Pickett: If there are SNF Medicare cuts, then our tenant operators will have reduced revenue. A 1% Medicare cut would reduce our cash flow to rent coverage ratio by approximately 0.03. The potential 2% sequestration cut would reduce our rent coverage ratio by 0.06. Our current trailing 12 month rent coverage ratio for the period ending June 30 is 1.58. Our operator coverages provide significant cushion to absorb rate reductions. Importantly however, this is not the case for the industry as a whole.
Thomas: Omega has a well-balanced portfolio of 460 facilities, 47 operators, in 33 states. How do you intend to expand and what geographic markets are most attractive?
Pickett: Omega will continue to expand by allocating capital to our existing tenants and, to a lesser extent, allocating capital to new tenant relationships. Omega will also look to strengthen market positions in our existing geography.
Thomas: Your largest operators are Communicare (11.4%), Sun (11.1%) and Airamid (7.9%). Do you believe these three operators will be impacted with revenue cuts? Do you see any operators in your portfolio that are concerning?Pickett: All of our large operators continue to perform well. Assuming rate cuts, if any, are not draconian, then all of our operators should continue to do well. As I mentioned earlier, there is a large portion of the SNF industry that would not be viable if rates were significantly reduced. Thomas: Your company's occupancy rate is around 84% and it has been fairly stable. Do you expect to maintain that number, or potentially increase it next year? Pickett: We expect our operator's occupancy to remain stable. Thomas: I consider rent coverage to be the most important metric for your sub-sector. Today Omega has an enviable coverage ratio of 1.58 EBITDA. Is that sustainable? Pickett: We expect that our cash flow to rent coverage ratio will remain above 1.5, assuming no Medicaid or Medicare rate cuts. I mentioned earlier that a 2% Medicare rate cut reduces coverage by 0.06. Thomas: Omega has sound financial fundamentals (leverage at 4.8 times). How do you intend to utilize your balance sheet in the future?
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