Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Second Quarter 2018 Earnings Conference Call. This call is being recorded.

I would now like to turn the call over to Michael Costa, EVP, Finance. Please go ahead, Mr. Costa.

[Michael Costa, EVP, Finance]

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements and our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, and our expectations regarding our future financial position and results of operations.

These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2017, and in our Form 10-Q that was filed with the SEC yesterday, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

[Rick Matros, Chairman and CEO]

Thanks, Mike. And thanks for joining us everybody. After I make my comments, I'll turn the call over to Talya Nevo-Hacohen, our CIO; and she'll turn it over to Harold Andrews, our CFO and then will go to Q&A after that.

So to kick the call off I just want to note that our guidance is affirmed well likely be adjusting it probably in the third quarter call as we have a little bit more clarity, which we should have at that point on timing of the Senior Care Centers sales process. And I'll update everybody on that a little bit more -- little bit further into the call. CMS issued their final rule of affirming the October 1st 2.4% market basket increase with the implementation of PDPM in October of 2019. The final rule was consistent with the proposed rules. That's obviously a good news for the skilled nursing space.

Moving on to our acquisition pipeline. It’s lighter than usual at this point; a little bit over $200 million, almost all of that is senior housing and a lot of the products that we're seeing on the senior housing side is not stabilized product. We are also seeing their -- until they're being re-traded. None of which, at this point, is leading to an expansion in cap rates, but hopefully that will happen as these trends continue to -- continue which we expect to see.

In terms of skilled nursing, we are not seeing much in the way skilled nursing deals. While operators are, obviously buying all the assets at Sabra and some of our peers are selling, they seem to be holding on to the good assets that they currently operate in. I think everybody in this space is seeing the right at the end of the tunnel, and we’re going to hold on to these assets to get some upside.

The assets that we do see in the skilled nursing space, we just missed out of hand. And the way we work our pipeline, is if we are willing to do any level of work on as well as goes into the pipeline, we see where it takes us. But the skilled nursing deals that we have seen to-date have been pretty unattractive income a turnaround perspective. So we dismiss them out of hand. That's said, we do expect to see more come into market, which is a little bit hard of tailwind. I think with all the changes in the reimbursement model, we’re going to see the smaller traditional, long-term care providers determine that is in their best interest to get out of the business and that will provide some opportunities for our operating partners to grow and for us to grow with them.

We also continue to see private equity despite the re-trading that we’re seeing in some of the recycle deals, we continue to see private equity bid on the senior housing properties, the prices that we think are is much too high. We’ve forecasted that we think are not achievable. So that's sort of the environment that we see today.

Moving on to operating metrics. Our skilled nursing occupancy has now moved up two quarters in a row, so that’s, obviously, a good thing. Its pickup only incrementally, obviously, but I think given the decline over the last few years having two sequential quarters, where occupancy has increased is, obviously, a good thing.

Our skilled mix moved up much more dramatically, 70 basis points to 79.1%. Also we think a good sign that we're getting closer to the bottom here. Our EBITDA coverage was slightly down to 1.27%, but other than senior care centers, we don't see any trends with our operators that causes any concern. And we've been very consistent, I think all along over these past few quarters, talking about the fact that at least from our perspective that we may not be at bottom, but we're close to bottom. And I think the -- some of the decline of the coverage, which is pretty minimal on almost every case, and the minimal increase in occupancy go to that. I make couple of comments about some of our operators.

In terms of Signature Health, we're seeing an upward trend over the last couple of months in coverage and performance. And I think it is expected in a last couple of years for those guys and getting into the conclusion of a restructuring really was a huge diversion for the management team. So these past six to eight weeks is really the first opportunity, kind of long-term to focus on nothing but the business. So we feel good about that.

In terms of Avemer, Avemere’s performance actually has been very consistent. Their problem is the buildings that they have in Washington State, which has exceedingly low Medicaid rates and as much as 25% of the operators or the facilities in the state of Washington are in real trouble. Avemere's strategic focus is given the size of the company and the strength of the company. They're a very healthy company. But they’re going to basically wait this out and hopefully benefit from some of the strong line. That will occur with some of the other operators. And they were expecting or hoping that there was going to be an increase in Washington State Medicaid rates as a result of the these troubles their operators are having, but that didn’t occur. However, they also have a presence in Oregon, and Oregon unexpectedly is increasing Medicaid rates by 5% both this year and next year. So that's going to help pre-avenue of portfolio overall even though they don't continue to have some issues in Washington for a while.

In terms of Cadia, we're pleased with the progress that they are making and transitioning the other facilities that they've taken over for us, but they are struggling to the transition. So we expect that to be another several quarters before their coverage starts to improve with activity could be strong as it is. So there are event-driven things with some of our operators that there are no sort of consistent trends that cause us any concern.

In the case of Enlivant, they've recovered very nicely off of the first quarter flu season. The last couple of months have been their achieved best months that they've had are not just in three of them but they are too their sequential months, since they acquired that portfolio. We don’t think that over the course of the whole year regards to the uptick that they will completely compensate for the hit they took with the flu in the first quarter but on a run rate basis they look really good and they right on plan in terms of meeting our expectations.

Our own managed portfolio is performing well overall with occupancy at 92.1%, and Talya will provide some more detail on that as when I turn the call over to her.

I want to talk about Senior Care Centers just for a minute. So we moved on to another buyer, we started losing confidence in the buyer that we have been talking to close the deal. And we have the construct of an offer with a buyer that we have a relationship with. This is a buyer who was our largest buyer of Genesis assets. We've closed two tranches of Genesis assets with them. So we feel much better about going down the path with this particular buyer rather than the previous buyer. That's said we've been talking about this for quite some time, so now we are getting some other offers logged in well. And there are offers outside of the Genesis buyer who is a private equity buyer and we've never disclosed their name as their request. The other interested parties are all parties that everybody on this call would know Genesis story our event is to -- we will try to work through this with the buyer of that -- with private equity buyers that's been close to Genesis assets with us. So there seems to be very good interest in the portfolio.

We still expect this to be the 2018 event although certainly would be more towards the end of the year than before that. And one other comment I just want to make about Genesis, they had a good earnings call. So we're pleased to see that for them. And on a performer basis their fixed charge coverage is actually 1 to 2, and that's the former for the restructuring not the 120 that we report. We report that actual fixed charge coverage. And one final comment and that's on Holiday, I think everybody saw the coverage there with the new senior deal restructuring there that pulled new senior out of the guarantor sub and that we are running some of our peers were in so that improves their coverage to 1.15.

And with that, I will turn the call over to Talya.

[Talya Nevo-Hacohen, EVP, Chief Investment Officer and Treasurer]

Thank you, Rick. I will provide some color about the operating results and statistics for our managed portfolio. First I will address the properties in Canada then those in the United States breaking up the wholly owned properties from the 172 joint venture properties managed by Enlivant and co-owned by Sabra with TPG.

Sabra owns 10 homes in Canada, eight of which are independent living and two of which are assisted living and memory care communities. Sienna Senior Living, manages eight independent living properties in Ontario and British Columbia and one assisted living community in Ontario. And Sienna's focus has been on building and retaining occupancy and engaging with the local communities in each location to solidify the property's position in the community.

In the second quarter of 2018, the nine properties managed by Sienna saw a 90.3% occupancy compared to 91.9% occupancy in the preceding quarter, with a decline attributable primarily fluctuation in occupancy in one building, which was not fully offset by occupancy pickup to the other eight communities. However traffic is strong coming out of the winter months and has increased in the spring and summer months due to special events and focused marketing efforts. We achieved -- Sienna achieved a 37.7% cash net operating income margin compared to 40.6% in the preceding quarter that's slightly higher than budgeted for the quarter reflecting Sienna's ability to manage expenses.

Moving to the U.S where we have 14 wholly owned properties with two operators Enlivant and Pathway to Senior Living. Results at the wholly owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia and Delaware surpassed expectations in the second quarter of 2018. We’re seeing robust increases in occupancy for the strong hold through to net operating income. Average occupancy rose 140 basis points to 94.1% compared with 92.7% in the preceding quarter, which was itself a 110 basis points increase over the prior quarter. This is 600 basis points higher occupancy and which forecasted for the portfolio to achieve through 2021.

Revenue per occupied unit increased to $5,090 a month, which is 2% higher than the preceding quarter and cash NOI margin was 29%, which is 2.2% higher than the prior quarter and more than a 4% higher than budgeted. In January 2018, Sabra also acquired a 49% interest in a joint venture with TPG, which owned 172 properties in 18 states across the United States, all managed by Enlivant. Enlivant JV properties had a solid quarter with higher rate driving revenue. Average occupancy for the quarter was 80.5%, essentially flat compared to the preceding quarter, but what was happened subsequent to quarter end is important to note.

As of the end of July, occupancy was 82%, which is a pickup of 150 basis points importantly after a tough flu season that drove move outs -- again increase by 375% creating leasing momentum heading into the second half of 2018. Revenue for occupied unit was $4,051 per month, rebounding from the slight dip in the prior quarter and nearly about the Q4 pre-flu season revenue.

Cash NOI margin was 23.8% compared to 25.8% in the preceding quarter, driven by increased medical and workers comp claims and costs associated with new leadership positions. We continue to see positive trends in the Enlivant portfolio, which has exposure across the country, so 172 communities include -- these also communities in stronger market as well as more challenging market experiencing wage pressures or oversupply. In sum, we believe at the Enlivant team has the talent and the tactics to improve the operations of this portfolio as a whole.

I’ll now turn over the call to Harold Andrews, Sabra’s Chief Financial Officer.

[Harold Andrews, CFO]

Thanks, Talya. For the three months ended June 30, 2018, we reported revenues and NOI of $166.3 million and $162.7 million, respectively compared to $64.7 million and $60.3 million for the second quarter of 2017. These increases are due predominately to revenues and NOI generated from the properties acquired in the CCP Merger and the Enlivant transactions.

FFO for the quarter was $104.5 million and on a normalized basis was $109.7 million or $0.61 per share. FFO was normalized to exclude $5.5 million of capitalized costs related to our preferred stock issuance that we wrote-off in connection with the June 1, 2018 preferred equity redemption. This write-off was reflected as additional preferred stock dividend in our current quarter segment of income. Additional normalizing items during the quarter include $0.4 million of CCP Merger and transition related costs and a net $0.8 million recovery of doubtful accounts and loan losses. This normalized FFO compares to $36.4 million or $0.55 per share with second quarter of 2017, with per share increase of 10.9%.

AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses was $98 million, and on a normalized basis attributes including similar items as normalized FFO was $102.8 million or $0.57 per share. This compares to normalized AFFO of $35.2 million or $0.53 per share in the second quarter of 2017, a per share increase of 7.5%.

For the quarter, we recorded net income attributable to common stockholders of $193.6 million compared to $18 million for the second quarter of 2017. G&A cost for the quarter totaled $9.3 million and included the following, $0.3 million of CCP related transition costs and $2.7 million of stock-based compensation expense. Recurring cash G&A cost were 3.4% of NOI for the quarter. We expect our quarterly recurring cash G&A run rate to be approximately $5.4 million per quarter through the end of 2018.

During the quarter, we've recognized a $0.7 million recovery of doubtful accounts and loan losses, which were, primarily related to the collection of $1 million of previously reserved receivables from the guarantors of our former Forest Park Frisco hospital investments. This is offset by $0.3 million of general reserves related to straight-line rental income and loan losses.

The $1 million collection of Forest Park Frisco receivables is excluded from our normalized FFO and normalized AFFO. To date we have collected $2.2 million all of which is excluded from normalized FFO and AFFO. We expect to collect an additional $4 million to $5 million over the next several quarters.

Our interest expense for the quarter totaled $36.8 million compared to $15.9 million in the second quarter of 2017. Included in interest expense was $2.5 million of non-cash interest expense compared to $1.7 million in the second quarter of 2017.

As of June 30, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility, and including our share of the Enlivant joint venture debt was 4.18%. Borrowings under the unsecured revolving credit facility bear interest at 3.34% at June 30, 2018, an increase of 21 basis points over the first quarter of 2018. We recognized an aggregate net gain on sale of real estate of $142.9 million during the second quarter of 2018, as a result of the sale of 32 skilled nursing facilities and four senior housing communities.

During the quarter we made investments of $57.2 million with a weighted average initial cash yield of 7.59%, including $41.9 million invested in four senior housing communities with an average cash yield of 7.7%. These investments were funded with cash held and borrowings under our revolving credit facility. As of June 30, 2018, we had total liquidity of $362.6 million, comprised of currently available funds under our revolving credit facility of $324 million and cash and cash equivalents of $38.6 million. In addition, restricted cash as of June 30, 2018, included $174.4 million held by exchange accommodation titleholders, which may be used to fund future real estate acquisitions.

We were in compliance with all of our debt covenants as of June 30, 2018, and continue to maintain a strong balance sheet with the following pro forma credit metrics, which incorporate among other items aggregate CCP rent reductions of $28.2 million and the $19 million Genesis rent reduction. Net debt to adjusted EBITDA of 5.53x, net debt to adjusted EBITDA including unconsolidated joint ventures debt of 5.99x, interest coverage of 4.14x, fixed charge coverage of 3.88x, total debt to asset value 50%, secured debt to asset value 8%, and unencumbered asset value to unsecured debt of 216%. On June 1, 2018 we redeemed all 5.75 million shares of our Series A Preferred stock price at a redemption price of $25 per share plus accrued in unpaid dividends for an aggregate payment of $146.3 million. As a result of redemption, the company incurred a charge of $5.5 million coming to the write-off of the original issuance costs of the Series A Preferred stock. On August 8, 2018, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. Dividend will be paid on August 31, 2018 to common stockholders of record as of the close of business on August 18, 2018.

Finally, a quick update on Genesis asset sales. We made great progress toward completing Genesis asset sales this quarter closing on 27 property sales and generating gross proceeds of $235.9 million. Currently, Genesis represents 5.4% of our annualized cash NOI. This is down from 8.5% in the first quarter. Of the remaining 19 facilities we’re selling, five are currently under a contract for sale, which excludes total gross sales proceeds of $40.4 million and 14 are under letter of intent with expected total gross sales proceeds of $75.8 million. These anticipated sales together with the previously completed Genesis sales are expected to trigger residual rents to us of $10.4 million per year.

Our agreement with Genesis provides residual rents to be paid to Sabra for 4.28 years following the sale of each facility. We expect one all but one of these sales will occur over the remainder of 2018. The expected delay of one being due to a potentially longer HUD approval process. Ultimately, we expect to have total continuing cash rents from Genesis, including residual rents generated from the sold assets of approximately $20.8 million or 3.7% of our current annualized cash NOIs.

And with that I we'll open it up to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Juan Sanabria from Bank of America. Your question please.

[Juan Sanabria, Bank of America]

Just hoping you could talk a little bit about senior care. I saw that you switched the disclosure to your corporate guarantee. So I was hoping maybe if you can provide the facility level coverage, and if you had the best talent as well?

[Harold Andrews, CFO]

Yes, so you're right, we did. We're now presenting the fixed charge coverage versus the individual facility level coverage. And as you can imagine with the fix charge coverage around 1.02, I think, is what we are right now. The total coverage is now a little bit below one time.

[Rick Matros, Chairman and CEO]

Yes, and Juan, just to give you a little bit more color in terms of sort of our take on the company. Even though our coverage is bit low for quite some time, it was consistent, so in other words it wasn't any better, wasn’t any worse, that was just sort of plodding along, and but it's clearly the instability and lack of management that’s been going on for month now.

They just finally hired a CEO five weeks ago, has clearly impacted the business and even though they have had a senior operator last fall, the execution wasn't happening. And so what we saw in the last couple of months in terms of the performance, just further strengthened our resolve if you will to move the portfolio out. You know, hopefully the new CEO will be able to turn things around, but I think given all the instability in the company and how it's impacting their performance and typically when new CEO's come into situations like that, it is going to be further shake up, at least that always in my experience. And so while we certainly hope that the things turned around, we're just not willing to wait out at this point and way too many advantages to us can move to senior care portfolio out as we talked about, reducing our exposure in Texas, getting our skilled exposure along with the Genesis sales to a point where it actually be lower than it was before the CCP merger. So for us it doesn't change, it doesn't change our path, it just reinforces that we are on the right path to begin with.

[Juan Sanabria, Bank of America]

Okay. Are you still contemplating financing the purchase for a potential acquirer?

[Rick Matros, Chairman and CEO]

Yes, so that was the construct that we are looking at the previous buyer, it’s a construct that we're still looking at. We liked the idea of providing some seller financing for a couple of reasons. One, it will still reduce our exposure dramatically but give us much better debt coverage than the operational coverage that we see today. The new owner time to take the portfolio of the HUD, otherwise the sales process will be a lot longer. And then obviously allows us to manage the impact on earnings and also manage the rate at which proceeds come in. We've got so many proceeds coming in from Genesis to be able to spaces out since we obviously need to redeploy all these proceeds that allowed us to manage that process as well.

[Juan Sanabria, Bank of America]

Just curious on your comments about stabilization in skilled nursing, but at the same time you [indiscernible] support that saying you expect to shake out with a change to PDPM from some existing long-term orders. How do we -- how are those two kind of statements were in line with seemingly some distress coming some long-term owners being positive on the long-term implications of PDPM?

[Rick Matros, Chairman and CEO]

Well, I think most of the tenants that we have and our peers have on to traditional level of top tenants. So I think most of the tenants that we all have, and then if you look end-to-end top of the other guys out there, these are smart operators that have been preparing for the future, having been moving up the acuity scale have strong skilled mix. So you all don’t have very much visibility to traditional model pots, which is still pretty seasoned percentage of the overall of the overall skilled factors. So I just don’t have that much visibility there. So in terms of what you do have the visibility to the tenants at all REITs have HUD and Genesis, there is a separation there. So it shouldn't be that will have with the tenants that we all have. And again, there will be a tenant here that so working through stuff, as I said, we’re not quite all the way there yet. But in terms of the opportunity that our guys will have to acquire some of the older traditional facilities that build and modernize both from the physical client perspective and modernize from an operational perspective then that will be a good opportunity. Does that make sense?

[Juan Sanabria, Bank of America]

It does. And if I'm -- you would mind, one last quick one. Do you have the EBITDAR coverage for Avamere at facility level?

[Rick Matros, Chairman and CEO]

It's slightly below. I don’t have that on top of my head. But it's slightly below the fixed charge coverage. It's still pretty solid. There are no issues with those guys there.

[Operator]

Thank you. Our next question comes from the line of Jonathan Hughes from Raymond James. Your question please.

[Jonathan Hughes, Raymond James]

So Rick, you did touch on the investment landscape at the start of the call and mentioned Senior Care potential buyer, would that be a single portfolio dealer or piecemeal over the next several quarters? And would you be open to selling those 38 properties to multiple parties if that one single buyer didn’t take them all?

[Rick Matros, Chairman and CEO]

That’s a great question. So it’s a single portfolio deal. The reason we haven't showed yet in our process is because if it seems to be a lot of interest in the single portfolio. If for some reason, we started believing that we won’t get a single portfolio deal done, the reason to run a process would be exactly that. Learning a process would allow us much more easily to break the portfolio --to say three or four pieces whatever happens to be, similar to what we did with Genesis. So if you think about Genesis, that’s exactly what was happened with Senior Care. Clearly if we can sell the entire portfolio in one piece, we can get that done more quickly than with the greatest certainty of closing then if we are selling it in multiple tranches.

[Jonathan Hughes, Raymond James]

Okay. And then so just looking at coverage at Senior Care, it's about 1x, so say if you sold that on some implied market level say at 1.3x or 1.4x coverage that would suggest say it like $400 to $500 million of potential proceeds. Is that the right way to think about it and the ballpark of regional reasonable expectations, if you can comment on that?

[Rick Matros, Chairman and CEO]

Sure. I mean, I think, we have talked about before, you were seeing offers and prices that were very attractive given where assets trade in Texas, and we still feel like the offers that we are looking at are also very positive. I think part of the challenge that we've had and we're continuing to work through is identifying where are those operations that ultimately be relative to stabilized management team in order to determine an appropriate value. So your thinking is right in that analysis. The question is, given that the performance that they've had in their operations to date identifying where the proper run rate is going forward? And that's part of what we are working through with the new buyers we're talking to.

[Jonathan Hughes, Raymond James]

Yes, okay. And then just one for Talya on Enlivant. I'm sorry, I didn’t get all the numbers taking down that you mentioned, but it sounded like you were saying occupancy within that JV is three years ahead of underwriting. Did I here that correctly?

[Talya Nevo-Hacohen, EVP, Chief Investment Officer and Treasurer]

Occupancy in the wholly owned properties is that well ahead of what was budgeted for now and for several years as we did that. It’s not the joint venture. So the joint venture is basically had a dip with the flu season and has emerged from that breath and has actually recovered hopefully. So subsequent to the close of the quarter, they've actually moved up additional 150 days just points to 82% occupancy there.

[Rick Matros, Chairman and CEO]

So the JV is basically where we expecting to be and just take a little bit longer because of the flu season and in the owned portfolios ahead of where we thought it would be.

[Jonathan Hughes, Raymond James]

And then, thinking with the JV, just one more and then I'll hop off. But I noted that it attached to your 100% ownership there over the next couple of years. Could that timeline move up, obviously, as you've got these proceeds coming up from Genesis and potential Senior Care Center sale, I mean, your views on that industry were kind of bottoming and balancing along wouldn't maybe gaining full ownership earlier and catching more that upside makes sense given you are going to have all these proceeds coming in?

[Rick Matros, Chairman and CEO]

It's certainly a possibility. One thing I would add to that Jonathan is that if you remember, there is floor in what we can and what we will pay for that. And so to some extent, if you were to trigger it really early, you are not going to be -- you're going to be having a lower yield until that you achieve that higher level. So there is that fees to consider is that like we're immediately going to capture every bit of upside based on performance today if that make sense.

[Operator]

Our next question comes from the line of Chad Vanacore from Stifel. Your question please.

[Chad Vanacore, Stifel]

I’ve just got one for you Rick. You've shown some relevant enthusiasm for skilled nursing or maybe a little more cautious on the senior housing side, I’ll say. Are you expecting senior nursing operators or skilled -- sorry, skilled nursing operators improved performance in second half of '18 versus first half this year? And then where do you see the largest gain with the occupancy rates, managing costs or something else that we’re not considering? What do you think is really going to drive the improvement?

[Rick Matros, Chairman and CEO]

So I don’t think we’re going to see it in 2018. That’s just consistent; I think all along saying that this is a 2019 event and it could be couple of quarters in the 2019. I mean there’ll be some incremental improvements due to the market basket. We always love October in that business because it’s a 31-day month and it’s a one month -- the first month you get the market basket effective at all. So that’s our favorite month of the year. But other than that, I think it’s more an event or an improvement that we’ll see next year, once you're going to have all the operators preparing for the transition to PDPM. So I think it’s a lot of parts left to second half of 2019 as of yet. The improvement is going to be, I think primarily in occupancy. I think the industry by and large did a really good job and always has done a good job controlling costs. Obviously labor has been an issue that labor has always been an issue. It’s exacerbated by the fact that you don't have a business at 90% occupancy. It’s dropped to down to the low 80s, and so there's been a no way to hide when your occupancy is that low. So as occupancy starts to improve next year then that will make it easier to manage labor expenses, because you will have more of that revenue to work with. And in terms of rates, that's probably more of 2020 event, simply because PDPM is going into effect October 1, 2019, so in the fourth quarter of 2019, we should start see some changes in mix and rates as a result of that, which you’re really not going to have a full impact of that, obviously and so you get 2020, could be formal one quarter in 2019. So to recap, we see improvements coming in 2019, probably a couple of quarters in 2019, or we think things will continue to stabilize as we've been seeing after that point the initial improvement will come from occupancy. The secondary improvement after PDPM goes into place will be on mixing rate.

[Operator]

Thank you. Our next question comes from the line of Richard Anderson from Mizuho Securities. Your question please.

[Richard Anderson, Mizuho Securities]

So if I can maybe draw another comparison between what you’ve done with Genesis and what you’re thinking about your Senior Care. The sentiment towards the skilled nursing has at least had gotten better over the past 6 to 12 months. How would you describe your conversations for Genesis assets that have yet to close that you're still negotiating relative to those that happened in 2017? And how is that playing into your process with Senior Care? Do you find that people are a bit more sanguine towards the space and that's helping pricing to some degree?

[Rick Matros, Chairman and CEO]

Yes, I think, it’s fair to say that because most of the buyers are buyers that are already in the business. They're either operators on the ground or they're finance sources like the one that we referred to you that we’re working with, that are affiliated with other operating entities. So they understand the business really well. And compared to 2017, where we had no idea what was going to happen with reimbursement. There was all that conversation about RCS1, which we thought was an improvement, but as it turned out much more complex than PDPM is going to be

So now that we all know we are in the latter half of 2018. And even with some of these slippage and coverage that you saw really across the space very much this earning season, it's really slow down quite a bit. And so people see that, they understand the business, they know it. So they feel more positive about it.

So, you know, I think in terms of senior care centers, they see a business that even all those positives aside, should organically benefit from stronger management. And then if you add those other positives to it that are more function of what's happening in the environment. Then that makes that portfolio more attractive than I think it would've been in 2017.

[Richard Anderson, Mizuho Securities]

Okay. You mentioned private equity has been aggressive towards senior housing, which is sort of locked you out of some of those deals. Would you be able to make a statement similar or is there anything to extrapolate to the skilled nursing side as it relates to private equity? Or is that there's that's just a completely different animal for them?

[Rick Matros, Chairman and CEO]

Yes, I think, it’s a completely different animal that's I was stating there.

[Richard Anderson, Mizuho Securities]

Okay. That’s all I need here. And as far as the timing of Senior Care, to what degree are you -- I understand that you had a buyer in place. But are you also, perhaps not that you're dragging your feet, but you also want to line up a use of proceeds. To what degree are you sort of a participant or sort of dictating the process because you as a REIT you want to make sure that you have a use of proceeds at least to some degree line up over and above the solar financing idea?

[Rick Matros, Chairman and CEO]

I wouldn't say we're dictating the process. We certainly have a preference in terms of which buyer we're focusing on currently, a buyer that is more amenable to the structure that we want, which does allow us to manage earnings -- better manage proceeds coming end of deployment of those proceeds. We prefer to work with that buyer. That's said, we want to move the portfolio out, and that's the number one priority. So we're not going to be sort of stubborn about it. And if you turns out as a best buyer is a buyer that just wants to buy the whole thing for cash, then we're not going to -- we wouldn't dismiss that because we prefer to sort of managing this whole thing better. And I think we have an opportunity to manage it better. And look most everybody is going to want to take this to HUD because, as you know, the long-term rate is just phenomenal.

So, unless someone's really got that kind of access to cash to pay you for all cash, and can live with that for awhile because the HUD process that's going to take -- it could nine months, it could take 15 months, it's only a matter of when, not if, but when measured in HUD standards. You know it’s like a dog's life. To the extent that we can be helpful which also, obviously helps us we would like to do it that way.

[Richard Anderson, Mizuho Securities]

And last question for Harold, when you think about the Genesis and the residual rent that you're going to book in the next four plus years, does it actually work out from a value perspective better for you, so you get lesser proceeds but you get this income stream over the next four years? I'm wondering if $15 million less proceeds is less valued in the 10, I imagine it is, I mean, is that work better for you as a company to have those residual proceeds and lesser proceeds of residual rent and lesser proceeds from the sales at the point of the event. Is that a true statement?

[Harold Andrews, CFO]

I think you could defiantly make that argument Rich, and that’s precisely why we structured it that way because our negotiation with Genesis was they hadn't asked of a rent cut. And we knew that rent cut was going to get into the coverage they were looking for, but we felt like there's some risk there than our ability to exit asset at that coverage. And so we said we will give you that rent cut now, but what we're going to ask in return is that we'll take any risk on selling assets, we're going to be basically made whole for many lower purchase prices we get because buyers want more coverage. So the intent was to at least at a minimum making us neutral, but I think you can make it argument that is actually positive to us, yes.

[Operator]

Our next question comes from the line of Tayo Okusanya from Jefferies. Your question please.

[Tayo Okusanya, Jefferies]

On the West Coast. Question for you Rick, I mean, if you take a look at the mixed data and where occupancies are kind industry-wide? You kind of just take a look at that occupancy you will make some assumptions about mix of things like that. And it just strikes me that there have to be a lot SNFs out there with SNF operators who are just not making any money at this point. So when you kind of take a look at that, I guess you are talking about things getting better in '19, but when I take a look at just that numbers, it strikes me that there should be a fair amount of mom -- whether it's mom and pops whoever it is, who are currently in a lot of trouble that may not make it to '19. Do you think that's a fair statement?

[Rick Matros, Chairman and CEO]

So I take a couple of things Tayo. I look at that SNF data with a little bit of skepticism on from that only because this is a really unusual year in terms of the flu season. Historically, senior housing gets slammed by the flu and skilled nursing operators benefit from the flu. So I think as everybody now know this string was so bad, I think, would it be here that only 20% of the people that receive vaccinations actually worked. And so for the first time this year we saw skilled nursing operators restricted missions rather than admit these patients because of their high level of concern with admitting patients would cause basically an epidemic and able to control that backdoor. So we've never seen that before. So we think that the decrease in occupancy, I think they showed, sequential occupancy decrease in fourth quarter and first quarter, we think it was because of a flu season. So I’m sure that you can continue see that, we'll see obviously. But in terms of the mom and pops, yes, I agree with you. I'm not sure you're going to see a bunch of little bankruptcies, but could most of these guys have little or no debt service, but you are going to see them selling at facilities because you are absolutely correct. It's a still a high percentage could be -- the amount of pops could still be a third of the industry. And so that is a legitimate component of the mixed data that brings the numbers down. And it’s hard to see those guys making anymore. I think it's been getting worse every year because if you think about it, these are primarily Medicaid shops. And so really going back to what 2006 or '07 was the last time that you saw Medicaid rate increases, I'm talking on an average basis. It's obviously different in every state. But prior to 2008, you were still seeing 3% Medicaid inclusive kind of all over the place. And since then it's been anywhere it was sort of flat to the recession and it's sort of 1% to 1.5% on an average of vacancy across 50 states since then.

So when you look at your costs increasing and you are not seeing much in the way of we have or complex nursing or anything like that, we are going to get more Medicare than higher rates, we are trying to exist on a declining revenue base your cost increasing. So, and I think the fact that for a lot of these mom and pops, if the generation of business they've only vacant for a really long time they don’t have much of anything in the way of debt service, so that's allowed them to survive. But this shift to PDPM -- it's a big shift, right, I mean you're talking about -- you're going to change how you're doing business in mix of business, how you build you got to make software changes, it really is going to -- its considerable if you think about an operator who just see one things one way forever and ever. It’s really a lot to think about. So I just think that that's going to create more, as I said, more opportunity and these are the guys that are going to be drilling -- that will be -- [indiscernible] I shouldn't think going under, but when we would get out of the business however that happens.

[Operator]

Your next question comes from the line of Daniel Bernstein from Capital One. Your question please.

[Daniel Bernstein, Capital One]

You have a lot of buyers looking at your assets on the Senior Care side. Does that -- and pricing seems to me probably pretty good out the market right now, so cap rates have been backed up. Is it -- I think you want to go ahead and kind of reevaluate your portfolio even further and maybe sell some more assets at this point?

[Rick Matros, Chairman and CEO]

Not really. I mean we have operators that are looking at selling some individual assets within their portfolio where Avamere makes seller close the building, you've got [Indiscernible] is in the process of moving for their assets actually to another operators. So we actually may wind up re-trading with the different operator. So we've got a number of those situations where it's just the tweaking existing portfolio. But as I look at our tenants as sort of a whole -- we haven't looked at any particular tenant beyond what we've already talked about and said we just don’t confuse guys can make it or we're concerned about their making and we just don’t want to wait as long as that's going take to them to make it. And so we want to move them out of the portfolio. So I don’t think, again other than tweaking things here and there, which is as much the operator wanted to do [Audio Gap] as it is -- I just don’t see much else happening.

[Daniel Bernstein, Capital One]

And then on the pipeline, it sounds like it’s mostly turnaround value add type of properties in the senior housing side, and maybe from the toe -- it didn’t sound like you’re too interested in those assets. But if you were, would you consider moving that to RIDEA structure, should we expect maybe for you to do more RIDEA or some of the kind of operating joint venture type of structure in the senior housing space?

[Talya Nevo-Hacohen, EVP, Chief Investment Officer and Treasurer]

So -- this is Talya. I would suggest that to you that RIDEA is very situation-specific. And from our perspective that could be an opportunity but there’s nothing that we’ve looked at so far that we have seen and sell was worst of risk of turning into RIDEA structure, and because we believe that there’s a fairly achievable turnaround in a reasonable time horizon. A lot of the so called value-add and turnarounds are properties that have reached -- and not very robust occupancy level and revenue level because of the issues around over supply and that is going to take time to resolve this out.

[Rick Matros, Chairman and CEO]

That’s why I made a comment, I think, in my quota of the press release the upside in senior housing, we think lags behind skilled nursing because you do have that over supply issue, which outside of the stated factors just doesn’t exist in skilled nursing. So it’s just going to take longer and probably should in that role. The other dynamic, I think, to Tayo's question maybe, the other dynamic that we’ve really liked is not just the increase in occupancy that we see skilled nursing and the reimbursement system, but you’re going to have continuing decline in supply as some of these mom and pops continue to get out of the business. And existing operators buy those facilities; they’re going to have to modernize those facilities. And when they modernize those facilities, they’re going to be taking a lot of beds out of service. So you may buy 45-year -old 100-bed facility by the time you modernize it and have more semi-private and private and more common space that 100-bed building maybe 75 or 80 beds. And so you’re going to see a lot more of that over the next few years. So I think the demographic trend combined with decline in supply bodes really well for the skilled nursing space.

[Daniel Bernstein, Capital One]

Are you going to be willing to take the risk to buy those medicated heavy mom-and-pop assets and then put money into it, right upfront within a lease or you think it may be you’ll help fund operators via loans or some other kind of capital to get those assets to a right place and then maybe buy the assets later on. Just thinking about that over a couple of years that consolidation might work?

[Rick Matros, Chairman and CEO]

I think we’ll be willing to take the risk. One, I think we're pretty good at assessing that list. But for us it’s going to come down to -- it’s not really enough of lessons factored even at old skilled nursing facility, if it’s in the right market and has the right operator. So sometimes you go into those things and you may structure an earn-out or its not earn-out or something like that for the operator can get in there at a lower rent and then you have an opportunity to have a higher rent as the business improves. But I don't see a kind of it what we're assuming here today. Funding an operator and then buying it later on, I think we go in with the operator and watch them turn that around. So and -- I think for certainly for me and in my experience and some of the other folks in our team who have been in the operating world for a long time, my whole career was built on turnaround. So we really liked those kind of opportunities. We haven't seen very many good opportunities like that recently, but I think it's fair to assume that we may see more of those going forward.

[Operator]

[Operator instructions] Our next question comes from the line of Smedes Rose from Citi. Your question please.

[Smedes Rose, Citi]

Earlier in the year you had talked about potentially refinancing, I think, up to $700 million, and it got kind of postponed, I think, due to a split rating. And I'm just wondering, if you could just talk about any recent conversations or upcoming conversations with the rating agencies? And maybe how you're thinking about refinancing opportunities at this point?

[Rick Matros, Chairman and CEO]

Yes, sure. So yeah, the answer is we definitely were looking at it back in November once we completed the Care Capital transaction. And that time, the market was such that we had our eye on being able to refinance our existing bonds and have some nice accretion from that transaction given where interest rates were. Since that time, interest rates really haven't cooperated both kind of on a macro basis -- and it improves some of you more recently. But also in some specific situations around some of things with some of our peers they had around tenant coverages and things back in November. That really forced us to put that on the back burner. So it wasn't specific to being split weighted that we pulled back. I think where we're at today is as we think about what's going to differentiate us further from some of the expectations that where a skilled nursing REIT, which again, when our skilled nursing exposure was over 70%, it was pretty hard to argue that that was a comparison we should be made.

So I think the thing that we're looking at now is as we continue to divest some of our skilled nursing assets based on recent conversations with the one rating agency who’ve currently does not have this as an investment grade rated company. Today it will go a long way to getting us over that hurdle and become investment grade, so we're no longer split rated and thereby removed kind of that issue for investors such that we think we could have better execution and further differentiate ourselves from being a SNF REIT.

So our position right now is that we're going to be opportunistic and will continue to have conversations with the agencies as well as educating the high grade investors onto the Sabra story and the progress that we're making. And then we'll look for the opportunity to do so, because again, we're not compelled to do anything here in the short term given we've got a couple of years before those dogs come do. And so we think there are enough catalysts in our strategy that will allow us to further improve our spreads and our comparisons to some of our peer companies. And get something done that’ll be accretive.

[Operator]

Thank you. Our next question comes from line of [indiscernible] from Green Street Advisors. Your question please.

[Unidentified Analyst]

I just had a quick one. The gap between skilled EBITDAR and EBITDA coverage has widened over the past couple quarters. I guess, it looks like management fees are going up. Can you talk about that? Is that just noise or is there something structural exchanging there?

[Rick Matros, Chairman and CEO]

No, there is nothing structural at all. There shouldn’t be much noise there. So as we take that comment off-line and take a look at what you're looking, so it's nothing has really changed.

[Operator]

Our next question comes from the line of Todd Stender from Wells Fargo. Your question please.

[Todd Stender, Wells Fargo]

Rick, you made a comment on turnaround opportunities. I don't know if you've addressed this. But does that strategy work with the senior care portfolio? You might be taking a write-down, should you sell it, but what about if you swap down the operator? Just getting a sense and if you like the real estate or maybe there is some CapEx you got to put in. What’s your thoughts?

[Rick Matros, Chairman and CEO]

No. That’s actually really good question. We thought about it. But Texas is one of the tougher skilled nursing state. We have other operators in Texas. And they're actually -- they're holding their own, and which is in [indiscernible] contract, I think, continued care centers, but they don't have many buildings there. So I think for us, look, resell this and some new operator goes in there and turns that around kind of more powerful, really our attitude. We want to see everybody to be successful in the business. But I think for us, Texas is a big state for us even thought there is a huge lobbying effort going on to having Medicaid system change in the fall of 2019. It failed last time, and so -- even though, I think, the efforts good. We don’t know what’s going to happen there. There continues to be new buildings going on in Texas. So maybe if we had 10% exposure there to the state and 17% or 18% whatever it is, we give a little bit differently. But it’s just a lot of exposure to one stage that's got some challenges, but again it's a fair question because we have operators in Texas and doing lot better than Senior Care Centers. But I think for us to get our skilled mix staff down into the mid-50s, gives us a lot more play even in terms of skilled opportunities if we see some operators that we really like so that we can do some more those kinds of deals without really impacting our exposure. I just think there is too much benefit to us there and if you go back to look at -- if you go back and look at how well we traded before we kick up the sales that's over 70%, even though we got a lot of benefits out of all those transactions, we just think we better off staying on that path.

[Todd Stender, Wells Fargo]

Thank you. And just kind of a high level question, private equity has proven to be the primary buyer of the senior housing, especially with the REITs are disposing of. What changes that -- what get the REITs back in the market? It just seems like a longer cycle? Do you have to see operator distress within the private equity portfolios going into next year and beyond? Is it a cost of equity that the REITs have been get a better advantage of and work through other disposition so far? What brings the REITs back in and maybe pushes private equity out?

[Talya Nevo-Hacohen, EVP, Chief Investment Officer and Treasurer]

This is Talya, I'll tell you, I think on the private equity side what pushes them out is the one -- it's at least two things. One is change in the cost of debt is going to make a difference on their leverage IRR outcomes. And then two, I think the private equity has been behind a lot of the development initiatives. And I think that exists that don’t need expectations is going to have a significant chilling effect on outgoing investments by private equity. When that starts to really prove out in a significant fashion? We're still waiting to see that, but I think it's starting to happen. I think the REITs have been collectively on the sidelines watching this and waiting for to play out poised with prudent portfolios and ready to move forward more strategically at a better cost.

[Rick Matros, Chairman and CEO]

And the other comment I've made Todd, in terms of your reference the cost of equity to the REIT, I don’t really see that as a determining factor because the way private equity is valuing these businesses on future earnings that I think -- for most of it, we just don’t see as realistic. That's not really the cost of equity issue. I don’t think even if all things were equal that you would see the REITs paying up the way some of these guys are paying up, and not just on assets that are leasing up around stabilized assets that you look at them and there is no reason to believe that that hockey stick and revenue improvement ever going to occur. So I just think -- I think REITs are lot more disciplined. I think that private equity just has ton of money as they have to put to work. So but I think it's more focused -- more mater of discipline in the part of us and our peers.

[Operator]

Our final question is a follow-up from the line of Juan Sanabria from Bank of America. Your question please.

[Juan Sanabria, Bank of America]

I just have two quick ones. Rick the improvement that you expect in skilled nursing coverage in '19, is that something fundamental driven mix shift or is that more just calling back the lost occupancy from the flu this year?

[Rick Matros, Chairman and CEO]

It's not necessarily -- its occupancy -- not necessarily calling back from the flu. The occupancy has been dropping since last 2013. I think we're going to finally start to see some in the benefit of the demographic. And I just think it comes in a little bit sooner to the skilled space and the senior housing space just because of a health issue. And if you go back to -- when the boomers were born and you're sort of run that thing forward, it starts becoming apparent in terms of the admissions, we think in 2019. And it's not going to be a big wave. It’s going to be incremental. But incremental -- when you've got occupancy as well as it currently exist in the space, incremental is really a big deal because your costs are currently fixe. You've no levers left to call, you have no place left to hide, when you get that extra patient -- well that execute patient, and that's just the straight pull through to the bottom line. So we're not anticipating a big move demographic ways, but we think there is going to be incremental improvements in the demographic starting sometime in 2019. That will then continue on a regular basis.

[Juan Sanabria, Bank of America]

Okay. And then maybe just lastly a question for Harold, just curious is to why you guys don’t deduct CapEx to arrive at the AFFO? And if you could just give us a sense of what you’re budgeting from a CapEx perspective for the RIDEA portfolio?

[Harold Andrews, CFO]

Historically we just not have any significant CapEx. So we’re going to take another look around the definition of AFFO. I know a lot of people include CapEx because -- as it becomes more material. It is somewhere between -- and I think it’s somewhere around $10 million a year, is kind of our budget for the Enlivant portfolio and the CapEx. So it’s just a matter of circumstance one.

[Juan Sanabria, Bank of America]

And that $10 million -- your pro rata share for the joint venture?

[Harold Andrews, CFO]

No that’s the full amount. Our pro rat share would be half of that.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I’d like to hand the program back to Rick Matros, Chairman and CEO for any further remarks.

[Rick Matros, Chairman and CEO]

Thank you. And thanks for joining us today. We appreciate it. As always we’re available for follow-up conversations, we’re very accessible. And if we don’t talk to you in the near term, we hope everybody enjoys remainder of the summer. Thanks.

[Operator]

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.