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Omega Healthcare Investors, Inc. (NYSE:OHI)
Q2 2018 Earnings Conference Call
Aug. 6, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Omega Healthcare Investors second quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question please press * then 2. Please note this event is being recorded.

I would now like to turn the conference over to Michelle Reiber. Please go ahead.

Michelle Reiber

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 regard 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 identified 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.

Taylor Pickett -- Chief Executive Officer

Thanks, Michelle. 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 a 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 underlying rent, yet we were able to achieve sale proceeds which equate to a cash flow yield of 8%. We believe we are 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 to date 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 1st, 13 Mississippi facilities with annual contractual rent of $12 million were transitioned to an existing Omega operator. On August 1st, 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 it 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 25th.

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 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 reminder of 2018. Our second quarter 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 the fact that we project Orianna asset rent or rent equivalent of $8 to $9.5 million per quarter.

After normalizing the effect of Orianna, the pro forma dividend 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 31st, CMS issued it's 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 27th. The market basket increase in Medicare fee-for-service rates was set at 2.4% effective October 1, 2018. The value-based purchasing program discounts for 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 are capped per capita, federal Medicaid funding have failed to materialize in Congress subject to the outcome of the upcoming mid-term elections and their impact on the balance of power in Congress. I will now turn the call over to Bob.

Robert O. Stephenson -- Chief Financial Officer

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 $0.076 per share for the quarter, and excludes the impact of $564,000 in provisions for uncollectable accounts, $1 million related to unrealized gains on our Genesis common stock warrants, and $4.1 million of non-cash 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 the result of approximately $16 million of reduced revenue as we placed Orianna on a cash basis effective July 1, 2017, and accordingly, did not report any leased revenue in the second quarter of 2018, and reduced revenue as a result of assets sales that occurred since the second quarter of 2017.

The decrease in revenue resulting from the asset sale 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 from non-cash 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 this Signature deferred revenue until it is 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 non-cash quarterly revenue will continue at $18 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 to $6 million starting in late 2018 or early 2019.

We expect the Orianna facilities to generate annual rent or rent equivalent of $32 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 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 to $9 million of quarterly run rate. In addition, we expect 2018 non-cash 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 non-cash deferred financing cost, was $48 million, or the same as the second quarter of 2017, as lower debt balances were offset by a higher blend of 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 of revenue related to those 47 disposition. 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 through their estimated fair values or expected selling price for a net recovery on real estate property of $1.1 million.

Turning to the balance sheet. At June 30th, 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 three months ended June 30th, our net debt to annualized EBITDA was 5.49X and our fixed-charge coverage ratio was 4X. It's important to note EBITDA in this 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 sale, our pro forma leverage would be roughly 5X.

I will now turn the call over to Dan Booth.

Daniel J. Booth -- Chief Operating Officer

Thanks, Bob. Good morning, everyone. As of June 30th, 2018, Omega has an operating asset portfolio of 923 facilities, with approximately 93,000 operating beds. These facilities were spread across 67 third-party operators and located with the United States and the United Kingdom. Currently, 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 1st of this year. Omega expects the remaining 14 facilities to be released 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 with were existing Omega operators. These transactions bring our year-to-date investment total through June 30th 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 payoffs, for total proceeds of approximately $335 million. In addition to facility sales, Omega has released 43 facilities year-to-date, which includes the 12 Mississippi facilities mentioned earlier by Taylor. We are currently evaluating approximately 15 additional facilities to sell and 28 facilities to release 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.

Steven J. Insoft -- Chief Corporate Development Officer

Thanks, Dan. 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 2nd 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 and our investment was supported by the market comps 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 proportionately with cost. Including the land and CIP of our New York City project, at the end of the second quarter, Omega's senior housing portfolio totaled $1.5 billion of investment on 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 largest senior housing portfolios among the publicly listed healthcare REITs. Our ability to successful 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.

Taylor Pickett -- Chief Executive Officer

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 considerate 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.

With that, I'll open it up to questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes -- Raymond James -- Analyst

Good morning. Thanks for taking my questions. You mentioned plans to focus on redeploying proceeds and returning to growing your business. I recall in the past and maybe a 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 PDPM on the horizon?

Daniel J. Booth -- Chief Operating Officer

Yeah, we're not saying the acquisition activity increases any real significance at this point. Mostly we're seeing sort of your smaller size transactions with our existing operators and there just haven't been any large traits come to market. 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.

Jonathan Hughes -- Raymond James -- Analyst

Interesting. Then I guess sticking with investments, how do you look at replacement cost 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 with pricing similar there and no construction risk?

Taylor Pickett -- Chief Executive Officer

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. 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 pure [inaudible] that talked about last week, the possibility of seeing more product come out at PDPM becomes a reality.

Jonathan Hughes -- Raymond James -- Analyst

Okay. 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 talk about the capex earmarked for that portfolio? Those upgrades begun. Operationally how have things gone now that they don't have to devote all their time and effort to fixing the cap structure? Thanks.

Daniel J. Booth -- Chief Operating Officer

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. I think things look good. 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.

Jonathan Hughes -- Raymond James -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

Through the process, they didn't have any major blips in admissions or census, payer mix. Everybody's 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, they'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 sort of front end of the labor issues and have tried to retain folks on the front end by providing higher wages and better benefits. 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.

Jonathan Hughes -- Raymond James -- Analyst

Okay. Thank you for the color. I'll jump off. I appreciate it.

Operator

Our next question is from Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Hi, thanks for the time. Just hoping we could talk about the non-core, non-stabilized bucket that you break out in your rent coverage disclosure in the supp. How and when is that going to reduce in size? You've completed a lot of sales, you said. 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.

Robert O. Stephenson -- Chief Financial Officer

15% of that bucket that's come down from 17%. There are 3 components there. The biggest is Orianna, which is 6% of that bucket. As Orianna transition facilities move and we finish out that restructuring, you'll see that 6% go away over time. Then you have 6% that's transition and sale assets. Dan mentioned we have a number of assets that we're looking at transitioning and we have additional sale assets. Those will move, again, over time. You're probably talking about 6 months for the bulk of that.

Then the balance, 3%, are the non-stabilized assets that are [inaudible]. The best example of that is a Maplewood new build that takes time to fill, or a skilled nursing facility that's opened that's filling. That bucket can take up to a year, just because it takes a long time to fill some of those buildings. The bulk of it, Juan, is you're going to see Orianna move and then the sales and transitions will move, and that's all relatively near term.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Great. Then just on the incremental $90 million 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 in? Any color on what drove that incremental disposition guidance would be great.

Daniel J. Booth -- Chief Operating Officer

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

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

That's part of that bucket, correct.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Okay. Then just a last question for me. You mentioned that do you expect more acquisition opportunities in the second half of this year related to PDPM like your peers said. Why is that? Are people worried about requirements under PDPM and just the transition or uncertainty of it? If you could just elaborate on how those two tie together.

Daniel J. Booth -- Chief Operating Officer

Just to clarify, 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, we'll start to see the cycle, which has been kind of slow, pick up. Forget about PDPM. But I think we've seen historically, anytime 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. It's just another iteration of what has caused the consolidation of this industry over the last decade. I think if history holds true, we'll see some of these local operators say OK, I've had enough. 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.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Our next question is from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore -- Stifel Nicolaus -- Analyst

Good morning. Last quarter, you gave us an update on Daybreak. They were paying 75% of rent. Now, I think you said they're back at full rent. Was there any back rent collected and what's the balance of accounts receivable owed now?

Taylor Pickett -- Chief Executive Officer

Chad, I think you're referring to Signature. Signature was paying 75% last quarter. It's basically what I said. Go ahead, Chad, sorry.

Chad Vanacore -- Stifel Nicolaus -- Analyst

Was Daybreak up to date as of last quarter?

Taylor Pickett -- Chief Executive Officer

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

Chad Vanacore -- Stifel Nicolaus -- Analyst

Okay. Does that mean that they're already caught up so there's no outstanding AR associated with rent earlier this year?

Taylor Pickett -- Chief Executive Officer

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

Chad Vanacore -- Stifel Nicolaus -- Analyst

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

Taylor Pickett -- Chief Executive Officer

Yeah. Just to be clear, they're paying 100% of the contractual cash amount this quarter. They actually paid that amount last quarter and caught up AR that we have recorded. What you're getting at, Chad, and I understand it, is they have back rent, not recorded on our books and fully reserved that they'll begin to pay, and we think it'll be the back half of this year. But in the meantime, we're going to receive 100% of the contractual amount on a 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.

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. Thanks for clearing it up, Taylor. Then just that the same-store pool has changed a bit. I know Juan asked about coverage. But I'm curious about occupancy, how that's trended across the portfolio outside of just your stabilized portfolio.

Daniel J. Booth -- Chief Operating Officer

Occupancy has been pretty consistently stable over the last, if you go back in our supplemental the last 5 quarters, but you can go back further than that. It stayed pretty stable. The 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. I consider both occupancy and mix to be overall very stable in our portfolio. There's not much movement.

Chad Vanacore -- Stifel Nicolaus -- Analyst

All right. Thanks, Dan. That's it for me, thanks.

Operator

Our next question comes from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein -- Capital One Securities -- Analyst

Hi, guys. I guess my questions 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 RUGS-III to RUGS-IV? Do they start changing their patient mix a quarter or two 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.

Taylor Pickett -- Chief Executive Officer

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. It goes to something that we all know. We've seen 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.

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 RUGS-IV payment model to PDPM and we agree with CMS that based on the rules, the regulations, that the revenue impact will be neutral.

Daniel Bernstein -- Capital One Securities -- Analyst

Okay. How are your operators and 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. We're at very long-time, 10-year lows in operating margin in the space. Is PDPM going to help operating margins come back up even if it's revenue neutral or is it just too early to tell?

Taylor Pickett -- Chief Executive Officer

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.

Daniel Bernstein -- Capital One Securities -- Analyst

Okay. Then turning to acquisitions in the pipeline, I know you said there's not a lot coming on for the second half of the year and who knows for '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 expend with them? I'm thinking like the have and have nots, 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 or do you want to grow with your existing operators?

Taylor Pickett -- Chief Executive Officer

Both. We continue to look for new relationships with sophisticated folks. I think we'll continue to find them at the rate of 2 to 3 a year. I think we will 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.

Daniel Bernstein -- Capital One Securities -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

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

Daniel Bernstein -- Capital One Securities -- Analyst

Okay. That's all I had. I'll hop off. Thank you.

Operator

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

Lukas Hartwich -- Green Street Advisors -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

It's a lot of operators that are just on one side of the coverage range or the other. In this particular quarter, you just had some folks that were just below the 1-2 bump up into 1-2 and also with the below 1 that bumped up into the over 1 coverage. It's not a dramatic movement of a lot of operators, but it's a little bit more subtle. It's just crossing over from one bucket to another. In this particular quarter, they went the right way.

Lukas Hartwich -- Green Street Advisors -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

Overall, 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.

Lukas Hartwich -- Green Street Advisors -- Analyst

Very helpful. Thank you.

Operator

Our next question comes from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo -- Analyst

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

Daniel J. Booth -- Chief Operating Officer

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

Taylor Pickett -- Chief Executive Officer

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

Todd Stender -- Wells Fargo -- Analyst

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

Taylor Pickett -- Chief Executive Officer

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

Todd Stender -- Wells Fargo -- Analyst

Okay. 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?

Daniel J. Booth -- Chief Operating Officer

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%. Then the 10% of the mezz loan, which is additive to an existing mezz loan term that we had, and it was at 12%, and the term, I believe, was extended out several years.

Todd Stender -- Wells Fargo -- Analyst

Okay. Thanks. Then how about the tenant for the 5 SNFs in Texas you added? Did I miss that? And any coverage that it was underwritten at?

Taylor Pickett -- Chief Executive Officer

It was underwritten at our normal underwriting, so it's somewhere in the 1.3% to 1.4% range. And once again, it yielded a 9.5% rate.

Todd Stender -- Wells Fargo -- Analyst

Who was that leased to?

Taylor Pickett -- Chief Executive Officer

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

Todd Stender -- Wells Fargo -- Analyst

All right. Thank you.

Operator

Our next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Tayo Okusanya -- Jefferies -- Analyst

Good morning, gentlemen. Couple from me. First of all, just give me your comments on the acquisition outlook. Is it reasonable to expect that maybe you focus more on the debt book near-term building that business since you're still getting pretty good returns there in the capital structure?

Taylor Pickett -- Chief Executive Officer

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

Tayo Okusanya -- Jefferies -- Analyst

Okay. That's helpful. Then could you also talk a little bit about just your tenant base and your watch list that [inaudible] have stable coverage this quarter, but again, taking a look at your tenant list, again, companies liked Diversicare that are public entities, that again the stock seems to be struggling a little bit. Just walk us through, again, some of your Top 10 tenants, public and private, and what you're thinking at this point about their overall health.

Daniel J. Booth -- Chief Operating Officer

Overall, our Top 10 have tracked our overall portfolio. 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+ years. It's arguably one of the more stable group of assets in our portfolio and it has been for a very, very long time. It's 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.

Then as far as our other Top 10, we've addressed some issues that we had with those guys. Obviously, Signature, Daybreak, Orianna. 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.

Tayo Okusanya -- Jefferies -- Analyst

Okay. That's helpful. Last one for 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 gain 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 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.

Daniel J. Booth -- Chief Operating Officer

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

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 we put those assets back to work, let alone other assets that we have in the construction pipeline, 2nd 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.

I would expect that the dividend will remain at $0.67 a share and you'll see the coverage ratio improve pretty significantly with the hope being that we get back to our old model 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.

Tayo Okusanya -- Jefferies -- Analyst

Thank you very much.

Operator

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

Jonathan Hughes -- Raymond James -- Analyst

Thanks for the follow-up. I misspoke on the cost of building SNFs earlier. It looks like it's about $160,000 bed to build. You're buying about half that. I assume your answer is the same though. I mean, acquisitions look more attractive than building, right?

Taylor Pickett -- Chief Executive Officer

There's just going to be more opportunity from an acquisition perspective. If we had more opportunity to build, we would. Even if we had the desire to put 20 shovels in the ground, we wouldn't be able to find that many opportunities. From our perspective, you're right. We're going to be focused more on acquisitions in terms of capital allocations just because of opportunities. 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 facility levels are quite strong.

Jonathan Hughes -- Raymond James -- Analyst

Okay. Then just one more. What was the IRR on the $300 million of dispositions completed this year? Sorry if this has been mentioned before, but were those legacy Omega? Assets? Aviva assets? A mix of both? Thanks.

Taylor Pickett -- Chief Executive Officer

In my prepared comments, I talked about the underlying cash flow at the facility level was $25 million on $311 million in sales. So, 8% yield type assets. It's pretty attractive pricing. What was the second half of this question?

Robert O. Stephenson -- Chief Financial Officer

It was a mix of Omega and legacy Aviva.

Jonathan Hughes -- Raymond James -- Analyst

Fair enough. Thanks.

Operator

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

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

I just wanted to follow up on Tayo's question. You talked about 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 because of litigation or other cash flow issues?

Daniel J. Booth -- Chief Operating Officer

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

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Okay, thank you.

Operator

As a reminder, if you would like to ask a question, please press * then 1. At this time, I'm seeing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Taylor Pickett -- Chief Executive Officer

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

Operator

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

Duration: 51 minutes

Call participants:

Taylor Pickett -- Chief Executive Officer

Robert O. Stephenson -- Chief Financial Officer

Daniel J. Booth -- Chief Operating Officer

Steven J. Insoft -- Chief Corporate Development Officer

Michelle Reiber -- Senior Vice President, Investor Relations

Jonathan Hughes -- Raymond James -- Analyst

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Chad Vanacore -- Stifel Nicolaus -- Analyst

Daniel Bernstein -- Capital One Securities -- Analyst

Lukas Hartwich -- Green Street Advisors -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Tayo Okusanya -- Jefferies -- Analyst

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