Omega Healthcare Investors, Inc. (OHI) Q1 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Omega Healthcare Investors First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, 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’s CEO, Taylor Pickett; CFO, Bob Stephenson; 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-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, and thank you for joining our first quarter 2019 earnings conference call. Today, I will discuss our first quarter 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 fourth quarter 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 2018’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 fourth quarter 2019 guidance of $0.78 to $0.81 per share. We will revisit 2019 guidance after we close on the MRT acquisition and have our second 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, we’ll provide welcome rate relief and expense savings opportunities. In addition, our census continues to remain stable with fourth quarter occupancy of 82.8%. I will now turn the call over to Bob.

Thanks, Taylor, and good morning. Our reportable FFO on a dilutive basis was $144 million, or $0.67 per share for the quarter, as compared to $147 million, or $0.71 per share in the first quarter of 2018. Our adjusted FFO was $161 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 press release, supplemental and on our website. Operating revenue for the quarter was approximately $224 million versus $220 million for the first quarter of 2018. The increase was primarily a result of incremental revenue from a combination of over $450 million of new investments completed and capital renovations made to our facilities since the first quarter 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 third and fourth 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 a new lease accounting standard effective January 1, 2019, which resulted in the recording of $4 million related to tenant real estate taxes and ground lease income. It’s important to note a corresponding offset to operating expenses was booked during the quarter and therefore, this had minimal P&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 $1.2 million 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 million of revenue for the quarter includes approximately $15.8 million of non-cash revenue. Our G&A expense was $11.8 million for the first quarter of 2019 and included approximately $1 million in restructuring charges related to the closing of our Chicago office, including severance resulting from the elimination of certain positions. Interest expense for the quarter, when excluding non-cash deferred financing cost, was $48 million or the same as the first quarter of 2018, as lower debt balances were offset by a higher blended cost of debt, primarily as a result of higher LIBOR rates. We recorded $7.7 million of impairment on direct financing leases in the first quarter related to the finalization of the Orianna portfolio based on the estimated collectability of the remaining accounts receivable owed to Omega held in the estate trust. For 2019 guidance and modeling purposes, we are assuming the following major assumptions. On MedEquities, we assume the acquisition will be completed in mid-May. We plan to issue approximately 7.5 million Omega common shares for MedEquities, take on approximately $350 million 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 million and $18 million per quarter. We project our G&A for the second quarter of 2019 to be consistent with our first quarter when normalizing for restructuring charges. As legal expenses decrease, we will return to a more traditional $9 million to $10 million per quarter starting in the second-half of 2019. Non-cash stock-based compensation expense is estimated to continue at approximately $4 million 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 million 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 7.5 million common shares to be issued for MedEquities, we assume we’ll be issuing approximately $10 million to $15 million 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 first quarter of 2019, we issued or sold approximately 3.1 million shares of Omega common stock, generating $111 million 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 $4.5 billion in debt is fixed and our net funded debt to adjusted annualized EBITDA was 5.2 times and our fixed charge coverage ratio was 3.9 times. It’s important to note, EBITDA on these calculations has no revenue related to construction and process related to our eight 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 forma leverage would be roughly 5.0 times. I’ll 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 core portfolio remained stable during the fourth quarter 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 in Texas are not unique to Daybreak and have placed continued pressure on all Texas operators. As reported on our fourth quarter earnings call, Omega and Daybreak entered into a second amendment to our settlement and forbearance agreement effective January 30, 2019, whereby we granted Daybreak a $2.5 million rent deferral in each of the first two quarters of 2019. To date, Daybreak has met their 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 uncertainties 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 QIPP program, the implementation of PDPM and the 2.5% Medicare rate increase, all free benefits are slated to become effective on October 1, 2019. Turning to new investments. As mentioned by Taylor, we’re preparing for the upcoming MedEquities merger. From an operational perspective, this involves integrating our respective portfolio management systems, meeting with existing operators in an effort to better understand their business and identify their capital needs, and identifying opportunities in MedEquities other diverse asset classes. As a reminder, Omega will be acquiring a portfolio 34 facilities spread across seven 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 MedEquities 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 three significant elements to be effective October 1, 2019. One, a net increase of 2.5% in SNF Medicare Part A Prospective Payment Systems, or PPS rates; two, confirmation that the new PPS patient-driven payment model, or PDPM, will replace the existing work for payment methodology at that time; and three, 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 million in Medicare funding to the sector and results from a market basket increase of 3.0% reduced by a mandated multi-factor 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 SNF Medicare 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 four patients to involving anywhere from two to six 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 work on our ALF, memory care high rise at Second Avenue, 93rd Street, 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 first quarter, Omega Senior Housing portfolio totaled $1.5 billion of investments on our balance sheet, anchored by our growing relationship with Maplewood Senior Living and their best-in-class properties, as well as Healthcare Homes in 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, is 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 $47.6 million in the first quarter in new construction and strategic reinvestment. $41.8 million of this investment is predominately related to our active construction projects, with a total budget of approximately $500 million, inclusive of Manhattan. The remaining $5.8 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. We look forward to closing the MRT acquisition and sourcing new growth opportunities in 2019. We’re optimistic about the reimbursement and demographic environment and the opportunity for improving tenant results. And with that, I’ll open up to questions.

We will now begin the question-and-answer session. [Operator Instructions] 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 the 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 reported. Principally, skilled nursing facility assets, the follow-up question to that usually is where 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 rates. So we think about cap rates, I think, it’s still at 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 hundred million or $400 million to $500 million?

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 a $1 billion of deal activity, MRT $600 million, I think, we still have the opportunity for a good year.

Okay, got it. And then on MedEquities, I realize you may not be able to comment fully. But on the creative solutions transition, could you maybe talk about how that’s progressing since January 1 is 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 I 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 share that, I understand?

Yes, 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 break-even. 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 downside to PDPM here since I ever really hear about is the upside opportunity?

Yes. I think the cross walks – so many people have done cross walks 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 the first time that I’ve 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.

Oh, 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 something 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 QIPP 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 sometime. We’ve also seen a pickup in Daybreak’s Q mix. It sort of hit a low watermark in the third quarter of 2018. We’ve seen it slowly trend up into the first quarter 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. It 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 they’re working around the clock in the State of Texas to try to get some rate relief for our operators.

And then other Texas operators.

Other Texas operators, a lot of them fortunately are in other states. So some of their operations are in the states are actually subsidizing their Texas operations. The coverages of that is 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 think you’ll need to give additional rent relief for the third quarter on Daybreak?

It’s – once again, it’s – I think at this point, it’s too early to call. I want to see how the Q mix 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 to 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 – coming 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 looks 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?

On the – as far as the Manhattan project is concerned, our sales and leasing office – yes, 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, increase are very strong. We’re confident around price point and see the building being talked off at the end of this year with occupancy starting in the first quarter of 2020.

How is it performing – how is it looking so far on the rent side versus underwriting? And then can you just talk about the new project in Ohio?

The market reaction of 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 the absolute quantum, because we did start very early. But we’re confident based upon total inquiry and deposits received that will be on target for early leasing consistent with underwriting.

Great. Thank you.

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 talk about how you’re thinking about this since the stock is trading right around to slightly higher than where you issued in the first quarter on average?

We’ve always been opportunistic 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 think, we always use 4 to 5 times, but it’s more like 4.7, 5 times the sweet spot there. So we’ll take it day by day what we’re in the post the MRT merger ahead of week or so and be opportunistic looking at the ATM market.

Okay. Maybe just a quick follow-up on this topic. You had no acquisitions in the first quarter, and 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 ultimately be actionable.

Okay. And my next question just my other one. So CMS just updated its five star quality ratings and the broad takeaways 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?

Hey, 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 domain, such that they wanted to ensure the cut points reflect a certain percentage of facilities in each of the one through five star rating categories. So those changes where a third of the facilities lost a star rating and maybe a six of the facilities gained a star rating are directly 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 attributes. But if operators are already in referral networks, 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 continues to involve a minor amount of participants and those have a minor impact. We haven’t cross-walk to see how many of our operators who might have lost a star, which really would mean if they went below three stars would be impacted, I think, the impact is minor.

Great. I 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 $3.6 million or 3.9 million in the quarter? What’s the rationale behind that increase?

Hey, Chad, I’ll take.

Go ahead, Bob.

This is Bob. All that schedule is doing, Chad, is taking the inception-based 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 – the ramp will be on the full investment amount spent. But I was just trying to give direction for guidance on here’s some with respect to day that’s in our debt. So how much would it generate into quarterly EBITDA.

All right. And then, Taylor, you alluded to updating guidance post MRT close. So what are some of the factors that might change guidance? Is it just timing, which seems pretty clear from here where there are other factors doing plots, and maybe you can 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 yes, 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 in walking in up over quarter-by-quarter, the argue is let’s get MRT close, let’s see what our second quarter is G&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 is your accounts receivable 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 leasing just ramping [ph] together. So now we broke – we’ve broken out the normal contractual versus the 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 a year where you got the trust, it’s actually approved quarter-over-quarter-over-quarter. But going forward, we’ll keep it broken out, so it’s easier to say.

All right. I appreciative it. Thanks.

Our next question comes from Omotayo Okusanya with Jefferies. Please go ahead.

Yes, good morning, everyone. Great quarter. Question, the portion of your tenant basic and that has a rent coverage below 1.2 times, 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 of how you’re feeling about some of your tenants with lower rent coverage?

Yes. So, quarter-over-quarter, [indiscernible], we remain flat at 1.32 EBITDAR coverage. We feel good about that, obviously. The percentages within the 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’s all about. I don’t really give it any significance, but it does happen and in the next quarter, we can see it move right back up again.

Gotcha. Okay, that’s helpful. And then second of all, I know we’ve always been talking about this idea of at some point demographic start to play a role in improving fundamentals. And I think, you guys have been very vocal that probably happen 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?

I think we see the demographics of the stability in occupancy really when we talk 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 see Medicaid expenses 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 demographics that we’re talking about, because it’s much longer-term and much less controllable in terms of patient takes. And then on the Medicare quality side, all the dynamics we talk about the shift to Medicare advantage, reduction in length of stay and you still have days that are pretty consistent in Q4 to Q1, that makes us feel good right now.

Gotcha. Last one for me if you could indulge me. Again, you kind of have a situation where the CMS proposal for PDPM should be net positive. You talked a little bit about demographics becoming a little more positive, acquisition outlook seems to be a pretty positive as you hope to get to $1 billion. 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 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 are starting in October and the cash flow generated by those good things will start till December. So we’ve got a half a year here to there and labor kind of in the backdrop and you mentioned it, Texas, hopefully, we get something out in the State of Texas that’s reasonably positive, otherwise that will continue to be a battle for the Texas operators. So, short-term in the next six 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.

Great. Thank you.

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 has ticked up sequentially. And I’m just curious if that was a shift in Medicare that you’re just talking about, or if there was something else that drove that?

Not – it’s – 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 Daybreak is going to exercise its purchase option later this year?

Our sense is that, that it – it’s unlikely that they’re going to exercise the option. As we discussed in the past and individual meetings, we’re prepared for the event if they do so the options that are 6.5% cap rate, we redeploy those proceeds in 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 senior 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 right day 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 is, what’s the right entry point for us in that business. We’ll continue to lever into our Maple – and support our Maplewood relationship, because it’s such a huge value creator and we continue to look for, is there the right entry point in the 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 have it. That being said, we also are looking at are thee value-add opportunities, where portfolios are below normal occupancies and their markets that you 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 their 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. There are 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 on the expense side and obviously that runs the margins just as you described. We’ve gone 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% on the Medicare side, on the revenue side, frankly, I look at that 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 hop off. Thank you.

Thank you.

[Operator Instructions] 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.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.