Omega Healthcare Investors, Inc. (OHI) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Omega Healthcare Investors Q2 2019 Earnings Conference Call. [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, but 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 second quarter 2019 earnings conference call. Today, I will discuss our second quarter results, our recent acquisition activity, our 2019 earnings guidance and Texas Medicaid reimbursement.Our second quarter adjusted FFO is $0.77 per share, and we declared a $0.66 per share dividend. The payout ratio is 86% of adjusted FFO and 97% of funds available for distribution. In May, we closed the MedEquities acquisition. All of the operational and accounting functions have been fully integrated in Hunt Valley. We're excited about the new MedEquities tenant relationships and look forward to potential new capital deployment opportunities. We've also announced our recently signed $735 million purchase agreement. Dan will provide additional details later in the call.Turning to earnings guidance. We have tightened our 2019 full year adjusted FFO guidance to a range of $3.03 to $3.07. The tightened guidance reflects the closing of the MedEquities deal, the opportunistic pending $85 million sale of 10 Kentucky facilities currently operated by Diversicare and the anticipated cash rents from our Daybreak facilities. In addition, we have adjusted our fourth quarter adjusted FFO guidance to a range of $0.76 per share to $0.79 per share.The redeployment of the Diversicare sale proceeds and any improvement in our Daybreak cash rents will positively impact our adjusted FFO run rate going into 2020. Lastly, Texas remains a challenging state with very low Medicaid rates. As Dan will detail, this is particularly difficult for rural Texas skilled nursing facilities.I will now turn the call over to Bob.

Thanks, Taylor, and good morning. Our reportable FFO on a diluted basis was $157 million or $0.71 per share for the quarter as compared to $154 million or $0.74 per diluted share for the second quarter of 2018. Our adjusted FFO was $169 million or $0.77 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release, our website and on our supplemental.Operating revenue for the quarter was approximately $225 million versus $220 million for the second quarter of 2018. The increase was primarily a result of incremental revenue from a combination of over $850 million of new investments completed and capital renovations made to our facilities since the second 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 the third and fourth quarters of 2018; and, finally, we adopted the new lease accounting standard effective January 1, 2019, which resulted in a 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 occurred throughout 2018; 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 $6.7 million for noncollectible revenue related to two operators during the quarter. The $225 million of revenue for the quarter includes approximately $17 million of noncash revenue. Our G&A expense was $9.5 million for the second quarter of 2019 versus $11.1 million for the second quarter of 2018 with the reduction resulting from reduced workout and restructuring related expenses.Interest expense for the quarter, when excluding noncash deferred financing cost, was $48 million or approximately the same as the second quarter of 2018. For 2019 guidance and modeling purposes, we're assuming the following major assumptions. For MedEquities, the acquisition was completed on May 17 and as a result our second quarter results have $7.1 million of revenue from MedEquities or half a quarter. We issued 7.5 million Omega common shares as part of the acquisition, and we incurred approximately $350 million of additional credit facility debt related to the payoff of their credit facility and the cash portion of the purchase price to their shareholders. 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 revenue from Daybreak will continue to be recorded on a cash basis with revenue of $3 million to $5 million per quarter.We assume noncash quarterly revenue should be between $16 million and $18 million per quarter. We project our G&A for the remaining quarters of 2019 to be consistent with our second quarter or $9 million to $10 million per quarter. Noncash stock-based compensation expense is estimated to continue at approximately $4 million per quarter. The variability in our interest expense is primarily driven by borrowings on our credit facility and LIBOR rates. At June 30, 24% of our debt or $1 billion was floating rate debt.We assume the disposition of the 10 Diversicare assets will occur by the end of the third quarter. And although not included in guidance, additional asset disposition opportunities may occur. The $735 million potential acquisition is not included in the 2019 guidance. Regarding share issuances, in addition to the 7.5 million Omega common shares issued for MedEquities in the second quarter, we assume we will be issuing approximately $15 million to $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 equity under our ATM to continue to delever and fund potential acquisitions. During the first six months of 2019, we issued or sold approximately 4.4 million shares of Omega common stock generating $159 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 June 30, approximately 76% of our $4.7 billion in debt is fixed, and our net funded debt-to-adjusted annualized EBITDA was 5.37x, and our fixed charge ratio was 4.06x. It's important to note EBITDA on these calculations has no revenue related to construction and process associated with our six new builds scheduled to become operational in the next 12 months. When adjusting for a full quarter of MedEquities and the known revenue on new builds, our pro forma leverage would be roughly 5x.I will now turn the call over to Dan.

Thanks, Bob, and good morning, everyone. As of June 30, 2019, Omega had an operating asset portfolio of 930 facilities with approximately 93,000 operating beds. These facilities were spread across 75 third-party operators and located within 40 states in the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverages for our core portfolio dipped slightly during the first quarter of 2019 to 1.67 and 1.31x respectively versus 1.67 and 1.32x respectively for the trailing 12-month period ended December 31, 2018.Turning to portfolio matters. On September 1, 2017, Omega placed one of its top 10 operators, Daybreak, on a cash basis for revenue recognition purposes due to operational challenges and liquidity issues. As a result of these concerns, Omega and Daybreak consensually entered into a settlement and forbearance agreement on October 30 of 2017, which was amended and extended effective January of 2019, whereby we granted Daybreak a $2.5 million rent deferral for the first two quarters of 2019.With the exception of $1.1 million in record real estate tax escrows, Daybreak met their contractual obligations through the second quarter of 2019. However, continued pressures on overall occupancy, Medicare census and labor costs have resulted in even tighter liquidity. And accordingly, we have not recognized any income to-date in the third quarter of 2019. Compounding these ongoing pressures, and as Taylor mentioned, the Texas State Legislature recently failed to pass a bill, which would have provided Texas nursing home operators much-needed Medicaid rate relief.Confronted with these challenges, Omega recently engaged a third-party consultant to provide a comprehensive review of Daybreak's overall operations, provide commentary and recommendations for improvement opportunities and provide a long-range forecast for future cash flow expectations. While the ultimate results of our consultant's findings are not yet final, we are adjusting our expectations for future cash rent receipts to a range of between $3 million and $5 million per quarter for the foreseeable future. It is important to point out, however, that this remains a work in progress and in no way reflects our future rent expectations for this portfolio as we continue to work with Daybreak's management team and our third-party consultants to maximize Daybreak's future cash flow and thus fine tune our rent forecast.While many of our Texas operators are challenged by Texas' woefully low Medicaid rate and the continued labor pressures, Daybreak is further challenged given its widespread geographical footprint across the entire state, its lack of exposure to any other better reimbursement states and its mostly rural localities resulting in limited Medicare Q-mix and low occupancy.While the third quarter is expected to be a particularly challenging one, we are confident that Daybreak will benefit from several known factors in the fourth quarter, including the addition of 26 Omega facilities into the Texas QIPP program, the implementation of PDPM and the 2.4% Medicare rate increase. The QIPP benefit begins September 1, while PDPM and Medicare rate increases take effect on October 1. The results of these benefits as well as our ongoing discussions with Daybreak and our consultant's recommendations will greatly assist Omega in our future forecast and our ultimate restructure plans.Turning to new investments. As mentioned by Taylor, we closed on our acquisition of MedEquities on May 17, 2019, for total consideration of $623 million. The MedEquities portfolio consisted of 35 facilities located in eight states with 12 different operators, 10 of which are new to Omega. We believe this portfolio will provide Omega with new opportunities as well as the potential to expand into new asset classes. In addition to the MRT acquisition, Omega invested $55.5 million in capital expenditures during the second quarter of 2019.Turning to subsequent events. In July of 2019, Omega completed a $25 million purchase leaseback 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%. Also as mentioned earlier, on July 26, 2019, Omega entered into a purchase and sale agreement for the acquisition of six new facilities for $735 million consisting of approximately $345 million of cash and the assumption of approximately $390 million of debt.The facilities comprised of 58 skilled nursing facilities and two assisted living facilities are leased to two operators via three triple-net leases generating approximately $64 million in 2020 annual cash revenue. Completion of the transaction is subject to consent by HUD as well as the satisfaction of customary closing conditions. An executed nondisclosure agreement limits our ability to share additional details of this transaction at this time.I will now turn the call over to Jeff.

Thanks, Dan, and good morning, everyone. Florida's average nursing home Medicaid rate dropped 4.5% effective July 1, 2019, resulting from the loss of onetime discretionary funding applied to October 1, 2018, rates to cover the impact of hold harmless provisions in the new prospective payment system or PPS enacted at that time. The new PPS basically changed the rate methodology from cost based to price based and was designed to be budget neutral.However, because 44% of Florida SNFs would have immediately suffered Medicaid rate decreases upon implementation of the new PPS, additional discretionary funding was allocated to allow SNFs to be paid the higher of their actual rate as of September 30, 2016, or the rate calculated pursuant to the new PPS subject to a cap. This hold harmless provision extends through September 30, 2021, after which SNF rates are expected to be based exclusively on the PPS, which benefits the more cost-efficient providers with good quality outcomes.The fiscal year 2019-20 loss of discretionary funding directly attributable to unanticipated state spending increases for hurricane relief was allocated to the 56% of facilities whose PPS rates were above hold harmless levels resulting in average rate decreases for those facilities of about 7%. However, the impact of these decreases was essentially to change rates back to their pre-PPS levels just nine months prior such that operational adjustments to maintain coverage levels could be made effectively.A smaller discretionary increase effective October 1, 2019, will bump those facilities rates back up by 1.5%. As for the rest of the nation, based on the June 2019 report of the National Association of State Budget Officers, the general economic outlook for all states projects a healthy average general fund growth rate of 3.7% for fiscal year 2019-20, a comparable average increase in overall Medicaid spending of 4.0% with the state portion to increase 3.1% and record high rainy day funds with a median reserve balance equal to 7.5% of general fund spending. None of the states reported budgeted nursing home Medicaid rate decreases. As a result, aside from the unique Florida rate cut, we expect nursing home Medicaid rates to generally keep pace with the growth in operating expenses for Medicaid beneficiaries.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 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 second quarter, Omega's senior housing portfolio totaled $1.6 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 health care homes in Gold Care in the U.K., our overall senior housing investment now comprises 127 assisted living, independent living and memory care assets in the U.S. and U.K.On a stand-alone basis, the core portfolio not only covers its lease obligations at 1.19x, but also represents one of the larger senior housing portfolios amongst the publicly listed health care REITs. Our ability to successfully continue to grow this important component of our portfolio is 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 tenant's operating capabilities with our commitment to having in-house design and construction expertise.Through the same capability, we invested $55.5 million in the second quarter in new construction and strategic reinvestment. $40.3 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 $15.3 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've been clearing our intention to move back to our traditional accretive growth model in 2019. And between the deal announced today and our recently closed MedEquities' acquisition, we are executing on that plan. We will continue to look to augment our portfolio with additional accretive acquisitions, while also generating further value through our robust development pipeline.We will now open up the call for questions.

[Operator Instructions]. Our first question comes from Karin Ford with MUFG Securities.

I wanted to ask some question around the Daybreak resolution and the Diversicare sales. Following these, how is the visibility into future operator issues? Are you comfortable that negative headline risk around your operators is going to be ebbing in the coming quarters?

Yes. I mean, listen, the Daybreak issue quite frankly has been an issue now for going on close to two years. The Diversicare situation is one where we're looking to get them out of the state, where they probably shouldn't be in. So I think that's a win-win for both companies. As far as other issues on the horizon, at this point, we see nothing of any materiality. So all clear from this standpoint.

Okay, great. I know you're unable to share a lot of additional detail on the pending acquisition, but can you tell us how it was sourced? How does it compare just generally quality and credit wise with your existing portfolio? When do you think it will close? And what are your funding plans for the cash portion?

I can't describe how we'll source, but we'll tell you that its coverage is slightly above our current mean and expectations of closing is hard to predict, because really is contingent upon the assumption of HUD deck, which once again it's a government agency and not able to pin them down on their timing. So I think we have a pretty wide range of between three and as far as maybe outside of nine months for the closing to take place.

Great. And then just, lastly, on the financing side, you have about $500 million out on your line. Should we be modeling a debt deal later this year to term that out? Or now are you considering refinancing of any of your 2022 term loans given low rates?

Our historical practice is we use our credit facility to lever up and do acquisitions. And then once it gets to a certain point, $500-plus million, we always look to term it out. So I can't tell you whether we're doing them or not, but we will be opportunistic looking at the market given the current rate environment. But going back to your other question, how do -- the follow up on how we plan to finance the potential deal, a piece of it is assuming HUD. The second piece is we'll use our credit facility, but we also have the proceeds coming in from the Diversicare sale.

Is a bond deal included in your guidance range?

It is not.

Our next question comes from Jonathan Hughes with Raymond James.

What's the pipeline look outside of that portfolio under contract? I know you did another $2,500 million of acquisitions at 9.5% yield at start of July. Just curious how many more of those single and double type acquisitions, to use a baseball analogy, are in the pipeline?

We're constantly looking at those singles, if you will. The rows in our pipeline, there it shall be in terms of when we receive them and when we close upon them. But I will just say that it's consistent with what we've seen in the past. The bigger deals obviously are even more choppy, if I may say. The big deal that we just announced, it wasn't even on our radar screen six months ago. So they are very, very hard to predict.

Okay. Maybe I'll turn to Texas then. Obviously, legislation expected to address Medicaid reimbursement rates didn't happen there. How do you view that state over the next few years in terms of your current exposure and investment potential? I mean, any plans to pair exposure there? You did mention there could be more dispositions in the back half of the year. Or do you see those headwinds creating potential growth opportunities as some people struggle and you can create some value for shareholders?

I think it hit up with the latter point. I mean, listen, we're not going to be aggressive in acquiring facilities in Texas. But if one of our existing operators sources a deal and comes to us, we'll do everything we can to meet those needs. So we are going to be opportunistic in Texas, because I do think there will be some opportunities.

Okay. Is there any chance that legislature would readdress that before 2021? Or are we stuck here for two years with the current rate policies?

So you know that we're trying to do something unique. I mean, I don't want to -- they are trying to cap federal funds with this recent legislation. So it was a little bit unique. It was -- they were trying to pass a specific bill. That doesn't preclude Texas from granting just flat out Medicaid rate increases, which could occur within the next two years.

So maybe a chance for small size. All right. One more from me since it's in my backyard, but can you expand upon the Florida Medicaid legislation you talked about earlier basically? I just want to understand the risk to your Florida portfolio that's 9% of the overall company. Maybe what's coverage within your Florida segment? And where do you expect that to go maybe over the next 12 months-or-so?

The coverage in Florida is probably slightly above the mean, and it was helped up by the switch from cost base to PPS. So we actually got a pick up. And I think now this is going to sort of slip back down again. But most of the operators there had accounted for this, and most of them have dealt with it in terms of making some corporate cuts to bring cost back in line with the new rates.

Our next question comes from Lukas Hartwich with Green Street Advisors.

Can you provide the skilled mix and EBITDARM margin on the $735 million portfolio?

Off the top of my head, no. I think it's north of 20%. And then did you have -- what was the second one, the EBITDAR cover...

EBITDARM margin?

EBITDARM would be slightly above the mean for our entire portfolio.

Okay. And then are there any retenanting plans of that portfolio?

No.

Okay. And then lastly, can you provide the rent bumps?

There are more than one portfolio. I believe, one is to 2.25% and one is 2.5%.

Our next question comes from Trent Trujillo with Scotiabank.

So just following up on a topic from a little bit earlier in market exposure. With Diversicare exiting Kentucky and some news about other operators leaving states like Ohio and the issues that have been documented in Texas, can you give us your thoughts on market diversification and where you'd optimally like to add or remove the exposure?

In general, Trent, I would say that we continue to focus on the Southeast and the Far West. The middle of the country, we've lightened up already. Kentucky is somewhat unique, because it's a pretty good reimbursement state, but the professional liability exposure there makes it a dangerous state, particularly for public operators like Diversicare. So that's a little bit of a unique situation. Kentucky, in general, is a pretty good state. So that's a kind of broad brush. The Northeast has not been nor will it be a focus in the next year or two.

Okay. So I guess triangulating that, is it fair to say the $735 million acquisition is focused on markets such as that like in the Southeast?

That is fair to say. Trent, yes.

Okay. I guess sticking with Diversicare, they reported some, I guess, somewhat less than inspiring results earlier this week. And even after your sale of 10 assets in Kentucky you still have exposure to, I believe, 24 other assets of theirs that they operate. So how are you viewing that relationship?

We had a long relationship with Diversicare, and they've always had a tough balance sheet situation. And their cash flows have tightened a bit, but we think the balance of the portfolio that we sit with will continue to perform. I can't speak specifically to their overall balance sheet issues, but ultimately, we look to the facility level of credit, which we think will continue to be relatively strong.

Okay. Shifting a little bit looking at your operator EBITDAR coverage stratification, looks like about $28 million drop down one bucket into the 1 to 1.2x range. Can you talk about that shift and maybe how much rent is on the cusp of shifting either up or down because I know that can change quarter-to-quarter?

Yes. And that's exactly what happened this past quarter. We had somebody that was running the cusp that was right above the 1.2 line and fell below. At any time, we've got some folks on the fringe. I don't have the dollar amount of rent associated with those. But whatever we would define is on the fringe, but it's not an immaterial number. It's probably somewhere between the $25 million and $50 million of rent.

That is on the fringe, that could shift?

Yes. It depends on how you define fringe, but yes.

Well, okay, sure, okay. Are those numbers inclusive of the MedEquities properties? Did that portfolio -- did absorbing that portfolio affect your stratification much?

It didn't affect at all because it's not in corporate. We closed on that in mid-May. So it would be even out there the coverages that we were reporting on. So no, but the MedEquities' portfolio, in general, is slightly -- has slightly higher coverages than the legacy Omega, although it wouldn't fit. It's not enough to move the needle.

Okay. And one more -- one last one for me, if you don't mind. So given all the completed and announced acquisitions, how are you thinking about your dividend on a go-forward basis?

As we discussed in the past, Trent, we'll look at it every quarter as a Board. At this point, with dividend coverage in the 90s, I wouldn't expect to see a shift in our dividend policy. But again the Board takes it up every quarter. And we do have a number of assets coming online. They're going to produce pretty significant cash between Second Avenue and the closing of the transaction we announced today. The timing of that will drive a lot of the decision making.

Our next question comes from Daniel Bernstein with Capital One.

I wanted to go back to how you're thinking about your role versus overexposure in Texas, just following up on the -- your earlier comments?

I think as it relates to Texas, you're sort of making the point. I mean you have rural facilities that will continue to be relatively difficult, but we'll continue to look at opportunities in Texas just based on risk-adjusted analysis. So I wouldn't say that we're making a distinction between rural and urban in terms of allocating capital, but we will risk adjust rural in a different way than we do urban.

Okay. So I don't know if you can talk about your actual exposure rural versus urban. If not, we can always take that offline.

Yes. It really goes back to how you decide to define it, but I will tell you we think about our overall portfolio, it's about 20% to 25% rural. But again, it depends how you decide to define rural.

Okay. Kind of switch gears a little bit to seniors housing. You have a development pipeline with Maplewood. Are you actively looking or seeking out other operators to maybe build other development pipelines with them? I guess some of your peers have done that. And just trying to get kind of your proclivity at this point to do more seniors housing development and expand that beyond Maplewood.

We continue to look for opportunities on the development front across the spectrum of potential operators. But I will tell you from our perspective, the Maplewood relationship is incredibly important, and we're doing everything we can to turbocharge that, if you will.

Does rise in construction or labor costs temper any of that enthusiasm with your development at this point? Or is everything still kind of penciling out? Whatever is -- kind of what's on the drawing board maybe hasn't turned out yet, but you're working on. Are those still penciling out as developments you want to go forward with and are accretive?

They are generally, but, Steven, do you want to take a shot at that.

Yes. I think it's fair to say that construction cost in particular are putting a little bit of pressure on the excitement level around some of these new builds. But we haven't got to the point yet where they don't pencil out. They are just, I mean, a slightly less exciting than they were a year ago. but it's something we're particularly careful about. And the labor costs, I think you had mentioned also, are not really factoring into the desirability of those investments right now. They are factored, but not really swaying off one way or the other.

Our next question comes from Chad Vanacore with Stifel.

So how do you think upcoming implementation of PDPM is impacting the pipeline in next six months? Any noticeable acceleration or deceleration of opportunities?

No. At this point, well, not that we can directly tie to PDPM, that's for sure. So I'd say no.

So you can say that, Dan, after you sign in, what, $700 million deal?

I'm not sure that was a driving force.

Yes. All right. And then just looking across your operators, what are you seeing in terms of census trends?

For Medicaid, census has been slowly but surely picking up. Medicare has been flat or even still slightly dropping off just because, I think, just the length of stay -- they're not coming back up certainly and they are probably still creeping down a little bit. So overall, census is flat to slightly up, and it's mostly driven by Medicaid.

Okay. And then just one more question probably for Steven. Can you give us an update on the second half development with Maplewood? Where is leasing so far? You're right before opening a new plant -- opening in the first quarter. So can you give us an idea how the lease-up is going?

Sure, Chad. I think the best way to describe it is that the momentum behind -- and I would call it deposits at this point for leases rather than leases because the building is still a number of months away from being opened. But the momentum of the deposits being taken is consistent with the levels we would see in the suburban locations that Maplewood is executed really well on in the past. So we're cautiously optimistic. The market is accepting the pricing. So obviously more to follow as the opening day comes closer.

Our next question comes from Todd Stender with Wells Fargo.

My question has to do with the new portfolio announcement you made. So if demographics and potential bottoming and SNF fundamentals, if you've subscribed to that, are right now here in 2019, are you acquiring the in-place leases so the contractual rents are already locked in? Just kind of looking at the other side of that, if there is upside in fundamentals, how do you guys participate? And then how did you kind of underwrite that?

So we are buying effectively in-place leases, so the rent is locked. If the operations improve, our coverages improve, but there is no rents here. There's no revenues here.

Okay. Did you enter at maybe a lower rent coverage than you normally would with the backdrop of improving fundamentals? Or how did you look at that?

No. I think we underwrote it to our normal standards.

Okay. And back to Daybreak, so they dropped out of your top 10 tenant list in the quarter. Did their cash rent contribution drop out mathematically? Or was this something you proactively pulled them out of? Just maybe speak to Daybreak.

Well, it's based on the cash rent run rate we've had this year, which is at $5 million a quarter. And we've talked about $3 million to $5 million. So when you think about that on an annualized basis, they just -- they won't be in the top 10. Hopefully, over time we can push them back towards the top 10. We'll just have to wait and see.

Okay. Last question, Bob. I think you gave or you indicated, was it $25 million of new equity a quarter was I guess kind of a DRIP program estimate?

Correct.

Is it fair to say... sorry, go ahead.

That was based off of the leasing couple quarters. Sorry about that.

Okay. The reason I ask is, is it fair to assume maybe not as much new equity raised outside of that DRIP until you've gotten through your asset sales which include the Diversicare, chew through the dispositions before we should assume maybe larger equity raise?

That's a fair assumption.

Our next question is a follow-up question from Karin Ford with MUFG Securities.

Just a couple of quick ones. You mentioned a pivot back to accretive external growth this year. 2019 is turning out to be an above average year for you guys, $1.4 billion, $1.5 billion, maybe more to come. Should we be thinking about this volume level as the new normal for OHI? Or would you say that this year has been an anomaly given the two large transactions you've done?

So to an earlier comment that Dan made and something we've talked about a lot, we typically think about $400 million or $500 million of deal flow as naturally coming out of the relationships that we have. And that seems to be a normal minimum capital allocation that we see in the portfolio. And then, incrementally, it's these larger deal-driven opportunities. And so if you look over time, Karin, I think the best way, I think, about it is, if we do $1 billion in a year, that's a pretty good year, and it averages out over time in that range. So I would think about $1.5 billion as more than an average year. That being said, the type of activity we've seen in 2019, I think there are a lot of reasons to believe we might see similar things in 2020.

Great. And then just sorry if I missed this. Do you guys -- did you guys give an estimate to how much you think PDPM and the Medicare rate increase might lift overall coverage in your portfolio?

We have talked about that in the past, and it's specific by operator, but it's positive for each of the operators, at least the last time we modeled it. And we model between 0.2 of coverage improvement to 0.11 of coverage improvement with the overall being about the average of those two numbers.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thanks, Brandon. Thanks, everyone, for joining the call today. As always, we're available for follow-ups. I would ask you to call either Bob or Matthew if you have any specific questions. Thanks, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.