Good morning, and welcome to the Omega Healthcare Investors Third Quarter 2019 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to Please note that this event is being recorded. I would now like to turn the conference over to Michelle Reber. Please go ahead.
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 Insuff. Comments made during this conference call that are not historical facts may be forward looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook generally. These forward looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including without limitation our most recent report on Form 10 ks, which identifies specific factors that may cause actual results or events to differ materially from those described in 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 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 dotomegahealthcare.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 Q3 2019 earnings conference call. Today, I will discuss our Q3 results, our recent acquisition activity, Daybreak and the current reimbursement environment. Our 3rd quarter adjusted FFO is $0.76 per share. We declared a $0.67 per share dividend for the quarter.
Payout ratio is 88% of adjusted FFO and 97% of funds available for distribution. The $0.01 increase in our dividend reflects both known earnings upsides, namely the recently closed $735,000,000 Encore transaction and the 2020 opening of Maplewood's new Manhattan facility and our optimism around continued growth opportunities and improvement in cash rents or rent equivalents from the Daybreak facilities. Future potential dividend increases will be evaluated periodically by our Board of Directors, who will be partially dependent on achieving both known earnings upsides and additional growth opportunities. On October 31, we closed our previously announced Encore portfolio acquisition for $735,000,000 In addition, during the Q3, we opportunistically sold 19 facilities for $177,000,000 and recognized a related gain of $53,100,000 We continue to work with Daybreak. As Dan will detail, Daybreak's near term liquidity issues, which resulted in the payment of only $750,000 of 3rd quarter rent.
We expect these liquidity issues will be resolved over time and anticipate significant future Daybreak rent upside as we work through the near term Daybreak restructuring issues. Lastly, on the reimbursement front. Operator feedback related to PDPM, the new patient driven payment model has been positive. It is still too early to know the financial impact of PDPM. We will provide investors with more information as details unfold.
I will now turn the call over to Bob.
Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $163,000,000 or $0.72 per share for the quarter, as compared to $161,000,000 or $0.76 per diluted share for the Q3 of 2018. Our adjusted FFO was $173,000,000 or $0.76 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release, in our supplemental and on our website. Operating revenue for the quarter was approximately $233,000,000 versus $222,000,000 for the Q3 of 2018. The increase was primarily a result of incremental revenue from a combination of over $800,000,000 of new investments completed and capital renovations made to our facilities since the Q3 of 2018, as well as lease amendments made during that same time period.
Revenue from former Orianna facilities that were transferred to existing Omega operators in the 3rd Q4 of 2018. And finally, we adopted the new lease accounting standard effective January 1, 2019, which resulted in the recording of tenant real estate taxes and ground lease income in revenue. The increase in revenue was partially offset by reduced revenue related to asset sales, transitions and loan repayments that have occurred throughout 2019. The timing of cash receipts related to operators on a cash basis. And finally, based on the interpretation of the collectability guidance in the new lease accounting standard requiring the write off of straight line receivables for operators on a cash basis, we recorded approximately $3,000,000 for non collectible revenue related to 2 operators during the quarter.
The $233,000,000 of revenue for the quarter includes approximately $15,000,000 of non cash revenue. Our G and A expense was $10,800,000 for the Q3 of 2019 and included $600,000 in restructuring charges, primarily related to the early buyout of our Chicago office lease, which had a 2024 termination. You may recall that we closed our Chicago office in the Q1 of 2019. Interest expense for the quarter, when excluding non cash deferred financing costs, was $50,000,000 with a $2,000,000 increase over the Q3 of 2018, resulting from higher outstanding borrowings for the quarter. Our balance sheet remains strong and continues to improve.
In September, we entered into an equity forward sale agreement to sell 7,500,000 shares of common stock in connection with a $300,000,000 underwritten public offering. We expect to settle the forward equity sale agreement by the end of 2019. Net proceeds from the settlement of the forward sale agreement will be used to repay a portion of the debt borrowed to finance the Encore portfolio acquisition. Also in September, we issued $500,000,000 of 3.5.8 percent senior notes due October 2029. Net proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving credit facility and term loans.
At September 30, approximately 90% of our $4,700,000,000 in debt was fixed and our net funded debt to adjusted annualized EBITDA was 5.14 times and our fixed charge coverage ratio was 4.1 times. It's important to note EBITDA on these calculations has no revenue related to construction and process associated with our 5 new builds scheduled to become operational within the next 12 months. When adjusting to include a full quarter of contractual revenue on our new builds and eliminate revenue related to assets sold during the quarter, our pro form a leverage would be roughly 5 times. For guidance and modeling purposes, we are assuming the following. On the Oncor portfolio, the acquisition was completed on October 31, and as a result, we expect to record approximately 2 months of revenue in the 4th quarter or $10,500,000 in cash rent.
We also assumed $389,000,000 in HUD debt at a blended rate of 3.66 percent as part of the acquisition. We assume the U. K. Investment should close late in Q4. We assume new construction projects will be put into service in accordance with our schedule on Page 7 of our supplemental information posted to our website.
We assume revenue from the Daybreak portfolio will continue to be recorded on a cash basis, with rent from that portfolio generating $4,000,000 to $5,000,000 per quarter in late 2020. We assume non cash quarterly revenue should be between $16,000,000 $18,000,000 per quarter. We project G and A of $9,000,000 to $10,000,000 per quarter. Non cash stock based compensation expense is estimated to be approximately $4,000,000 per quarter. The variability in our interest expense is primarily driven by borrowings on our revolving credit and term loan facilities as well as LIBOR rates.
At September 30, 10% of our debt or $500,000,000 was floating rate debt. We recorded $2,800,000 of revenue related to assets sold during the Q3. Although not included in guidance, additional asset disposition opportunities may occur. Regarding share issuances, in addition to the $7,500,000 share forward sale agreement, which we expect to settle by year end, we assume we will be issuing approximately $25,000,000 of equity per quarter through our dividend reinvestment and common stock purchase plan, consistent with our recent quarterly issuances. Lastly, based on our stock price and subject to equity market conditions, we may decide to issue additional equity under our ATM to continue to delever and fund potential acquisitions.
During the 1st 9 months of 2019, we issued or sold approximately 5,600,000 shares of Omega common stock, generating over $200,000,000 in gross proceeds through a combination of our ATM and our dividend reinvestment and common stock purchase plans. I will now turn the call over to Dan.
Thanks, Bob, and good morning, everyone. As of September 30, 2019, Omega had an operating asset portfolio of 910 facilities with approximately 91,000 operating beds. These facilities were spread across 73 third party operators and located within 39 states in the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our core portfolio during the Q2 of 2019 was 1.66 and 1.3 times respectively versus 1.67 and 1.31 times respectively for the trailing 12 month period ended March 31, 2019. Turning to portfolio matters.
During the Q3 of 2019, Daybreak's liquidity challenges and operational performance deteriorated further as a result of reduced overall occupancy, a fall off in quality mix, ongoing labor pressures and significant legacy operating costs that consume much of Daybreak's current run rate. As a result, Omega recognized less than $1,000,000 in rent for the Q3. While Daybreak is expected to benefit from the addition of 26 Omega facilities into the Texas Quick program, the implementation of PDPM and the 2.4% Medicare rate increase, the vast majority of these benefits will not assist with Daybreak's liquidity challenges into the Q1 of 2020. The combination of these factors has resulted in Daybreak and Omega consensually agreeing to begin to selectively downsize Daybreak's wide geographic footprint across the state of Texas, allowing Daybreak to more narrowly focus attention on only a few select markets. Accordingly, during the Q3 of 2019, Omega began to have discussions with several other Texas based operators about releasing a number of facilities that fall outside Daybreak's desired core geographic footprint.
Both the discussions and the downsizing process are ongoing. While the ultimate outcome of this process is difficult to ascertain at this time, we feel confident that Omega will eventually end up with rent or rent equivalents of between $15,000,000 to $20,000,000 per annum on our current Daybreak portfolio. Turning to new investments. On July 1, 2019, Omega completed a $25,000,000 purchase lease transaction for 3 skilled nursing facilities in North Carolina and Virginia. Facilities were added to an existing operators master lease for an initial cash yield of 9.5% with 2% annual escalators.
Turning to subsequent events. As mentioned by Taylor, on October 31, 2019, Omega closed on our previously announced $735,000,000 acquisition of 60 facilities. The purchase consisted of approximately $346,000,000 of cash and the assumption of approximately $389,000,000 in HUD mortgage loans. The portfolio consists of 58 skilled nursing facilities and 2 assisted living facilities located across 8 states with a significant concentration in the Southeast. The facilities are leased to 2 operators, one being an existing Omega operator via 3 triple net master leases.
The facilities will generate approximately $64,000,000 in initial cash rent with annual escalators ranging from 2.25 percent to 2.5%. Year to date, Omega has made new investments totaling approximately $1,500,000,000 including capital expenditures. Also as mentioned earlier, on October 29, 2019, Omega entered into a share purchase agreement to acquire Healthpeak Properties 49% interest in an existing joint venture with Syndat Capital Management for a total equity investment of approximately $90,000,000 The portfolio consists of 67 owned care homes across the United Kingdom leased to 2 operators via 3 separate triple net master leases and a single facility development loan with a 3rd party borrower. The transaction is expected to close by year end. Turning to dispositions.
During the Q3 2019, Omega divested 19 facilities via 6 separate transactions for total proceeds of approximately $177,000,000 Lastly, as of today, Omega has approximately $995,000,000 of combined cash and revolver availability to fund future investments and capital expenditures. Will now turn the call over to Stephen.
Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our ALS 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 early 2020. Including the land and CIP of our New York City project, at the end of the 3rd quarter, 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 125 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 1.2 times, but also represents one of the largest 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 15 Maplewood facilities, including the newly opened 98 Unit ALF in Southport, Connecticut, as well as 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 $38,000,000 in the 3rd quarter in new construction and strategic reinvestment.
Dollars 19,800,000 of this investment is predominantly related to our active construction projects with a total budget of approximately $500,000,000 inclusive of Manhattan. The remaining $17,900,000 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.
Thanks, Stephen. This concludes our prepared comments. We will now open the call up for questions.
Thank you. We will now begin the question and answer session. And our first question will come from Joshua Dennerlein of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning guys. Just curious on the U. K. JV that you bought into, Why did you decide to pursue that acquisition? And do you have any color on cap rates?
And then how does the JV partnership work? Is there an opportunity for you eventually to kind of consolidate the whole portfolio?
Yes. I mean, listen, we've been opportunistic in the U. K. We're still very bullish on it. So we're always kind of looking for new opportunities there.
We have 2 existing operators that we do business with. This opportunity will add 2 more. I think diversity is a good thing. The demographics over there are great. There are quality operators and we think we've matched up with them.
Cap rates are we look at care homes over the UK much more like assisted living here in the United States. So cap rates are lower than your average SNFs. You're looking in the 7s rather than the 8s and 9s and that holds for this deal as well. And then in the future, if I captured all your questions, there is an opportunity to potentially unwind the JV. I mean, we have a we are in a JV structure right now where basically it's a 5,149, but everybody has sort of mutual voting rights.
I think our strategy in the UK is long term. I can't speak to my partner, but we're still bullish in the UK and if the opportunity presents itself, we would probably buy out the other piece.
Okay, great. Thank you. And then maybe just one question on Daybreak. I'm not sure if I heard it. How much rent are you including in guidance for 4Q from Daybreak?
Is 3Q a good run rate?
Yes. So as you know and we said Daybreak is on
a cash basis and we'll
so we assume it's in that we have a range of guidance. So we had $750,000,000 in the Q3 and our guidance is in that range.
And our next question will come from Jonathan Hughes of Raymond James. Please go ahead.
Hey, good morning. Just going back to Daybreak, have they paid October rent in line with the $3,000,000 to $5,000,000 you're projecting? A little confused there.
No, that $3,000,000 to $5,000,000 that we're projecting is not in the 4th quarter. That's out a ways. That's after a number of different things are recognized. Some of the things that I talked about, PDPM rolling in, the Texas Quip properties, the Medicare rate increases and then they've got a number of legacy costs, which are old promissory notes or vendor notes, etcetera, that roll off in the coming months and throughout 2020. So when you swirl all of that together, that's a pretty big economic pickup.
It's about $9,000,000 in revenue enhancements and about $2 plus 1,000,000 in legacy costs running out. And then as I alluded to, we've got some transitions in the work. So that's not quite as quantifiable. That's really more narrowing Daybreak's focus on a single geographic market or really on 2 geographic markets, which I think we'll be able to focus their attention a little bit more and then taking some of these outlier facilities and literally they're spread across the entire state of Texas, both from the northern tip to the southern end and east to west as well. So we're going to be able to focus their attention and then parse out some of these other outliers to operators that are more focused or concentrated than those other markets.
So I think the combination of what is quantifiable and what is not quantifiable is where we get to this 3% to 5% or 15% to 20%. But there's time between here and there.
And that 3% to 5% is essentially for a 4Q 2020 quarterly run rate, right?
That's a good way to look at it, John. Okay.
Looking at the shift in coverage distribution, that surprised me a bit given the sequential increase in occupancy. Was that driven by a few large operators on the fringe or maybe the impact of the MedEquities portfolio rolling in there?
MedEquities was pretty flat actually, maybe just slight pickup, but given their scale, it was didn't have any impact. It was really 2 operators that sort of slipped over from one bucket to another. We think it's temporary, but it's hard to predict. But yes, that you're exactly right. It was 2 of our top 10 operators that went from the from a higher bucket down into the lower bucket.
Was the move for those 2 operators, I mean, was it like 0.05 turns or are we talking kind of like a rounding error?
1 was a rounding, 1 was a little bit more significant, more of a 0.05, 0.06, something like that.
Okay. And then last one, I know it is too early to tell fully on the impact of PDPM, but has that altered your underwriting process for SNFs? Meaning, as you look further out on the horizon, are you underwriting SNFs using maybe overly conservative assumptions in case there's some kind of reimbursement rate cut in the future like they did in 2011 if overall margins began to significantly improve and CMS looks to kind of recover some costs. I'd love to hear your thoughts on how that's impacting how you look at properties.
So I don't think we're not going to really see PDPM roll through our numbers in full force until I would suggest the Q1. And while it's expected to have an impact, I don't see us materially changing our underwriting. We're not sure where CMS will head with this or where the reimbursements will go. But if it looks after several quarters that there's that the PDPM has leveled out and that the operators are happy and that the results are consistent, then yes, I think that will be ultimately built into our underwriting. But that's not a flip of a switch.
Right. I mean, have you seen any more sellers come to you? I know a lot of your deals are relationship driven. Just curious as the cadence of the external growth pipeline, how that's trended over the past
few months? As always, it's choppy. And we're sort of getting into that part of the season where the opportunity slowed down a little bit until the Q1.
Okay. All right. I'll jump off. Thanks for the time.
And our next question will come from Trent Trujillo of Scotiabank. Please go ahead.
Hey, good morning, everyone. So following up on one of Jonathan's questions about the EBITDAR coverage distribution, I just want to clarify something. So part of that drop down from into the 1 to 1, 2 bucket was from a large operator with a pretty sizable downtick. My understanding or what I think anyway, maybe you can shed some light on this, is that was perhaps Signature because it was early to transitioning to PDPM. But also my understanding is that happened in like over the summer.
So it wouldn't be reflected in the stats shown in your supplemental as of June 30. So maybe can you give a little bit more context as to why there was such a drop in the coverage stratification?
Well, I don't think there was that materially a drop. We actually had 2 operators that sell from the 1.2 to 1.8 bucket into the 1 to 1.2 bucket. But once again, the drop offs were not that material. Some of it was in fact sort of the prep for PDPM and getting systems and education in place for that to come on October 1. So some of it we think we'll see come back in the form of when PDPM kicks on October 1, we start to see those results.
But I would not describe it or define it as a material drop off from any one of those 2 operators.
Okay. Maybe rephrasing that a little bit then. So there was roughly $70,000,000 that dropped from a higher bucket to a lower bucket. And if there was no material decline, you would expect that the weighted average coverage wouldn't really move much or even actually improve from the prior quarter, but the weighted average coverage actually went down, which would imply that it was a pretty big shift. So again, if there's any sort of color you can provide on that, it would be helpful because just in perspective, this 23.5% from the 1% to 1% to 2% bucket is now reminiscent of a couple of years ago before you started having operator issues.
I don't want to insinuate their operator issues. Maybe it's a one time thing with these operators and it could bounce back, but just some more color would be helpful. Thanks.
Yes. I mean, I'd have to look at the weighted average, to be honest with you and dig into that before I could respond anymore with any more clarity than I already have. But as I indicated, once again, it's sort of 2 operators that sort of dropped from one bucket to the other, wasn't material, but I'll look at the I'll focus and look at the weighted average as well.
Okay. Appreciate that. Maybe we'll follow-up later. But I guess switching topics to the Encore portfolio, looks like with Consulate set to come in as that majority operator, they're going to be a top 2 or top 3 operator. Can you maybe talk about your relationship with them?
How that's evolved over time? And your comfort level with them being a top operator? And are you seeing further growth opportunities given prior comments about favoring growth in the Southeast region?
So, yes, Consulate will ultimately end up being well, has become our number 2 operator actually. I don't see any growth opportunities today, but we will certainly talk with them. I think our relationship with their management team is excellent. We have frequent conversations with them. They are in markets that we covet, particularly the Southeast.
They have gone from being in over 20 states down to, I think, 8 at this point. So they've done a good job narrowing their geographic footprint and really honed in on where they want to operate going forward. They've done a lot to rein in their costs. There's a lot to like about console that we do think that they're a quality operator. And to the extent that we have opportunities to do stuff with them in the future, we will certainly look at that long and hard.
Okay. And last one for me. The other operator in the deal sounds like it's a relatively smaller one, maybe a newer one and definitely new to your portfolio as you put in the prepared remarks. What are your plans in terms of growth with that relationship over time?
So they are a new operator, represents 3 facilities in this transaction. We have met with them previously and will continue to talk with them and if there are any new opportunities, we'd like to expand with them. We think they are quality operator as well.
Okay. Thank you. Appreciate the time.
Our next question will come from Chad Vanacore of Stifel. Please go ahead.
All right. Good morning, all.
Good morning, Chad.
All right. Could you talk a little bit more about the U. K. Investment that you bought from HCP? So what we don't know is how has performance of the underlying properties trended over the past year?
Give us some lease terms and coverage ratio. And then what is ultimately your target allocation or expected growth in that UK market?
The coverage and the performance of those facilities has been pretty flat. Actually, one portfolio has picked up,
the other stayed
flat. So from the time that we first looked at it and looking back historically, the portfolio has improved. It's it's not at our meet because it's really is assisted living, so it's slightly below that, but it's in line with what our assisted living coverage looks like today. And then how big can we get in the UK? I think we're just going to continue to be opportunistic.
We've got we will have 4 operators there that will be, I think, aggressive on the acquisition side. So, we'll have, I think, some more opportunities to do some more deals over there. But we don't we haven't picked a target where we want to end up at the end of the day.
Okay. And then this one is probably for Steve, which is a second Avenue development in Manhattan that opens up in the Any surprises either positive or negative to this point?
So lease up or I should say deposit deposits are going sort of according to plan. Operator would sort of like to see the deposit level preopening on the
date of opening. So it
would be in the 30% to 40% of unit count, in there consistent with what their suburban operations have shown over the years and it's on track now to do that. I would think about full stabilization in 24 plus months. And to the extent you had asked about surprises, actually it's sort of going according to plan. No wild swings either way. Market is accepting
product really well.
So no changes on rent expectations at this point?
No.
Okay. And then about on the debt side of things, so this is probably more geared toward Bob. You did about 10 year, dollars 500,000,000 senior note at 3.5.8 in September, which was pretty attractive. So given where average long term debt costs are, any chance to refinance some more of the existing nodes that carry a higher interest rate at this point?
Chad, we look at that all the time and we will be
All right.
That's it for me. Thanks.
Thanks, Chip.
And the next question will come from Lukas Hartwich of Green Street Advisors. Please go ahead.
Can you guys talk a bit about skilled mix trends over the past few quarters?
Yes, I mean, the trend has come under pressure. I mean, the mix the quality mix trend has come under pressure. I mean, it still has, I mean, lengths of stay are they're still trending down, although the downward trend has has slowed up quite a bit. We're still seeing hospitals hold on to patients longer and the length of stay and SNPs to be shorter. It hasn't fallen off much, but there is a slow decline if you look at it over the past 4 quarters.
Great.
The one other thing I'd add, Lucas, is we've seen Medicaid tick up. It's in an environment where with occupancy where it is, our providers are taking all available patients, not a selection type of situation except for maybe a very, very high occupancy parts of California. But around the country, you're not having operators say, no, I want this patient versus that. And I think the movement in Medicaid Upwork is the beginning of the demographic analysis that we've done and talked about over the last year and a half. That's a situation where our residents really don't have other options in terms of settings.
It's completely needs driven. There is no length of stay issues around that. So I think what you're seeing on the Medicaid side is the beginning of that demographics. And we're seeing on the Medicare side, it's just not obvious because of the length of stay pressure. And as Dan mentioned, that pressure is abating, but it's still out there.
That's helpful. And then you kind of touched on this earlier, but your New York development is nearing completion. I'm just curious if you have any updated thoughts on similar projects that you could start over the next few quarters?
The Midland Wood team is incredibly active in looking for opportunities and we're very supportive of that. The lead times on these sort of things are a lot. I will say we continue to be actively looking for the next big opportunity. In the meantime, we continue to find opportunities for their suburban product, which they tend to be a 5th or a 6th of the size of Second Avenue, Carnegie Hill, but they're still quite additive and we're finding those as well.
Great. Thank
you. Thank you.
Our next question will come from Daniel Bernstein of Capital One. Please go ahead.
I was on mute. Good morning. I guess my question right now is maybe more about the pipeline. You just did some large portfolio transactions. What's the outlook for kind of the bread and butter, one off, two off assets, where you can do $200,000,000 or $300,000,000 a year?
And maybe in that context talk about opportunities to expand relationships with new operators. Some of your largest operators started off as smaller operators for you and just want to kind of understand what the opportunities are there on the smaller side?
So to your point, the bread and butter, which tends to generate $300,000,000 plus per year, is out there and it's consistent. And I would expect that to just continue to roll forward into 2020. On the operator side, as you know, Dan, we've skinnied down our number of operators, but we actually add 2 or 3 new relationships every year. And it's interesting, we really haven't talked about this a lot, but if you look at some of those relationships we've added over the last few years, they've all tended to grow with us. So we continue to look for the next generation of growth opportunities.
And I think we'll find it in a market that continues to have to be opportunistic and good operators are hard to find when you find them, you want to invest in them. The only other comment I'd make about the pipeline is, the conditions we've talked about over the last year that provide opportunities for the bigger type deals are still there. We found a couple last year. I wouldn't the same market conditions exist today. We don't have anything in the pipeline today, but it still feels like a market where we might see those type of transactions as well.
Okay.
So $200,000,000 to $300,000,000 of one off and probably $1500,000,000 to $1,000,000,000 deal is kind of the way to think about what the option is or more. The other question I had is, I know that's very preliminary on the PDPM, but whether have your operators talked about any surprises, whether good or bad in your transition to PDPM?
Haven't heard anything bad, which is really and we would have by now. So I think the coding, the revenue cycle, I don't know that we've gotten feedback on that. But in terms of coding and expectations around that, that's all been positive. I think the adjustment of rehab expenses, it really just depends on when you start the process. We think it's generally a 3 month process and most of our operators didn't start on those efficiencies until now.
But the tone has been good.
Okay. And then on the operators that slipped in the coverage bucket, I don't know if you can go over maybe kind of what the maybe safeguards in there in terms of covenants or guarantees and maybe subordination of G and A or something like that. I just want to understand what the lease structure is there a little bit?
Yes. I mean, that's a little bit. We've had consistent lease structures now
for a
dozen plus years. I mean, we generally put everything into master leases. There's almost always a secondary source of repayment from either a parent company, a management company or individuals. Yes, there is subordination of management fees. Sometimes there is equity pledges.
We get seconds on AR. There are financial covenants. There are a number of other things that protect us and protect our interest. So I think our underwriting has been consistent over many years. It hasn't changed and we don't expect it to change.
Okay. And then one last question, there's potential changeover in Medicaid funding in Michigan, and I think it's your 3rd largest state. Any concerns there from your standpoint that there could be some negative impacts on your operators in Michigan?
So we have one obviously large operator in Michigan and what they're doing is lowering the caps and the early analysis is that this will be neutral for them.
Our next question will come from Todd Stender of Wells Fargo. Please go ahead.
Hi, thanks. Just some quick tenant questions, I guess, around some of the portfolio changes. The acquired assets in the quarter, so 3 SNFs for $25,000,000 Who are those going to be leased to?
An existing private operator.
Can you disclose who it is or is it I think it goes into a master lease if I caught that right?
It does. But as a rule, we generally don't disclose our private operators.
Okay, got it. And then on the sales, you sold 9 assets for $93,000,000 How about the operators in those?
Non diversification. Non The core strategic operators that
we sold. You want to know who we sold to?
Who were the operators in those facilities?
They were sort of one offs within different portfolios. It wasn't 1 big 9 facility deal. It was a bunch of smaller transactions with smaller operators.
Got it. Okay. Thank you. Just finally, just looking at CapEx, I want to kind of reconcile what the forecast CapEx year to date is about $48,000,000 Just as a reminder, is that money that's mostly going towards re tenanting facilities? Just considering you're a triple net owner, what is that mostly going towards?
Our CapEx, Todd, is incremental additions to buildings typically that has yield. So there's very there's almost no CapEx that is kind of your office type re tenanting CapEx, might as well call it 0 there.
So no maintenance CapEx, this is all something revenue enhancing and at a yield comparable about what you're acquiring at?
Correct. That's exactly right.
Okay. Thank you.
Our next question will come from Tayo Okusanya of Mizuho. Please go ahead.
Yes. Good morning, gentlemen. How are you?
Welcome back, Teo.
Thank you very much. I appreciate it. It's good to be back. I just wanted to follow-up on 2 questions that were asked a little earlier. The first one again is just again the coverages, again the 2 tenants that did the coverage buckets moved down a little bit.
Again given all our due diligence, it sounds like one of them one of those tenants was Signature. And again, just given Trent's comments earlier on, which I agree with about Signature was one of the first ones to really start to implement PDPM early. I guess everyone's talking very positively about what PDPM is going to do, but is there like a short term negative impact that we should all be bracing for where coverage ratios may actually go down first before ultimately climbing? I'm just kind of curious if there's some type of shock we should all be waiting for that we may not be thinking about today?
Honestly, we don't know 100% what the answer to that incur trying to get in front of PDPM that would have that will incur expenses prior to October and that will push their coverages a little bit and some who will have waited. My sense of it is that you won't see coverages move meaningfully one way or the other and we'll get a really good view, as Dan mentioned, Q1 2020. I will comment that Signature particularly interesting because they have a big rehab program that became much less aggressive in terms of minutes delivered. And so they're one of the rare cases where we may see both a reasonably good revenue pickup from PDPM from just the straight coding, and also because rehab is still a big piece of their overall expenses, a decent expense pickup. So they're an unusual circumstance given that they had the prior disclosed issues with the government and really dial back in terms of rehab delivery, which will, as you know, affect the revenue side of the equation to the positive for them.
So Signature in particular is one of our tenant relationships, obviously, we spend a lot of time with that we feel very comfortable rolling into this next year of reimbursement.
Okay. That's helpful. Thank you. And then the second question is specifically on Texas. Correct me if I'm wrong, but I thought like all the regulatory changes that we're trying to make around QIPP and some of the other reimbursement changes that all that kind of stuff got delayed somehow and or held up within in regards to voting on these things?
And if that is indeed the case, how does one really start to get more comfortable with the idea of Daybreak recovering if some of these items that were meant to help them improve profitability seem to just kind of be hanging in legislation?
So the Texas QIP program has been in place now for a number of years. Then what just took effect on September 1 was QIP 3. It was not held up at all. That revenue is well, it's not coming in yet because it's a delayed reimbursement, but it will come in into the Q1 of 2020. So I think what you're referring to more is Texas attempted to push through what I can now say is what's called or was thought of as a provider tax And it did not make it out of committee, so it was not voted on.
We did have high hopes, but it certainly wasn't in our planning and it's certainly not in our underwriting and might come back in a couple of years, but right now, it's not active.
Okay. That's helpful. And then Michigan, again, just indulge me one more time. Could you just help me understand how with your large tenant that exposed to that market, how they expect these changes to their Medicaid payment to end up being somewhat neutral to them? I don't think I quite understand how it's going to end up being a negative impact to their bottom line or neutral impact to their bottom line?
So number 1, I think it's just proposed legislation unless something's happened in the last 24 hours, it's not passed.
Yes, correct.
And then secondly, what you have is what's being presented at the UL is a reduction in the caps to certain cost centers. So our operator there is going to have some facilities that are above the caps, which will get hit and certain that are below the caps, which they'll be able to have a pickup on. So ultimately, when they took all their Michigan facilities and looked at the impact, it was neutral. Based upon what we know today and what's been proposed in the legislature or what the I should say, what the governor is actually proposing.
Okay, great. I appreciate it. Thank you.
You bet.
This concludes our question and answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks. Please go ahead.
Thanks everyone for joining our call today. As always, we'll be available for any follow-up you may have. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.