Good morning, and welcome to the Omega Healthcare 4th Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note today's event is being recorded. I would
now like to turn
the conference over to Michelle Reber. Please go ahead, ma'am.
Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett CFO, Bob Stevenson 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 regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition 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 ks, which identifies specific factors that may cause actual results or events to differ materially from those described in forward looking statements.
During the call today, we will refer to some non GAAP financial measures such as 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 recently issued press release. I will now turn the call over to Taylor.
Thanks, Michelle. Good morning and thank you for joining our Q4 2018 earnings conference call. Today, I will discuss the completion of our strategic asset repositioning and portfolio restructuring, the status of the MedEquities acquisition, our 4th quarter results and our expectations for 2019. We have completed our strategic asset repositioning and portfolio restructurings. In 2018, we disposed of 86 facilities for total consideration of $409,000,000 The revenue reduction related to these assets was $47,400,000 while the trailing 12 month cash flow on these assets was 28,000,000 dollars Cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to a cash flow yield of 7%.
We will redeploy these proceeds into higher quality assets with good rent coverage, while experiencing minimal revenue impacts. In addition to the facilities that we disposed, we transitioned 63 facilities to 12 existing and new operators, which should improve facility level results and typically has resulted in better overall credit strength. All of the 42 Orianna facilities have been transitioned or sold. 26 facilities have been released to 6 existing Omega operators with related annual rent of $19,100,000 1 facility in Tennessee was sold for $4,000,000 15 facilities in South Carolina and Georgia were sold. We expect to receive $116,000,000 from the estate liquidation and have received a note with a face value of $30,000,000 and a GAAP value of $20,000,000 which generates $1,800,000 in annual cash interest.
Consistent with all of our prior estimates, final rent and rent equivalent received from the Orianna portfolio is approximately $33,000,000 Final transitions and sales resulted in a non cash accounting impairment of $27,200,000 that has no effect on our future cash flow run rate related to the former Orianna assets. Regarding MedEquities, we filed a registration statement with the SEC yesterday for our proposed acquisition of MedEquities Realty Trust Inc. Once the registration statement is declared effective by the SEC, MedEquities will mail a proxy statement to its stockholders to approve the merger. Omega stockholder approval is not required. We expect the transaction to be completed in the Q2 subject of course to approval by MedEquity's stockholders.
Turning to our 4th quarter results and guidance for 2019. Our adjusted FFO of $0.73 per share is $0.04 less than our Q3 adjusted FFO of $0.77 per share. The difference consists of approximately $0.02 per share for increased legal costs related to the conclusion of the Orianna workout and non executive employee bonuses related to a 3 year incentive plan payout and approximately $0.02 per share related to uncollected Daybreak obligations. Daybreak's current liquidity issues reflect the particularly difficult operating environment in Texas, where the combination of relatively low statewide occupancy of 70% and a Medicaid rate that is the 2nd lowest in the United States has resulted in a number of restructurings both in and out of bankruptcy court. We believe the long term outlook in Texas is positive with favorable demographics, a slowdown in new supply, the imminent start of PDPM and the possibility of much needed rate relief.
In the near term, as Dan will detail, we are working with Daybreak by providing near term liquidity relief via cash rent deferrals through June. Our 2019 full year adjusted FFO guidance of $3 to $3.12 per share and 4th quarter guidance of $0.78 to $0.81 per share includes the acquisition of MedEquities. It also includes normalizing our general and administrative cost run rate at $9,000,000 to $10,000,000 per quarter. We have provided 4th quarter guidance as the timing of MRT, normalizing general and administrative costs and the ultimate run rate cash collections from Daybreak will impact our full year 2019 guidance. However, by the Q4 of 2019, all of these moving parts will be resolved.
I will now turn the call over to Bob.
Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $125,000,000 or $0.59 per share for the quarter as compared to $159,000,000 or $0.77 per diluted share in the Q4 of 2017. Our adjusted FFO was $155,000,000 or $0.73 per share for the quarter and excludes the impact of the $27,200,000 provision for impairment on direct financing leases, dollars 3,900,000 of non cash stock based compensation expense, dollars 1,100,000 of one time revenue, dollars 400,000 of merger related costs, dollars 300,000 in provisions for uncollectible accounts and a $200,000 mark to market loss on our Genesis warrants. Operating revenue for the quarter was approximately $220,000,000 versus $221,000,000 for the Q4 of 2017. The decrease was primarily a result of reduced revenue related to asset sales, transitions and loans paid off that occurred throughout 2018 and the timing of cash receipts related to operators on a cash basis.
The decrease in revenue was partially offset by incremental revenue from a combination of $471,000,000 of new investments completed and capital renovations made to our facilities in 2018 as well as lease amendments made during that same time period and also revenue related to the Orianna facilities that were transitioned to existing Omega operators in the 3rd 4th quarters of 2018. The $220,000,000 of revenue for the quarter includes approximately $16,000,000 of non cash revenue. Our G and A expense was $13,700,000 for the Q4 of 2018 with the growth over the Q4 of 2017 due to the continued legal expenses related to operator workouts and restructurings, which is primarily related to Orianna as well as bonus accruals. Interest expense for the quarter, when excluding non cash deferred financing costs, $49,000,000 or roughly the same as the Q4 of 2017, as lower debt balances were offset by a higher blended cost of debt, primarily as a result of LIBOR rates. We recorded a $27,000,000 impairment on direct financing leases in the Q4 related to the finalization of the Orianna portfolio.
We also recorded approximately $3,000,000 in real estate impairments charges to reduce the net book values on 3 facilities to their estimated values or expected selling prices. In the 4th quarter, we sold 15 assets for net cash proceeds of $67,000,000 recognizing a gain of approximately $16,000,000 We recorded in the Q4 approximately $975,000 in revenue related to the 15 dispositions. As part of our constant evaluation to approve our effectiveness and efficiency, we are implementing an internal realignment of our organization. The realignment will result in the closing of our physical Chicago office and the elimination of certain positions effective February 15. As a result, for the quarter ended March 31, 2019, we will record a restructuring charge of approximately $2,500,000 consisting primarily of severance payments and office closure expenses.
For 2019 guidance and modeling purposes, we are assuming the following major assumptions. For NetEquities, we assume the acquisition will be completed in the second quarter. On Daybreak, we assume that we will receive approximately $5,200,000 in cash in each of the first and second quarters before returning to their contractual obligation of approximately $7,700,000 per quarter. Regarding Orianna, as Taylor mentioned, 26 facilities have been re leased for annual rent of $19,100,000 Roughly $1,500,000 of that annual amount will start in the 2nd quarter. We assume new construction project revenue as outlined on Page 7 of our supplemental information posted on our website.
We assume non cash quarterly revenue should be between $16,000,000 $18,000,000 per quarter. We project our G and A in the first quarter of 2019 to be consistent with our 2018 Q4 G and A as a result of continued legal expenses related to operator workouts and transitions, reducing somewhat in the second quarter before returning to a more traditional $9,000,000 to $10,000,000 per quarter in the second half of twenty nineteen. Non cash stock based compensation expense is estimated to $4,000,000 per quarter in 2019. Interest expense, the variability in our interest expense is primarily driven by borrowings on our credit facility and LIBOR rates. At December 31, 21 percent of our debt or 966 $1,000,000 was floating rate debt.
Every 25 basis point increase in LIBOR rates will result in roughly $2,400,000 in increased annual interest expense or $0.01 per share. We assume proceeds from potential asset disposition opportunities will be redeployed at between 9% and 9.5%. Regarding share issuances, we plan to issue approximately 7,500,000 Omega common shares for MedEquities. Historically, we've issued $10,000,000 to $15,000,000 of equity per quarter through our dividend reinvestment and common stock purchase plan and assume that will continue. And lastly, based on our stock price and subject to equity market conditions, we may decide to issue equity under our ATM to continue to delever and fund potential acquisitions.
Our balance sheet remains strong. At December 31, we had 3 facilities valued at approximately $1,000,000 classified as assets held for sale. Approximately 80% of our $4,600,000,000 in debt is fixed and our net debt to adjusted annualized EBITDA was 5.5 times and our fixed charge coverage ratio was 3.8 times. It's important to note EBITDA in these calculations has only $17,000,000 of annual revenue related to Orianna facilities and no revenue related to construction and process associated with our new builds. When adjusting for Orianna and the Daybreak 4th quarter cash shortfall, the known revenue on the new builds and removing revenue related to our 4th quarter asset sales, our pro form a leverage would be roughly 5.17 times.
I will now turn the call over to Dan.
Thanks, Bob, and good morning, everyone. As of December 31, 2018, Omega had an operating asset portfolio of 909 facilities with approximately 91,000 operating beds. These facilities were spread across 68 third party operators and located within 40 states in the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our core portfolio was down slightly during the Q3 of 2018 at 1.67 and 1.32 times respectively versus 1.7 and 1.34 times respectively for the trailing 12 month period ended June 30, 2018. Just as a reminder, our core portfolio represents facilities that are deemed stabilized.
Excluded from our core portfolio are new development projects, projects which are open but not yet stabilized, facilities slated for sale or closure and facilities expected to be or that have recently been transitioned to a new operator. As we have executed on our strategic repositioning, the amount of rent reported this quarter has consistently increased over the last 4 quarters, improving from 83% in the Q4 of 2017 to 85% in the Q1 of 2018, 87% in the Q2 of 2018 and up further in the Q3 of 2018 to 91%. Turning to portfolio matters. As Taylor mentioned, the operating environment for skilled nursing facilities in the state of Texas has gotten increasingly more challenging over the last several years. Recent headlines have reported that several operators, including the largest operator in the state, have sought protection under the U.
S. Bankruptcy code. While none of Omega's operators have reached that point, many are experiencing shrinking margins as a result of woefully low state Medicaid rates, a slow but steady erosion in occupancy and a robust labor market causing virtually across the board labor pressures. As a direct result of these challenges, 1 Omega operator, Daybreak, has requested a partial rent deferral for the second time in the span of approximately 5 quarters. Accordingly, on January 30, 2019, Omega and Daybreak entered into a second amendment to settlement and forbearance agreement, whereby Omega agreed to defer approximately $4,200,000 in the Q4 of 2018 and 1 month's rent were approximately $2,500,000 in each of the first and second quarters of 2019.
These deferrals were granted for a number of reasons. 1st, to allow Daybreak to continue to embark on certain operational improvements, which are already starting to yield positive results in the form of improved operating performance. 2nd, to give Daybreak time to reap the benefits of a significant increased participation in the Texas Quick program, which is similar to what other states commonly refer to as a UPL program. Daybreak currently has 16 Omega facilities enrolled in the Texas Quick program and has recently applied to enroll an additional 31 facilities, which is currently estimated to increase annual revenue by between $5,000,000 $7,000,000 And third, to permit Daybreak to potentially benefit in the event the state of Texas passes the nursing facility reinvestment allowance or NEFRA, which is expected to be introduced into legislation within the next several months. The NEFRA legislation will provide for an enhanced Medicaid rate to be used for direct care and capital improvements.
In addition, the legislation in its current form would provide for additional rate enhancements to be earned based upon quality performance metrics. Similar to programs already in existence in 43 states, the NEFRA bill will provide much needed relief to providers across the entire state of Texas. While the outcome of the NEFRA bill and the benefit and timing of the aforementioned operational improvements is uncertain, we believe the temporary rent deferrals are critical provide additional time to allow these initiatives to reach their full potential and positively impact the performance of the Daybreak portfolio. Turning to new investments. During the Q4 of 2018, Omega completed new investments totaling $53,000,000 plus an additional $45,000,000 in capital expenditures.
The new investments included the purchase of 3 skilled nursing facilities in Pennsylvania for $35,000,000 and 2 skilled nursing facilities in Indiana for $17,000,000 Omega purchased the facilities from 3rd party sellers and leased them to existing Omega operators pursuant to long term master leases. These transactions bring our 2018 investment total to $470,000,000 including capital Subsequent to the Q4 and as Taylor mentioned, on January 2, 2019, Omega announced a proposed merger with MedEquities for approximately $600,000,000 The transaction involves 34 facilities in 7 states with 11 operators, nearly all of which are new to Omega. In addition to further diversifying our operator base, the MRT transaction also diversifies our operator classes by adding in addition to 20 SNFs, 5 behavioral health facilities, 3 acute care hospitals, 2 inpatient rehab facilities, 2 LTACs, 1 ELF and 1 medical office building.
Turning to
dispositions. During the Q4 of 2018, Omega sold 15 facilities for approximately $67,000,000 This brings the 2018 total dispositions to 86 facilities inclusive of 3 mortgage loan payoffs for total consideration of approximately $409,000,000 I will now turn the call over to Steven.
Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our ALF memory care high rise at Second Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $285,000,000 including accrued rent and is scheduled to open in late 2019, Including the land and CIP of our New York City project, at the end of the Q4, Omega Senior Housing Portfolio totaled $1,500,000,000 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 UK, our overall senior housing investment now comprises 124 assisted living, independent living and memory care assets in the U. S. And UK.
On a standalone basis, the core portfolio not only covers its lease obligations at 1.19x, but also represents one of the larger senior housing portfolios amongst the publicly listed healthcare REITs. Our ability to successfully continue to grow this important component of our portfolio, as highlighted by our 14 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 the same capability, we invested $45,200,000 in the 4th quarter in new construction and strategic reinvestment. $37,200,000 of this investment is predominantly related to 13 active new construction projects with a total budget of approximately $500,000,000 inclusive of I will now turn the call over to Taylor for some final comments. Thank you, Taylor.
Thank you, Taylor. Thank you, Taylor. Thank you, Taylor.
Thank you, Taylor. Thank you, Taylor.
Thank you, Taylor. Thank you, Taylor. Thank you, Taylor. Good morning, everyone. I will now turn the call over to Taylor for some final comments.
Thanks, Stephen. We look forward to 2019 and returning to our historical net acquisition profile, which should drive FFO growth going forward. In addition, our operators are preparing for and are excited about the October 1 patient driven payment model, which should improve both patient outcomes and operator profitability. And with that, I'll open up to questions.
Thank you. We will now begin the question and answer session. Today's first question comes from Daniel Bernstein of Capital One. Please go ahead.
Hi, good morning.
Good morning, Dan.
Hey. I actually just wanted to ask a little bit more about the operating environment in Texas and then maybe overall, if you look at Medicaid mix, it's gone up for you and the industry. So, try to get some confidence that Daybreak will recover that the assets you're picking up at MRT are going to do well. And so trying to understand how you're thinking about that increase in Medicaid mix, how has it changed the risk profile or operating profile of skilled nursing assets and how maybe you're thinking about underwriting within that context as well?
Yes. So we did see a little decline in the quality mix. I mean, we've been ever so slowly eroding occupancy for the portfolio and for most of our operators specifically has been flat for at least the last five quarters. Texas specifically, we talked about the challenges there. I don't want to go back through that again.
But they remain challenges. We think that there is some upside in the future that we've got, as Taylor mentioned, the PDPM coming online on October Texas, In Texas specifically, you've got additional quick monies coming online for certain operators that elect to enter into that program. You've got the potential of the NEFA bill, the Nursing Facility Reinvestment Allowance Act that we talked about. So and then once again, the operators are just having to block and tackle in terms of keeping their occupancy level, trying to pick up a percentage point here and there and keeping the quality mix at least at this point the same until PDPM comes on. So that's kind of overall the operating environment that we're dealing with.
Okay. Does it change your underwriting at all that Medicaid mix is increasing?
I think you have to look at it on a case by case basis as you're underwriting.
Okay. And then one more question, trying again not look so much at the past, but the future. It seems like a lot of the upside is predicated upon your acquisitions. Are you seeing bid ask spreads? What are the opportunities you're seeing within skilled nursing or seniors housing that makes you optimistic that you can continue to acquire assets at reasonable underwriting and reasonable yields at this point?
Dan, the pipeline is more active today than it was in 2018. And I think the discipline in pricing that we saw throughout 2018 has benefited us coming into 2019 where we're seeing yields in the nines for assets of medium to high quality. And I think we'll see more as the year progresses. So we feel good about that. Some of our operators that had been a little less acquisitive at the end of 'seventeen and into 'eighteen have more of an appetite.
We did a little bit in Q4, which was the beginning of that from our perspective. So we feel good about the environment and I think there's a reasonable amount of clarity among the more sophisticated operators around the impact of PDPL. So from an underwriting perspective, that visibility is helpful.
So operators are bringing you a lot of transactions, I think, is the way to read that?
We're seeing more. We're seeing more.
You're seeing more. Okay. Okay. I'll hop off. I'm sure there's plenty of questions behind me here.
Thanks.
And our next question comes from Trent Trujillo of Scotiabank. Please go ahead.
Hi, good morning and thanks for taking the questions. If you don't mind just sticking with Daybreak for a little bit. It seemed like up until the release last night, things were trending positively. Yes, they were on a cash basis, but rent was being collected. There was no indication that they weren't collecting, that you weren't collecting, operations were improving.
And then this announcement happens and this is the 2nd time in the last year you've had to work out a situation, an arrangement with them. So how can you I appreciate the prepared comments earlier, but how can you get confident with them as an operator that something like this won't happen? And are you having conversations with other Texas based operators about rent adjustments?
As we said, Daybreak happens to operate in a very difficult environment right now for all the reasons that we stated. But we do see some upside. As we said, they have showed some recent operating improvement trends in terms of both occupancy and their payer mix, which is clearly falls to the bottom line. We have them expanding in the quick program. We have once again PDPM and once again the network bill that's going to come through Texas in the next 2 or 3 months.
We see those all as upside and some or any combination of those we think will vastly help Daybreak. And that's why we're buying ourselves a little time here with the with what we did for the 1st two quarters of 2019 and kind of see where we end up because we'll have a lot more clarity on a lot of these issues that we brought up and where Daybreak will land.
Okay. Do you happen to have the I know you do a breakout of your EBITDAR coverage. Do you happen to have that just for your Texas portfolio, for your Texas exposure?
I don't at my fingertips, but we can certainly do
that. Okay. And maybe just one more if you don't mind. So for the EBITDAR coverage bucket below one times cover, it looks like that deteriorated quarter over quarter. Can you talk about how you're addressing that portion of your contractual rent?
A lot of the there's some folks that sort of go back and forth between the under one times and over. And depending on any given quarter, they'll float back and forth, but it's mostly the same group. And almost to every one of them, they have a strong credit support in the form of corporate or individual guarantor, which is why we have and continue to collect rent from all of those below 1 to 1 operators in that bucket.
And our next question today comes from Chad Vanacore of Stifel. Please go ahead.
Good morning. Beat a dead horse on Daybreak. So Daybreak had been an issue earlier in 2019. You deferred some rent, but they caught up by mid year. Now they're back in the red.
So what changed in operations or liquidity that allowed them to catch up the first time? And then what changed from mid year to now?
I don't think they necessarily caught up. They just started back on paying their contractual rent throughout really all of 2018 and with the exception of the Q4. The Q3 was a difficult one and they had expectations of improving certain operational things a little bit quicker than it came to fruition. And we are starting to see that pay off now, but it was slower than expected. And once again, the Q3 was a rough one, not just for Daybreak, but for a lot of our operators.
Dan, is it really a matter of census and rate or were there some excess expenses that were accumulated in the back half of the year for them?
Well, it's all the above really. I mean they've got labor issues, right, that's running through everybody's operating performance. You've got not a good rate obviously in the state of Texas. So those are consistent of what was new was, yes, blip in occupancy and a blip in the quality mix. And they do have residual expenses that are running through their P and L.
Obviously, they have to keep their vendors on a relatively current basis.
All right. And then just thinking about your MRT acquisition coming up mid year, MRT had some hospitals, especially a hospital that's kind of outside your core. What do you think you'll do with those? And what do you think you'll learn?
We're actually anxious. We've met we're anxious to be part of to have add that to our asset pool. We've met all the operators in the MRT world and we're excited about growing with them. And when you think about the hospitals, the big anchor is Baylor's. You have a stellar credit and we'll look to continue to communicate with Baylor, but they've got pretty deep pockets.
So we'll see what happens there. And then on the LTACH side, we are in that business in a small way. So we understand it and we're excited about the relationship there as well.
All right. Taylor, I mean, is that something that you'd look to expand upon or just keep the door open?
We'll continue to grow those relationships. We're looking forward. We like the relationships that we're picking up as part of the merger.
Got it. All right. Then just one last one for me. So last quarter, you mentioned you're evaluating about $60,000,000 asset dispositions. You disposed a little bit more than that in the Q4.
How should we think about dispositions going forward? Almost all materially done? Or you're just taking the time to reevaluate where you stand?
We're done from a repositioning perspective. I think there might be scenarios where you'll see dispositions that are strategic for different reasons, not driven from asset quality or operator quality, but just driven from repositioning and discussions with operators. But we don't we're for sure going to be net acquirers in a meaningful way in 2019.
All right. Thanks for taking the questions.
And our next question comes from Michael Lewis of SunTrust. Please go ahead.
Great. Thank you. Chad thought he was beating a dead horse on Daybreak. So I guess I'm really going to beat it with one more question. Just to be 100% clear, you expect to recover this $9,000,000 right, dollars 4,000,000 from 1Q, dollars 5,000,000 from the first half of this year.
And by the back half of this year, they should be running kind of business as usual. And is that dependent, you think, on this legislation passing? Or do you think just time and a little bit of relief gets this back on track?
Actually the deferral for the $9,000,000 give or take is deferred out till 2020, it's not the back half of this year. And the legislation would be hugely helpful, but we also think that the other components that we've laid out will be very helpful even without the legislation.
Okay. Fair. I have a bigger picture question. You may have seen this, but George Hager of Genesis yesterday speaking at a conference. He said, I'll quote him here, I would argue that the traditional REIT structure in skilled nursing has been proven to be a failure.
I might argue that your stock performance over the last year argues against that statement. But I think as far as the model of 1.3x coverage, 2% escalators, Do you think that's a sustainable model given all the uncertainty? And it seems like quarter after quarter there's an operator here or there. What do you think from a big picture perspective about that model and the sustainability of it?
We have a big relationship with Genesis and we like the Genesis management team and George in particular. And he's been through the last couple of years, which have been a struggle and I think he's reflecting on that. One of the things I would note that he talked about was demographics and occupancy challenges. And one of the and in the face of occupancy and demographic challenges and a tight reimbursement environment, then there are lease structures that can catch up to you and that's happened within the Genesis portfolio. But our view is long term 2% escalators, which reflect inflation and tie basically to rates.
If you look at all of our rate analysis over the last decade, it tracks to inflation. We don't think that model is broken. And frankly, all the demographic work that we've done, which we know is here, is going to be a big driver in the right direction. So from our perspective, we look at the model and we think it makes sense. 1.3 cover isn't where we underwrite today.
We underwrite at 1.3.5, 1.4. So when you get into the 1.3 world, that's a little bit tighter than any of us would like to be, but we build the cushion in knowing that you're going to have ups and downs in this business. So I think the model works fine. I think the broken models were the ones where you saw escalators at 4% and 4.5% that way outpaced inflation and that does eat into coverage. There's no way to get around that.
Okay. And I'll stick in just one more if I can. I thought you said $9,000,000 to $10,000,000 quarterly G and A run rate. I thought that was $8,000,000 to $9,000,000 a quarter ago and maybe MedEquities changes that. Is that kind of the correct run rate for the G and A?
Yes, 9% to 10% is the correct runway run rate, excuse me, med equities is a piece of that 9% to 10%. You also have normal inflation
year over year as well. So
Okay, got it.
Perfect. Thanks a lot.
And our next question today comes from Tayo Okusanya of Jefferies. Please go ahead.
Hey, good morning. This is Austin Caito on for Tayo. Just a quick question. So Daybreak, Texas focused skilled nurse facility, they're kind of you're seeing some headwinds now. Can you just talk a little bit about the decision to buy MRT?
Like what's different about that portfolio versus Daybreak? Thank you.
You mean a well, I guess you mean the snip component in Texas. Fortunately, MRT did a lot of work on that. They basically resolved that issue before we even announced our transaction. There was a portfolio of 10 facilities in Texas that they released to a new operator and reset the coverage and reduce the rent by approximately $5,500,000 So we think that portfolio is fixed. We think it's with a good operating partner.
And so that one does not trouble us.
All right, great. That's it for me. Thank you.
Thank you.
And this concludes our question and answer session. I'd like to turn the conference back over to Taylor Pickett for any final remarks.
Thank you, and thanks everyone for joining our call this morning.
Thank you, sir. The conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.