Omega Healthcare Investors, Inc. (NYSE:OHI) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Michele Reber – Senior Director of Asset Management
Taylor Pickett – Chief Executive Officer
Robert Stephenson – Chief Financial Officer
Daniel Booth – Chief Operating Officer
Megan Krull – Senior Vice President of Operations
Conference Call Participants
Jonathan Hughes – Raymond James
John Pawlowski – Green Street Advisors, LLC
Michael Griffin – Citigroup Inc.
David Rodgers – Robert W. Baird & Co.
Joshua Dennerlein – Bank of America Merrill Lynch
Tayo Okusanya – Credit Suisse
Nicholas Yulico – Scotiabank
Vikram Malhotra – Mizuho Securities USA LLC
Steven Valiquette – Barclays Bank PLC
Daniel Bernstein – Capital One Securities, Inc.
Richard Anderson – SMBC Nikko Securities America, Inc.
Operator
Good morning, and welcome to the Omega Health Investors’ Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Michele Reber. Please go ahead.
Michele Reber
Thank you, and good morning. With me today are Omega’s 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 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 identify 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, and 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
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 FFO is $0.76 per share and funds available for distribution are $0.71 per share. We have maintained our quarterly dividend of $0.67 per share. The dividend payout ratio is 88% of adjusted FFO, and 94% of funds available for distribution.
The adjusted FFO per share, FAD per share, and dividend payout ratios are all exactly the same as the second quarter. Year-to-date FAD is $2.07 per share, while our year-to-date dividend paid is $2.01 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 diminution in value of our assets and our long-term cash flows. The most recent example of our successful restructuring work is the sale of 21 Agemo assets generating gross proceeds of $359 million. Early in 2023, we expect Agemo 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 Agemo retained portfolio will add nearly $0.03 per share to quarterly FAD.
In addition, the redeployment of the Agemo asset sale proceeds are expected to add another $0.03 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 and Medicaid reimbursement and occupancy challenges. These ongoing restructurings will likely include asset sales, operator transitions and rent deferrals.
Turning to our COVID era results. This is our 11th COVID era 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 $0.71 compares favorably to our pre-COVID first quarter 2020 FAD per share of $0.74, particularly when you consider the FAD per share upside from the nearly complete Agemo 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 strengthen 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 in capital, we have deployed an equivalent amount $1.6 billion via asset purchases, construction, loans, and leverage neutral stock buybacks. Three, in addition to acquiring and disposing assets, we have transitioned dozens of facilities to new or existing operators. The net result of our active asset management is a stronger operator platform as we narrowed our operator base from 70 operators in Q1 2020 to 63 operators today.
Four, turning to the balance sheet, the issuance of $1.4 billion in long-dated sub 3.4% unsecured bonds. Five, the issuance of $400 million in common equity. Six, the extension of our $1.5 billion 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 risks from increased short-term interest rates and near-term maturities.
We believe that we will continue to grapple with ongoing COVID-related operator issues for the next 12 to 16 months. Fortunately, our 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.
Robert Stephenson
Thanks, Taylor, and good morning. Turning to our financials for the third quarter. Our NAREIT FFO for the third quarter was $159 million or $0.65 per share as compared to $181 million or $0.73 per share for the third quarter of 2021. Our adjusted FFO was $185 million or $0.76 per share for the quarter, and our FAD was $173 million or $0.71 per share, and both exclude several items as outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release as well as our third quarter financial supplemental.
Revenue for the third quarter was approximately $239 million before adjusting for certain non-recurring items compared to $282 million for the third quarter of 2021. The year-over-year decrease is primarily the result of asset sales completed throughout 2021 and 2022, operator restructurings and revenue recorded in the third quarter of 2021 related to Agemo.
The $239 million of revenue in the quarter included $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 FFO and FAD calculations.
In our last earnings call, I provided revenue, adjusted FFO and FAD commentary on Agemo, 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 prepared talking points.
First, regarding Agemo, as stated in the press release, Agemo continued to not pay its contractual rent or interest payments and no payments were made in October. At September 30, 20 Agemo facilities were moved to assets held for sale, and so far in Q4, we’ve sold 19 of the 20 Agemo facilities for $316 million, bringing the total Agemo assets sold to 21 facilities for $359 million
In both our first and second quarter earnings releases and conference calls, we discussed Guardian and an operator representing 3.4% of Q1 annualized contractual rent and mortgage interest. We did not mention either of these two operators in yesterday’s press release as both operators paid all contractual rent and interest due in Q3 and remained current through October.
Also, as discussed in both our first and second quarter earnings releases and conference calls, an operator representing 2.4% 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 FFO and FAD purposes.
In the third quarter, the operator continued to underpay rent and paid only $2.5 million, which was recorded for both adjusted FFO and FAD purposes. Of the $2 million in October contractual rent owed from this operator, $500,000 was collected and we will only recognize revenue, adjusted FFO and FAD in Q4 to the extent cash is received from the operator.
Finally, last quarter, we discussed an operator, representing 2.2% of our second quarter 2022 annualized contractual rent and mortgage interest that underpaid contractual rent due under its lease agreement by $550,000. On June 30, 2022, we held a $5.4 million letter of credit as collateral from this operator, and in July, we drew the full amount of the letter of credit and applied the $550,000 of proceeds to pay the 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 $3.3 million of cash collateral against the unpaid rent for Q3. We place this operator on a cash basis of revenue recognition in Q3 and wrote-off approximately $10.5 million of straight-line rent receivables and lease inducements through rental income. As the operator is 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 FFO and FAD purposes.
In October, the operator paid a $749,000 in rent and we applied $974,000 in security deposits to fund the underpaid portion of October’s rent. At October 31, $555,000 remains as collateral to the master lease. As highlighted by Taylor, our balance sheet remained 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 Agemo asset sales completed in the fourth quarter. Our next debt maturity is $350 million of [4 3/8%] notes due August of 2023.
In 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of 0.8675%. 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 30, 98% of our $5.3 billion in debt was at fixed rates and our net funded debt to annualize adjusted EBITDA was 5.3x, the same as both our first and second quarter. And our fixed charge coverage ratio was 4.1x.
It’s important to note similar to NAREIT FFO, adjusted FFO and FAD, EBITDA in these liquidity calculations includes our ability to apply collateral and recognize revenue related to the operator non-payments 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.
Daniel Booth
Thanks, Bob, and good morning, everyone. As of September 30, 2022, Omega had an operating asset portfolio of 916 facilities with approximately 92,000 operating beds. These facilities were spread across 63 third-party operators, and located within 42 states in the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio as of June 30, 2022, decreased to 1.39x and 1.06x, respectively, versus 1.44x and 1.1x, respectively, for the trailing 12-month period ended March 31, 2022.
During the second quarter of 2022, our operators cumulatively recorded approximately $29 million in federal stimulus funds as compared to approximately $39 million recorded during the first quarter. Trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the second quarter of 2022 to 1.23x and 0.9x, respectively as compared to 1.24x and 0.92x respectively for the first quarter when excluding the benefit of any federal stimulus funds.
EBITDAR coverage for the stand-alone quarter ended June 30, 2022 for our core portfolio was 0.96x, including federal stimulus; and 0.84x, excluding the $29 million of federal stimulus funds. This compares favorably to the standalone first quarter of 0.93x and 0.76x with and without $39 million in federal stimulus funds, respectively. Occupancy for our overall core portfolio has steadily trended 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 0.94x at the end of the second quarter as compared to the end of the first quarter, which covered at 0.93x. 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, Agemo. As previously reported, we have been in ongoing discussions with Agemo for quite some time. As a result, during the third quarter and subsequently in the fourth quarter, Omega divested 21 facilities formerly leased to Agemo in a series of separate transactions to unrelated third parties. The gross proceeds from the sales totaled $359 million and involved 17 facilities in Florida, two facilities in Georgia, and two facilities in Maryland with a total of 2,522 operating beds. It is anticipated that one additional facility in Florida would be sold in the coming weeks. The remaining of Agemo portfolio will consist of 18 facilities in Tennessee and 11 facilities in Kentucky with a restated initial annual rent of approximately $23 million and annual interest of approximately $4.7 million beginning in the second quarter of 2023.
Other operators. As previously mentioned in the first quarter of 2022, an existing Omega operator representing approximately 2.4% of total rent began to experience liquidity issues. Accordingly, this operator has failed to pay full contractual rent since March, and as such, Omega has utilized a security deposit in 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 and/or re-leases to unrelated third parties. At this point, it is too early to predict the outcome of these discussions.
Subsequently, in the second quarter of 2022, another Omega operator, representing approximately 2.2% of Omega’s total rent began making only partial monthly rent payments, thus causing Omega 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 and/or re-leases 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/or re-leases will occur throughout the first half of 2023.
Turning to new investments. On September 1, 2022, Omega closed on a $40 million mezz loan investment to a new operator for the purchase of 43 facilities in Texas. The mezz loan bears a cash yield of 12% and has a five-year term. Additionally, on September 30, 2022, Omega closed on a $28 million purchase leaseback transaction for four care homes in the United Kingdom. Concurrently with the acquisition, Omega entered into a master lease for the care homes with a new operator with an initial cash yield of 8% with 2.5% escalators.
Omega’s new investments and capital expenditures for the quarter totaled $87 million. Year-to-date, as of September 30, 2022, Omega’s 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 21 Agemo 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.
Megan Krull
Thanks, Dan, and good morning, everyone. While operators continue to be diligent about managing COVID within facilities, the worst of COVID appears from a clinical perspective to be behind them. However, the pressures exacerbated by the pandemic continue to take their toll. Occupancy continues to recover in extremely slow pace. That said, 29% of core facilities have now recovered from an occupancy perspective with an additional 25% recovered within 5% of pre-COVID levels for a 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, ACA reported that nursing homes are still down 14.1% of their workforce as compared to February, 2020 with assisted living facilities faring somewhat better at a loss of 3.9%. However, there started to be slight positive momentum with an average of 4,600 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 continue to be elevated from pre-COVID 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 6x what it was in 2019. There was a per patient day decrease of slightly more than $1 PPD in second quarter versus first quarter. While this very slow positive movement in the fundamentals is promising, similar to what we saw with the FMAP distribution to nursing homes during the pandemic. As it relates to Medicaid rates setting keeping pace with inflation, there are 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 staffing costs. However, we are also seeing other states either not keep pace or even make cuts to reimbursement. Where we are seeing the most strain in the portfolio tends to be in those states that either didn’t give FMAP funds or at least not in any meaningful way and/or haven’t kept their rates setting up with inflation.
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 7.8% rate increase, somewhat keeping pace with inflation. That said, FMAP funds from the state were 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, will rate set 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.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jonathan Hughes with Raymond James.
Jonathan Hughes
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 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 those UK acquisition yields or any impact on pricing from higher costs of capital?
Taylor Pickett
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 and the second quarter were deals that were actually cut previously, right, several quarters before. So we [held] our original quote on those yields. But going forward, unless there are a deal or two in the pipeline where we continue to hold with that yield, but really going forward, as we go to transactions, our yields will go up from 8%.
Jonathan Hughes
Okay. And then I think you said cash balance today – or Bob said, cash balance today is $435 million. How quickly can you swing back to offense and be a net acquirer of properties? I realize the private market for SNFs here in the States is really competitive evidenced by the Agemo sale, but maybe the longer this period of uncertainty continues, that could change.
Robert Stephenson
Yes. I mean, well, for starters, our pipeline is pretty much the same and 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. We’re seeing 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 other acquirers towards 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 has not materially changed. So there’s an expectation that will pick up in the future, but right now, it’s the same.
Jonathan Hughes
Okay. And then my last one on EBITDAR coverage, you talked about how it did tick down a little bit from last quarter. And I saw that the sub 1x coverage bucket saw an increase. Can you just talk about the expected trajectory on coverage in that sub 1x coverage bucket going forward? Thanks.
Taylor Pickett
Yes. Jonathan, one of the interesting things is we always talk about trailing 12 months and you saw that coverage 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, along with occupancy. So I think that’s a good trend. The other thing to keep in mind is a number of states, and Florida is a great example, you have the new rates kicking in October. We’ll see the impact of that coming through coverage. That being said, liquidity is still tight. Megan’s comments are 100% valid. We have some more ground to cover with particularly the below one operators.
But we feel pretty good about – it’s not just math to restrike a 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 in restructuring pathways where you don’t dilute your future cash flows in a meaningful way. So we see a little bit of positive momentum quarter-to-quarter. And I think when we identify that group of operators that’s in the below one bucket and think about it, we don’t think about long-term problems there.
Jonathan Hughes
All right. Appreciate the time.
Taylor Pickett
Thank you.
Operator
Thank you. Your next question comes from John Pawlowski with Green Street.
John Pawlowski
Good morning. Thanks for taking the question. Could you give us a sense in the UK, what type of margin degradation the operators have seen in recent months, given the – just the shaky macro environment? And then are you seeing any demand-related softness in the UK?
Daniel Booth
So I’ll do the first question first, which is we haven’t seen a lot of diminution of results in the UK. We are expecting some as it relates, as Taylor mentioned, there’s provisions that could increase utility rates significantly. We’ve heard as much as fourfold. Utilities are generally not a big component of an operator’s expense, but when you’re talking about something that could be increased by fourfold, it is material and that will run through all of our operators.
That being said, the recovery in occupancy was quicker in the UK. Obviously, inflation is starting to hit them now. But all things being equal, to date, we haven’t seen any real diminution of results from the UK. I’m sorry, I didn’t catch the second question.
John Pawlowski
Yes. Sorry for the multipart question. Just in terms of – I know expenses are an issue, but actually demand coming in the door. Has there been any softening in recent quarters from just occupancy?
Daniel Booth
No, there’s not.
John Pawlowski
Okay. And then Taylor, back to your comments on the percent of operators below one. You’re point is well taken on just there’s a lot of old news in the trailing 12-month figures, but there’s been a substantial amount of rent below one for a while. So could you just give us a sense for what type of conversations you’re having with this cohort of operators? Have conversations picked up in terms of people starting to think – or starting to ask about rent deferrals and any other types of restructuring.
Taylor Pickett
Yes. 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. And I think in both those scenarios, you’re talking about lease enhancing transitions or sales. And so that’s the expectation from my perspective for the vast majority of what’s in there. And frankly, the bulk of them continue to pay other than the couple bigger operators that Bob and Dan talked about.
John Pawlowski
Okay. Thanks for the time.
Operator
Thank you. The next question comes from Michael Griffin with Citi.
Michael Griffin
Great. Thanks. Maybe we can go back to the Agemo transaction. Can you give us any sense of sort of what the cap rate was on that? How it was marketed? Did 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.
Daniel Booth
So we did hire an outside third-party to broker the Agemo 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?
Michael Griffin
And then just in terms of like pricing expectations when you were first marketing the deal versus kind of when it ended up coming in?
Daniel Booth
I’d say that we met and potentially even exceeded price expectations in that transaction.
Michael Griffin
And then do you have a sense of – on a cap rate basis, what it might have translated to?
Taylor Pickett
Well, it’s a fair question. If you look at the historical cash flows, cap rates would be extremely low. They’re very aggressive. Most of the buyers look at this from a pro forma perspective. And I’d say it’s consistent with historical cap rates pre-pandemic as they’re thinking about cash flows returning to pre-pandemic levels on the underwriting stages.
Michael Griffin
Got you. Appreciate the color on that. And then I’d be curious your thoughts on potential extension of the PHE, I think it’s expected to expire here in January. I know states that you have exposure in like Texas, North Carolina and Kentucky have add-ons, but they hadn’t made it permanent. Do you think there’s any expectation that these additional reimbursement levels will stay permanent?
Megan Krull
Well, in terms of the public health emergency, there’s no way to know whether that will get pushed out. It will sort of depend on what’s going on with COVID. In terms of those particular states, Texas, for instance, I know there’s a big push by the operators to try to get that 1963 permanent in 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.
It’s hard with Texas. I mean we watch it every two years when they go through rate setting, and we think they’re going to do something and they don’t. But it’s positive. We’re cautiously optimistic news coming out of operators right now in terms of Texas. North Carolina, you’re correct. They have a pretty large FMAP increase. They haven’t done much on the rate setting in 2022. We’re just hopeful that in 2023, they do some rate setting that either includes that increase or try to tie to inflation a little bit better.
And then Kentucky also has a rather large FMAP, $29 PPD increase. That actually, I believe, I have to confirm it, but I believe that actually got extended through June 30, 2024. At least that was the proposal in the governor’s budget. And so we don’t really have concerns on the Kentucky front.
Michael Griffin
Okay. That’s it for me. Thanks for the time.
Taylor Pickett
Thank you.
Operator
Thank you. The next question comes from Dave Rodgers with Baird.
David Rodgers
Yes, good morning. On the 4.5% of tenants or so that’s not fully paying today, do you guys have a preference based on location, whether you retenant 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 2023 and 2024 based on your comments?
Daniel Booth
Based upon the geography of those tenants, I think that we would see more re-leases than sales. So I don’t think that number is going up.
David Rodgers
Okay. Thank you. And then maybe, Megan, one for you. The recovery at the operator level, you talked about the jobs that have been added in 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?
Megan Krull
Unfortunately, I don’t have that level of detail. It was from an ACA report that, that was from. But I do think on the nursing side is what our operators are talking about getting a little bit better. So we’re hoping over the next few quarters, we start seeing that. Folks are having a little bit more traction getting international nurses coming in and just seeing things improve a little bit in general.
David Rodgers
All right. Great. Thank you.
Operator
Thank you. The next question comes from Joshua Dennerlein with Merrill Lynch.
Joshua Dennerlein
Yes. Good morning, everyone. Please correct me if I’m wrong, but it looks like the top operator – your top operator slip below1x coverage. Could you just remind us where this operator has geographic exposure and like kind of walked through some of the states, but what are kind of the positive and negatives on the funding in those states in the year ahead?
Daniel Booth
So this particular operator, its biggest exposure is in the state of Florida, which as you know, has been probably that, along with Texas, has been one of our really challenging states and that they really didn’t help during the pandemic. I will say they recently did pass for the first time in years a 7% increase in Medicaid rates in Florida, which go effective on October 1. So we won’t see that running through until the latter part of the fourth quarter, but that is a big help to that particular operator this year. Basically, East Coast, and those are faring much better than Florida.
Joshua Dennerlein
Okay. With that Medicare rate, will that increase kind of get them back above 1x coverage or we’re going to see that kind of stable at 1x for a while?
Daniel Booth
So it’s a Medicaid rate increase and there’s a lot of moving parts, so it’s hard to forecast that in. But it certainly moves much closer, than in conjunction with the other efforts that they’re undertaking, including obviously trying to get occupancy of reducing agencies, et cetera. We hope that they will be above that 1x to 1x.
Joshua Dennerlein
Okay. And then you mentioned UK power costs are impacting your operators over there. 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.
Daniel Booth
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.
Joshua Dennerlein
Okay. All right. Appreciate the color. Thank you.
Operator
Thank you. Your next question comes from Tayo Okusanya with Credit Suisse.
Tayo Okusanya
Hi. Yes. Good morning, everyone. Could you talk a little bit about just from the lobby group perspective what’s happening? And any chances that your lobby group could kind of help with managing – with helping operators just kind of manage through some of the challenges that they’re having now. Specifically, I’m curious if there any initiatives around maybe trying to get more federal help, maybe trying to get certain federal benefits extended even if PHE is kind of called in January of 2023. Just kind of 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 they are getting.
Megan Krull
So ACA is not necessarily spending as much time on trying to get federal money because I think that’s pretty much dried up at this point. But they are concentrating their efforts on the states and particularly those states who have some of the FMAP increases and trying to get those into the rate setting. So that’s where they’ve been concentrating their efforts in terms of the federal government, when they’re concentrating on, it’s really looking at some of these mandates that Biden has been talking about and making sure that any mandates that come through, it come through with money along with it to pay for those mandates. So that’s where they’re sort of concentrating their efforts right now.
Tayo Okusanya
Got you. All right. 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 weak free cash flow at this point?
Daniel Booth
Tayo, the lion’s share of our operators really don’t have third-party debt other than working capital lines of credit, which usually come up every one or two years. They’re fairly short-term. But other than those coming up and they’re generally just automatically renewed, no, there would not be any big debt components that our operators are saddled with on their balance sheet.
Tayo Okusanya
Great. Thank you.
Operator
Thank you. Your next question comes from Nick Yulico with Scotiabank.
Nicholas Yulico
Hi. Good morning, everyone. So I want to make sure I’m looking at this correctly. So on Page 6 of the sup where you give the operator coverage below one, it looks like there’s various small tenants on that page that are new this quarter that are not current on their rent, adds up to 2.2% of the portfolio, which is, I think, above and beyond the ones that you’re referencing in the earnings release where you’re calling out specific operators. So I just want to be clear on that and then also understand if you have a number for the whole portfolio, maybe putting aside Agemo, what percent of rent in the portfolio right now is – or operators are just not current on rent?
Robert Stephenson
Hey, Nick. It’s Bob here. So you’re right looking at that. So I’ll put Agemo out until we get back them up. So right back them up, so roughly 24% of our operators grow on a cash basis. And we have six operators that aren’t current, Agemo being the largest that they need to pay at all. Of the other five and you still see – they’re kind of listed on Page 6 there, they all paid a portion, just not the full amount during the third quarter. So that’s important.
And then of the 24% that are on a cash basis, if you go through it, you have Agemo, you had the 2.4%, the 2.2% and Guardian, Dan’s already talked about. And the next big one there is Genesis who’s paying. So you take those five operators, they represent 18% to 19% of the 24%. I don’t know if that color helps.
Nicholas Yulico
Yes, that’s helpful. And I guess just to be clear then, there’s nothing – I mean as we think about other operators, are there any that wouldn’t be on this Page 6 that are not current on rent?
Robert Stephenson
The only one, like I said, it’s not all there is Agemo.
Nicholas Yulico
Agemo, okay, which you already highlighted. Got it. Okay. Thanks. That’s helpful. So the other question I had was how I guess – and I know you talked about earlier that you’re going to get – you expect Agemo rent, some portion of that rent coming back next year on the retained assets. You talked about the redeployment of the proceeds and getting some benefit there. But I guess, I mean, if you just look at nine-month FAD, as you guys calculated, it’s kind of barely covering the existing dividend. You look at the cash flow from ops on the cash flow statement, it’s not covering the dividend. So there’s 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 you might have a little bit of incremental pressure on cash flow from – as you’re getting further along with these tenants having already used letters of credit, et cetera. There’s some timing element on the redeployment of proceeds. So I’m just trying to understand, I guess, how the Board is thinking about this from a dividend standpoint heading into next year, sort of higher-than-normal payout ratio. And then at the same time, I guess, if there’s any, just to be clear, if there’s 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.
Taylor Pickett
Yes. Nick, from our perspective, the reason I provided that color around Agemo is we look forward, you think about our FAD run rate of $0.71 and just Agemo alone, the redeployment of the Agemo sale proceeds get you to $0.77 of FAD. And that’s without fixing some of these other things, which are 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 have had gains, the dividend shelters that to some extent. We likely will have some additional sales in 2023. They’ll likely have gains. So we’ll be thinking about the tax plan around that. But frankly, we have lots of levers we can pull to manage that. Not necessarily be the dividend, but we have upward pressure on taxable income, not downward.
Nicholas Yulico
Okay. Appreciate. That’s helpful. Thanks, Taylor.
Operator
Thank you. Your next question comes from [indiscernible] with Stifel.
Unidentified Analyst
Hey. Good morning, everyone. So just trying to get an idea of next year on the SNF side. I think you mentioned that we’re getting some healthy rates in some states and a 2.7% increase on Medicare. So I guess the blended rate is probably around 46%. And then you add another 200 basis points of 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 today. I’m probably over generalizing this, but you mentioned the positive trend in 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 if we look at the SNF operators’ bottom line, if they don’t improve meaningfully over the next 12 months, when we look at the lease that are under 1x coverage today and is still current, how many of those do you think will need more restructuring of some sort, particularly those larger leases that you have not addressed already?
Taylor Pickett
You’ve identified all the moving parts. And it’s an incredibly complex puzzle. And I think from our perspective, it’s fine, we’re 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 list, and we’re engaged with these operators on a nearly daily basis. There’s nothing I would highlight where you’d say I’ve got an issue that’s going to take an extremely long 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, states reacting positively from a rate perspective, an inflation environment that’s difficult, but seems relatively predictable.
When we think about all those things and we look at our coverages, as Dan mentioned, our biggest operator that’s fallen into that bucket, there’s a pathway for them to get it in or above that 1x area, and frankly, we’ll continue to have discussions about them, are there certain assets that if we were to sell or re-lease to another party to actually improve that credit there’s lots of toggles and levers we can pull. So we feel pretty good about our outcome in terms of predicting what those coverages would be, just too many moving parts.
Unidentified Analyst
Yes. Got you. So just to follow-up on that point, if we are thinking of doing more transitioning, what is the excess bandwidth that some of the backup SNF operators have maybe to take over a larger portfolio? Is it more challenging now to do a larger portfolio transition now or maybe it takes longer to ramp up operations? I think I heard you say that you expect similar rent levels, but just to clarify how quickly you think you can transition those if there are any short-term shortfall in the revenue that we might not – we might need to think about.
Taylor Pickett
I think that it’s going to be limited. I mean you can always have gaps in time where you have an operator that’s not currently paying you and moving assets just on a regulatory front, it takes three or four months. So that alone creates gaps. But we’re not talking about transitions of portfolios of 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 that take them.
Unidentified Analyst
Okay. And one last from me. On Brookdale, do you have any change of control language in the current lease that require Omega’s consent if there’s a sale?
Taylor Pickett
We’re all looking around. I’m going to tell you I don’t think we – I doubt we do, but we’re happy to go take a look and provide you that answer.
Daniel Booth
That would not be normal in a lease with the [Pelico].
Unidentified Analyst
Okay. That’s helpful. Thank you.
Operator
Thank you. Your next question comes from Vikram Malhotra with Mizuho.
Vikram Malhotra
Thanks for taking the question. Maybe just first on the asset sales you did. I may have missed this, but was it around like $170, $180 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?
Daniel Booth
So as it relates to the Agemo sale specifically, it’s about $140,000 a bed. That’s a little bit of a blend because remember, it’s three states, but the lion’s share of those facilities were in the state of Florida. So I don’t think those numbers will hold. 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 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 bed rates. I would expect them to go down.
Vikram Malhotra
Got it. Okay. And then could you clarify, you had mentioned debt that you had swapped last year. And I just want to make sure I heard it correctly, was that pertaining to the debt coming due next year. And in that sentence, you referenced something about liquidity ratios being impacted. Could you just flesh that out for us?
Taylor Pickett
Yes. Two separate topics there. So on the first one, when the pandemic first started, we did go lock the [indiscernible] because they were sub 1 and we really like treasury sub 1, which most companies do. So we did $400 million of treasury locks, and it wasn’t tied to a particular maturity, but tied to date and time, it just happens to coincide with a maturity. So we have a 2023 maturity in August, but our treasury locks go through – they go into the first quarter of 2024, giving us the ability to unwind those if we choose to and apply to 2023 or hold them and apply them to a different debt maturity.
And then what I was saying on the liquidity ratios that it’s EBITDA calculation. So in those 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 – once they’ve all exhausted their security deposits. And to the extent we’re not paid, then we have less EBITDA in the calculation. But again, it’s really a small…
Vikram Malhotra
Those ratios – I mean, you’re well above or in compliance with those. Like your comment was just that it would be impacted.
Taylor Pickett
Well, we have a ton of cushion. No REIT impact, no bond or debt covenant impact, zero.
Vikram Malhotra
Okay. Thanks for clarifying. And then just last one on the – just I want to go back to the tenants you’ve disclosed in terms of either not paying rent or have been converted to cash paying and the disclosure with your chart where you have the rent coverages, the bands. Just to be totally clear, you’ve called out, you’ve continuously called out all the tenants that have had issues or now on cash paying over and above that, what you have disclosed or what we can see. There are no – I’m assuming there’s always some like 0.2% tenant every quarter that has an issue, but it’s not worth – I mean you may not have to call it out because it happens every quarter, even pre-COVID. But over and above that, there is no other tenant that is buried in there that we do not know about.
Taylor Pickett
That’s correct. I mean I listed – I told you it was six of them, five are listed here. The sixth was Agemo we talked about.
Vikram Malhotra
And then just to clarify, so the tenants that are below one or in general, can you just describe for us in the lease agreements, is it fair – is there a lot of variability between maybe letters of credit or security deposits that you may have and the need for you to draw on them in the future? Is it fairly – is it very varied across tenants?
Daniel Booth
It’s very varied, yes. And then also there’s not only that, it varies amongst what type of credit or secondary credit support you have in terms of either corporate or personal guarantees.
Vikram Malhotra
Got it. Okay. Thank you.
Operator
Thank you. The next question comes from Steven Valiquette with Barclays.
Steven Valiquette
Great, thanks. Good morning, everybody. So a couple of questions here. 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 a percent of rent.
And one another just kind of a housekeeping one. I might have missed this, but you had a $350 million of senior notes due in August of 2023. What’s the expected source of funds to pay down the principal on that tranche. You got some time, obviously, but just curious what the thought pattern is right now around that tranche? Thanks.
Robert Stephenson
Yes. I’ll address the latter question first. The $350 million, we’re currently sitting with $435 million of cash on the balance sheet. We have that hedged worth – or the treasury locks worth $100 million. And so there are the two primary sources. And then Brookdale, I think we partially answered it because we need to go respond to the prior question around what our rights are in the event of a change of control, but as Dan mentioned, be atypical in a public company lease scenario where we have rights to stock something like that. So if there was a transaction, we would have new set of equity holders.
Steven Valiquette
Okay. So in the event it’s acquired by, let’s say, private equity probably wouldn’t matter in the event that it would be theoretically – this is little hypothetical obviously, but if it was acquired by another REIT and things probably start to get more messy under that sort of scenario? Is that just at a high level way to think about it now? Or are you – I’m just curious how much this has your attention, I guess, maybe we’ll just ask it that way as well.
Taylor Pickett
Depending on the REIT, I’d probably be really happy with the credit.
Steven Valiquette
Okay. Maybe I’ll follow-up offline. We could talk more about it offline might be helpful. Thanks.
Taylor Pickett
Sure.
Operator
Thank you. Your next question comes from Daniel Bernstein with Capital One.
Daniel Bernstein
Hi. Good morning. A lot has been asked. Did you provide any seller financing for Agemo asset sale?
Daniel Booth
No.
Daniel Bernstein
Okay. And then I guess a related question to that. I’m just trying to understand the – I guess, aggressiveness of potential buyers for assets. I came out of the NIC conference thinking that maybe lending was tightening up significantly, especially for skilled nursing. Are the buyers 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. So just trying to understand maybe some of the lending and investing environment that’s out there and how much cash is available from buyers to continue to be aggressive on buying SNFs for the future?
Daniel Booth
So as I indicated, our latest trade, which was a sizable one with Agemo from the start where we set the price to the end, which was really in the matter of days and weeks ago, that number held firm and the buyers were able to come up with the appropriate financing now. The specifics of that financing. I’m not privy to. I don’t underwrite their financing for them. So as long as they come to the closing table with their money, we’re good. 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 any trades have moved up significantly. So to the extent that we have to put something on the market of any size, we’ll be wary of that, and that very likely could affect pricing.
Daniel Bernstein
Okay. And then you really haven’t spoken too much about senior housing fundamentals. So I was trying to get your thoughts on maybe the trends there in seniors housing versus the 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.
Daniel Booth
Well, it’s interesting because we have the perspective from our portfolio, Dan, which is Maplewood, high end, just at pre-COVID occupancies and going up. Our piece of the Brookdale portfolio performs pretty well. The UK has recovered. So when you think about those three big pockets for us, it looks pretty good. Now we obviously hear what’s going on in the industry, and you see that. But honestly, that’s just what we’re reading. So from our perspective, when we look at our portfolio, it appears to be in pretty good shape. And obviously, the real issue for everybody is the labor costs and inflation around everything else.
Daniel Bernstein
All right. I appreciate the color. That’s all I have. Thanks.
Operator
Thank you. [Operator Instructions] Your next question comes from Rich Anderson with SMBC Nikko.
Richard Anderson
Thanks. Good morning. I’ve been sitting, flying the wall here, but I do have one question, and I apologize if it’s been said. But for the 19 remaining Agemo 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?
Daniel Booth
So it’s actually 29 facilities just to let you know, and we didn’t indicate what the coverage would be. But it’s – we think at or above our – what we would normally underwrite a new credit for. So yes, we’ve made sure that what’s left is creditworthy.
Richard Anderson
Okay. So obviously, in a highly comfortable spot from a credit perspective based on those numbers.
Daniel Booth
From a coverage perspective, that’s correct.
Richard Anderson
Okay. Thank you.
Operator
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.
Taylor Pickett
Yes. I appreciate it. Thanks, everyone, for joining us this morning. I know there are a couple of follow-up items. Please feel free to reach out to Matthew or Bob, and we’ll get your answers. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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