Good morning, and welcome to the Omega Healthcare Investors third quarter 2019 earnings conference call. All participants will be in a listen-only mode, so you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead.
Thank you, and good morning. With me today are Omega CEO, Taylor Pickett, CFO, Bob Stephenson, COO, Dan Vuj, 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, or prospects of our operators, contemplated acquisitions, dispositions, or transitions, and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which 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, Michele. Good morning. Thank you for joining our third quarter 2019 earnings conference call. Today, I will discuss our third quarter results, our recent acquisition activity, Daybreak, and the current reimbursement environment. Our third 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 million 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 and will be partially dependent on achieving both known earnings upsides and additional growth opportunities.
On October 31st, we closed our previously announced Encore portfolio acquisition for $735 million. In addition, during the third quarter, we opportunistically sold 19 facilities for $177 million and recognized a related gain of $53.1 million. 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 third 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, good morning. Our reportable FFO on a diluted basis was $163 million, or $0.72 per share for the quarter, as compared to $161 million, or $0.76 per diluted share for the third quarter of 2018. Our adjusted FFO was $173 million, 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 million versus $222 million for the third quarter of 2018.
The increase was primarily a result of incremental revenue from a combination of over $800 million of new investments completed and capital renovations made to our facilities since the third quarter 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 third and fourth quarter of 2018. Finally, we adopted the new lease accounting standard effective January 1st, 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 collectibility 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 million for non-collectible revenue related to two operators during the quarter. The $233 million of revenue for the quarter includes approximately $15 million of non-cash revenue.
Our G&A expense was $10.8 million for the third quarter 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 first quarter of 2019. Interest expense for the quarter, when excluding non-cash deferred financing cost, was $50 million, with a $2 million increase over the third quarter 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 7.5 million shares of common stock in connection with a $300 million 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. In September, we issued $500 million of 3 and 5/8% 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 30th, approximately 90% of our $4.7 billion 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 in these calculations has no revenue related to construction in process associated with our five 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 forma leverage would be roughly five times. For guidance and modeling purposes, we are assuming the following. On the Encore portfolio, the acquisition was completed on October 31st. As a result, we expect to record approximately two months of revenue in the fourth quarter or $10.5 million in cash rent. We also assumed $389 million in HUD debt at a blended rate of 3.66% as part of the acquisition. We assume the U.K. investment should close late in the fourth quarter. We assume new construction projects will be put into service in accordance with our schedule on page seven 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 million-$5 million per quarter in late 2020. We assume non-cash quarterly revenue should be between $16 million-$18 million per quarter. We project G&A of $9 million-$10 million per quarter. Non-cash stock-based compensation expense is estimated to be approximately $4 million 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 30th, 10% of our debt, or $500 million, was floating rate debt. We recorded $2.8 million of revenue related to assets sold during the third quarter. Although not included in guidance, additional asset disposition opportunities may occur.
Regarding share issuances, in addition to the 7.5 million share forward sale agreement, which we expect to settle by year-end, we assume we will be issuing approximately $25 million 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 de-lever and fund potential acquisitions. During the first nine months of 2019, we issued or sold approximately 5.6 million shares of Omega common stock, generating over $200 million 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 . Good morning, everyone. As of September 30th, 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 and the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio during the second quarter 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 31st, 2019. Turning to portfolio matters. During the third quarter 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 million in rent for the third quarter.
While Daybreak is expected to benefit from the addition of 26 Omega facilities into the Texas QIPP 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 first quarter 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 its attention on only a few select markets. Accordingly, during the third quarter of 2019, Omega began to have discussions with several other Texas-based operators about re-leasing 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 million-$20 million per annum on our current Daybreak portfolio. Turning to new investments. On July 1st, 2019, Omega completed a $25 million purchase lease transaction for three skilled nursing facilities in North Carolina and Virginia. The facilities were added to an existing operator's master lease for an initial cash yield of 9.5% with 2% annual escalators. Turning to subsequent events. As mentioned by Taylor, on October 31st, 2019, Omega closed on our previously announced $735 million acquisition of 60 facilities. The purchase consisted of approximately $346 million of cash and the assumption of approximately $389 million in HUD mortgage loans.
The portfolio consists of 58 skilled nursing facilities and two assisted living facilities located across eight states with a significant concentration in the Southeast. The facilities are leased to two operators, one being an existing Omega operator, via three triple net master leases. The facilities will generate approximately $64 million in initial cash rent, with annual escalators ranging from 2.25%-2.5%. Year to date, Omega has made new investments totaling approximately $1.5 billion, including capital expenditures. Also, as mentioned earlier, on October 29th, 2019, Omega entered into a share purchase agreement to acquire Healthpeak Properties' 49% interest in an existing joint venture with Cindat Capital Management for a total equity investment of approximately $90 million. The portfolio consists of 67 owned care homes across the U.K., leased to two operators via three separate triple net master leases and a single facility development loan with a third-party borrower.
The transaction is expected to close by year-end. Turning to dispositions. During the third quarter 2019, Omega divested 19 facilities via six separate transactions for total proceeds of approximately $177 million. Lastly, as of today, Omega has approximately $995 million of combined cash and revolver availability to fund future investments and capital expenditures. 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 2nd Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $285 million, including accrued rent, and is scheduled to open in early 2020. Including the land and CIP of our New York City project, at the end of the third quarter, Omega's senior housing portfolio totaled $1.5 billion of investment on our balance sheet. Anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties, as well as Healthcare Homes and Gold Care in the U.K., our overall senior housing investment now comprises 125 assisted living, independent living and memory care assets in the U.S. and U.K.
On a standalone basis, the core portfolio not only covers its lease obligations at 1.2 times, 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 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 this same capability, we invested $38 million in the third quarter in new construction and strategic reinvestment. $19.8 million of this investment is predominantly related to our active construction projects, with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $17.9 million of this investment was related to our ongoing portfolio CapEx reinvestment program.
I will now turn the call over to Taylor for some final comments.
Thanks, Steven. 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. To ask a question, you may press star and then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. 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? How does the JV partnership work? Is there an opportunity for you eventually to kind of consolidate the whole portfolio?
Yeah. Listen, we've been opportunistic in the U.K. We're still very bullish on it, we're always kind of looking for new opportunities there. We have two existing operators that we do business with. This opportunity will add two 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 in the U.K. much more like assisted living here in the U.S. Cap rates are lower than your average SNFs. You're looking in the 7s, rather than the 8s and 9s, That holds for this deal as well. In the future, if I captured all your questions, there is an opportunity to potentially unwind the JV.
We're in a JV structure right now where basically it's a 51/49, but everybody has sort of mutual voting rights. I think our strategy in the U.K. is long-term. I can't speak to my partner, but we're still bullish in the U.K. and, if the opportunity presents itself, we would probably buy out the other piece.
Okay, great. Thank you. 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?
Yeah. As you know, and we said, Daybreak's on a cash basis, and we have a range of guidance. We had $750 in the third quarter, and our guidance is in that range.
Okay, thanks. I yield the floor.
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 million-$5 million you're projecting? I'm a little confused there.
That $3 million-$5 million that we're projecting is not in the fourth 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 QIPP properties, the Medicare rate increases, and then they've got a number of legacy costs, which are old promissory notes or vendor notes, et cetera, that roll off in the coming months and throughout 2020. When you swirl all of that together, that's a pretty big economic pickup. It's about $9 million in revenue enhancements and about $2+ million in legacy costs running out. As I alluded to, we've got some transitions in the works. 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. Then taking some of these outlier facilities. 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. 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 in those other markets. I think the combination of what is quantifiable and what is not quantifiable is where we get to this 3-5 or 15-20.
Right.
There's time between here and there.
Okay. That three to five is essentially for a 4Q20 quarterly run rate, right?
That's a good way to look at it, Jonathan.
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?
No, MedEquities was pretty flat, actually, maybe just slight pickup, but given their scale, it didn't have any impact. It was really two operators that sort of slipped over from one bucket to another. We think it's temporary, but it's hard to predict. Yeah, you're exactly right. It was two of our top 10 operators that went from a higher bucket down into the lower bucket.
Was the move for those two operators, was it like 0.05 turns, or are we talking kind of like a rounding error?
One was a rounding, one was a little bit more significant, more of a 0.05, 0.06, something like that.
Okay. Last one, I know it is too early to tell fully on the impact of PDPM, 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 is some kind of reimbursement rate cut in the future, like they did in 2011 if overall margins begin to significantly improve and CMS looks to kind of recover some costs? Would love to hear your thoughts on how that is impacting how you look at properties.
We're not going to really see PDPM roll through our numbers in full force until, I would suggest, the first quarter.
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. If it looks after several quarters that the PDPM has leveled out and that the operators are happy and that the results are consistent, then yeah, I think that will be ultimately built into our underwriting. That's not a flip of a switch.
Right. 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. We're sort of getting into that part of the season where the opportunities slow down a little bit until the first quarter.
Okay. All right, I'll jump off. Thanks for the time.
Our next question will come from Trent Trujillo of Scotiabank. Please go ahead.
Hey, good morning, everyone. Following up on one of Jonathan's questions about the EBITDA coverage distribution. I just want to clarify something. Part of that drop-down into the 1-1.2 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 over the summer, so it wouldn't be reflected in the stats shown in your supplemental as of June 30th. Maybe can you give a little bit more context as to why there was such a drop in the coverage stratification?
I don't think there was that materially a drop. We actually had two operators that fell from the 1-2 to 1-8 bucket into the 1 to 1-2 bucket. 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 one. Some of it we think we'll see come back in the form of when PDPM kicks on October one, we start to see those results. I would not describe it or define it as a material drop-off from any one of those two operators.
Okay. Well, maybe rephrasing that a little bit then. There was roughly $70 million that dropped from a higher bucket to a lower bucket. 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. The weighted average coverage actually went down, which would imply that it was a pretty big shift. 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 one to one-two bucket is now reminiscent of a couple of years ago before you started having operator issues. I don't want to insinuate there are 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.
Yeah, I'd have to look at the weighted average, to be honest with you, and dig into that, before I could respond with any more clarity than I already have. As I indicated, once again, it's sort of two operators that sort of dropped from one bucket to the other. Wasn't material, I'll focus and look at the weighted average as well.
Okay. Appreciate that. Maybe we'll follow up later. 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 two or top three 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?
Consulate has become our number 2 operator, actually. I don't see any growth opportunities today, but we would certainly talk with them, and 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've gone from being in over 20 states down to, I think, eight at this point. 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 Consulate. 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. Last one from me. The other operator in the deal, it 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?
They are a new operator, represents three facilities in this transaction. We have met with them previously, and we will continue to talk with them, and if there are any new opportunities, we'd like to expand with them. We think they're a 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.
Morning, Chad.
All right. Could you talk a little bit more about that U.K. investment that you bought from HCP? 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. What is ultimately your target allocation or expected growth in that U.K. market?
The coverage and the performance of those facilities has been pretty flat. Actually, one portfolio has ticked up, the other stayed flat. From the time that we first looked at it and looking back historically, the portfolio's improved. It's not at our mean because it really is assisted living, so it's slightly below that, but it's in line with what our assisted living coverage looks like today.
How big can we get in the U.K.? I think we're just going to continue to be opportunistic. We will have four operators there. They will be, I think, aggressive on the acquisition side. We'll have, I think, some more opportunities to do some more deals over there. We haven't picked a target where we want to end up at the end of the day.
Okay. Then this one's probably for Steven, which is, hey, Second Avenue Development in Manhattan, that opens up in the first quarter or at least should. Can you give us an update on development leasing activity and then expected stabilization date at this point? Any surprises, either positive or negative to this point?
Lease up, or I should say deposits are going sort of according to plan. Operator would sort of like to see the deposit level pre-opening on the date of opening, sort of be in the 30%-40% of unit count, and they're 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. To the extent you had asked about surprises, actually, it's sort of going according to plan.
No wild swings either way.
All right.
Market is accepting product really well.
No changes on rent expectations at this point?
No.
Okay. About on the debt side of things, this is probably more geared toward Bob. You did about 10-year $500 million senior note at 3.625% in September, which was pretty attractive. Given where average long-term debt costs are, any chance to refinance some more of the existing notes that carry a higher interest rate at this point?
You know, Chad, we look at that all the time, and we will be opportunistic if the make whole makes sense to us and given the spread on the 10-year. We do analyze that all the time.
All right. That's it for me. Thanks.
Thanks, Chad.
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?
Yeah. The quality mix trend has come under pressure. It still has. Lengths of stay are still trending down, although the downward trend has slowed up quite a bit. We're still seeing hospitals hold onto patients longer and the length of stay in SNFs to be shorter. It hasn't fallen off much, but there is a slow decline if you look at it over the past four quarters.
Great.
The one other thing I'd add, Lukas, 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 situation, except for maybe in very high occupancy parts of California. Around the country, you're not having operators say, "No, I want this patient versus that." I think the movement in Medicaid upward 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 niche driven. There's no length of stay issues around that. I think what you're seeing on the Medicaid side is the beginning of that demographics.
We're seeing it on the Medicare side, it's just not obvious because of the length of stay pressure. As Dan mentioned, that pressure's abating, but it's still out there.
That's helpful. 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 Maplewood team is incredibly active in looking for opportunities, and we're very supportive of that. The lead times on these sort of things are long. 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 fifth or a sixth 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 or $300 million 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 wanted to kind of understand what the opportunities are there on the smaller side.
To your point, the bread and butter, which tends to generate $300 million plus per year, is out there and it's consistent. 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 two or three new relationships every year. It's interesting, and 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. We continue to look for the next generation of growth opportunities, and I think we'll find it in a market that continues 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. 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, $200 million-$300 million of one-off and probably one $500 million-$1 billion deal is kind of the way to think about. The other question I had is, I know that's very preliminary on the PDPM, but have your operators talked about any surprises, whether good or bad, in their transition to PDPM?
I haven't heard anything bad, and we would've by now. I think the revenue cycle, I don't know that we've gotten feedback on that, but in terms of coding and expectations around 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 three-month process, and most of our operators didn't start on those efficiencies until now. The tone's been good.
Okay. On the operators that slipped in the coverage bucket, I don't know if you can go over maybe kind of what the safeguards in there are in terms of covenants or guarantees and maybe subordination of G&A or something like that. I just wanted to understand what the lease structure is there a little bit.
Yeah. Listen, we've had consistent lease structures now for a dozen plus years. 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. Yeah, there's subordination of management fees. Sometimes there's 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. I think our underwriting's been consistent over many years. It hadn't changed, and we don't expect it to change.
Okay. One last question. There's potential changeover in Medicaid funding in Michigan, and I think it's your third largest state. Any concerns there, from your standpoint, that there could be some negative impacts on your operators in Michigan?
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.
Okay. That's all I have. Thanks.
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 million. Who are those gonna be leased to?
An existing private operator.
Can you disclose who it is? 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. On the sales, you sold nine assets for $93 million. How about the operators in those?
They're non-diversifier.
They're non-
Non-core strategic operators that we sold.
Yeah. 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 one big nine-facility deal. It was a bunch of smaller transactions with smaller operators.
Got it. Okay. Thank you. Finally, just looking at CapEx, want to kind of reconcile what the forecast CapEx year to date, it's about $48 million. As a reminder, is that money that's mostly going towards re-tenanting facilities? 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. There's almost no CapEx that is kind of your office type re-tenanting. Might as well call it zero there.
No maintenance CapEx. This is all something revenue enhancing and at a yield comparable about what you're acquiring it?
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, Tayo.
Thank you very much. I appreciate it. It's good to be back. I just wanted to follow up on two questions that were asked a little earlier. The first one, again, is just the coverages. The two tenants that did the coverage buckets moved down a little bit. Again, given all our due diligence, it sounds like one of those tenants was Signature. Again, just given Trent's comments earlier on, which I agree with, about Signature was one of the first ones to really start to try to implement PDPM early. I guess everyone's talking very positively about what PDPM is going to do, but is there 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 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 question is going to be, Tayo. I will say that I don't think we'll see a shock. I think you may have certain folks that were trying to get in front of PDPM that will incur expenses prior to October that'll 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 in, as Dan mentioned, Q1 2020. I will comment that Signature's particularly interesting because they have a big rehab program that became much less aggressive in terms of minutes delivered.
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's still a big piece of their overall expenses, a decent expense pickup.
Got you.
They're an unusual circumstance given that they had the prior disclosed issues with the government and really dialed back in terms of rehab delivery which will, as you know, affect the revenue side of the equation to the positive for them. 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 era of reimbursement.
Okay. That's helpful. Thank you. The second question is specifically on Texas. Correct me if I'm wrong, I thought all the regulatory changes they were 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 in regards to voting on these things. 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 be hanging in legislation?
The Texas QIPP program has been in place now for a number of years. What just took effect on September 1 was QIPP III. It was not held up at all.
Okay.
That revenue, well, it's not coming in yet because it's a delayed reimbursement, but it will come in into the first quarter of 2020. I think what you're referring to more is Texas attempted to push through what I can now say was thought of as a provider tax. 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. It might come back in a couple of years, but right now it's not active.
Okay, that's helpful. 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 if I don't think I quite understand how it's going to end up being a negative impact to their bottom line or a neutral impact to their bottom line.
Number one, I think it's just proposed legislation. Unless something's happened in the last 24 hours, it's not passed.
Yeah, correct.
Secondly, what you have is what's being presented, if you will, is a reduction in the caps.
To certain cost centers. 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. 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 I should say, what the governor is actually proposing.
Okay, great. I appreciate it. Thank you.
You bet.
Again, if you have a question, please press star then one. 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.