Good day, and welcome to the Omega Healthcare Investors First Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Please note 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 Chief Corporate Development Officer, Steven Insoft and SVP Operations, Jeff Marshall. 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 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 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 Q1 2019 earnings conference call. Today, I will discuss our Q1 results and our 2019 earnings guidance, status of the MedEquities acquisition, and I will comment on the skilled nursing facility industry in general. Our adjusted FFO of $0.76 per share is $0.03 more than our Q4 2018 adjusted FFO of $0.73 per share. This improvement was expected and reflects the beginning of our return to a more predictable environment post 20 eighteen's asset repositioning and restructuring activity.
We again declared a $0.66 per share dividend. Payout ratio is 87% of adjusted FFO and 97% of FAD. As we have indicated in the past, we expect that these payout ratios will continue to strengthen throughout 2019. Our adjusted FFO guidance remains unchanged with full year guidance of $3 to $3.12 per share and Q4 2019 guidance of $0.78 to $0.81 per share. We will revisit 2019 guidance after we close on the MRT acquisition and 2nd quarter results.
The skilled nursing facility industry remains challenged, but we believe there is some near term upside and continue to be optimistic over the long term, notwithstanding the current challenges facing Daybreak and certain smaller operators. Proposed 2.5% increase in Medicare reimbursement combined with the implementation of PDPM starting in October will provide welcome rate relief and expense savings opportunities. In addition, our census continues to remain stable with 4th quarter occupancy of 82.8%. I will now turn the call over to Bob.
Thanks, Taylor, and good morning. Our reportable FFO on a diluted basis was $144,000,000 or $0.67 per share for the quarter as compared to $147,000,000 or $0.71 per share in the Q1 of 2018. Our adjusted FFO was $161,000,000 or 0 point exclude several items as outlined in our adjusted FFO reconciliation to net income found in our press release, supplemental and on our website. Operating revenue for the quarter was approximately $224,000,000 versus $220,000,000 for the Q1 of 2018. The increase was primarily a result of incremental revenue from a combination of over $450,000,000 of new investments completed and capital renovations made to our facilities since the Q1 of 2018, as well as lease amendments made during that same time period.
Revenue related to the Orianna facilities that were transitioned to existing Omega operators in both the 3rd 4th quarters of 2018 $972,000 of non cash one time revenue related to writing off a tenant reserve liability recorded with the Aviv merger that was no longer needed And lastly, we adopted the new lease accounting standard effective January 1, 2019, which resulted in the recording of $4,000,000 related to tenant real estate taxes and ground lease income. It's important to note a corresponding offset was booked during the quarter and therefore this had minimal P and L impact. The increase in revenue was partially offset by reduced revenue related to asset sales, transitions and loans paid off that occurred throughout 2018. Timing of receipts related to operators on a cash basis a $1,200,000 provision for uncollectible straight line revenue resulting from the transfer of assets from one tenant to another. Please note the new lease accounting standard requires the write off of straight line receivables to be recorded as a reduction to revenue instead of a provision for uncollectible accounts receivable.
The $224,000,000 of revenue for the quarter includes approximately $15,800,000 of non cash revenue. Our G and A expense was $11,800,000 on MedEquities. We assume the acquisition will be completed in mid May. We plan to issue approximately 7,500,000 Omega common shares for MedEquities, take on approximately $350,000,000 of additional debt related to the payoff of their existing credit facility and paying $2 per share in cash for each MRT common share. We assume new construction projects will be put into service in accordance with our schedule 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 and A for the Q2 of 2019 to be consistent with our Q1 when normalizing for restructuring charges. As legal expenses decrease, we will return to a more traditional $9,000,000 to $10,000,000 per quarter starting in the second half of twenty nineteen. Non cash stock based compensation expense estimated to continue at approximately $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 March 31, 19% of our debt or $850,000,000 was floating rate debt. We assume proceeds from potential asset disposition opportunities will be redeployed at between 9% and 9.5% cash yields. Regarding share issuances, in addition to the 7,500,000 common shares to be issued for MedEquities, we assume we'll be issuing approximately $10,000,000 to $15,000,000 of equity per quarter through our dividend reinvestment and common stock purchase plan consistent with our historical issuances. 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.
In the Q1 of 2019, we issued or sold approximately 3,100,000 shares of Omega common stock, generating $111,000,000 in gross proceeds through a combination of our ATM and our dividend reinvestment and common stock purchase plans. Our balance sheet remains strong. At March 31, approximately 81% of our $4,500,000,000 in debt is fixed and our net funded debt to adjusted annualized EBITDA was 5.2x and our fixed charge coverage ratio was 3.9x. It's important to note EBITDA on these calculations has no revenue related to construction and process related to our 8 new builds, which will be operational in the next 12 months. When adjusting for the Daybreak Q1 cash shortfall and the known revenue on the new builds, our pro form a leverage would be roughly 5.0 times.
I will now turn the call over to Dan Booth.
Thanks, Bob, and good morning, everyone. As of March 31, 2019, Omega had an operating asset portfolio of 891 facilities with approximately 89,000 operating beds. These facilities were spread across 68 third party operators and located within 40 states and the United Kingdom. Trailing 12 month operator EBITDARM and EBITDAR coverage for our portfolio remained stable during the Q4 of 2018 at 1.67 and 1.32 times respectively versus 1.67 and 1.32 times respectively for the trailing 12 month period ended September 30, 2018. Turning to portfolio matters.
As discussed previously, one of our top 10 operators, Daybreak, has continued to struggle with liquidity issues as a result of labor challenges and a very low Medicaid reimbursement system in Texas. The reimbursement challenges are not unique to Daybreak and have placed continued pressure on all Texas operators. As reported on our Q4 earnings call, Omega and Daybreak entered into the 2nd amendment to our settlement and forbearance agreement effective January 30, 2019, whereby we granted Daybreak a $2,500,000 rent deferral in each of the 1st two quarters of 2019. To date, Daybreak has met the contractual obligations under this agreement. At this point, it remains uncertain given the state of affairs in Texas and the ultimate outcome of any rate relief as to whether a further amendment or extension of the forbearance agreement will be required.
Notwithstanding the uncertainty surrounding rate relief in Texas, we are confident that Daybreak will benefit from several known factors, including the addition of 26 Omega facilities into the Texas Quick program, the implementation of PDPM, and the 2.5% Medicare rate increase. All three benefits are slated to become effective on October 1, 2019. Turning to new investments, as mentioned by Taylor, we are preparing for the upcoming MedEquities merger. From an operational perspective, this involves integrating our respective portfolio management systems, meeting with the existing operators in an effort to better understand their business and identify their capital needs, and identifying opportunities in BetEquity's other diverse asset classes. As a reminder, Omega will be acquiring a portfolio of 34 facilities spread across 7 states and 11 operators, nearly all of which represent new relationships for Omega.
This diverse group of operators represents not just skilled nursing providers, but also acute care hospitals, behavioral and rehab hospitals, LTACs, an assisted living facility and a medical office building. We believe the addition of the MedEquity portfolio of high quality diversified assets will provide Omega with meaningful growth opportunities. I will now turn the call over to Jeff.
Thanks, Dan, and good morning, everyone. On April 19, CMS issued its annual proposed SNF payment rule, which included 3 significant elements to be effective October 1, 2019. 1, a net increase of 2.5% in SNF Medicare Part A Prospective Payment System or PPS rates 2, confirmation that the new PPS patient driven payment model or PDPM will replace the existing RUG IV payment methodology at that time and 3, revision of the group therapy definition to align with that used in other post acute care sites. The 2.5% net rate increase will provide an additional $887,000,000 in Medicare funding to the sector and results from a market basket increase of 3.0 percent reduced by a mandated multifactor productivity adjustment of 0.5%. This increase compares favorably to the 1.8% rate increase provided on October 1, 2018, net of the value based purchasing discount and coupled with inflationary Medicaid rate increases allows operators to keep pace with the escalation in operating expenses that ran 2.4% in calendar year 2018 within Omega's core portfolio.
PDPM changes the treatment and payment focus for patients from therapy minutes to patient characteristics and emphasizes the value of patient clinical outcomes over the volume of services provided. Although CMS has intended this policy change to be budget neutral for the Medicare program, opportunities for operators to yield cost efficiencies in the provision of therapy services and to admit a broader disease cohort of patients create our cautious optimism that PDPM will positively impact operating margins without adversely affecting patient outcomes. The flexibility for therapists to engage patients in group or concurrent therapy protocols for up to 25% of total therapy treatments, which provides the best opportunity for cost efficiencies, has now been enhanced by a revision to the definition of group therapy from involving 4 patients to involving anywhere from 2 to 6 patients, matching the definition currently used for inpatient rehabilitation facilities. Finally, with CMS's original notice a year ago that PDPM would be implemented on October 1, 2019, operators have already begun the necessary training, simulation, clinical protocol and technology enhancements and other retooling efforts to facilitate a smooth transition on that date. We do not expect significant transitional problems as a result, though PDPM expertise will certainly build over time.
I will now turn the call over to Steven.
Thanks, Jeff, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue to 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 early 2020. Including the land and CIP of our New York City project, at the end of the Q1, Omega's 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 1.17 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 14 Maplewood facilities in 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 $47,600,000 in the Q1 in new construction and strategic reinvestment. $41,800,000 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 $5,800,000 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. We look forward to closing the MRT acquisition and sourcing new growth opportunities in 2019. We are optimistic about the reimbursement and demographic environment and the opportunity for improving Tenet results. And with that, I'll open up to questions.
Our first question comes from Jonathan Hughes with Raymond James. Please go ahead.
Hey, good morning. You mentioned the pipeline is beginning to pick up. Can you just give us some color on the size and maybe asset mix for deals in that pipeline?
Sure. Well, obviously, we have MRT closing, but we've seen a fair amount of activity that shows up on our pipeline report. It's principally skilled nursing facility assets. The follow-up question to that usually is where our cap rates, I'd say that it probably tightened just a little bit. And I would attribute some of that to the 10 year moving south of 2.5% and the ability for folks to borrow a little bit cheaper rate.
So when we think about cap rates, I think it's still 9%, but they're a little bit tighter. So hopefully that answers the question.
Yes, it does. And then maybe just the size of the pipe, I mean, a couple of $100,000,000 or $400,000,000 to $500,000,000
It's really lumpy. So it's hard to think about modeling it out. But we I always talk about a good year for us being $1,000,000,000 of deal activity, MRT $600,000,000 I think we still have the opportunity for a good year.
Okay. Got it. And then on MetmedEquities, I realize you might not be able to comment fully, but on the Creative Solutions transition, could you maybe talk about how that's progressing since January 1 since that's a pretty big component of that portfolio?
Yes. I mean, there's nothing really going on there other than obviously the entire portfolio is going to transition hopefully by the end of next week, but there's nothing specific to creative. Obviously, MRT did a lot of work around that portfolio with the previous tenant and when they transitioned it
over to Creative,
obviously there was a rent reset, if you will. But other than that, there's nothing else going on.
I guess I was maybe asking more so for coverage, but if you can't share that, I understand.
Yes. Look, it was the reset rent had relatively ample coverage. And to date, we think they're performing at that level.
Okay. And then just one more and I know this might be a tough one to answer, but PDPM is supposed to be budget neutral most projections for operators at least those projections I see in the news are positive or breakeven. It sounds like you guys are in the same camp. But is there a chance that revenues would ultimately fall short? I'm just trying to understand the downside to PDPM here since all I ever really hear about is the upside opportunity.
Yes. I think the crosswalk so many people have done crosswalks from the old system to the new. And it always comes out at or about revenue neutral. So I think on the revenue side, it's very unlikely we see downside from PDPM. And just to be clear, it's this is the first time that I ever spent in this industry where so much time was spent between CMS and the industry in crafting a plan.
So I just don't see any surprises.
Okay. All right. Maybe I'll follow-up offline. But that's it for me. I'll jump off.
Thanks for the time. Thank you.
Our next question comes from Karin Ford with MUFG Securities. Please go ahead.
Hi, good morning. Are you feeling better or worse on Daybreak today than you were say on our last call? Can you give us an update on the status of the Texas nursing facility reinvestment allowance? And what's the overall trend you're seeing on coverage in your properties in Texas and in the Daybreak portfolio?
Well, I'll start with how we feel about Daybreak. I mean, there are a lot of positive things that we're seeing. Some of these that I spoke about in my talking points, One of the big ones is that they're adding 26 additional mega facilities into the Texas QIP program. So we expect that to have a very favorable pickup in revenues. PDPM, which we talked about revenue neutral, but we expect and we hope that they would see some reduction in their expenses.
And then on October 1, we get a Medicare rate increase of about 2.5%, which is bigger than we've seen in quite some time. We've also seen a pickup in Daybreak's Q mix. We sort of hit a low watermark in the Q3 of 2018. We've seen it slowly trend up into the Q1 and we're hoping that that could pick up further or at least stabilize. So that's also been a big positive.
As far as Texas rate relief, it's still too early to call. The legislation is still in session, runs through pretty much the end of May and we're hopeful that they're able to obtain some rate relief. What form it ultimately takes, we do not know, but I know that they're working around the clock in the state of Texas to try to get some rate relief for our operators. Other Texas operators, a lot of them fortunately
are in other states. So some
of their operations on the states are actually subsidizing their Texas operations. The coverage is not stable, but it's just not overall, it's above 1 to 1, but it's below the mean, so as a group.
Got it. With a lot of those benefits coming in October, do you you'll need to give additional rent relief for the Q3 on Daybreak?
Once again, I think at this point, it's too early to call. I want to see how the QMIG shakes out in the second quarter. I want to see what happens in Texas with the rate relief. I mean, because it's these things don't come into play until October, but
it's not just it's a cash situation, but it's
also a long term prospect situation. We have look at sort of both and weigh what we're going to do. I mean, you don't want to do something for tomorrow that solves the next quarter and not look to the future and see what's going to come down the road. So we have to take, I think, both of those things into account. And in order to do that, we just have to get as much information as we can.
Got it. And then my next question is just on the Manhattan development. It looked like rent commencement got pushed back a quarter there. Have they started pre leasing? How are rents trending versus underwriting?
And can you also talk about the new development you started or the new commitment you have on the development side in Ohio?
As far as the Manhattan project is concerned, our sales and leasing office Maplewood sales and leasing office opened in early part of this year in advance of what they would typically do with their suburban locations, but wanted to educate the market. Inquiries are very strong. We're confident around price point and see the building being topped off at the end of this year with
far on the rent side versus underwriting? And then can you just talk about the new project in Ohio?
The market reaction at the deposit level would suggest that we're on target as far as underwriting of rents. And a little bit too early to tell in terms of absolute quantum because we did start very early, but we're confident based upon total inquiry and deposits received that we'll be on target for early leasing consistent with underwriting.
Our next question comes from Trent Trujillo with Scotiabank. Please go ahead.
Hi, good morning and thanks for taking the questions. Bob, I appreciate some of the earlier comments on this, but you mentioned in the press release and earlier
here that equity issuance could impact your FFO guidance range. So I'm hoping
maybe you could equity issuance could impact your FFO guidance range. So I'm hoping maybe you could talk about how you're thinking about this since the stock is trading right around to slightly higher than where you issued in the Q1 on average? We've always been Q1 on average?
We've always been opportunistic that to take advantage of the ATM to help fund the pipeline. And we've also been very strong in our conviction that our leverage goal between 4 or 5 times and we're currently above that. So to get in our stated goal and I'm going to I know we always say 4 times to 5 times, but it's more like 4.75 times the sweet spot there. So we'll take it day by day when the post the MRT merger in a week or so and be optimistic looking at the ATM market.
Okay. Maybe just a quick follow-up on this topic. You had no acquisitions in the Q1. I think that's the first time in multiple years where you didn't have any activity. Is that just a function of reserving the capital for the MRT acquisition because you did state you have a nice pipeline available of SNF portfolios and even though the cap rates have come in a little bit, they haven't changed on the whole and they're still around 9%.
So any thoughts on that would be appreciated.
Yes, it really wasn't a capital driven decision. We continue to look at everything that is out there. It's just the weirdness of the cycle, frankly. So there's a fair amount sitting out there and hopefully there's a fair amount that will ultimately be actionable.
Okay. And my next question just my other one. So CMS just updated its 5 star quality ratings and the broad takeaway is that star ratings declined on average, not saying that that's for your portfolio, but just on average. But can you talk about what kind of impact that could have on your operator referral networks given the shift in quality ratings?
Jeff, do you want to take this one?
Sure. Yes, the change in the star ratings really are impacted by CMS essentially moving the goalposts on quality and staffing domains such that they wanted to ensure the cut points reflect a certain percentage of facilities in each of the 1 through 5 star rating categories. So those changes where a third of the facilities lost a star rating and maybe a 6th of the facilities gained a star rating are direct related to those quality and staffing domains, not inspection. But they therefore don't also represent any kind of change in the existing quality or staffing levels of facilities just in CMS changing those as long as they're maintaining true quality metrics such as the as long as they're maintaining true quality metrics such as the rehospitalization rates, discharge to community and functional improvement, as well as the length of stay metrics, that should override any consideration about a star decline because those relationships would already be established. And we have bundling programs such as BPCI and CJR, which continue to involve a minor amount of participants, and those have a minor impact.
We haven't cross walked to see how many of our operators who might have lost a star, which really would mean if they went below 3 stars would be impacted, I think the impact is minor.
Great. Appreciate the color. Thank you very much.
Our next question comes from Chad Vanacore with Stifel. Please go
ahead. All right, thanks. So this one is for Steven. It looks like you increased the rent estimate for the Manhattan project, the Inspire with Maplewood from 3 point $6,000,000 $3,900,000 in the quarter. What's the rationale behind that increase?
This is Bob. All that schedule is doing, Chad, is taking the inception date funding, multiplying it by our initial cash yield. So as we spend more money, you'll see that estimated quarterly rent to Omega going up. So at the end of the day, it's going to be on the rent will be on the full investment amount spent. But I was just trying to give direction for guidance on here's how much spent today that's in our debt.
So how much would then generate into quarterly EBITDA.
All right. And then, Taylor, you alluded to updating guidance post MRD close.
So what
are some of the factors that might change guidance? Is it just timing, which seems pretty clear from here? Are there other factors still on Platts? And maybe you could quantify some cost synergies that you expect out of the transaction?
We're going to have very little incremental costs from the MRT acquisition. But it's mostly timing, Chad. And part of the reason I put the comment in there is with a run rate of $0.76 you just annualize that and you go, well, why aren't you raising the bottom end of your guidance? So rather than kind of walking it up over quarter by quarter, our view is, let's get MRT closed. Let's see where our Q2 is G and A and otherwise and really give a good perspective on what we think the full year will be.
Obviously, with the likelihood that the low end certainly moves up and then we'll evaluate where we are in terms of the high end.
All right. Fair enough. And then one more question is for Bob. So how's your accounts receivable been trending from operators? Any change in payer speed given the headwinds in parts of the industry?
Yes. Chad, what we did this quarter and
we haven't done in the past, we've on the balance sheet, we've broken out our contractual AR. We used to just lump it together. So now we broke we've broken out the normal contractual versus straight line. And you can see it's actually improved slightly. And if you go back the last couple of quarters, you can't see it here, but trust me, it's actually improved quarter over quarter over quarter.
But going forward, we'll keep it broken out, so it's easier to see.
All right. I appreciate it. Thanks.
Our next question comes from Omotayo Okusanya with Jefferies. Please go ahead.
Hi, guys. Good morning, everyone. Great quarter. Question, the portion of your tenant base again that has rent coverage below 1.2x, again that inched up a little bit this quarter. Just kind of curious what was kind of going on there?
And if we just kind of talk in general about kind of the status or how you're feeling about some of your tenants with lower rent coverage?
Yes. So quarter over quarter, our TTM over TTM, we remain flat at 1.32x EBITDAR coverage. We feel good about that obviously. The percentages within these various the way we put them into different buckets, that does tend to move around and it's really the movement in this quarter was just having one operator that was slightly above 1, 2 times, go slightly below 1, 2 times. And that's really what it was all about.
I don't really give it any significance, but it does happen. And the next quarter we can see it move right back up again.
Got you. Okay, that's helpful. And then second of all, I know we've always been talking about this idea of at some point demographics start to play a role in improving fundamentals. And I think you guys have been very vocal that that probably happens sooner rather than later. Just curious if you saw any of that in your portfolio this quarter?
And if you did specifically, what were the circumstances around that?
Yes. I think we see the demographics in the stability in occupancy really when we talked about this in the past. Although length of stay reductions have mitigated to some extent, they're still out there. And so the one interesting thing that I think you see is, we've seen Medicaid census creeping up a little bit. And length of stay for Medicaid residents is a lot less controllable than it is for Medicare residents.
So I think a little bit of what we're seeing on the Medicaid side is some of the demographic that we're talking about because it's much longer term and much less controllable in terms of patient base. And then on the Medicare quality side, all the dynamics we talked about, the shift to Medicare Advantage, reduction of length of stay, and you still have days that are pretty consistent in Q4 to Q1, that makes us feel good right now.
Got you. Last one for me, if you could indulge me. Again, you kind of have a situation where the CMS proposal PVDPM should be net positives. You've talked a little bit about demographics becoming a little bit more positive. Demographics becoming a little bit more positive.
Acquisition outlook seems to be pretty positive as you're hoping to get to $1,000,000,000 But Taylor, you kind of still mentioned on the call, you still see the skilled nursing outlook as being challenging. So I'm just kind of curious about the juxtaposition between those two things. Where are you still kind of seeing a challenging outlook? Is this specifically because of Texas and some of the stuff going on Medicaid wise? I'm just kind of curious that the areas where you're still kind of expressing some caution?
I think labor is going to continue to be a pressure point near term. And a little bit of my commentary is around the fact that it's May and there are lots of good things that start in October and the cash flow generated by those good things won't start until December. So we've got a half a year of here to there, and labor kind of in the backdrop. And you mentioned it, Texas, hopefully, we get something out of the state of Texas that's reasonably positive. Otherwise, that will continue to be a battle for the Texas operator.
So short term, the next 6 months, we've got to get through. But I think as we look into 2020, other than the labor issue likely continuing, we feel really good about the rest of the dynamics in our industry.
Our next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Thanks. Hey, guys. You kind of touched on this already, but occupancy ticked up sequentially. And I'm just curious if that was a shift in Medicaid that you're just talking about or if there was something else that drove that?
Well, it's not even a shift in Medicaid. It's just Medicaid being additive because you do all the math. Medicare on a days basis is pretty steady. So the incremental population is coming for instance from Medicaid patients. Again, we look at occupancy moving up, particularly in Q4 as a very good sign.
Great. And then in terms of MRT, do you have a sense if Baylor is going to exercise its purchase option later this year?
Our sense is that it's unlikely that they're going to exercise the option. As we've discussed in the past and individual meetings, we're prepared for the event. If they do so, the options at a 6.5% cap rate and we redeploy those proceeds at 9%. But we like the relationship and we think there might be some opportunities there.
Great. That's it for me. Thank you.
Thank you.
Our next question comes from Daniel Bernstein with Capital One. Please go ahead.
Hey, how are you? I wanted to switch gears a little bit to seniors housing and how you're thinking about the prospects for that industry today and maybe some updated thoughts on whether you would consider more value add assets in RIDEA or would you kind of seeking out triple net acquisitions at this point in that particular subsector?
Yes. I think for us, Dan, it's what you said. It's what's the right entry point for us in that business. We'll continue to lever into our Maplewood and support our Maplewood relationship just because it's such a huge value creator. And we continue to look for is there the right entry point into senior housings with other potential operators.
And we just can't get our arms around risk adjusted returns. You sort of expected cap rates to move up given the dynamics in that industry and they really haven't. That being said, we also are looking at are there value add opportunities where portfolios are below normal occupancies and there are markets that you can look at and get comfortable with, and
we just haven't found any of those opportunities. Okay.
And then switching back to skilled nursing, you made some earlier comments about PDPM being more revenue neutral, but I think the positivity around that has been more around the margin side. So is that positive view on margins, especially in rehab, I suppose, is that what you're still hearing from your operators? And how might that translate into lease coverage as we progress into 2020? I know that's far off and a lot of variables in there such as labor, but how are you thinking that lease coverages might progress through 2019 and then into 2020 given some of the PDPM and the 2.5% market basket increase?
Yes, it's a totally fair question. It is all on the expense side or predominantly the expense side and obviously that runs the margin just as you described. We go through our entire portfolio operator by operator and every operator has positive margin impacts from PDPM. But the range is pretty wide. It goes from a low of 0.02 of coverage to a high of 0.11 of coverage.
And you can basically take the midpoint in that range and think about that as an improvement in coverage. In terms of the 2.5 percent on the Medicare side, on the revenue side, frankly, I look at that and go that's going to offset the labor pressures.
So I would be hesitant to go ahead
and model that through coverages thinking in about 2020.
Okay. That's all I have.
I'll hop off. Thank you.
Thank you.
At this time, there are no further questions in the question queue. I would like to turn the conference back over to Taylor Pickett for any closing remarks.
Thanks, Sean. And thanks, everyone, for attending our call today. We will stand ready with any follow-up questions.