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Omega Healthcare Investors Inc
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Good morning and welcome to the Omega Healthcare Q4 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. 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; and Chief Corporate Development Officer, Steven Insoft. Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplated acquisitions, dispositions or transitions and our business and portfolio outlook generally.
These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission including without limitation, our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.
During the call today, we will refer to some non-GAAP financial measures such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under Generally Accepted Accounting principles as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com and in the case of FFO and adjusted FFO in our recently issued press release.
In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega.
I will now turn the call over to Taylor.
Thanks, Michele. Good morning and thank you for joining our fourth quarter 2019 earnings conference call. Today I will discuss our fourth quarter results, 2020 earnings guidance, and the current reimbursement environment. Our fourth quarter adjusted FFO is $0.78 per share and we declared a $0.67 per share dividend for the quarter. Payout ratio is 86% of adjusted FFO and 93% of funds available for distribution.
Consistent with our planning and prior earnings call commentary, our dividend payout ratio strengthened throughout 2019 and we expect further dividend payout ratio improvement in 2020. Our full year 2019 adjusted FFO of $3.07 per share was above the midpoint of our initial 2019 guidance $3 to $3.12 per share and was the high end of our revised guidance of $3.04 to $3.07 per share. Our 2020 adjusted FFO guidance is $3.12 to $3.20 per share.
We also anticipate a meaningful increase in 2020 funds available for distribution with 2020 per share FAD 4% to 6% higher than 2019 per share FAD. On the reimbursement front, the initial feedback from operators implementing the new October PDPM Medicare reimbursement system has been positive. The revenue side of the equation has been neutral to slightly positive and most of our operators have reported rehab expense savings.
At this time, we would expect a modest and much needed improvement in facility level cash flow as a result of PDPM. In mid-November, CMS proposed the Medicaid Fiscal Accountability Rule MFAR. If finalized MFAR would modify and refine the federal portion of Medicaid funding for two programs commonly referred to as UPL upper payment limit and provider taxes. Indiana, Texas and Utah currently have UPL programs while 46 states have provider tax programs.
Based on our analysis of MFAR and discussions with our tenants and other industry leaders as proposed MFAR would eliminate the incremental UPL funds. For provider taxes, it is likely that most, if not all states are or will be able to become compliant under the provider tax programs. If finalized MFAR will become effective two years after the rule is finalized for the Indiana and Utah UPL programs and three years after the rule is finalized for most of the other states. It is too early to estimate the ultimate potential impact of MFAR on our facilities in Indiana and Texas. As we expect any reductions in revenues will be at least partially offset by expense reductions.
I will now turn the call over to Bob.
Thank you, Taylor, and good morning. Our NAREIT FFO on a diluted basis was $176 million or $0.77 per share for the quarter as compared to $125 million or $0.59 per diluted share for the fourth quarter of 2018. Our adjusted FFO was $178 million or $0.78 per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release and in our supplemental as well as our website.
Revenue for the quarter was approximately $247 million versus $220 million for the fourth quarter of 2018. The increase was primarily a result of incremental revenue from a combination of over $1.6 billion of new investments completed and capital renovations made to our facilities since the fourth quarter of 2018 as well as lease amendments made during that same time period.
One-time revenue collected in the fourth quarter of 2019 related to secure deposits held by OP unitholders due to Omega upon the sale or lease termination of certain facilities. And finally we adopted the new lease accounting standard effective January 1, 2019, which resulted in the recording of tenant, real estate taxes and ground lease income and revenue. The increase in revenue was partially offset by reduced revenue related to asset sales, transitions and loan repayments that occurred throughout 2019, and the timing of cash receipts related to operators on a cash basis.
The $247 million of revenue for the quarter includes approximately $14 million of non-cash revenue, $1.4 million of one-time revenue and only $500,000 related to Daybreak. Our G&A expense was $9.9 million for the fourth quarter of 2019. Interest expense for the quarter when excluding non-cash deferred financing cost was $52.8 million with a $4.2 million increase over the fourth quarter of 2018 resulting from higher outstanding borrowings for the quarter. In September, we issued $500 million of 3.625% senior notes due October 2029.
Our balance sheet remains strong and continues to improve. In September, we entered into an equity forward sale agreement to sell 7.5 million shares of common stock in connection with a $300 million underwritten public offering. On December 27, we settled the equity forward sale agreement generating net proceeds of approximately $296 million. The proceeds were used to repay the majority of the debt borrowed to finance the Encore portfolio acquisition. The remaining of the Encore portfolio acquisition was financed through the assumption of $389 million of HUD debt at a blended all-in annual rate of 3.66%.
At December 31 approximately 88% of our $5.2 billion in debt was fixed and our net funded debt to adjusted annualized EBITDA was 5.5 times and our fixed charge coverage ratio was 4.0 times. It's important to note EBITDA on these calculations has no revenue related to construction and process associated with five new builds scheduled to become operational within the next 12 months.
When adjusting to include a full quarter of contractual revenue for acquisitions completed in the quarter and the five new builds and then eliminating revenue related to asset sold during the quarter, our pro forma leverage would be roughly 5.1 times. For 2020 guidance and modeling purposes, we are assuming the following. On the Encore portfolio the acquisition was completed on October 31st and as a result we recorded only two months of revenue in the fourth quarter of 2019 or approximately $10.5 million in cash rent.
We also assumed $389 million in HUD debt at a blended rate of approximately 3.66% as a result of the acquisition. On the UK joint venture, the investment was completed on December 18th and we financed the joint venture with borrowings on our credit facility. We assume new construction projects will be put into service in accordance with our schedule on page seven of our supplemental information posted on our website. Effective January 1, 2020 Maplewood will be paying approximately $21 million in annual rent related to the Second Avenue project.
We assume revenue from the Daybreak portfolio will continue to be recorded on a cash basis with the rent from that portfolio generating approximately $4 million to $5 million per quarter by the end of 2020 or the beginning of 2021. We assume non-cash quarterly revenue should be between $16 million and $18 million per quarter.
We project G&A of $9.5 million to $10.5 million per quarter. Non-cash stock-based compensation expense is estimated to be approximately $4.5 million per quarter. The variability in our interest expense is primarily driven by borrowings on our revolving credit and term loan facilities as well as LIBOR rates. At December 31, 12% of our debt or approximately $600 million was floating rate debt.
We recorded $822,000 of revenue related to asset sold during the fourth quarter, although not included in guidance additional asset disposition opportunities may occur. Regarding share issuances. In addition to the 7.5 million common shares forward sale agreement, which settled on December 27. We assume in 2020, we will be issuing approximately $25 million to $35 million of equity per quarter through a dividend reinvestment and common stock purchase plan consistent with our recent quarterly issuances. Lastly, based on our stock price and subject to equity market conditions, we may decide to issue additional equity under our ATM or through an equity forward sale agreement to continue to delever and fund potential acquisitions.
In 2019 we issued or sold approximately 6.2 million shares of Omega common stock generating over $225 million in gross proceeds through a combination of our ATM and our dividend reinvestment and common stock purchase plans. Regarding debt issuances based on the current treasury curve and subject to debt market conditions, we may decide to issue additional long-term debt to continue to extend our maturity schedule and reduce our overall cost of debt.
I will now turn the call over to Dan.
Thanks, Bob. Good morning, everyone. As of December 31st, 2019 Omega had an operating asset portfolio of 964 facilities with approximately 97,000 operating beds. These facilities were spread across 71 third-party operators and located within 39 states in the United Kingdom.
Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio during the third quarter of 2019 stayed flat compared to the trailing 12-month period ended June 30th of ' 19 at 1.66 and 1.30 times respectively.
Turning to portfolio matters. As mentioned on previous calls Daybreak's liquidity position and operational performance have continued to deteriorate. As a result Omega recognized less than $1 million in rent in both the third and fourth quarters of 2019. As such Omega and Daybreak have been an ongoing discussion concerning the potential for a consensual and orderly transition of a considerable portion of the Daybreak facilities that are currently leased from Omega. During December of 2019 and year-to-date in 2020 Omega has transitioned five facilities to an existing Omega operator with annualized rent of $3 million and sold one close facility to an unrelated third party for approximately $1 million.
During the course over the next several quarters Omega anticipates transitioning either through releases or sales, the vast majority of Daybreak's existing Omega facilities. These transitions will of course be subject to third party operator due diligence, regulatory approvals, legal documentation and the cooperation of Daybreak. While far from complete Omega continues to expect that upon conclusion of these transition efforts Omega will end up with between $15 million to $20 million in annual rent or rent equivalents.
Turning to new investments, as previously announced on October 31st, 2019 Omega closed on the Encore transaction which consisted of the purchase of 60 facilities for $735 million. The portfolio consists of 58 skilled nursing facilities and two assisted-living facilities located across eight states.
The facilities are leased to two operators. One being an existing Omega operator via three triple-net master leases. The facilities will generate approximately $64 million in initial cash rent with annual escalators ranging from 2.25% to 2.5%. Subsequently on December 18, 2019 Omega closed on its previously announced acquisition of Healthpeak Properties 49% interest in a joint venture with Cindat Capital Management.
Omega's total equity investment was approximately $93 million. The portfolio consists of 67 owned care homes across the UK leased to two operators via three separate triple-net master leases and a single facility development loan with third-party borrower. During the year ended December 31st, Omega made nine new investments totaling approximately $1.6 billion including $135 million in capital expenditures.
Turning to dispositions. During the fourth quarter of 2019 Omega divested 11 facilities for total proceeds of $33 million. For the year ended December 31st, Omega strategically divested a total of 35 facilities for $230 million. Lastly, as of today, Omega has approximately $1.1 billion of combined cash and revolver availability to fund future investments and capital expenditures.
I will now turn the call over to Steven.
Thanks, Dan, and thanks to everyone on the line for joining today. In conjunction with Maplewood Senior Living, we continue work on our ALF memory care high rise at Second Avenue and 93rd Street in Manhattan. The project is expected to cost approximately $285 million including accrued rent and is scheduled to open at the end of this quarter. Including the land and CIP of our New York City project, at the end of the fourth quarter, Omega Senior Housing portfolio totaled $1.6 billion of investment on our balance sheet.
Anchored by our relationship with Maplewood Senior Living and their best-in-class properties as well as Healthcare Homes and Gold Care in the UK. Our overall senior housing investment now comprises 129 assisted living, independent living and memory care assets in the US and UK. On a standalone basis, the core portfolio not only covers its lease obligations at 1.21 times, but also represents one of the larger senior housing portfolios amongst the publicly listed healthcare REITs.
Our ability to successfully continue to grow this important component of our portfolio as highlighted by our 15 Maplewood facilities including the newly opened 90-unit ALF in Southport Connecticut as well as the related pipeline is predicated on coupling our tenants' operating capabilities with our commitment to having in-house design and construction expertise.
Through the same capability, we invested $56.8 million in the fourth quarter in new construction and strategic reinvestment. $38.1 million of this investment is predominantly related to our active construction projects, the remaining $18.7 million of this investment was related to our ongoing portfolio CapEx reinvestment program.
I will now turn the call over to Taylor for some final comments.
Thanks, Steven. This concludes our prepared comments. We will now open the call up for questions.
[Operator Instructions] Our first question will come from Omotayo Okusanya with Mizuho. Please go ahead.
Hi. Good morning gentlemen. I have two questions more on the regulatory front. The first one, of course, PDPM. And I appreciate some of the color you've given about what your clients are seeing. I'm just a little bit surprised about the comment that on the revenue front it's just been flattish to a modest uptick. Just given some of the data that seems to be coming out so far about PDPM and reimbursements versus under RUGs IV?
Yes. So we saw October with a little bit of pickup. November was a little bit more moderated, which was expected as you know because all patients cut over October 1st. And you have the first few days that are higher rates.
So again it's a little early to make the call on that. I would say that our portfolio is consistent with what we've heard from other operators on a national basis of modest improvements in revenue. And remember you also have the 2.5% increase that kicked in October 1st in terms of with the Medicare in general. So it's up a little bit, but it's not anything like we saw at RUGs IV.
Got you. Okay, that's helpful. And then the second part with MFAR. Just kind of curious the commentary period that everyone had to comment on the proposal. And if you just kind of share some color about what kind of comments were being made by the industry towards the proposal. Any sense of how CMS is reacting to those comments and how that could potentially influence whether this finally gets approved or the timing around approval of the proposal?
Yes, I think, there are a couple of - it's still early in the process and this is just one observer of the process. In the rule, there were some commentary about whether the implementation would be after five years versus three. So I think there has been some commentary around that providing more lead time to the industry.
I think the general view is the UPL program is going to be very difficult to retain in its current form while provider taxes, there is the ability to likely retain that. Beyond that the only other comment I would make is, it is a very detailed well-written reservation about that addresses some perceived. I wouldn't even call it uses, but perceived strategies around the current regs that have been refined. And so I think there's at the CMS level they're intent on pushing it along. So I don't think we can sit here and think about it not becoming an active reg this year. That being said we'll see it. There's obviously a lot of road to cover and it's early, but we didn't want to ignore it in this call.
It could be an active reg this year, but the actual effective data implementation date could be three years to five years from now.
Yes. For the most part, you're looking at 2024.
The next question will come from Conner Siversky with Berenberg. Please go ahead.
Good morning, gentlemen, and thank you for taking my question. One thing, one more thing on PDPM. Under the new coding framework, has there been any commentary from your operators in regard to taking on higher acuity patients?
You know I think the initial take was that they would really stick to what they've been doing before. It was more about you know are we capturing the coding of the same patients that they've have been taken on for a long time and that's certainly I think, if there is any shift, it's been more in coding. I'm not sure that they have been actively taking on higher acuity patients.
Right, right. And then so I mean more on that subject on pertaining to the shift to value-based care in general. In New York State they're working on the rollout of the [indiscernible] program. The goal of reducing avoidable hospital usage by 25% over the next five years. Are you seeing any similar developments in the states where maybe you have a more meaningful presence and then how could that relate to SNF admissions?
We're not seeing the broad-based play that you're talking about in New York, but I think the trend is inevitable and we've seen baby steps in different states Ohio in [dual eligible] [ph]. I think you have to expect that's going to continue to evolve across the country. And frankly it's just the way it's Medicare advantage in a different package.
So from our perspective we think that will be a positive for our industry and you'll see shifts out of these higher cost settings whereas if you go through a skilled nursing facility today the cost of taking care of our residents today in a home setting as an example is it would be prohibitive.
Right, okay. Thanks for that. And then last one from me. Just related to the competitive environment for SNF real estate in general given some positive commentary surrounding PDPM. Intuitively there would be some more eyes on your target assets. Are you seeing any pricing pressures that may put some opportunities outside of what you'd be willing to underwrite?
We've seen a little bit of more aggressive pricing in the business, but I wouldn't call it. There is nothing that we're seeing that puts it outside the box of how we underwrite.
The next question comes from Jonathan Hughes of Raymond James. Please go ahead.
Hey, good morning. Just looking at the low end of AFFO guidance, it seems a little conservative and, Bob, you did mention some timing items in 4Q '19 to maybe that quarter is not reflective of the true run-rate. But can you walk us through the scenarios that would get us to the 312 AFFO guidance number. Does that include any non-Daybreak operator transitions or modest rent cuts? I'm just trying to get a better understanding of that downward scenario.
Yes. Well, if you look, we said on the Daybreak, first of all we've said it's - we're assuming they maintain on a cash basis and they only booked in the fourth quarter of 500 grand of revenue booked in the timing of Daybreak the full year. I don't really know Dan gave some guidance of $3 million annually that's already been - that's already occurred that's on an annual basis.
Also we're subject to variations in interest rates, which we don't. As I said earlier LIBOR rates we assume they're flat in the guidance. And we also from a guidance standpoint assume $25 million to $35 million of additional equity because that does happen like clockwork through our combination of our ATM and our other equity plans out there and those proceeds will be used to pay down debt to help delever, but they're dilutive.
The one other comment I would add, Jonathan is that we think we're in a pretty good spot with Daybreak and working through the process. But as you know if things get complicated you can have reasonably significant legal and consulting fees to actually transition and move properties. We've modeled our typical G&A at the midpoint.
If Daybreak turn a little bit sideways and we incurred some costs that we're not expecting that budget, we see that come through. We don't think that's going to be case and the only other comment, two other comments I make about Daybreak is its timeline in terms of the response, one is, we feel comfortable with our range of values, those properties continue to have significant value and it's really an issue from our perspective of timing and we're being conservative around that because it's complicated.
And then the second thing I know everyone saw that we had an impairment run through our earnings that was related to handful of Daybreak assets that it's pretty clear the best transition for them as a sale. So accounting requires you to mark them down to what we think fair market value is.
That being said. This is a fluid situation and it's possible. We'll have assets as we work forward other assets that we'll look at potentially sell that could create other impairments, again it's non-cash accounting. And so the point there is when we think about that group of assets and we think about the run rate that they have created for us the $4 million to $5 million of cash per quarter is where we think we end up but from here to there is we've got to work out that growth.
Okay. That is very helpful. I guess going back to the impairments that you just mentioned, I mean, given we knew the issues and challenges facing that portfolio. Why was that charge taken now, I mean, why didn't we see a charge for that in prior quarters?
It's really, it goes back to the accounting rules, and it's just the accounting rules would tell you at the time you make a decision. And remember this is coming out of a master lease. So at the time you make a decision to carve certain assets out of the master lease and the likely outcome is a sale.
And you have to individually identify the sale proceeds for those specific assets versus allocated values. You pull him out of the pool, you have an accounting event. If you look at that pool from a mass release perspective if we were to re-lease the entire pool at the rate that we think it's worth. There will be no accounting charge. So really goes to the accounting rules of pulling assets out of the master lease and the decision about it's the timing of when those decisions are made.
So it's a little bit fluid and that's another reason and thank you for bringing that up. It's another reason that we want to make it clear to our constituents that as we make decisions about that portfolio and assets potentially other assets might get pulled out, that's when you have to do the analysis for this impairment.
The only other thing I'd note is the vast majority of the Daybreak assets. Our legacy Aviv assets, which were part of a $3.5 billion acquisition and you had a mark-up across all that pool of assets. So some of the impairment you're seeing is a prior purchase accounting mark-up that's going away basically.
Okay, got it. And then maybe just sticking with you Taylor for one more. I appreciate the comments on the regulatory outlook. I asked similar question to this one last quarter but has the uncertainty around this impact of PDPM and now the MFAR proposal have both of those regulatory issues altered your underwriting process and in-turn impacted your external growth trajectory?
Yes, so I would tell you on the MFAR side of the equation. We never underwritten UPL in any deal. So from our perspective, it doesn't change our underwriting because we' never underwritten in any deal we've ever done. In terms of PDPM, we think based on what we're seeing today that the revenue increases are modest than any tweaks that might come out of PDPM should be very modest, but you have to take that into account as you look forward.
Okay. So nothing that's drastically impacting how you look at the properties today?
No. That's a good. That's a fair statement.
The next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. Maybe just following up on that. Obviously, guidance - assume any acquisitions. But what you're seeing in the pipeline today and what kind of volume do you think you could realistically achieve in 2020?
So usually there is a little bit of a slowdown at the beginning of the year in our pipeline and deal flow. I would say we didn't really see that so far in the beginning of 2020 there has been just a steady flow of transactions.
The lion's share of course are coming through our operator, our operators and they're small in size, that we have seen a few transactions of scale. And of course we take a look at those. It's hard to predict. You know at the end of the day, what if any of those transactions actually are ones that we end up underwriting and whether we end up actually being awarded the deal.
So the bigger deals are at this point of the game almost impossible to predict. I will say that we will do our normal transactions with our operators are a few dozen over the course of the year. We will continue to do our CapEx with our operators.
So that's pretty steady area, I don't expect that to change. But the bigger size deals are very unpredictable and listen historically we've had some success. We hope we had a couple of big deals this year, but it's early to tell, too early to tell at this point.
Thanks. That's helpful. And then just in terms of California. If appeal of Prop 13 or split role occurs. What's your understanding of the impact on skilled nursing and also senior housing?
So it's unclear whether it applies to, if it applies to skilled nursing facilities. We've done an analysis. We have 59 properties in California. We did a very high level assume 125,000 event value and just see what that does from a real estate tax assessment perspective. It would result in a little less than $100,000 increase in taxes per facility in California.
Just to give you some perspective. So it doesn't change any of our operators' ability to pay rent. It would impact the cash flows obviously. And again I think there is, it really is going to come down to whether or not skilled nursing facilities are considered residential for income tax purposes, skilled nursing facilities can be considered for residential properties. So there is some debate there about where it falls.
The next question will come from Nick Yulico with Scotiabank. Please go ahead.
Thanks. Hi. I just wanted to first ask on the Carnegie Hill development where you guys are at right now on pre-leasing.
So as I had said last quarter, Nick, and same is true today. We are on sort of a similar target to where we'd be on our suburban properties looking to be - the pre-leasing isn't the word we would use. It's number of deposits, we would have because they translate into leases at the time of the opening, but we are reasonably comfortable, we would be at the 40%, 50% pre-deposited range by the time we open at the end of the quarter.
Okay. And right now I think we had, I mean, when we last talked about this, I think, you are at about like 25% deposits by the - at the end of last year, I mean, you're a little bit higher than that right now closer to 40%?
We're not quite at that number yet, but we anticipate we're not - remember we're not opening for almost another eight weeks. So as you get closer to the opening not only the people become a lot more interested in putting deposits down, the likelihood of those deposits translate to leases is significantly higher. So we're still on similar track that we discussed with the market on the Investor Day.
Okay. And then in terms of additional opportunities, development opportunities with Maplewood. I know you've been actively looking sort of a focus, I guess on the US coastal markets even in the UK or any updates you have there on potential additions to your pipeline with them?
So we are moving dirt on a site in Princeton, New Jersey right now that we closed on middle of fourth quarter. And we've got the typical pipeline with them is sort of four to six opportunities that we're looking at any given time.
Obviously not all of them translate into actual transactions, but because they have historically been a low-volume, high-quality developer operator. Their pipeline has not really stopped the opportunity set, still focused in the markets we're looking at Northeastern, United States, Metro New York, but the opportunities are consistent with what we've seen over the last couple of years in terms of volume.
Okay. And then just going back to Daybreak. I just wanted to be clear what's actually factored in the guidance range. Is it that it's 3 million of annual rent from Daybreak is what is in the guidance range for 2020?
That's correct. It's just slightly under that of the timing of it.
Got it. Okay. So if you get back to that 4 million to 5 million of quarterly rent after the transition at the end of 2020. I guess there is potential that you get that benefit in the fourth quarter that would be additive to your guidance?
That's correct.
Okay, thanks. And then just last question, I guess, is going back to MFAR, if you just add up Texas, Indiana it is 17% of your portfolio. And I guess I'm wondering, are you considering taking any steps at reducing your exposure in those states ahead of what could be seems like a difficult, more difficult environment if that does pass and I guess are the or is the transaction market already starting to factor some of this meaning that it would be difficult to sell Texas and Indiana right now or is it still, you still have a window where you could sell and maybe it makes sense to reduce exposure ahead of if this legislative change happens?
Yes. So, yes, I mentioned earlier we've never underwritten UPL at any of our deals. So from an investment perspective, we're not overly concerned about the elimination of that. To your point though I think any sales in those states any buyer that's rational is going to have to look at that component of cash flow and decide whether it's going to go away or not.
So I don't know that I don't think there is a window to sell now just because the reg sitting out there. I will say
In Texas it's a fair point where we were more optimistic. We got certain aspects of Daybreak because they were able to participate in the QIPP program.
And you'd see it's not huge numbers per facility, but you'd see 100,000 or 150,000 per facility benefit from QIPP that as we think about the road of Daybreak from here to there, that's going to factor into decisions that are made by any potential buyer or any potential transition partner.
Okay. But it's still not - and that's helpful. It's still not - that still - that's not going to disrupt your expectation of the $4 million or $5 million per quarter after transition and you don't think MFAR impacts that number if it passes?
I don't think so and remember Texas, that's really likely a 2024 event. So you have time, but it's a fair point, it will probably be a discussion item, but I don't think in terms of our range it impacts it.
The next question comes from Chad Vanacore of Stifel.
Hey, good morning. I'm going to kind of retread some ground that we've covered already. So thinking about the bridge from 4Q FFO $0.78 get you to the low end of guidance. What gets you to the high end of the guidance, you've got Maplewood coming on. You've got a little bit of income from the former Daybreak facilities. So what other should we - what else should we'd be considering on the income side. I know you've laid out the cost side of things already?
Well, yes, you did mention that Daybreak also part of our guidance is the construction projects that we laid out at the supplemental on page seven. The timing of those could also be impacted. So they closed a month earlier or a month later that also could drive you down in the guidance or up in a guidance. So that's a piece of it as well, Chad. And then - so you have the G&A is - we've increased it based on what we believe our run rate will be, but that's partly an unknown.
All right. And then just on PDPM. So far you say you had minimal impact on providers, but what kind of use of group and concurrent therapy you're seeing across your portfolio.
It has been a mixed bag. We have a handful of operators that have done very little to-date and interestingly those operators tend to have pretty good coverages. So they can - the waiting hasn't cost them money and they're working through how they will implement group and concurrent. And then we've had other operators who were fully prepared and have moved to group and concurrent and they're not running at 25%, but Dan you could probably.
All right. So on average what would that be? Sorry.
We just don't have that enough data for me to throw a number out. I can just tell you that it's somewhere between some operators at zero and some at the high end of 15% to 20% group and concurrent. We just don't have enough data to blend it together and tell you what the whole pool looks like.
Yes, Chad. Most of our knowledge is coming from discussions. We only have one month the October results and some - a lot of November, but that's really all we have in terms of quantifiable information.
All right. Fair enough. It's still early. How about just thinking about the transaction market post-PDPM, pre-MFAR. Have you seen any acceleration, deceleration? Is anybody coming into the market are dropping out of the market any material changes there?
No other than we really didn't you see a slowdown. Normally, we see a slowdown at the end of the year, as people sort of close out their deals. And then there's sort of the pause button before sort of new transactions hit the market. As I said we really didn't see that, but we're not seeing some wild influx of new transactions at this point.
All right. So that's it for me. I'll talk to you guys soon.
The next question is from Daniel Bernstein with Capital One Securities.
Good morning. Back to PDPM a little bit. Do you expect or are you seeing any increase in CapEx funding request for operators maybe able to go ahead and accommodate higher acuity patients at some point in the future?
At this point we have not seen any escalation of CapEx funding requests from our operators to accommodate that. Not sure how much there would be associated with that to be honest, but at this point we're not seeing that.
Okay. And then just some housekeeping. I just want to make sure the Inspir Carnegie Hill, the rents are not being paid on that, yes, right rents get start to get paid when the doors open? So that in the guidance you only have three quarters of rent?
No. They're paying the $21 million affected on an annual basis effective January 1st 2020. So they are paying on that. But as far as AFFO or revenue is concerned we don't report revenues. So it's in FAD, we don't report revenue till it's open.
Okay. So it's technically not in the AFFO and FFO guidance. It is in the FAD guidance.
That's correct.
Okay. And then on the debt side of the equation, you mentioned very early in the call, the possibility of extending the maturity schedule. Looking at the maturity schedule and the debt, you have about 800 million or so coming due in 2022 mostly term loans. Is there some - and some of the chunk of that's over 3%. Is there any term out in guidance at this point for any of those term loans or any other that you might be considering terming out?
No, but we will be looking and I said that in my prepared comments that we'll be looking at the debt market given accommodates the yield curve and the spread on our long-term debt we had some debt due in '23 and '24 that we'll do liability management on to see if we should take that out and as far as the shorter-term credit facility and term loans. We'll definitely be looking at that as well in the next couple of quarters.
Okay, but that's not actually giving guidance one way or the other?
It is not.
Okay. And then one last question from me on the disposition side. Maybe you talk a little bit about it in terms of, I think, a previous question on whether you would want to decrease your exposure to Texas or Indiana. But what is actually the disposition strategy. How are you going about that? Are you looking property by property, operator by operator or are there certain geographies or regulatory risk that you're taking into account when you think about dispositions?
Interestingly it's all of the above. So we're constantly looking at individual properties. We'll evaluate operators and we think about geographies. So the best example I can give you is, we now exited the State of Illinois completely and that was based on geography. We've lightened up in Arkansas and Missouri.
And so Texas from our perspective, just to be clear, we like Texas. Demographics in Texas are great, particularly in the urban, suburban markets. By definition the Daybreak process we will lighten up in Texas because some of those facilities are slated to be sold.
So I think from, I think, the answer is it's all the above, but the vast majority of that work that we felt needed to be done, has been done over the last two years.
Okay. That's all I have. Good day.
Next up is Todd Stender with Wells Fargo. Please go ahead.
Thanks. Bob just to go back to the accounting treatment. Just so I understand maybe a little bit better for Carnegie Hill. You do have the number you get the 21 million in cash payments, I guess, in your guidance. Are you not recognizing it or you are but not receiving the cash just yet? Maybe you could just flush that out if you don't mind?
Yes. So two things. So we are receiving the cash and that hits FAD 100%. As far as on the AFFO side or the NAREIT FFO side that piece of it you don't start recording that piece until they basically take the occupancy, but what's running through in the first quarter will be cap interest associated with that which is approximately $3 million a quarter. So you're getting a piece of it anyway in the first quarter it's just where it falls out. So interest expense is lower by roughly $3 million.
Starting the second quarter assuming a - and I'll just make up the date of - 331 occupancy date just for ease of doing it. You'll take your - the revenue associated with the 21 million will be booked to as revenue, but you won't, but the cap interest will go away.
You also have straight line revenue to place on top of that. I can't tell you the full amount of straight line because that's determined based on the final amount that spent and the exact date it goes into place.
Okay, got it. Okay. So capitalized interest $3 million goes away then you get this quarterly run rate of about $5 million going forward?
That's correct.
Okay. That's helpful. And then the other you've got two other properties under construction. The Middleburg Florida and then Kent, Ohio. They come in, in Q1 as well, but they're not as far along as Carnegie Hill when did they start to cash flow?
For modeling purposes what I've tried, okay, but with the estimated in-service date. I used to just slide it when I do my model slide it a quarter because of plus or minus timing and again they are not large dollar amount.
Our next question is from Lukas Hartwich with Green Street Advisors.
Hey, guys. Lots of moving pieces in the Presidential Election. I'm just curious how you're thinking about the odds of healthcare reform and any thoughts on the potential impact that could impact the skilled nursing industry or senior housing industries from that?
Okay. I think if the current administration stays in place, you won't see, you'll just see a continuation of what we've seen, which is improvements on the regulatory front and stability around the business.
There was a proposal around our Medicaid block grants that's come out of the administration. I'll highlight that in that proposal it's for 65 and under population and has carved out long-term care services. So by definition that proposal doesn't impact our business or if it does it's very, very minimal. If we have a change and we go blue, hard to predict, but the early commentary from my perspective around that is there's no focus on our business as one that would have significant changes and like that Medicare for all just is further expansion of the Affordable Care Act, the Affordable Care Act that impact us.
That's helpful. Thank you. And then just one more, a decent amount of interest income is payment in kind. Can you talk about the underlying health of those loans?
They're fine, I mean, if they weren't, we wouldn't be recording the revenue base of the new revenue recommendation standards that are out there. So there's no issue around those.
Great. That's it for me. Thank you.
The next question is a follow-up from Omotayo Okusanya with Mizuho.
Hi. Good morning. So just a quick follow-up again around Daybreak and the process of potentially selling the asset strapping out the operator. What from there and could create challenges to you actually doing that and doing that relatively easily?
Any new operator and you mentioned sales, but a lot of these will be actually releases, but we need the current operator's cooperation. It's almost if you're not going to have it, you almost have to go through the court system. So we need financial information. They need access to the facility. They need access to the personnel.
They need to file the [indiscernible]. There is a whole host of different things that the current operator would need to cooperate with in order to make this smooth. And that's what we targeted way back when that if we could do it in a cooperative manner. That was the way that we wanted to go down. So that's what we've been doing.
The next question is also a follow-up from Jonathan Hughes with Raymond James.
Hey, thanks again. Given the regulatory uncertainty from PDPM and MFAR. I know it hasn't really impacted your underwriting process, but every view has changed to become a little more positive on sale leaseback transactions like the Encore portfolio since that's a bit less risky than your traditional growth strategy of buying properties and selling new operators at lower return, lower risk, but greater underwriting clarity. Any thoughts there?
I think you make a great point. One thing we've talked about is the relative certainty around this business that we haven't seen for a number of years and you throw the demographic tailwind behind that and it makes it, it makes the Encore type sale leaseback transactions really attractive from our perspective.
Okay. Are there any of those traditional sale leasebacks in the pipeline talked about earlier?
Not of any significance at this point. No.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.
Thanks. Thanks to everybody, everyone for joining us this morning. If you have any follow-up questions please give Bob or Matthew a call. Have a great day.
And thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.