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Good day, everyone, and welcome to the MedEquities Second Quarter Earnings Conference Call. [Operator Instructions]. And please note that today's event is being recorded. I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.
Thank you. Good morning. Welcome to the MedEquities Realty Trust conference call to review the company's results for the second quarter of 2018. On the call today will be John McRoberts, Chairman and Chief Executive Officer, and Jeff Walraven, Executive Vice President and Chief Financial Officer.
Our results were released earlier this morning in our earnings press release along with our supplemental package furnished with the SEC on Form 8-K, which can be found on the Investor Relations section of our website. A replay of this call will be available shortly after the conclusion of the call through August 15, 2018. The numbers to access the replay are provided in the earnings press release. For those who listen to the replay of this call, we remind you that the remarks made herein are as of today, August 8, 2018, and will not be updated subsequent to this call.
During this call certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to our 2018 guidance and related assumptions, the future performance of our portfolio and our operators, and our ability to reposition assets as and when needed, our pipeline of potential acquisitions and other investments, future dividends, and financing activities.
All forward-looking statements represent MedEquities' judgment as of the date of this conference call and are subject to risk and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the SEC.
We also will discuss certain non-GAAP measures, including but not limited to FFO, AFFO, and adjusted EBITDAre. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our earnings press release, which is available at ir.medequities.com.
I'll now turn the call over to John McRoberts. Please go ahead.
Thanks, Tripp. Good morning, everyone, and welcome to the call. Today I'd like to focus my remarks in 3 primary areas. First, to provide an update on the activities we're pursuing to manage the portfolio. Second, a brief overview of where we stand on the investment activity front. And third, to touch on recent developments and the reimbursement landscape.
I'll start with the portfolio update. As noted in the earnings release through March 31, 2018, reporting period for our stabilized portfolio, we continue to experience positive trends in the trailing 12-month coverage metrics. However, coverages were flat for the skilled operators and were higher for the non-SNF portfolio operators, positively impacting the entire portfolio.
In our press release we provided an update on the Texas Ten Tenant as we have done the last several quarters. For the results in late 2017 and early 2018 we had noted improvements in several metrics including increases in census, CMS, star ratings and other quality-related metrics.
However, preliminary data for Q2 2018 indicate a decline in census, reversing some of the improvements we saw in prior quarters. Additionally, the Texas Ten Tenant has not been successful at recovering aged receivables as both we and they anticipated which has negatively impacted their available liquidity as those older receivables age out of their borrowing base and have yet to turn into cash.
I'll not repeat what we disclosed in the earnings release, so I'll refer you to those disclosures. But I want to reiterate as clearly as possible what we have said in numerous discussions with the investment community. We are prepared to retenant or sell all or a portion of the building should we conclude that as the correct path. And in fact we have entered into discussions will several parties who have expressed interest in doing such a transaction. They and we are currently completing diligence to analyze and evaluate the opportunity.
Turning to our fundamental portfolio, we leased 4 facilities, two SNFs, an LTAC, and an acute care hospital under a master lease arrangement with Fundamental. There are two facilities namely the Mountain's Edge Hospital and to a lesser extent [indiscernible] to SNF that are not currently performing to expectations and EBITDA or coverage ratios are below those stipulated in the lease agreement. However, the parent guarantor that stands behind the mass release is meeting its required minimum coverage ratio.
While we provide a disclosure on this in the earnings release as well, I will address briefly the developments at the Mountain's Edge Hospital. As we've noted before, the facility has undergone an expansion to add 5 operating rooms. As a result of the construction, the procedure rooms at the hospital have been taken offline. These 5 new operating rooms which we expect to be ready for surgical procedures by the end of the first quarter of 2019 should allow for significant increase in patient volume with improved reimbursement and put the hospital in a much improved operational position.
In connection with these activities, we expect to defer a portion of the rent for Mountain's Edge Hospital through March 31, 2019, to allow for the completion and opening of the ORs. The deferred rent will be repaid in equal monthly installments over the remainder of 2019 in addition to the normal contractual rent. This deferral serves to match the rent stream with the expected operational performance of the hospital.
Fundamental has a long proven track record of managing a large healthcare operation and they are well-positioned in the Las Vegas market operating SNFs, LTACs, and acute care hospital and a behavioral facility. We believe in this property in the Las Vegas market for Fundamental. We're excited to see the expansion and look forward to its completion.
One point I'd like to stress before turning to our investment activities, given what we described with the Texas Ten Tenant the fact that our overall portfolio coverages have improved demonstrates how strong underlying performance is through the balance of the portfolio.
Now we remain on track for the year with our investments ramping up at quarter and bringing us to $57 million completed so far this year with an additional $13 million expected to fund by year end. We also have a couple of opportunities and due diligence that are expected to close in the third quarter.
Looking at what we completed over the quarter, in addition to the $7 million mezzanine loan we originated in April and talked about on our last call, we acquired a 60-bed in-patient rehabilitation hospital for $23.4 million in New Albany, Indiana, which is a suburb of Louisville, Kentucky. We leased this to Vibra for 15 years at an initial lease rate of 9%. We're pleased to have been able to complete the transaction and expand our relationship with Vibra Healthcare.
We continue to pursue a number of other opportunities in the acute care post-acute behavioral, memory care and integrated medical facilities subsectors. The amount of investments we have in front of us right now combined with what we've locked up with purchase options is the right level of activity for us at this point. By focusing on these properties and opportunities, we will be able to pick and choose the most advantageous to us as to asset type, yield, and credit metrics.
Moving on to reimbursement trends. As we noted last quarter, the news on the government reimbursement side has been fairly positive of late for the SNF industry. CMS finalized their rule for FY 2019 perspective payment system with a 2.4% rate increase and introduced a new payment methodology called the patient-driven payment model or PDPM to begin in FY 2020. Recall that the goal here was to shift toward patient [indiscernible] less confusion and paperwork required of providers. Having talked to our operators, we believe that the longer timeframe for implementation would be enough time to adapt to the changes. CMS also recently finalized rules for acute care hospitals, LTACs, and in-patient psychiatric facilities that were consistent with previous proposals or better than expected.
Looking ahead to the second half of the year, we are focused on select investments that provide strong risk-adjusted returns and are continuing to manage the portfolio and closely monitor the performance of our tenants.
Let me now turn the call over to Jeff who will address our second quarter financial results and the outlook for the remainder of 2018.
Thanks, John. The company reported AFFO per share of $0.30 for the second quarter of 2018, which is consistent with the reported Q1 AFFO results. The quarter release also includes $2 million in transaction cost comprised primarily of professional fees, and they were added back to AFFO because we consider them to be noncomparable expenses that are not reflective of our ongoing operating performance. The per share amounts reported for net income attributable to common stockholders and may redefine FFO did not adjust for these costs, representing approximately $0.06 per share, which account for the sequential decline from the prior quarter.
Regarding these costs, we have previously stated that we would explore all opportunities to grow the portfolio in a manner that was accretive to our stockholders. To that end, we always have projects in various stages of completion that may develop further or that we walk away from for some reason during our evaluation, some of which we view as regular comparable expenses and others which we determine to be noncomparable expenses that do not reflect our ongoing operating results.
Often there are costs associated with these projects. Sometimes they can be significant like they were in the second quarter. We highlighted the cost incurred in this quarter because of their size but we believe it prudent not to discuss the specifics of any project until it is appropriate to do so and that in most cases when a transaction can be announced we will continue with that policy today.
We invested over $33 million during the quarter, we aggregate weighted average yield on these new investments was 9.2%. We have a number of investments that are right in front of us either through purchase options as a part of funding commitments or opportunities under due diligence. One of those purchase options is with Sequel Youth and Family Services. In October 2017 we originated a construction mortgage loan for the funding of a new residential treatment facility for Sequel in Northeast Tennessee that replaces an existing facility at Brown.
The project was completed on time on August 1, and we expect to acquire the facility and lease it back to Sequel under a long term lease at 9% initial lease yield on or about September 01. The purchase price will be in the neighborhood of $6.4 million which represents the amount of our loan plus the estimated remaining cost of construction that should be finalized at this month. We've utilized the secured credit facility to fund our new investments. As of June 30, 2018, the amounts outstanding under the credit facility were $265 million, and we have a total borrowing base of $300 million. The interest rate on the outstanding borrowings under the credit facility is currently around 4%.
For the second quarter the weighted average interest rate was 3.9% compared to 3.7% for the first quarter. We continue to have a debt profile that remains firmly within our targeted leverage ranges. At June 30, 2018, the ratio of net debt to gross assets was 38.4% compared to 35.2% at March 31, 2018.
Net debt to consolidated adjusted EBITDAre annualized for Q2 2018 was 4.5x. These metrics have experienced slight increases as we had expected because of the additional borrowing to fund investments. John gave a high level portfolio overview in the earnings release and the quarterly supplemental information report contain more detailed coverage information. On an aggregate basis, the entire stabilized portfolio for the trailing 12 months, March 31, 2018 had EBITDARM coverage of 2.24x at the guarantor level, and 1.36x at the facility level. And EBITDAR coverage of 1.98x at the guarantor level and 1.4x times at the facility level.
The total facility level coverage has strengthened relative to prior quarter and were consistent at the guarantor level, while we spent significant time working for a positive resolution of the current performance of the Texas SNF Portfolio, these total facility coverage ratios demonstrate the underlying health of the rest of the portfolio. Lastly, I will provide a quick update on 2018 guidance, included in both the earning press release and the supplemental information report. The net income and FFO guidance changes primarily reflect the effects of the $2 million in additional professional fees I mentioned earlier. The new estimated range for net income attributable to common stockholders is $0.60 to $0.61 per diluted share, and the updated estimated range for FFO is $1.13 to $1.15 per share. For AFFO we raised the low end of our guidance by $0.01 to $1.19, and have reaffirmed the high end of the range at $1.22. This change is a result of higher investment activity to-date.
Based on our current capital availability and debt metrics, we believe we have sufficient capital resources to fund the expected investment opportunities that we have. We are constantly evaluating various opportunities to access capital, including refinancing opportunities and seek to maintain the appropriate balance between pursuing growth of our investment portfolio and prudent balance sheet management. We evaluate any of these alternatives on the spectrum of what provides the greatest benefit to the company stockholders over the long term.
[Operator Instructions]. And our first questioner today will be Jordan Sadler with KeyBanc Capital Markets.
Sorry to see some of the disclosure here this morning, but I wanted to dig in a little bit, see if you could offer me little bit insight, especially around the Texas Ten portfolio. This is going on for quite some time at this point. Could you give us a little bit more detail around where you are in the process in looking to retenant this portfolio time frame, et cetera?
Yes, Jordan. As we saw some of the improvements start to turn on us, we opened data rooms, we contacted people, we have a series of folks, companies who are looking through the data rooms now who had responded to their questions. And so we would expect to have at least the first of a few offers or potential structures to continue to negotiate on probably in the next couple of weeks. And then from that point as a matter of picking the one that makes the most sense from an operator standpoint and structuring from our side and continuing to negotiate that, try to get those transactions, get those assets transferred. So I think probably realistically we're probably talking 60 to 90 days before anything would happen. I can't -- you just don't know how long this might take, but we are seeing some of these assets or similar situations get transitioned in fairly quick order, just depends on who you're dealing with, how long it takes to finalize a negotiation and then you've got to go through the regulatory issues after that. So I think by the time we have this call next quarter we will have either transitioned, or I think we haven't totally transitioned we will have much more clarity on who and when that would be completed.
And from a processing perspective, I mean they are very cooperative with us in the asset [indiscernible] and the retenant part. And with that level of cooperativeness, essentially once we're in agreement with who and what that structure is within the State of Texas really the -- to get the OTA in place you have to give the state 30 days notice. So from -- with a cooperative process and once you really had agreement you can in a matter of really 60 days have completed the OTA press and the transfer to the new operator. So that's John's comments already of the active discussions that we go on continue to mature over the next 2 to 4 weeks and then begin into the transfer-type process. We should be able to take care of some definitely before the quarter end and have clear messaging where the rest will go.
What is market rent coverage for a portfolio like this?
Well, if we were underwriting one today, we would be looking somewhere in the 14 or 15 range, we're not seeing many of those, so we don't have -- we don't have any of those that [indiscernible] those sort of categories and would meet our yield requirements in our pipeline at this point. But in a transition it kind of goes all over the board, it could be 11, it could be 13, it could be in-between those two. Depends on the strength of the operator their balance sheet, their working capital, availability, so we just have to get to that point first. We're not quite there yet.
You would view this as a nonstabilized portfolio, if you were underwriting it new yourself you think like a incoming operator is going to view this as an undermanaged portfolio?
I believe it's undermanaged to a certain degree. Although from a current basis, not including the impact of their aged receivables that we discussed in the prepared remarks that they're doing a fairly decent job of billing and collecting on their current book of business. The question is can an operator discuss scale and that market bring these on and reduce the expenses because they do have scale in the market. So I think we would be looking at something like that to enhance the overall operational performance of the portfolio and those kinds of hands.
Is there anything qualitative about this portfolio that you can relay you had been updating us on the CMS quality star ratings for the portfolio. I think last measure was at 3.6 on average 1Q '18, do you have an update on that?
Yes, let me get you the exact number, we've got it in our particular deck. It has been covered. Mike, if you know it [indiscernible].
Hey, Jordan, it's Mike. There's a -- we posted an investor deck out on the website this morning, on Slide 13 bottom-left chart. Q1 was 3.6, the Q2 2018 average is 3.9.
3.9. Are there any other facilities under 3 now of the 10.
For quality or for overall, which one?
Quality.
Yes, we will follow up real quickly with that answer [indiscernible].
That's fine. And then this one is for you, Jeff, while I have you. The -- so you've used up the security deposit assumedly, can you talk about what the remaining collateral and guarantees are? And this may also be in the deck but maybe you could elucidate the point.
Well, the remaining collateral is the guarantees and the performance of the rest of the portfolio. That is where we've been pushing with the management on -- in addition to our 10 there is 8 other facilities. And those -- a number of those are performing well on their own financial basis and it is them getting their cash liquidity. They've on a year-to-date basis they've absolutely been collecting the cash for what they have been billing. We had previously even described that part of the troubles and the woes within here that they had gone from centralized billing to decentralized billing back to centralize billing, all of that occurred during the 2017 period. The residual of that disruption we expected and they expected to be and get collected in this first half of '18 and it has not materialized the way we expected and that has -- what that part is what then caught off guard by them and haven't met the expectation. So we do still expect a level of collections to occur on that. And the continued increase also in the other eight facilities and the collateral that exist and the profitability of those and then within the ownership structure there are other businesses where that are unencumbered at this point that management is looking to extract its equity out, appropriately leverage those and bring additional liquidity into the company so that we still get made whole all of our rents and the property taxes.
Okay, so hence the guidance change or update assumes -- what are you assuming in guidance as it relates to this portfolio, Jeff?
From the guidance numbers at this point, we have not put in any kind of a write-down of the collected revenue. It has the contractual revenue for the year. You know, we had still -- through June 30 there were no receivables for rents and right now guidance still assumes that we collect the rent.
So I think the point is if we get further down the road with some of these potential new operators and we have some sort of clarity on what the ongoing rents would be to the extent if we didn't have sufficient collateral to support the delta and we would update guidance at that point. We're just not far enough along right now to know what that might be.
But basically, you're assuming that July rent which you -- when was the July rent due, July 1?
This was due July 1.
So you're north of 30 days behind on that rent. You are assuming that that gets paid.
Yes.
In the guidance, right. You are booking that in your 3Q or your -- and your full year numbers now. And I guess your confidence level in receiving that rent is what does that need to be in order for you to sort of maintain the guidance or in order to not take a reserve?
Still, as where we sit today within guidance we have the count and expect management to live up to its obligations and its commitments to meet those -- to get those rents paid.
They're going to be slow though.
Yes.
Okay, but this is basically -- this operator is $0.03 a month in rent essentially, right?
Yes, million dollars a month.
Okay, and then lastly, I'll yield the floor apologize to everybody, just on the transaction expenses that you booked. I know you don't want to disclose too much but this is on a new investment opportunity, to be clear, this is -- so are these ongoing working deal costs or dead deal costs during the quarter?
Those calls are primarily legal accounting and tax work for a transaction that was and is large and complex.
And is ongoing did you say?
Yes, that was repositioning the OnPointe assets.
That is related to OnPointe.
No, it is not.
No, it is not.
Oh, it is not. Oh, it is not. And is it ongoing or is -- is that transaction ongoing?
Yes.
And the next questioner today will be Jonathan Hughes with Raymond James.
Just kind of piggybacking off of that question from Jordan. I mean, those professional fees, were there any costs in there related to say improving the asset management or data analytics platform or is it pretty much just related to this other ongoing large portfolio -- complex portfolio transaction not related to OnPointe?
It would be the latter.
Okay. And is that larger complex portfolio transaction embedded in your external growth outlook in guidance?
No, it is not.
Okay. All right. I'll move on. I guess switching to operations, Texas Ten SNF have had issues but now seem to be on -- back on track or at least maybe kind of getting there hopefully. And then the Brownsville MOB has stumbled and I believe is still waiting for some lease up there, now fundamental. I guess are there any other tenants on your watch list? And have these recurring tenant issues changed your underwriting strategy?
We don't have any other tenants that would pose any concern to us. We hope to have something positive to announce on Brownsville in the very near future. We're very close on that one. So it's really -- it's an OnPointe situations, it's an OnPointe story, and that's our first and foremost priority is to get that fixed and get the tenants into those buildings. The fundamental issue to us is more of recognizing that the hospital construction and expansion has disrupted what's going on there and just matching up the current operational performance to our cash collections but the deferred portion of the rent we feel -- I mean we're not worried about whether we will ultimately collect that, we're just recognizing what is going on in that market in that specific asset right now.
And one thing, one real quick backtrack on the transaction cost just to make it clear, that's not a run rate and so we would want to make sure nobody [indiscernible] imputed $2 million run rate on those. And then following, you know, as you consider then down the rest of our client list John has already, talking about OnPointe, talking about Fundamental, when you go to the rest of our tenant list, Vibra is still performing very, very strong at facility level and guarantor level. Life Generations in California is both on our assets and rest of their portfolio, they have continued to grow and add some. They are still very strong at the guarantor level and facility level. You then go to Magnolia which was one of our other SNF acquisitions in Indiana. They continue to perform well. Our step up in Connecticut with Prospect Medical it is also doing well. And AAC as an operator on our behavioral assets is also doing well. So to reiterate, as you go through the rest of our particular tenant list there is no troubled situations lurking in any of those.
Okay, that's great. Thanks for that extra color there, Jeff, I appreciate it. And then just one more from me and something I asked two quarters ago but we're now almost two years into the company being out in the publically traded realm, the NAV discount since the IPO has consistently been on double digits now the largest this morning among the [indiscernible] in the sectors, I know there are some deals in the pipe, so maybe after those are done the share price rebounds but at that point you're at the upper leverage targets. But if the market continues to ascribe the significant discount to your underlying asset value, you change your strategy your focus? I am just curious, what's the next move from here given you have a pretty prohibitive cost of capital and will be tapped out on liquidity by year end?
Well, I can't tell you specifically what the situation is going to be in a year or so after we deploy our available capital. We'll have to wait and see. But as we approach that we'll be looking at all options for the company to maximize the value of the shares. Could be any number of things but we're not prepared to talk about it today. But there are --= there -- you could sell the company, you could sell parts, you could refocus out of the SNF business and other aspects. But we would have to look at each of those at that time to see what we believe is the best strategic move for the company at that point in time if it continues to be a problem.
And then I think you mentioned joint ventures in your prepared remarks earlier. Is that maybe something that is related to the transaction fees that came up in the quarter?
No, I don't know that we mentioned joint ventures, do you think? Anyway, we probably talked about it in the past. The problem we have with joint ventures, honestly, is they are complicated, it clouds the story. And a lot of joint venture partners that we have spoken to in the past are not interested in doing a small deal, they want to do large transactions, multiple transactions. So it start to stretch our capital and we end up becoming a 5% joint venture partner in a big transaction. But at the end of the day then our shareholders start to question who we are really working for. So there it's complex and we just had not found the right partner, although we have had discussions in the past.
And our next questioner today will be Daniel Bernstein with Capital One.
I just wanted to ask, I just wanted to make sure, so you are not on a cash basis on Fundamental or OnPointe at this point, I just want to make sure I am clear on that, right?
You are clear on that. That is correct.
What would be -- what would be the mechanism to go ahead, especially with OnPointe, to move towards a cash base. I mean you're going to obviously have to reset rents or do something there. You may collect the rents that is contractual but that's -- why not move to a cash basis on OnPointe at this point?
Well, that will be an evaluation that would be made on this particular quarter's reporting. When I say this quarter I am talking the third quarter we're actually operating and living in right now, not the second quarter that we've already historically put in the past. And as of June 30 at that point there -- we -- there were with the application of the deposits there is no receivables. So I hear your admonition there and that consideration as the month of August and the month of September continues and we conclude in our monthly and quarterly accounting for the third quarter. That absolutely will have to be a consideration with all the facts and circumstances in hand when we get to that particular point at September 30.
Good, okay. And then are you considering the sale of any of the assets? When you say you're retenant the assets, are you going to look to retenant all 10? Are you looking to retenant a portion and maybe sell a portion? Or is that to be determined?
Well, that's to be determined. We have some parties who are looking at some of the assets. So we have some parties that are looking at all of the assets. So we don't know yet whether we will maintain ownership and have new tenants in all of these buildings or some of these offers may come into actually buy the building as well. But we are -- slate is clean on that. I mean, we're looking to structure a transaction that makes sense for everybody and if it involves selling actual real estate, we're certainly open to that.
Okay. And then even if you retenant, why would that change the outcome necessarily on the age receivables? I mean I just want to understand a little bit more about whether struggles on recovering those receivables and why would retenanting those assets maybe change the outcome?
Well, retenanting would -- I mean that would -- a new tenant will bring their own working capital to bear and they would be responsible for operations from that date forward. The existing tenant would continue to try to work those receivables and collect as much as they could. So if they are successful in that, that would help provide liquidity to them and help them pay the background and…
We have lot of those collateral claims. And that is actually to the extent that we retenant it [indiscernible] any unpaid rent. There would be notes in place for any uncollected rent at that point that they would absolutely attempt to live up to.
Okay, did you guys give out a fixed charge coverage on fundamental or corporate coverage? I just wanted to understand the protection behind that guarantee.
We did not disclose. And I don't think we do disclose company-level. We disclose asset -- asset-level, asset category.
Category, yes.
Yes.
Okay, good. Is it possible to give a range, is it sufficiently above 12, 13, 14 is it -- just again I am just trying to get a sense of the security behind Fundamental. I know it is a very large company and [indiscernible] very small portion of your assets. I am just trying to get comfortable with security on that.
So I will say they are meeting or exceeding their fixed charge coverage but we don't want to disclose specific data on fundamental or any specific company that we deal with. I will say I [indiscernible].
We can understand that
Look, we're close -- we're close to Fundamental, we know some things they have done internally as a company that we're going to be beneficial to them as a company over the next 12 months. So I mean we feel good about Fundamental.
Okay. No, no, I understand the answer. Just trying to get comfortable with that. And then 1 last question, I'll hop off. On the hospital coverage going up could we get a little bit more granular in terms of what's bringing that coverage up and maybe how much of that coverage increase might have been impacted by acquisitions on the IRFs that you brought in if at all?
Are you talking about the acute care segment and the coverages there?
Yes, the hospital segment.
Okay. Well, we've got some good operating assets that are in that bucket. ADHE would be one of those that's doing extremely well. So it has an effect to pull up the average in total. So that's a fairly new asset for us. We've owned it about a year, I think, but they're doing extremely well.
And then our IRFs and the LTAC rates are -- LTACs have been -- are also in that category and they've been increasing in coverage, so.
And actually, Fundamental's LTAC in Las Vegas we own is doing very well.
And our next questioner today will be Mike Mueller with JPMorgan.
First of all, quick housekeeping item. With all due respect to Jordan, good friend, I think you need to limit questions here because it gets disruptive on the call to have 10 or 15 minutes of questions taken up by one person. So for whatever that's worth, going to put that out there. Second thing in terms of operations, can you just talk about the dividend level? And I mean do you expect a dividend cut?
No, our dividend is -- our payout ratio is very conservative. I think we're in the upper 60%s.
68% [indiscernible] for this quarter.
So regardless of what may happen with the retenanting efforts at the Texas Ten portfolio, we don't anticipate any cut in dividend.
Got it. So a sale, don't expect it. Retenanting, don't expect it anyway.
I mean with -- no, even with a retenanting and a rent cut that would -- if it came with the retenanting would not yield any dividend cut, no.
[Indiscernible] you would be able to redeploy those monies into other assets, so I think that could not affect our ability to cut our dividend.
Got it. And last question for me, I think when you're talking about refinancing, was that a reference to possibly refinancing Lakeway?
Yes, it is.
That's one option, yes.
Okay. And how viable is that?
It's fairly viable. We've been looking at it, we've been discussing it, we've been working with our partners on it, we've been working with potential sources of that, so I think it's pretty viable.
And our next questioner today will be Michael Carroll with RBC.
Can you guys provide some more details on the Texas Ten and the preliminary 2Q results? I guess according to your presentation, expenses did drop pretty dramatically and the scale mix also dropped. How should we think about that? And where is coverage going on these assets?
Well, we get census levels and statistics before we get final numbers. So we don't have the final coverage numbers at this point in time, but you've got to think that if those factors are at play it's going to impact their collections and billing and all that for the next month or 2. So that's not a good fact pattern which is why we've moved ahead to --
Depending on which calculation of that, when you look at it on a quarter-over-quarter basis, clearly it's with the census piece and that mix it would be down a little bit. On a trailing 12 basis though it would actually still be up and have a small tick-up. But we'll be able to disclose those numbers further because definitely with the mix -- well, there was the census and a little bit of the mix [indiscernible] decrease, there's other factors in here that -- and comparing to the prior quarter end into the same quarter on the trailing 12 periods, it doesn't has -- doesn't have as much of an impact, but definitely still now.
But just to be clear, we're not that focused on trailing 12 at this point.
Right.
So have you talked to the operator for the reasons why these dropped? Did they lose focus? Did they realize that they were losing too much money, so they decided to try to cut costs? I mean what was the reason for the drop?
Primarily it's been because some of the hospitals in the markets that they are in have had low census levels themselves and that dominoes down through the systems. So the acute care hospitals have lower census, that means fewer discharges and fewer admissions in the post-acute setting within each market.
Okay. And then how disruptive will a transition be at this point? And I would imagine you would need to provide any new operator a significant rent credit for the new move-in? How should we think about the size of that? And I know John, you said earlier that it was going to 14 to 15 as the stabilized coverage, is that what you would want to underwrite or a new operator would want underwritten to take over these leases?
What I intended to say, if we were looking at a new transaction today with a new operator, we would be looking at those kinds of coverages, but with the retenanting, we wouldn't expect to have to underwrite to that…
I mean in a re-tenanting situation like this, there's a negotiation that's going to go on as to what profit is left at the operating company. Right, operator is generally going to come in and say from a management fee, let me get X, a reasonable [indiscernible] management fee earning off of it, and then the residual on the coverage above 1 on a EBITDA basis on somebody who is coming in, right, they haven't done a sale leaseback, so they didn't get proceeds, et cetera. You can start with a lower -- potentially a lower coverage more at a 1.2 and the retenanting agreement for them to come in if they get a 5% management fee and then have upside opportunity that can be agreed to be shared. Now I'll state with that the -- your question there is, okay, would you have to provide any rent holiday or other working capital? That is really totally dependent upon the operator that you're willing to negotiate with and bring in. As we mentioned, we have groups that we are already talking about with retenanting. Those groups that have conversations have indicated they have the ability to do the working capital matters themselves because there is a child process so that incoming operator has a little bit of an interruption in collections while you complete the child process to where they can -- you can bill, but can't yet collect until the [indiscernible] is complete. And the guys we've been talking [indiscernible] can handle that. So hope that [indiscernible] what your question is, Mike.
Yes, no, it does. And then just last question related to the professional fees. Can you clarify if that is related to an acquisition or a disposition?
We can't really comment on that until it's either ready to announce or it goes away, for whatever reason.
And how are you guys looking at the investment market, are you still out there deploying capital? I guess, given the 2 tenant issues that you have right now, does that make you want to pause your investment activity until you get those fixed?
Well, we have an active pipeline. We have transactions we're looking at. We're in due diligence on some. So we expect to close some additional transactions. And in fact, I mean, we think it's a good thing. As you grow the company and grow the portfolio, the issue you do have become a little bit less in turn. They're not less issues, but they're less as a part of the whole portfolio as you grow the portfolio. So we know these things will be taken care of ultimately and so we're not hitting the pause button on acquisitions to answer your question.
Just going to say our next questioner today will be Bryan Maher with B. Riley FBR.
Regarding Mountain's Edge, with the addition of the operating rooms, shouldn't they have seen that in advance and kind of planned accordingly with respect to the rents that they would owe you, why should this be on you instead of on them? And who's actually paying for that -- those improvements?
We're financing the improvements and they will be rolled into the lease upon completion. So we're taking care of that. They have -- since that hospital opened, they were approached by several groups of orthopedic surgeons in that market wanting a place to land to have sort of an orthopedic center of excellence. And so this whole -- they didn't have the ORs in place to accommodate the volume or the right size for that kind of surgical procedure. So this is in an effort to accommodate and attract and bring that group together. Now this group of physicians, at least the leaders of those groups of physicians have been very involved in the project in terms of the size of the ORs, the equipment in the ORs, the layout of the ORs. So they're very, very focused on it and anxious to get to work at that hospital when those are completed.
And then not to beat a dead horse on the Texas Ten, but I thought that they has swapped out an executive there who is kind making the changes necessary. Did that -- did this end up being more of an executive issue in a failure of the new executive there? Or was it more market related? And should we be concerned by your comment a few minutes ago that hospitals are having a lower census in the area and thereby discharging fewer people and what would make one think that things would improve that that continues to be the case even with a new operator?
We don't believe the drop in census at the hospitals is a permanent situation. You have fluctuations in census levels frequently. And sometimes in the summertime they do tend to have some seasonal down. So we don't think that's a systemic issue. I do believe the Texas Ten portfolio and the management had to deal with issues with the SNF industry in general, issues with what was going on in Texas in particular, which you can get through. But on top of that they had a couple self-inflicted issues that were -- that made a big difference. And I think we've talked about the history of that before, but one of the issues was the executive they had managing those 10 assets or 11 assests, 10 of which we own that were in Texas, managed to cut expenses. And that ultimately hurt them pretty badly on their quality outcomes and that started sort of a cascading.
But the other thing that Jeff alluded to earlier was the central or actually the moving of their billing office from one stake to another and then decentralizing it and then recentralizing it. And that was again, that was a self-inflicted wound. And they're still suffering from that. The receivables that kind of got caught up in that, they never were billed properly. And we think that our good receivables it just takes a lot of effort to clean them up and get them out the door and bird-dog them and hound until you get collected. That's just what it takes. So it's an intensive effort over and above your normal billing and collecting of your current book of business. So they had -- again they had the things that were all SNFs or dealing with across the country. And Texas SNFs with the penetrating of managed Medicaid and the low rates there. So they had those things like everybody did, but they did some things that were -- that were harmful to them that they have total control of.
And so just to be clear, you're looking to retenant two of the Texas Ten or all of the Texas Ten or that's TBD. And based upon your comments earlier, it seems like whether it's 2 or 10, the existing tenant has already kind of thrown in the towel and knows they're not going to be there 3 to 6 months from now, is that correct?
Well, the first part of your question is we don't know exactly where it will end up. We're willing to retenant or sell some or all of the facilities. The second part of your question related to the existing operator. They're very and always have been very transparent with us and have worked closely with us. So they understand the situation and they know what path we're moving down and they're cooperative with us. Having said that, their people in the field and all that are still working, still at their jobs working day-to-day doing the things they need to be doing, so.
Taking care of people.
Yes.
And it's safe to say that even if a new operator comes in a lot of those employees will stay -- still stay as employees of the new operator, wouldn't that be correct?
I would think virtually all your field people would stay in place until such time that a new operator had a chance to evaluate their performance and whether they can get with the plan and what have you, but certainly in the beginning.
Yes. When you look at -- there's 2,200 employees that make up the entirety of the company. And in an operator change maybe 50 of those change out. That to the extent that's where if an executive director in any given facility all of that starts to get evaluated differently, but yeah, there's -- when you think about an operator change it's not changing out the 2,200 employees, it's effectively the upper level, the management company aspect of that is where the change takes place between operator to operator.
And then just last for me. Assuming something happened inter-quarter, okay. So we'd have to wait for the third quarter earnings call, would you guys be agreeable to issuing a press release and doing a conference call to give us an update if something substantial occurs regarding this?
Yes, certainly if there is a material event we would announce.
And our next question today will be a follow up from Michael Carroll with RBC.
After Bryan's first question I wanted to kind of talk about what actually went wrong with Fundamental? What drove that weakness? And shouldn't you have underwritten the expansion project of the Mountain's Edge. And shouldn't that already been understood by the operator before rent payments were missed?
We probably didn't understand or estimate properly the disruption that the whole project would take on. So I think if there's anything there there's that issue. But we certainly understand and have looked very closely. In fact, I've met several of these physicians out in that market. And so I have a pretty good feel for their support of this project and their willingness to come onboard and kind of move, book a business over there. So we -- again we feel very comfortable with it. We've seen the pro forma. We've looked at the assumptions, the drivers. We've tested them for reasonableness, and so we feel very comfortable with the project.
And then with regard to the parent guarantee, how comfortable are you with that? And I guess given how big Fundamental is, I'm kind of surprised that they needed that deferral in the operations of their assets cannot fund this shortfall, this temporary shortfalls for a few months?
Well, as I said earlier, they're not immune to what's going on in the industry as a whole. And we think that's bottomed out. As a company they took on a portfolio of assets in Missouri which kind of help [indiscernible] I believe at the time. And those assets, they never -- they couldn't, the previous operator couldn't make it work, neither could Fundamental, but those assets have been transitioned away and those leases are now behind. So that's going to be a big positive for them going forward. They have renegotiated their therapy services that's outsourced that's going to save them a lot of money. So we're very confident in the Fundamental's ability to develop this expansion in the market of Las Vegas, bring these physicians onboard, and as a corporate entity support everything we're doing and everything they're doing.
And then how did the rent deferral discussion go? I guess the way the press release said is they intend to do this. Did they kind of come to you and talk about how you're going to do the new rent payments or did they just basically say this is what we plan on doing?
Well, we haven't memorialized that yet, we're still in discussions with them on how much of the rent would be deferred. So the disclosure today which is to let you know that's coming down the pipe, but we haven't finalized that yet.
And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. McRoberts for any closing remarks.
Well, thanks, everybody for your time today. And as usual, we're available for calls at any time. I know a few of you have reached out and wanted to have follow-up calls which we're accommodating. So should you have any additional questions, just give us a holler. We appreciate your time.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.