Omega Healthcare Investors Inc

NYSE:OHI

Earnings Call Transcript 2018-Q4

[Operator]

Good morning and welcome to the Omega Healthcare Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]

Please note today's event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead ma'am.

[Michele Reber, Investor Relations]

Thank you and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth and Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference call that are not historical facts may be forward-looking statements, such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially.

Please see our press releases and our filings with the Securities and Exchange Commission including without limitation our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations to 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.

[Taylor Pickett, Chief Executive Officer]

Thanks, Michele. Good morning and thank you for joining our fourth quarter 2018 earnings conference call. Today, I will discuss the completion of our strategic asset repositioning and portfolio restructuring, the status of MedEquities acquisition, our fourth quarter results and our expectations for 2019.

We have completed our strategic asset repositioning and portfolio restructurings. In 2018, we disposed of 86 facilities for total consideration of $409 million. The revenue reduction related to these assets was $47.4 million, while the trailing 12-month cash flow on these assets was $28 million.

Cash flow on these assets did not cover the underlying rent, yet we were able to achieve sale proceeds that equate to a cash flow yield of 7%. We will redeploy these proceeds into higher quality assets with good rent coverage while experiencing minimal revenue impacts.

In addition to the facilities that we disposed, we transitioned 63 facilities to 12 existing and new operators, which should improve facility level results and typically has resulted in better overall credit strength.

All of the 42 Orianna facilities have been transitioned or sold. 26 facilities have been released to six existing Omega operators with related annual rent of $19.1 million.

One facility in Tennessee was sold for $4 million. 15 facilities in South Carolina and Georgia were sold. We expect to receive $116 million from the estate liquidation and have received a note with a face value of $30 million and a GAAP value of $20 million, which generates $1.8 million in annual cash interest.

Consistent with all of our prior estimates, final rent and rent equivalent received from the Orianna portfolio is approximately $33 million. Final transitions and sales resulted in a non-cash accounting impairment of $27.2 million. That has no effect on our future cash flow run rate related to the former Orianna assets.

Regarding MedEquities. We filed a registration statement with the SEC yesterday for our proposed acquisition of MedEquities Realty Trust Inc. Once the registration statement is declared effective by the SEC, MedEquities will mail a proxy statement to its stockholders to approve the merger.

Omega stockholder approval is not required. We expect the transaction to be completed in the second quarter subject of course to approval by MedEquities Stockholders.

Turning to our fourth quarter results and guidance for 2019. Our adjusted FFO of $0.73 per share is $0.04 less than our third quarter adjusted FFO of $0.77 per share. The difference consists of approximately $0.02 per share for increased legal costs related to the conclusion of the Orianna work-up and non-executive employee bonuses related to a three-year incentive plan payout and approximately $0.02 per share related to uncollected Daybreak obligations.

Daybreak's current liquidity issues reflect the particularly difficult operating environment in Texas where the combination of relatively low statewide occupancy of 70% and a Medicaid rate that is the second lowest in the United States has resulted in a number of restructurings both in and out of bankruptcy court.

We believe the long term outlook in Texas is positive with favorable demographics, a slowdown in new supply, the imminent start of PDPM and the possibility of much needed rate relief.

In the near term as Dan will detail, we are working with Daybreak by providing near-term liquidity relief via cash rent deferrals through June. Our 2019 full year adjusted FFO guidance of $3 to $3.12 per share and fourth quarter guidance of $0.78 to $0.81 per share includes the acquisition of MedEquities.

It also includes normalizing our general and administrative cost run rate at $9 million to $10 million per quarter. We have provided fourth quarter guidance at the timing of MRT, normalizing general administrative costs and the ultimate run rate cash collections from Daybreak will impact our full year 2019 guidance.

However, by the fourth quarter of 2019, all of these moving parts will be resolved. I will now turn the call over to Bob.

[Bob Stephenson, Chief Financial Officer]

Thank you, Taylor and good morning. Our reportable FFO on a dilutive basis is $125 million or $0.59 per share for the quarter as compared to $159 million or $0.77 per diluted share in the fourth quarter of 2017.

Our adjusted FFO was $155 million or $0.73 per share for the quarter and excludes the impact of the $27.2 million provision for impairment on direct financing leases, $3.9 million of non-cash stock based compensation expense. $1.1 million of one time revenue, $400,000 of merger related cost, $300,000 in provisions for uncollectable accounts, and a $200,000 mark-to-market loss on our Genesis warrants.

Operating revenue for the quarter was approximately $220 million versus $221 million for the fourth quarter of 2017. The decrease was primarily a result of reduced revenue related to asset sales, transitions and loans paid off that occurred throughout 2018 and the timing of cash receipts related to operator on a cash basis.

The decrease in revenue was partially offset by incremental revenue from a combination of $471 million of new investments completed and capital renovations made to our facilities in 2018 as well as lease amendments made during that same time period. And also revenue related to the Orianna facilities that were transitioned to existing Omega operators in the third and fourth quarters of 2018. The $220 million of revenue for the quarter includes approximately $16 million of non-cash revenue.

Our G&A expense was $13.7 million for the fourth quarter of 2018 with the growth over the fourth quarter of 2017 due to the continued legal expenses related to operator workouts and restructurings, which is primarily related to Orianna as well as bonus accruals.

Interest expense for the quarter when excluding non-cash deferred financing costs was $49 million or roughly the same as the fourth quarter of 2017, as lower debt balances were offset by a higher blended costs of debt primarily as a result of LIBOR rates.

We recorded $27 million impairment on direct financing leases in the fourth quarter related to the finalization of the Orianna portfolio. We also recorded approximately $3 million in real estate impairments charges to reduce the net booked values on three facilities to their estimated values or expected selling prices.

In the fourth quarter, we sold 15 assets for net cash proceeds of $67 million recognizing a gain of approximately $16 million. We recorded in the fourth quarter approximately $975,000 in revenue related to the 15 dispositions. As part of our constant evaluation to improve our effectiveness and efficiency, we are implementing an internal realignment of our organization.

The realignment will result in the closing of our physical Chicago office and the elimination of certain positions effective February 15. As a result for the quarter ended March 31, 2019, we will record a restructuring charge of approximately $2.5 million, consisting primarily of severance payments and office closure expenses.

For 2019 guidance and modeling purposes, we are assuming the following major assumptions, MedEquities, we assume the acquisition will be completed in the second quarter. On Daybreak, we assume that we will receive approximately $5.2 million in cash in each of the first and second quarters before returning to their contractual obligation of approximately $7.7 million per quarter.

Regarding Orianna, as Taylor mentioned, 26 facilities have been released for annual rent of $19.1 million, roughly $1.5 million of that annual amount will start in the second quarter.

We assume new construction project revenue as outlined 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 in the first quarter of 2019 to be consistent with our 2018 fourth quarter G&A, as a result of continued legal expenses related to operator workouts and transitions, reducing somewhat in the second quarter before returning to a more traditional $9 million to $10 million per quarter in the second half of 2019.

Non-cash stock based compensation expense is estimated to be 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 December 31, 21% of our debt or $966 million was floating rate debt, every 25 basis point increase in LIBOR rates will result in roughly $2.4 million in increased annual interest expense or $0.01 per share. We assume proceeds from potential asset disposition opportunities will be redeployed between 9% and 9.5%.

Regarding share issuances, we plan to issue approximately 7.5 million Omega common shares for MedEquities. Historically, we've issued $10 million to $15 million of equity per quarter, through our dividend reinvestment and common stock purchase plan and assume that will continue.

And lastly, based on our stock price and subject to equity market conditions, we may decide to issue equity on our ATM to continue to deliver and fund potential acquisitions.

Our balance sheet remains strong, at December 31, we had three facilities valued at approximately $1 million classified as assets held for sale. Approximately 80% of our $4.6 billion in debt, is fixed and our net debt to adjusted annualized EBITDA was 5.5 times and our fixed charge coverage ratio was 3.8 times.

It's important to note EBITDA on these calculations has only $17 million of annual revenue related to Orianna facilities and no revenue related to construction and process associated with our new builds.

When adjusting for Orianna and the Daybreak, fourth quarter cash shortfall the known revenue on the new builds and removing revenue related to our fourth quarter asset sales our pro forma leverage would be roughly 5.17 times.

I will now turn the call over to Dan.

[Dan Booth, Chief Operating Officer]

Thanks Bob and good morning everyone. As of December 31, 2018, Omega had an operating asset portfolio of 909 facilities with approximately 91,000 operating beds. These facilities were spread across 68 third party operators and located within 40 states in the United Kingdom.

Trailing 12 month operator EBITDARM and EBITDAR coverage for our core portfolio, was down slightly during the third quarter of 2018, at 1.67 and 1.32 times respectively, versus 1.7 and 1.34 times respectively form the trailing 12-month period ended June 30, 2018.

Just as a reminder, our core portfolio represents facilities that are deemed stabilized. Excluded from our core portfolio are new development projects, projects which are open, but not yet stabilized, facilities slated for sale or closure, and facilities expected to be or that have recently been transitioned to a new operator.

As we have executed on our strategic repositioning, the amount of rent reported as core has consistently increased over the last four quarters, improving from 83% in the fourth quarter of 2017 to 85% in the first quarter of 2018, 87% in the second quarter of 2018, and up further in the third quarter of 2018 to 91%.

Turning to portfolio matters. As Taylor mentioned, the operating environment for skilled nursing facilities in the state of Texas has gotten increasingly more challenging over the last several years. Recent headlines have reported that several operators including the largest operator in the state have sought protection under the U.S. bankruptcy code.

While none of Omega's operators have reached that point, many are experiencing shrinking margins as a result of woefully low state Medicaid rates, a slow but steady erosion in occupancy and a robust labor market causing virtually across the board labor pressures.

As a direct result of these challenges, one Omega operator Daybreak, has requested a partial rent deferral for the second time in the span of approximately five quarters. Accordingly, on January 30, 2019, Omega and Daybreak entered into a second amendment to settlement and forbearance agreement, whereby Omega agreed to defer approximately $4.2 million in the fourth quarter of 2018 and one month's rent or approximately $2.5 million in each of the first and second quarters of 2019.

These deferrals were granted for a number of reasons. First, to allow Daybreak to continue to embark on certain operational improvements, which are already starting to yield positive results in the form of improved operating performance.

Second, to give Daybreak time to reap the benefits of a significant increase participation in the Texas Quick program, which is similar to what other states commonly refer to as a UPL program. Daybreak currently has 16 Omega facilities enrolled in the Texas Quick program, and has recently applied to enroll an additional 31 facilities, which is currently estimated to increase annual revenue by between $5 million and $7 million.

And third to permit Daybreak to potentially benefit in the event of State of Texas passes the Nursing Facility Reinvestment Allowance or NFRA, which is expected to be introduced into legislation within the next several months.

The NFRA legislation would provide for an enhanced Medicaid rate to be used for direct care and capital improvements. In addition, the legislation in its current form, would provide for additional rate enhancements to be earned based upon quality performance metrics, similar to programs already in existence in 43 states. The NFRA bill will provide much needed relief to providers across the entire State of Texas.

While the outcome of the NFRA bill and the benefit and timing of the aforementioned operational improvements is uncertain, we believe the temporary rent deferrals are critical to provide additional time to allow these initiatives to reach their full potential and positively impact the performance of the Daybreak portfolio.

Turning to new investments, during the fourth quarter of 2018, Omega completed new investments totaling $53 million plus an additional $45 million in capital expenditures. The new investments included the purchase of three skilled nursing facilities in Pennsylvania for $35 million and two skilled nursing facilities in Indiana for $17 million.

Omega purchased the facilities from third party sellers and leased them to existing Omega operators pursuant to long term master leases. These transactions bring our 2018 investment total to $470 million including capital expenditures.

Subsequent to the fourth quarter and as Taylor mentioned on January 2, 2019, Omega announced a proposed merger with MedEquities for approximately $600 million. The transaction involves 34 facilities in seven states with eleven operators, nearly all of which are new to Omega.

In addition to further diversifying our operator base, the MRT transaction also diversifies our operator classes by adding in addition to 20 SNF, five behavioral health facilities, three acute care hospitals, two inpatient rehab facilities, two LTACs, one ALF and one medical office building.

Turning to dispositions, during the fourth quarter of 2018, Omega sold 15 facilities for approximately $67 million, this brings the 2018 total dispositions to 86 facilities inclusive of three mortgage loan payoffs, for total consideration of approximately $409 million.

I will now turn the call over Steven.

[Steven Insoft, Chief Corporate Development Officer]

Thanks Dan and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our ALF, memory care high rise at Second Avenue, 93rd Street, Manhattan. The project is expected to cost approximately $285 million including accrued rent and is scheduled to open in late 2019.

Including the land and CIP of our New York City project. At the end of the fourth 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 health care 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 1.19 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 components 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 $45.2 million in the fourth quarter in new construction and strategic reinvestment. $37.2 million of this investment is predominately related to 13 active new construction projects with a total budget of approximately $500 million inclusive of Manhattan. The remaining $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.

[Taylor Pickett, Chief Executive Officer]

Thanks Steven. We look forward to 2019 and returning to our historical net acquisition profile, which should drive FFO growth going forward. In addition, our operators are preparing for and are excited about the October 1 patient-driven payment model, which should improve both patient outcomes and operator profitability.

And with that, I'll open up to questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Daniel Bernstein of Capital One. Please go ahead.

[Daniel Bernstein, Capital One]

Hi, good morning.

[Taylor Pickett, Chief Executive Officer]

Good morning, Dan.

[Daniel Bernstein, Capital One]

I actually just wanted to ask a little bit more about the operating environment in Texas and then maybe overall – if you look at Medicaid mix, it's gone up for you and the industry so try to get some confidence that, Daybreak will recover that the assets you're picking up at MRT are going to do well and so trying to understand how you're thinking about that increase in Medicaid mix how is it change the risk profile or operating profile of skilled nursing assets and how maybe you're thinking about underwriting within that context as well?

[Dan Booth, Chief Operating Officer]

Yes. So we did see a little decline in the quality mix. I mean – ever so slowly eroding occupancy for the portfolio and for most of our operators specifically, it's been flat for at least the last five quarters. Texas specifically we talked about the challenges there, I don't want to go back through that again. But there remain challenges. We think that there is some upside in the future that we've got, as Taylor mentioned, the PDPM coming online on October 1, which we think is going to be a pick up or a benefit for virtually all of our operators in Texas specifically, you've got additional quick money is coming online for certain operators that would like to enter into that program. You've got the potential of the NFRA bill, the nursing facility reinvestment allowance act that we talked about. So – and then again, the operators are just having a block and tackle in terms of keeping their occupancy level, trying to pick up a percentage point here and there and keeping the quality mix at least at this point the same until PDPM comes on. So, that's kind of overall the operating environment that we're dealing with.

[Daniel Bernstein, Capital One]

Okay. Does it change your underwriting at all that Medicaid mix is increasing?

[Dan Booth, Chief Operating Officer]

I think you have to look at it on a case-by-case basis as you underwrite.

[Daniel Bernstein, Capital One]

Okay. And then one more question trying again not look so much as the past, but future and it seems like a lot of the upside is predicated upon your acquisitions, are you seeing bid-ask spreads, what are the opportunities you're seeing within skilled nursing or senior housing, that makes you optimistic that you can continue to acquire assets at reasonable underwriting and reasonable yields at this point?

[Dan Booth, Chief Operating Officer]

Dan, the pipeline is more active today than it was in 2018. And I think the discipline in pricing that we saw throughout 2018 has benefited us coming into 2019 where we're seeing yields in the nines for assets of medium to high quality and I think we'll see more as the year progresses. So we feel good about that. Some of our operators that had been a little less acquisitive at the end of 2017 and into 2018 have more of an appetite. We did a little bit in Q4, which was the beginning of that from our perspective.

So we feel good about the environment and I think there's a reasonable amount of clarity among the more sophisticated operators around the impact of PDPM. So, from an underwriting perspective, that's – that visibility is helpful.

[Daniel Bernstein, Capital One]

Understood. The operators are bringing you a lot of transactions and I think this is the way to read that?

[Dan Booth, Chief Operating Officer]

We’re seeing more. We’re seeing more.

[Daniel Bernstein, Capital One]

We’re seeing more. Okay, I'll hop off. I'm sure there's plenty of questions behind me here.

[Dan Booth, Chief Operating Officer]

Thanks.

[Operator]

And our next question comes from Trent Trujillo of Scotiabank. Please go ahead.

[Trent Trujillo, Scotiabank]

Hi, good morning and thanks for taking the question. If you don't mind just sticking with Daybreak for a little bit, it seemed like up until the release last night, things were trending positively. Yes, they were on a cash basis, but rent was being collected. There was no indication that they weren't collecting – that you weren't collecting, operations were improving.

And then this announcement happens and this is the second time the last year you've had to work out a situation on an arrangement with them. So how can you – I appreciate the prepared comments earlier, but how can you get confident with them as an operator that something like this won't happen. And are you having any more recent conversations with other Texas-based operators about rent adjustments?

[Dan Booth, Chief Operating Officer]

As we said, the Daybreak happens to operate in a very difficult environment right now for all the reasons that we stated. But we do see some upside as we said they have showed some recent operating improvement trends in terms of both occupancy and their payer mix, which is clearly falls to the bottom line. We have them expanding in the Quick program. We have, once again PDPM and once again the NFRA bill that's going to come through Texas in the next two or three months.

We see those all as upside and some or any combination of those, we think will vastly help Daybreak. And that's why we're buying ourselves a little time here with what we did for the first two quarters of 2019 and kind of see where we end up because we'll have a lot more clarity on a lot of these issues that we brought up and where Daybreak will land.

[Trent Trujillo, Scotiabank]

Okay. Do you happen to have – I know you do a break out of your EBITDAR coverage. Do you happen to have that just for your Texas portfolio – for your Texas exposure?

[Dan Booth, Chief Operating Officer]

I don't have it on my fingertips, but we can certainly do that.

[Trent Trujillo, Scotiabank]

Okay. And maybe just one more if you don't mind. So for the EBITDAR coverage bucket below one times cover, it looks like that deteriorated quarter-over-quarter. Can you talk about how you're addressing that portion of your contractual rent?

[Dan Booth, Chief Operating Officer]

A lot of it – there's some folks that sort of go back and forth between the under one times and over and depending on any given quarter, they'll float back and forth. But it's mostly the same group and almost to every one of them, they have a strong credit support in the form of a corporate or individual guarantor, which is why we haven't continue to collect rent from all of those below one to one operators in that bucket.

[Trent Trujillo, Scotiabank]

Okay. Thanks for the time. I'll hop back in the queue and yield the floor. Thank you.

[Operator]

And our next question today comes from Chad Vanacore of Stifel. Please go ahead.

[Chad Vanacore, Stifel]

Good morning. Hello?

[Taylor Pickett, Chief Executive Officer]

Good morning, Chad.

[Bob Stephenson, Chief Financial Officer]

Good morning, Chad.

[Chad Vanacore, Stifel]

Okay. So I'm going to take a minute and just beat a dead horse on Daybreak. So, Daybreak had been an issue earlier in 2019. You deferred some rent, but they caught up by mid-year. Now they're back in the red. So what changed in operations or liquidity that allowed them to catch up the first time and then what changed from mid-year to now?

[Dan Booth, Chief Operating Officer]

I don't think they necessarily caught up. They just started back on paying their contractual rent throughout really all of 2018 and with the exception of the fourth quarter. The third quarter was a difficult one and had expectations of improving certain operational things a little bit quicker than they came to fruition. We are starting to see that pay off now. But it was slower than expected and once again the third quarter was a rough one not just for Daybreak, but for a lot of our operators.

[Chad Vanacore, Stifel]

So Dan, is it really a matter of census and rate or were there some excess expenses that were accumulated in the back half of the year for them?

[Dan Booth, Chief Operating Officer]

Well, it's all the above really. I mean, they've got labor issues, right, that’s running for everybody's operating performance, you've got, not a good rate and obviously the State of Texas. So, those are consistent of what was new was – blip in occupancy and a blip in the quality mix and they do have residual expenses that are running through their P&L. Obviously, they have to keep their vendors relatively current basis so.

[Chad Vanacore, Stifel]

All right. And then just thinking about your MRT acquisition coming up mid-year. MRT had some hospitals especially a hospital that's kind of outside your core. What do you think you'll do with those? And what do you think you'll earn?

[Taylor Pickett, Chief Executive Officer]

We're actually anxious. We've met – we're anxious to be part of – to add that to our asset pool. We've met all of the operators in the MRT world. And we're excited about growing with them and when you think about the hospitals, the big anchor is, is Baylor's, you have a seller credit. And we'll look to continue to communicate with Baylor if they've got pretty deep pockets. So, we'll see what happens there and then on the LTAC side, we are in that business in a small way. So we understand it and we're excited about the relationship there as well.

[Chad Vanacore, Stifel]

All right. Taylor, I mean is that something that you'd look to expand on or just keep the door open?

[Taylor Pickett, Chief Executive Officer]

We’ll continue to grow those relationships. We're looking forward. We like the relationships that we're picking up as part of the merger.

[Chad Vanacore, Stifel]

Got it. All right, then just one last one for me. So last quarter you mentioned you're evaluating about $60 million asset dispositions. You disposed a little bit more than that in the fourth quarter. How should we think about dispositions going forward or almost all materially done or you're just taking the time to reevaluate where you stand?

[Taylor Pickett, Chief Executive Officer]

We're done from a repositioning perspective. I think there might be scenarios where you'll see dispositions that are strategic for different reasons, not driven from asset quality or operator quality, but just driven from repositioning and discussions with operators. But we don't – we're for sure we're going to be net acquirers in a meaningful way in 2019.

[Chad Vanacore, Stifel]

All right. Thanks for taking the questions.

[Taylor Pickett, Chief Executive Officer]

Yes.

[Operator]

And our next question comes from Michael Lewis of SunTrust. Please go ahead.

[Michael Lewis, SunTrust]

Great, thank you. Chad thought he was beating a dead horse on Daybreak. So I guess, I'm really going to beat it with one more question. Just to be 100% clear, you expect to recover this $9 million with $4 million from 1Q, $5 million from the first half of this year, and by the back half of this year they should be running kind of business as usual. And is that dependent you think on this legislation passing or do you think just time that a little bit of relief gets this back on track?

[Dan Booth, Chief Operating Officer]

Actually the deferral for the $9 million give or take is deferred out till 2020. It's not the back half of this year. And the legislation would be hugely helpful, but we also think that the other components that we've laid out will be very helpful, even without the legislation.

[Michael Lewis, SunTrust]

Okay. I have a bigger picture question, you may have seen this by George Hager of Genesis, yesterday speaking at a conference. He said, I'll quote him here, I would argue that the traditional restructuring still nursing has been proven to be a failure, I might argue that your stock performance over the last year argues against that statement. But I think as far as the model of 1.3 times coverage, 2% escalators – do you think that's a sustainable model given all the uncertainty, it seems like quarter-after-quarter there's an operator here or there. What do you think from a big picture perspective about that model and the sustainability of that?

[Taylor Pickett, Chief Executive Officer]

We have a big relationship with Genesis and we like the Genesis management team and George in particular. And he's been through the last couple of years which have been a struggle and I think he's reflecting on that. One of the things I would note that he talked about was demographics and occupancy challenges. And one of the – in the face of occupancy and demographic challenges and a tight reimbursement environment, then there are restructures that can catch up to you and that's happened within the Genesis portfolio.

But our view is long-term 2% escalators, which reflect inflation and tie basically to rates if you look at all of our rate analysis over the last decade, it tracks to inflation. We don't think that model is broken. And frankly, all the demographic work that we've done which we know is here, is going to be a big driver in the right direction.

So from our perspective, we look at the model and we think it makes sense. 1.3 cover isn't where we underwrite today. And we underwrite at 13.5, 1.4. So when you get into the 1.3 world that's a little bit tighter than any of us would like to be. But we build the cushion and knowing that you're going to have ups and downs in this business. So I think the model works fine. I think the broken models were the ones where you saw escalators at 4% and 4.5% that lay outpaced inflation and that does begin to cover. So there's no way to get around that.

[Michael Lewis, SunTrust]

Okay. And I'll sneak in just one more, if I can. I thought you said $9 million to $10 million quarterly G&A run rate. I thought that was $8 million to $9 million a quarter ago and maybe MedEquities changes that – is that kind of the correct run rate for the G&A?

[Dan Booth, Chief Operating Officer]

$9 million to $10 million is the correct run rate. MedEquities is a piece of that $9 million to $10 million. You also had normal inflation year-over-year as well so.

[Michael Lewis, SunTrust]

Okay, got it. Perfect, thanks a lot.

[Operator]

And our next question today comes from Tayo Okusanya of Jefferies. Please go ahead.

[Austin Caito, Jefferies]

Hey good morning. This is Austin Caito on for Tayo. Just a quick question so Daybreak, Texas focused skilled nursing facility. They're kind of – you're seeing some headwinds now. Can you talk a little bit about the decision to buy MRT, like what's different about that portfolio versus Daybreak? Thank you.

[Dan Booth, Chief Operating Officer]

Do you mean – well, I guess, you mean the SNF component in Texas. Fortunately, MRT did a lot of work on that and they basically resolve that issue before we even announced our transaction. There was a portfolio of 10 facilities in Texas that they released to a new operator and reset the coverage and reduce the rent by approximately $5.5 million. So we think that portfolio is fixed. We think it's with a good operating partner and so that one does not trouble us.

[Austin Caito, Jefferies]

All right, great. That's it for me. Thank you.

[Dan Booth, Chief Operating Officer]

Thank you.

[Operator]

[Operator Instructions] And this includes our question-and-answer session. I'd like to turn the conference back over to Taylor Pickett for any final remarks.

[Taylor Pickett, Chief Executive Officer]

Thank you and thanks everyone for joining our call this morning.

[Operator]

Thank you, sir. This conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.