's helpful. Just as it relates to the line of credit and the building deferral balance, I mean, what does the total tab to OHI look like currently? How big do you expect that to get? Is there a threshold that you wouldn't want to cross?

Taylor Pickett (CEO)

We're at $270 million, round numbers, and we don't expect to, to fund any additional cash into that line. Remember, we have interest that we're on a cash basis with Omega, so we continue to accrue interest. That obligation continues to run to Maplewood, but from a cash perspective, we're done funding that line.

Connor Siversky (Director and Senior Equity Research Analyst of REITs)

Great, thank you. I'll hop back in the queue.

Operator (participant)

Our next question comes from Michael Griffin from Citi. Go ahead, Michael.

Michael Griffin (VP and Equity Research Analyst)

Great, thanks. Just maybe circling up on labor availability. You know, in conversations with your operators, do you have a sense of kind of where agency labor utilization is trending, expectations for the back half of the year, and kind of where do you need to see occupancy get to, to really ease a lot of those labor pressures?

Megan Krull (SVP of Operations)

I mean, from an agency perspective, it's definitely improving. That's what we're hearing anecdotally from our operators. Certain operators are able to get out of it completely, but it's really geographically based. I mean, Florida tends to be one of the states that's having severe staffing shortages. It really just depends on where you are. In terms of occupancy, we always talk about that magical 84% and getting back up close to there. I mean, we're close to that 80%. With agencies still high, you know, we just need to work through some of those staffing issues to, to solve all those problems.

Michael Griffin (VP and Equity Research Analyst)

Great. That's helpful. Then maybe switching to external growth opportunities, can you give us a sense of what the forward pipeline is looking like? You know, you've done a number of investments year to date, just kind of, you know, can you quantify maybe that opportunity set and, and where yields have gone relative to where they might have been previously?

Taylor Pickett (CEO)

I don't want to necessarily quantify, but I will say it's quite active. You know, we're looking at, a fair number of deals, both here in the States and abroad in the UK. I'd say the UK is particularly active. We're seeing some opportunistic transactions here in the States, we're gonna try to take advantage of some of those. You know, I think what we've done year to date is pretty good proxy for what we hope to do in the next latter half of the year. As far as rates go, yeah, we're seeing cap rates move up. We're starting to bid our deals, as you've seen, you know, high 9s, low 10s.

Michael Griffin (VP and Equity Research Analyst)

Great. That's it for me. Thanks for the time.

Operator (participant)

Thank you. Our next question comes from Joshua Dennerlein from Bank of America. Go ahead, Joshua.

Joshua Dennerlein (Senior Equity Research Analyst of REITs)

Yeah, thanks, guys. I hope everyone's doing well. In the opening remarks, you mentioned there was a, a certain subset of the portfolio still covering below 1x. I, I didn't hear the amount, but just curious, is there any kind of big picture theme that's causing the, that part of the portfolio to lag versus, like, the overall at 1.15?

Taylor Pickett (CEO)

I don't know that there's necessarily a theme. When you, when you break down those, those buckets, LaVie is a big piece. Obviously, we talked about that. We're fixing that. Then you have another significant piece of that 1.0 that we have pretty good visibility that's gonna... That they'll climb out of that, that below 1 bucket. Then you get back to the, the handful of operators where there's not a lot of visibility. They're small. It's under 3%, that's where we, we've run historically for many, many years. I think there's a pathway, honestly, to look at that below 1 times bucket, it's gonna take a little while, where we climb out of that bucket and get back into, you know, the less than 5%, of our portfolio there.

It's not gonna be next quarter, but we have some visibility, that's pretty good.

Joshua Dennerlein (Senior Equity Research Analyst of REITs)

Okay, awesome. Maybe just, the part of the bucket that you expect to climb out of that, any kind of timeframe on that? Is it or... Yeah, I guess maybe just timeframes. Just I'm trying to think through it.

Taylor Pickett (CEO)

Well, I think I'll give you the big two examples. LaVie is just subject to finishing the restructuring. As Dan mentioned, it's taken longer than any of us hoped on either side of the restructuring table. Then you have 8.1% that are running currently above 1 times. That's just a question in terms of how we report, waiting for the trailing twelve to catch up.

Joshua Dennerlein (Senior Equity Research Analyst of REITs)

Mm.

Taylor Pickett (CEO)

You've got almost, you've got almost 18% right there in those two buckets, and then you have some restructuring activity. I think a lot of this will have reporting visibility going into Q1 that, that will make a lot of people more comfortable.

Joshua Dennerlein (Senior Equity Research Analyst of REITs)

Okay, great. Thank you.

Operator (participant)

Thank you. Our next question comes from Steven Valiquette from Barclays. Go ahead, Steve.

Speaker 13

Hi, this is Amin Jazieri on for Steve Valiquette. First question would be, just wanted to kind of get a sense of how the ending of the PHE back in May has affected the business in June and July, or most recently, let's say. Just to kind of quantify or get a sense of how that's been that's been impacted. Then, just also wanted to kind of touch on the previous question. You know, assuming LaVie is the operator that's closest to completion, would you still say that it's, you know, in line with reducing the number of operators with an EBITDA coverage ratio below one times, down to that 20%, 20% range? Just to confirm that LaVie is the operator that's closest to being fully restructured.

Thank you.

Megan Krull (SVP of Operations)

The public health emergency, I would say, you know, there hasn't been a very large impact. Obviously, the ceiling in place is gone, it kind of tapered off anyway. It's not a huge impact. The other piece of it is really the FMAP piece, which, you know, we've gone over some of these states that had large FMAP increases, most of them, like California, put that through the end of the year. Hopefully, next year, that will get added on permanently. Texas is going to have their FMAP rate in their permanent rate as well. Most of these states have either dealt with it or are about to deal with it. I'd say, you know, not much of an impact at this point.

Taylor Pickett (CEO)

The second half of the question: Yes, LaVie, the 9.5% of the 29.9%. When LaVie's restructured, you're call it 20%. You have the two buckets of operators with strong, very, very strong balance sheet to 6.2%. You have the 8.1% bucket of operators that had Q1 EBITDA above 1 time. That's another 14%. I think we'll have visibility around all of that, again, not next quarter, but by the time we roll into 2024, I think we'll have very good visibility. That, that gets you down to 6%, and we're working a big chunk of that 6%.

The numbers should get down to historical levels, sub 5, if things continue as they're trending today.

Speaker 13

All right. Super quickly, do you, do you still intend on being net acquirers for the year?

Taylor Pickett (CEO)

That would be the expectation, given what we have held for sale, which is de minimis, and what we're restructuring, which, other than the restructuring around LaVie, we don't have anything big out there.

Speaker 13

All right. Thanks so much for the color. Appreciate it.

Operator (participant)

Again, ladies and gentlemen, it's star one to ask a question. Our next question comes from Vikram Malhotra from Mizuho. Go ahead.

Vikram Malhotra (Senior Equity Research Analyst and Co-Head of US REITs)

Thanks for taking the question. Maybe just first one, I wanted to clarify, you mentioned the share count impacting, you know, maybe the 3Q FAD run rate. I just wanted to clarify. Remind me, last quarter, I thought you had said you were hoping for- to hit sort of a $0.70-ish FAD number by 4Q. I think now you're saying you're, you're probably more approximating to the dividend. Is it just the shares? I just want to clarify, it's just the capital raise and nothing else on the tenant front that you're baking in to get to that 80% coverage in now 2024?

Taylor Pickett (CEO)

Well, well, the shares absolutely have an impact. They do. Again, getting in 2024, it's also getting LaVie restructured, a big piece of that as well.

Vikram Malhotra (Senior Equity Research Analyst and Co-Head of US REITs)

Okay, that, that's helpful. Just thinking about the outcome eventually of sort of the minimum staffing rule, whenever it comes, I'm just wondering if you sort of looked at, you know, a couple of scenarios where they, they require sort of the 4.1 hours, but the timeline is maybe sooner than you anticipated versus a relatively long period to adhere to the standard. In, in a more, call it negative scenario, is, is there an assessment you've done on how coverages may be impacted for operators?

Megan Krull (SVP of Operations)

You know, we haven't just because it's way too soon, given that nothing's come out yet, and we think, look, you're, you're probably, if this comes out, you know, proposed rule tomorrow, you probably wouldn't have it come into place if it could next year, right? We're hopeful it gets pushed out until the, the staffing shortages improve. There's really no good way to drill down into that. You know, AHCA had put out something saying if you had 4.1, it would cost the industry something like $10 billion. To get there, I mean, it's really difficult to figure out how that would affect the operators on a daily basis. They, they can't do something so draconian, and then it puts everybody out of business.

Vikram Malhotra (Senior Equity Research Analyst and Co-Head of US REITs)

Got it. Makes sense. Thank you.

Operator (participant)

Our next question comes from Wes Golladay, from Baird. Go ahead, Wes.

Wes Golladay (Senior Research Analyst of Real Estate)

Hey, good morning, everyone. Just a quick question on the, on the staffing. I guess, what is the dynamic there? Are you seeing lower turnover, or is there still a lot of churn, a lot of new hires, and a lot of people quitting?

Megan Krull (SVP of Operations)

I think folks are doing a, a better job at, at lowering the turnover, certainly, and finding folks out there. I think the turnover is getting better, and I think there's also some operators who've been successful with bringing folks in, in from international areas, to help bolster that as well.

Wes Golladay (Senior Research Analyst of Real Estate)

Okay. Then, you mentioned the $93 million gain. Can you remind us, like, what is the plan, I guess from a financing perspective? Is there a certain time period where if you were to roll that gain into a new offering, it could reduce your interest expense and maybe the accounting behind that?

Taylor Pickett (CEO)

Basically, we have till mid 2025 to roll that into a debt offering of at least 5 years or longer, and then we'll amortize it over the new offering from a P&L standpoint.

Wes Golladay (Senior Research Analyst of Real Estate)

Great. Thanks, everyone.

Operator (participant)

Thank you. That is the last question for today. At this time, I would like to turn the call back over to Taylor Pickett for any closing remarks.

Taylor Pickett (CEO)

Thanks, everybody, for joining us today. As always, we're available for any follow-up questions. Have a great day.

Operator (participant)

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.