Sabra Health Care REIT Inc
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Sabra Health Care REIT Inc
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Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Third Quarter 2019 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.
Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, our expectations regarding our financing 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, 2018, and in our Form 10-Q for the quarter ended March 31, 2019, as well as in our earnings 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 the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the 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.
Thanks, Mike. Happy Halloween everybody. We close our new credit facility at $2.2 billion. Recently, we also in our second investment grade bond issuance following the quarter end that one was dramatically more successful than the first one, simply because it was the first one that was 10-year paper versus five-year paper on the first, and really was the function how well the ones that we did in May have traded up since then. So we feel really great about that and certainly a tangible benefit from the merger and the other activity that we've gone through.
We've also brought our debt-to-EBITDA down to 5.7x, that's inclusive of the unconsolidated JV. By year-end, we'll be at/or below our target of 5.5x, positioning us to go into 2020 with the strongest balance sheet since the inception of Sabra.
We finally had some investment activity of $20 million, which includes our first investment in the addiction space 2 facilities. We're working on some other opportunities there as well. We'll see if those things becomes realize or not, but we feel good about this space as most people know it's relatively new space. Reimbursement with insurers is quite good. There is specialized Medicaid rates as well as number of states. None of our peers are in the states at this point, its very fragmented space, not easy to find deals, but hopefully for Sabra being the first ones and we'll develop reputation being the capital partners to folks and that space has lot of tailwinds and we'll also makes a lot of sense relative to our investment in the behavioral space as well, we continue to look for opportunities there.
We start we see some activity in skilled nursing for the first time. Our pipeline is about $600 million. Our acquisition pipeline still primarily senior housing, but again, we are starting to see some skilled nursing opportunities. We anticipated that for a while, hopefully, this is the beginning of something good relative to some opportunities there.
In terms of Senior Housing, pricing still pretty high. Although I would say that the bids that we lose are, we're not losing by the same margin that we've lost before. So may be that's the signal for pricing getting a little bit better, but I think, it's too soon to make any definitive statement on that and it's primarily the private equity funds bringing most of the competition there.
In terms of environment, we're newbie for the process now, exploring new JV partners as well as potential options as well. We expect to have our decisions made and a deal done by year-end it will take some time to close after that, because the change in ownership will also trigger changes of ownership from a regulatory perspective, so it will take several months after we announced what the deal is that has to happened. So we can't get into specifics on what we're negotiating right now, because we're in the middle of those negotiations, but we feel good about the process and where it's been going and where we think those conclude at.
Our skilled operators, they're about month in -- well, actually, a full month in right now on PDPM. No disruptions with any of our operators. They continue to feel really good about the opportunity. They're being pretty cautious relative to projections. At this point, they're going to little more time under their belt. We are seeing some signs of some better rates, but again, it's very early. So we're just pleased at this point. I think that all of our operators have transitioned into PDPM without any disruptions to their operations.
Now moving onto our operating results. Our EBITDAR coverage was flat sequentially to skilled nursing and senior housing. Our hospital coverage was up. I’ll remind you on the hospitals, most of our hospitals are behavioral hospitals, we have some children hospitals and that comprises the bulk of our hospital portfolio. We have one acute hospital, dental pack and IRF as well that is primarily behavioral and a couple of children's hospitals.
Our same-store occupancy ticked up for skilled and for senior housing. It was down for hospitals. The population that we have in those – in the specialized hospitals lot more dynamic growth to start floor activity, how short the length of the stay is and sometimes the unpredictability that length of stay, but our operators are doing really fantastic job managing extensive, so you see strong coverage sometimes regardless of occupancy moving up and down.
Of our top 10, a notable drop was Avamere. I know if everybody sort of picked up on that. That drop was specifically due to their ancillary businesses. Their facility performance was stable. They went through a complete overhaul of their IT systems in their ancillary businesses. And unfortunately, I certainly seen as an operator when you go through a huge IT conversion, sometimes take your eye off the ball a little bit, then really hurt the performances of those ancillary companies. We expect that to improve as we go into 2020, but that piece will be down for a little while. But again, we view that is a very good operator and we have no concerns about them going forward and certainly no concerns relative to rent.
In terms of our wholly-owned managed portfolio in light of the JV, Talya will get into specific details on that. We showed strong cash NOI margin growth, both sequentially and quarter-over-quarter as well as RevPAR growth. Our occupancy was down somewhat, and Talya will give you some explanation based on positive signs on occupancy on the last few weeks. And one of the things that we feel was with our Senior Housing operator’s is that they stay focused on rate and expenses and they don't give up rate for occupancies. I think over the long haul, that's a much better strategy to have.
And with that, I will turn the conference call over to Talya.
Thank you, Rick. I'll provide an update on our managed portfolio. In the third quarter of 2019, approximately 17.2% is Sabra's annualized cash net operating income was generated by our managed Senior Housing portfolio and approximately 57% of that relates to communities managed by Enlivant and 32% relates to Holiday-managed communities. The balance includes our Canadian portfolio and three small care communities in the United States.
On a same-store year-over-year basis, the managed portfolio, which excludes the Holiday assets, had solid results in the third quarter compared with the third quarter at 2018. Revenue increased by 3.3%, cash net operating income increased by 13.3% and revenue per occupied unit, excluding the non-stabilized assets was up 6.6%. This performance builds on the news we shared in the second quarter, when we reported same-store results with the 3.1% increase in revenue, 3.6% increase in cash net operating income, and 4.7% increase in revenue per occupied unit.
Our portfolio communities that largely target the middle market in secondary cities in the U.S. and Canada is delivering positive results in the current cycle, returning from last year's performance when the impact of the flu was felt across all Senior Housing communities.
Now for some details. The Enlivant joint venture portfolio, 170 properties, of which Sabra owns 49% showed steady improvement. Average occupancy for the quarter was 81.4%, 0.9% lower on a stabilized same-store year-over-year basis. Revenue per occupied unit was $4307, 6.9% higher on a stabilized same-store year-over-year basis. This is the highest RevPAR that we have seen since we made the investment.
Same-store cash net operating income for the quarter rose 15.3% year-over-year and 7.8% sequentially. Importantly, cash NOI margin was 26.7%, up from 23.9% on a same-store year-over-year basis. Similar to RevPAR, the best margin we have seen since we made the investment. Year-to-date, the Enlivant joint venture cash NOI was 9.2% higher than in the same period in 2018.
Enlivant's dynamic pricing model was rolled out this summer to drive the occupancy. The JV portfolio experienced 126 move-ins in the third quarter more than in any other previous quarter providing zero measurable success of this initiative. The biggest impact was seen in those communities with occupancy below 85% and even more so those communities with occupancy below 70%.
For the 19 communities that has 64.9% average occupancy in the third quarter, October occupancy was 67.4% and spot occupancy at month end is 70.9%, a 6-point increase over the third quarter period.
Our original objective in taking a minority stake in the portfolio included being physician to ultimately own 100% by buying out our partner TPG’s interests. This summer, we began the process of identifying potential partner to co-invests the Sabra, so we could jointly own 100% of the portfolio. That process continues with several investors keenly interested in the opportunity.
Now to the results of the wholly-owned managed portfolio. Sabra's wholly-owned Enlivant portfolio of 11 communities traded 2018's occupancy surge for meaningful increases in rates, resulting in higher net operating income in horizon.
Occupancy was 88.8%, which was 1.9% off of the prior quarter and lower on a year-over-year basis by 6.8%. The dynamic pricing initiative impact here as well even with the portfolio being relatively stabilized. October occupancy came in at 89.7% and spot occupancy is 90.2%, up 1.4% from the third quarter period.
Revenue per occupied unit rose to $5,526, a 1.7% increase over the prior quarter and a 11.5% over the prior year.
Cash NOI was up 7.8% on a year-over-year basis and year-to-date cash NOI was 5.7% higher than in the same period in 2018.
Enlivant typically sends out annual rate increase letter to its tenants in the fall -- this year to go into effect in October. This year, the average rate increase achieved for eligible residents is 5.2% in both the JV as well as our owned portfolio.
We transitioned our Holiday portfolio from our net leased to manage portfolio at the start of the second quarter. So, this is the second time that we are reporting community level statistics. Portfolio occupancy was 88.6% in the quarter, slightly lower than 89.1% in the prior quarter.
Revenue per occupied unit rose to $2,483, a slight increase over the prior quarter and cash net operating income rose 4.8% sequentially. We continue to look for middle market-oriented independent living communities where we believe the Holiday management team is well-suited to assume management including opportunities within the Sabra portfolio.
Sienna Senior Living manages eight retirement homes in Ontario and British Columbia for Sabra. In third quarter of 2018, the eight properties managed by Sienna showed steady operating and financial results with 89.8% occupancy, slightly up from 89.6% in the prior quarter. RevPAR was $2,261, which is 1.8% above the prior quarter and 4.1% higher on a same-store year-over-year basis.
Cash NOI was up 15.6% on a year-over-year basis and 4.1% sequentially. Notably, cash NOI margin was 40%, up from 35% on a same-store year-over-year basis.
Sienna continues to maintain occupancy in narrow band and tight expense controls, resulting in consistent operating results. We continue to look for attractive acquisition opportunities in Canada where the dynamics within Senior Housing is quite different from the U.S. and development capital is more disciplined in many markets.
With that, I will turn over the call to Harold Andrews, Sabra's Chief Financial Officer.
Thank you, Talya. This quarter, we continued our efforts to improve our balance sheet and cost of capital. On September 9th, 2019, we closed on our previously announced $2.2 billion credit facility amendment, which lowered our cost of permanent debt by 18 basis points to 3.91% and provided $2.7 million of annual interest savings based on our outstanding borrowings as of the end of the quarter.
The amendment also improved our debt maturities laddering by extending the maturity for the revolver by two years to September 2023 and created additional laddering of our term loans with various maturities to September 2024.
Throughout the quarter, we continued our delevering efforts through the sale of 4.2 million shares of common stock under ATM Program, generating net proceeds of $89.9 million. These proceeds allowed us to pay down our revolving credit facility by $75 million and reduced our net debt to adjusted EBITDA ratio, including our unconsolidated joint venture from 5.76 times as of June 30th, 2019 to 5.7 times as of September 30th, 2019.
We expect to continue this delevering effort through the fourth quarter, targeting a net debt to adjusted EBITDA ratio inclusive of our unconsolidated venture debt of at or below 5.5 times. These activities improved other key credit metrics compared to the second quarter of 2019.
Interest coverage improved 0.35 times, increasing to 4.97 times. Fixed charge coverage improved to 0.26 times, increasing to 4.72 times. Total debt to asset value improved 1% decreasing to 38%.
And finally, on October 2019, we achieved $350 million of 3.9% senior unsecured notes due 2029 and redeemed all $200 million of our outstanding 5.375% senior unsecured notes due 2023.
This refinancing is expected to result in $1.9 million of annual interest savings and on a pro forma basis, reduced our cost of permanent debt to 3.81% as of September 30th, 2019.
This was our second offering into the investment-grade market in a five-month span and it was, again, net with tremendous demand and excellent execution. We have now completed the refinancing of all of our high-yield debt instruments and along with the amendments of the credit facility, have reduced our debt maturities through the end of 2022 by over $2.4 billion, including the full availability on the revolver.
This completes our balance sheet refinancing activities for the foreseeable future and puts us in an excellent position to take advantage of our investment-grade balance sheet as we fund our growth into the future.
And now for a few comments about the financial performance for the quarter. For the three months ended September 30, 2019, we recorded revenues and NOI of $149.8 million and $130.4 million respectfully, compared to $219.4 million and $198.2 million for the second quarter of 2019. These decreases are primarily due to the $66.9 million of lease termination income recognized in the second quarter related to the transition of the Holiday communities to our Senior Housing managed portfolio.
FFO for the quarter was in line with our expectations at $85.8 million and on a normalized basis was $90.1 million or $0.47 per share. FFO was normalized primarily to exclude $1.6 million of unreimbursed triple net operating expenses, $1.5 million of straight-line rent receivable write-offs and $0.6 million loss on extinguishment of debt, we recognized in connection with the amendment of our credit facility. This compares to normalized FFO of $84.7 million or $0.46 per share in the second quarter of 2019.
AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses was also in line with our expectations at $87.7 million and on a normalized basis was $89.7 million, or $0.47 per share. AFFO was normalized primarily to exclude $1.6 million of unreimbursed triple net operating expenses. This compares to normalized AFFO of $83.9 million, or $0.46 per share in the second quarter of 2019.
For the quarter, we did record net income attributable to common stockholders of $23.3 million, or $0.12 per share. Our G&A cost for the quarter totaled $8.7 million, including $3.2 million of stock-based compensation expense. Recurring cash G&A costs of $5.3 million were 4.4% of our NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G&A cost to average of approximately $5.8 million.
Our interest expense for the quarter totaled $29.3 million, compared to $33.6 million in the second quarter of 2019. This quarter-over-quarter reduction was driven by a combination of lower total debt of $77.1 million and lower overall borrowing cost from our refinancing activities and the decline in the LIBOR borrowing rate during the quarter.
Borrowings under the unsecured revolving credit facility bore interest at 3.17% at September 30, 2019, a decrease of 48 basis points from the second quarter of 2019. The interest expense includes $2.5 million and $2.8 million of non-cash interest for the third and second quarter of 2019, respectively.
During the quarter, we recognized $14 million impairment of real estate related to three vacant skilled nursing facilities and four Senior Housing communities. The impairment associated with the four Senior Housing communities of $10.6 million being impacted by our decision to sell these assets rather than fund operations in the future in an effort to achieve a stabilized level of performance. We did not recognize any revenues from these assets during the quarter.
We were in compliance with all of our debt covenants as of September 30, 2019, and in addition to the metrics I mentioned previously, unencumbered asset value to unsecured debt increased from 246% to 253% quarter-over-quarter. And secured debt asset value remained at 2%.
As of September 30, 2019, we had total liquidity of $829.4 million, consisting of unrestricted cash and cash equivalents of $29.4 million and available funds under our revolving credit facility of $800 million. We reaffirmed our previously issued 2019 guidance, which reflects our stated goal of reducing our net debt to adjusted EBITDA ratio to no more than 5.5 times.
With respect to our same-store cash NOI growth rate expectations, we expect our Enlivant joint venture to be in the upper half of the 6% to 12% range and our wholly-owned portfolio to be in the lower half of the 3% to 6% range. These expectations are driven in large part by the 5.2% annual rate increase achieved in the two Enlivant portfolio's effective October 1, 2019.
Finally, on October 30, 2019, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on November 29, 2019 to common stockholders of record as of November 15, 2019.
And with that, I will open it up to Q&A.
Yeah, before -- just before we do that, let's make one of the comments, there are still a lot of postings about negative shop results for facilities that are in secondary markets. We obviously have a lot in secondary markets and we just are experiencing that. So I think its very market specific.
We certainly have a market here that experience little bit more difficulty with new entrants, but generally speaking, I think the performance of the shop portfolio shows that we just don't see that across the board in our portfolio. We view those markets as extremely stable and labor costs are lighter and you've got smaller buildings obviously. So impact of occupancy up or down by couple of patients is a bit more significant, but we tend to see more stability there.
So with that, I'll turn it over to Q&A.
[Operator Instructions] Our first question comes from Trent Trujillo with Scotiabank. Your line is open.
Hi. Good morning. So just looking at your top operator list for skilled nursing. EBITDA coverage declined across that group and since the trailing 12-month metric, it implies that the most recent period some more material decline. But at the segment level, you reported stable coverage so the implication the balancing portfolio in your smaller operators may have improved materially. So can you maybe bridge that gap or explain that difference?
Yes, I'll kick it off and then Rick can add to it. But keep in mind, that Avamere and Genesis was our part of the top 10. Those are not included in those coverage ratios because they have a material corporate guarantee. And so the portion of the portfolio that would have declined, that portion of decline is not reflected in the stabilized -- in the stable -- excuse me, coverage that we showed the overall portfolio. So there maybe -- some of that that goes to our excluding.
And in terms of trailing 12, number of those top 10, most of them just came down pretty incrementally. So we're not concerned about it, but I would say that headwind persisted, they had some stronger performances in the earlier quarters and those drop off its effective and a little bit, but nothing going on with any of those operators that we have concerns about and with the market basket increase on October 1 and PDPM, we expect to see improvement in those operators.
And I guess, speaking with PDPM, Rick. I know you mentioned, you had some comments in your prepared remarks. I know it's still early days, but can you maybe talk a little bit more about how it's been received? How you're operators have adjusted to the new model? Is there is anything left from a learning curve perspective, any additional color would be appreciated?
Yes. So I think, as I said, there was no disruption at all, they had much really to prepare for which was really helpful. And one of the things that made the transition a little bit easier, I think, for the good operators is that there are -- prior to PDPM and every Skilled Nursing Facility, there was some percentage of patients that had some serious nursing issues that the old system just wouldn't allow you to bill for.
So – they didn’t bill for because never get reimbursed for. So that allows the operators to have a population authority exist in those facilities to start focusing on trading, particularly relative to coding and setting up new clinical protocols. And the coding is really one of the biggest issues because coding has shifted from therapist doing coding to nurses doing coding and that's not something historically done much of, but it's much simpler system obviously interesting categories.
And -- so in terms of going forward, I think, a couple of things will happen to sort of fuel improvement as we go forward. I think people will get better at coding. I'm sure -- in fact, I know that on day one, even though there were no disruptions, it felt like everybody was hitting on still from day one. So it's going to take some time for that to get better.
In terms of concurrent and group therapy, I think our operators have been pretty cautious about not just moving as much in there as quickly as possible and certainly the regulators would look for red flags. I think they’ve being cautious on that. So I think growth in concurrent group therapy will happen strong have a period of time. So you'll see continued improvement there as well.
And then, of course, one of the issues that's very hard to quantify, really impossible to quantify, you can quantify cost savings to the extent that operators stayed away from certain kinds of patients because they want to reimbursed that doors now opened, which will help certainly the hospitals quite a bit because the whole host of people sitting there at Skilled Nursing facility and wouldn't take simply because they want to get reimbursed.
And so that may -- that's going to shift the population as well. That should also have some impact on length of stay because those patients will have a longer length of stay than the short-term rehab patients and that -- that's really the single biggest thing, I think, that changes here is that we got from reimbursement system that solely incentivized operators to go of the short-term rehab patients, which then, in fact, created industry headwinds because of that all your gearing, you're going to see continued shortening length of stay, which is going to lower your occupancy and exactly they going on in issues. So the other system actually created somewhere headwinds and actually significant percentage I think, of the headwinds that have impacted the industry in the last few years. So hopefully, that gives you at least some explanation.
That's very good color. Thank you. Just one more, if you don't mind. Rick, you mentioned more Skilled Nursing opportunities in your acquisition pipeline, but I think you also previously mentioned you're not really interested in, particularly, large Skilled Nursing portfolios, because that might push the perception of Sabra to be classified as SNF REIT.
But if the earnings yields are more attractive in that space and you peer seem to be active in acquiring and you are currently trading in a discount multiple to those peers, what's the negative stigma in your opinion of being viewed by some of this SNF REIT, if it means you're investing for earnings accretion?
Well, one, we're going to do skilled deals. We'll do portfolio deals. Maybe that through multi-billion dollar portfolio deals, but will do portfolio deals. We -- with our Senior Housing exposure increasing and our Skilled exposure where it is, we can afford to do -- we think a sizable number of deals without becoming a skilled being going back to 75%-plus on skilled exposure.
So, the negative for us really is much of the asset class is you completely dependent upon sentiment based on what that asset class by the market. And with all due respect to the market sentiment, swings and when it's negative, it's usually too negative. When it's positive, it's usually too positive. And so, to have sentiment based on more than one asset class because we invest in the long-term and Senior Housing's got a really bright future ahead of it. We think it's a little bit more advantageous to have some diversity in asset class.
But, no one should take that as meaning that we aren't focused on doing Skilled Nursing and more than just 1s and 2s, that kind of what we're seeing now, but to do portfolios that are several hundred million dollars, the absolute entertain doing that and we still think it’d be how to keep that in the portfolio by doing that. Earnings accretion is something that we’re going to be laser focused on for next year.
This year, we've really prepared the company and position the company to take advantage of those kind of opportunities, and clearly it's the one question that everybody has, how much growth it's going to have going forward? And it's the right question. So, we're not going to be stubborn about it and forgo opportunities that we think are good. And if it pushes our skilled exposure up, maybe a little bit more than we've liked in the interim, we have complete confidence that as we do other deals and our cost of capital continues to improve. As you know, with the existing discount that we'll always be in a position to be able to balance the portfolio more later on. So, expect that to take advantage as the opportunities that are out there in field side.
Appreciate that. Thank you very much.
Yeah.
Our next question comes from Nick Joseph with Citi. Your line is open.
Thanks. De-leveraging continues to grow as you read out. Let’s start to do in terms of actually getting that target. Is this the additional equity or more EBITDA growth driven?
I'm sorry. What was the first part of the question?
Would it take additional equity…
Execution get into the leverage target really, is there any additional equity that you’re contemplating or is it --
Yeah. So, it's primarily driven by continuing to issue equity under the ATM Program. And so, you'll see it continued to do that. We obviously made that announcement in the fourth quarter, but that's the main driver.
And we've been consistently said that from the day we issued guidance and build guidance. So there is nothing new or unusual there, and there is no -- no other any sort of spike them out that we're going to have to do. So the number -- the amount of equity that we're going to be raising on the ATM through the end of the year at this point isn't that material in the calendar.
Thanks. That's helpful. And just on core FFO guidance. You reaffirmed guidance and previously, you've indicated that you’re trending towards the low-end of the range. So, does that comment still stand or I think trending differently now?
No. I think on the AFFO, we're still trending towards the high-end. On FFO, we're still trending towards the low-end. And again, the reason for that trending towards the low-end was because we removed about $0.04 of straight line rents when we moved tenants to a cash basis from an accrual basis, but we do it -- we didn't update that specific comment. I think we've got some opportunity for that to be higher than that.
Obviously, the issue for us as far as mailing down the number is we have the cash basis tenants. And certainly, timing of collection cash could have an impact on the earnings more so than on of your booking stuff on the straight line basis. And then the managed portfolio obviously had some upside from where we forecasted it as well. So we still feel comfortable with the total range, but I would expect that it's still true, we have to put out forces on the AFFO, and so they have to overcome that to hit the high end of the range.
Thanks.
Sure.
Our next question comes from Jonathan Hughes with Raymond James. Your line is open.
Hey. Good morning out there on the West Coast.
Thanks, Jon.
I appreciate the earlier commentary on the EBITDAR coverage decline at Avamere. I know you're not concerned there, but are you able to give us facility level EBITDAR coverage for their portfolio and then remind us when those leases nature?
Yeah. Facility level coverage is actually pretty similar to the fixed charge coverage. It’s that a pretty similar coverage to employee.The difference that they got losses with Avamere in the combination of 1, 2, 2 as 1, 1, 1. So, in terms of lease exploration on Avamere, we’ve done quite a research on that.
It's now percept for many years.
Yeah. It’s probably five-years out, something like that.
It's actually beyond that. Avamere t matures before 2027.
Very good 2027. And one of the things that we're waiting to hear on Avamere, because it's really the issue that affects them the most is what's going to happen with Washington and Medicaid rates? Washington State is talking about doing a rate increase next year and hopefully, we'll have news on that sometime in the first quarter. But as everybody knows, they haven't been doing that after this point. But now they're up to 19 facilities being closed in the state that 10% of the facilities in the state have closed for financial reasons, there probably at least another 5% coming, that's a pretty huge number on – you know in 1 state.
So they're going to start to have access problems in certain markets. So once, we see what happens with the Medicaid rates in Washington State, we'll know whether we want to do anything differently or we’re going say, we’ve had that – really capital partner of Avamere.
One of the things that is appealing to them is, they're starting to see more opportunities for facilities being sold at extremely distressed levels. And if you can pick them up at the right price even in that environment, that might be a good way for them to go. So they're considering that.
But I think, none of those first want to see them do anything they don't want to do anything until really two things occur. One, we see the impact of PDPM on the facilities. And secondly, we know one way or another, whether there will be a rate increase in the state of Washington. So stay tuned for that, but that's really their single digit kind of issue. The ancillary issue with the IT conversion got all passed, but it's really Washington State.
Okay. That's helpful. And switching over to the managed portfolio, occupancy has declined little bit there. Your NOI growth has been really strong driven by the rate increases and expense savings. I'm just trying to understand with rate increases, when you need to provide more services and in turn higher expenses, I'm just trying to kind of better understand what is going on within those portfolios?
Sure. This is Talya. When we talk about the rate increases, we're talking about room and board rate increases. So that doesn't correlate to a change in service delivery and care. So the care rates has continued to be delivered as needed per the individual, but the basic room and board rate has been what we focused on in terms of the increase.
Yes. And our operators don't have extremely high acuity levels. I think it's going to continue to creep up over time and there will be more opportunity on the level of service rates on top of the room going forward, but that is part of that traffic driver -- the driver at this point.
I think as Talya noted on vibrant days, taking a much more sort of scalpel approach to things and has stratified the portfolio and the lower are ratification are starting to show some nice occupancy increases and that should have more of the disproportionate impact because of how low they are to begin with.
Okay. That's helpful. And then maybe just one last one for Rick, you talked about seeing more SNF deals in the pipeline and I know it's too early to tell in the impact of PDPM. But as that altered your underwriting process for SNF? Meaning as you look a bit further out on the horizon, are you underwriting SNF using overly conservative assumptions in case CMS take several years down the road might covering reimbursement rates that they did in 2011. If their overall margins begin to significantly improve and they look to kind of reduce some cost. I'm just -- I loved your thoughts there.
Yes. So our underwriting approach is 1.5 coverage on skilled and the cap rate depending on the quality of the facility and the market and the operator to be 8.5 to 9 plus. So I don't think that changes and I think that gives some breathing room.
But couple of things that I think is different now, versus what happened with the call back in 2011. One, it was a really poorly designed system and the amount of additional money beyond CMS projections or additional Medicare expenditures to facilities from the government beyond CMS projections was relatively egregious. And I don't think if there is any way with PDPM that you're going to see that same level again.
Secondly, the timing issue that was really horrible back then and certainly it could happen again is the call back was during the great recession. And you may not recall that, but at the time within about 48 hours of the final rule coming down, the call back was supposed to be half before it was in industry threat system of pure math perspective that the actual was about twice as much as it should have been, but it was a recession and then the White House is looking for money and there was just nothing we can do it.
Operators -- I think operators have a memory than with investors do with all due respect. So they remember what happened, and I think to my comment earlier. That's why you're not going to see from the good operators and I would include all ours in that bucket to restart the conversation. You're not going to see the good operators. So from 0% concurrent and group therapy to 25% this is the max.
You may see some guys do that out there and I think they'll be in trouble if they do that. But most of the operators that we've talked to are smarter than that and they're going to be much more judicious because they don't want a scenario where they looking at callback few years down the line. And if there is some adjustment, it's more of a marginal adjustment and its looking through the system than what happened in 2011.
So I just think people are really mindful of it. And I do think this is much better design system and the fact that I think we all would have like to see some pilots out there, but CMS didn't want to do that. But the fact that the industry was engaged at every step of the way in putting this system together with CMS and giving them input and feedback I think creates a much different environment for that than it would runs for.
Got it. Okay. Appreciate all the color.
Our next question comes from John Kim of BMO Capital Markets. Your line is open.
Thank you. Just a follow-up on the Senior Housing managed facility performance. Can you just elaborate on how you're able to push room and board rates in the face of new supply? And what we're hearing from some of your peers is that with new communities out there been aggressive on incentives, it's really hard to push rate and at the same time not loose too much occupancy. So can you provide more color?
Sure. This is Talya. So first of all, the bulk of our managed portfolio frankly sits in the joint venture, because that's 170 properties, we have 49% economic exposure. Those properties as well as many others in our portfolio are not in markets where there has been significant overbuilding and additional new supply. So the competitive forces have -- are not uniformly spread across all markets. And so the news that we hear about new supply, oversupply, et cetera are specific to certain markets and they are within that, probably more narrowly within certain submarkets.
And we have found that in the secondary and even some of the territory locations in which we have communities in the managed portfolio, we have not had anywhere near the kind of pressures that some others are experiencing because of the primary markets. There are some markets where we have seen some pressures. The Dallas Metro area, we have seen some pressure from significant addition of new supply across the spectrum of cost that has impacted some of our assets, but generally that's not been the case.
The other thing I'll add is our focus on middle market is becomes really interesting in this part of the cycle, because you really see how a product that targets a certain price point that probably is not economic to build to today, if you started construction. That product has a large market -- target market that needs that product and can't afford a product that needs $10,000 a month rent in order to break even.
Yes. I'll make a couple of other comments. All of Talya's comments also apply to our triple net senior housing portfolio as well. And look, I think the market tends still if you look at things everything is monolithic. So the secondary market are this, the high urban market are this and it's just not the way it is. You've got to look at the specific portfolios and where they're located and who the operator is, the operator make difference. I think the quality of services provided by our operators has a lot to do with why they've been able to push rates the way they have, their resistance to discounting in the long-run, I think will pay off.
And if you got 50% of the middle class elderly, we'll not be able to afford senior housing in our country. And we happen to have a lot of product -- a lot of assets in our portfolio where to Talya's point is going to be affordable. And so we underwrite these things for 10 to 15 years and we're holding a pretty well right now in the tough environment. And so as the recovery becomes realized over the next couple of years, we'll be in that much better shape, but the stuff just isn’t monolithic.
Sure. What was the catalyst kind to get the double-digit rate increase this quarter? Was surely the revenue management system or just pushing rate and being willing to give us some occupancy? I'm just wondering what the exact catalyst was?
Well, our live and wholly owned portfolio so it's 11 properties, so it's a small set that we're talking about. They gave up -- they really pushed occupancy at the expense of – and they put that. They really pushed occupancy and they really push rate and expense of occupancy and they did so by intent. So they were at like 95.6% occupancy a year ago and they were willing to go below that and really drive rate.
They looked at …Their expense control is better. One of the ways to think about it rather -- just, say, in terms of my experiences and operator having done turnarounds in BKs [ph] and stuff is, those first few years, there's a lot of low-hanging fruit.
And so, you're sort of improving your results in leaps and bounds. Then you start getting to the point where it's a lot more fine-tuning. And that's where we see it live and doing really nice job of looking at everything on a market-specific basis, stratifying their efforts so we can allocate resources differently, and then getting better in their expense controls over time, as well as they start putting systems in place.
And they're not close to done particularly on the new system part, and we've already convey to them that a lot of the IT initiatives that they are looking at embarking on in 2020, EMRs and the like, that we will be partner with them in doing that.
So there's an awful lot of that can still get done from a fine-tuning perspective. But I appreciate the fact that they -- and actually our other operators too, it's not just them, are really focused more on the long term when it comes to rate versus just occupancy and giving discounts.
Given the strong performance, I'm sure you feel more comfortable with the joint venture assets. And your balance sheet and cost of capital improving at the same time, do you still need to pursue a joint venture partner for the buyout of existing partner? Why not just go back…?
I think it's -- look, it's still going to be less dilutive to bring a partner in regard to where that percentages is at, then to write to check for the full 51%. And still retain our ability to exercise whatever the remainder is of that percent on the ownership of the portfolio. So we're still in the middle of negotiations. So we'll kind of see how it goes. But our focus right now -- and it may not be a new joint venture partner that maybe a new arrangement with TPG.
Is your intention to start on a majority stake?
That's always been our stated intention. We said that on the second quarter call on August 9. It's always been our intention to go from 49% to some majority.
Great. Thank you.
Yeah.
Our next patient comes from Rich Anderson with SMBC. Your line is open.
Thanks. Good morning. Just finishing up on Enlivant. So do you -- I didn't quite get -- are they in low-hanging fruit phase still? Or are they in fine-tuning or they're transitioning to fine-tuning from low hanging?
So they -- I would say that now -- they've stratified the portfolio in terms of marketing and allocation of resources. So there are portions of the portfolio about close to couple of dozen buildings that there's still a lot of low-hanging fruit. But in sort of a middle Tier where it's kind of -- they're not quite low-hanging, maybe bigger ladder. But they're not quite, just a fine-tuning. And then you've got a big chunk of the portfolio really is fine-tuning.
So that's really where they shifted where they've taken a more holistic -- historically more holistic effort towards improving the portfolio, because there were some issues when the got it, now I'm getting it to the point where they can look at it and say, okay, we're in pretty good shape over here.
I'm not going to my eye off the ball, obviously, but there is a different level resource management that's needed with this percentage versus this percentage, because these guys are already over 85% occpuancy, this group's over 75%, this group's under 70%.
All right. Okay. And IT initiatives, what was that? Did John [ph] say revenue management, is that what that was?
Its electronic medical records is really probably the biggest ones.
Okay.
Because everything still paper. So that will improve efficiencies and expenses quite a bit. And should help on the -- it's an intangible hat – how that kind of stuff occupancy, but to the extent you have systems in place, that better allow to show what your outcomes are through your referral source and that’s helps with the occupancy.
Okay. So this might be yes or no question, but is there anything predetermined about the cap rate when you're addressing the process of taking out or TPG partially or fully or is this all market driven and that could yes or no question?
Yes. As we stated before, the current range with TPG has a floor on the option price. That's part of the discussion. So I think that will be the right way to think about, to think about the performance, there is a cap writing under our current options. So we still kind of working with -- talking with them in kind of the next context of what's already in place.
Yes. Okay. Rick, maybe one of the main messages that you've been talking of last few quarters is sort of turned down the fire hose in times of external growth and make it a story much easier to understand. But today, do you find yourself kind of striking the balance between that message and also starting to use your currency a bit more incrementally beyond just using the ATM to delever?
Yes. So, one -- and this is an important point. People tend to think, because you're so busy with things, that you're not focused on other things. So we're finishing the restructuring, we're focusing on the balance sheet, so we're not focusing on acquisitions. We've always been completely focused on getting some acquisitions done this year.
We've had an active pipeline, we have a full investment team that's just focused on that and not distracted by anything else. We just haven't found opportunities that have been interesting or frankly affordable, and most is Housing -- have not many opportunities outside of the couple of portfolios and some of the stuffs that we’ve been selling on the skilled nursing side. So, I think the main message for us whatever we happen to get done from an investment perspective this year would it be complicated, just wanted to be uneventful in terms of that. So whatever it is done, people just looked at it and say, yes, that makes sense.
And even though, we like to ramp up our growth going into 2020, we need to do that. It's with that mindset. We don't want to be -- we a lot of noise and it doesn't matter that it's for the right reason and it got us to a good place. We have a lot of noise for quite a while, and we don't want that going forward. It's made it really difficult for people to understand the story. It just takes too much work. And so, this is been a nice period of time, I think, for people to kind of see who we are post all the activity that we had, looking how the balance sheet changed, how diversity of tenants have changed, all that stuff. And we can get back to growing in a more routine ways. And maybe another way to pin it is we don't want to be in a position, we are going to announce the deals that so complex, we're going to have a conference call to talk about it and try to frame you why we’re doing it.
Okay. Last question from me. The whole Avamere thing with the tech rollout and eye off the ball, all that sort of stuff. It seems to me a fair amount of operators can be easily distracted if the environment around them isn't sterile. I'm wondering, how can you play a role in avoiding this in the future? In other words, these are your partners and if something is coming down the pipe that is potentially disruptive, can you sort of get ahead of it somehow. Is there a landlord and say keep your eye on the ball and be a partner in that regard? Is that something that you think you can do from the REIT perspective or do you sort of holding to these types of dynamics that happen from time to time?
It's somewhat challenging when you've got triple net flow. I would say this, when it came to PDPM, I think, we were as active partner as a REIT can possibly be. A lot of dialogues making referrals to new stores is going to be helpful. So, I think we're really active from that perspective there. Operators Conference was helpful as well because it provided the form to talk about all the things for our operators to share best practices with each other. So I think, in terms of that, we've done that. And look, all the credit goes to our operators for having a period of time with PDPM, where they haven't seen a disruption, but I think, certainly, these kind of margin, we have been helpful there.
When it comes to doing things like IT rollout and stuff, look, I've been there and its frustrating people just – it takes a lot, and people do take their eye of the ball. I've seen it zillions times you have to have some level of trust in your operators I think we’ve compounded issue at Avamere was the gentlemen who Founder and Chair and CEO of Avamere had really taken a backseat and had another management running the company and he is fully engaged now – he has made a number of senior management changes. He's running on a day-to-day basis, which we by the way think its really good thing. So I think probably didn't help, but at the same time, they're going through a transition with their software systems, with their ancillary companies, they're going to senior management changes at the same time just compounded it.
Got you. Okay. Thanks very much.
Our next question comes from Steven Valiquette with Barclays. Your line is open.
Thanks. Good morning, everyone. Thanks for taking the question. So you overall comments so far around PDPM for sniff operator have certainly been helpful. I guess I am just curious to hear more specifically whether or not the therapy utilization per average patients it was already coming down within the industry. And then Rick it sounds like in your comments that there may already initial REIT that some higher acuity patients are already been funneled into sniffs, because that would be reimbursement is more appropriate kind of as you talked about. So I guess I am curious with those higher acuity patients been taken from pool of patients that would normally go LTAC and/or IRS so would they be coming from somewhere else? Thanks,
Yeah. So, I know, a few knew each other, but others well would call me saying that I think any changes of reimbursement system, you've got to make it create more equality from a reimbursement perspective helps sniffs and LTAC and IRS. There've been a number of studies done by Med path that show IRS exhortative Medicare rates that they get to have more better outcomes than skill had at the rates that they had. And we've got a number of operators that do things that happen in LTACs on a regular basis only because they happen to be in states where their specialized rates that do it. You couldn't do that under normal sort of Medicare and Medicaid rates. So yeah, I do think – so I think, they get patients from hospitals – where hospitals haven’t had a place to discharge them to, because LTAC aren't in that many market, there in what about five states or something like that. And even though if you look at the map on IRS they are in a lot more states, they're absolutely concentrated in a relatively small number of states. There are a lot of markets out there where the hospital has had no choice but to sit with these patients because they easily can have tracker or an IRF to send them to in those markets where we have high acuity skilled nursing facilities that compete with LTACHs and IRFs, I definitely believe it's going to impact the occupancy in those other asset classes.
Okay. And then at the very beginning when you talked about just no disruption in the -- at the very beginning of your prepared comments and then there was a little more color on that. But again, should we take that to mean that there is just -- hey, there is no problems, but maybe there is no change in therapy trend yet. But I guess I'm just curious are you not saying already that the therapy is coming down maybe per average patient, or are you not seeing that yet?
We're not really seeing that yet. And that goes to my earlier comments specifically where I think our operators are being really careful. There's no reason it's the day before PDPM you're billing 600 minutes for patients and the next day it's 400 and you have them in group therapy same to that patients.
So, I think our operators in all of their discussions with us are being really careful about that. So, I think that the -- any decrease in the level of therapy utilization is going to be over a period of time and it's going to be rational. And as they start ramping up their services to other competition, they'll be able to manage that balance, we believe in a way that will be net positive. So, stay tuned. But I think we'll see more over the next few months.
And I've been consistent, I think, in saying that even though we've been really positive about PDPM that we believed all along we're going to take good six months to really see some super tangible impact across number of operators on PDPM. And so by the time we issued first quarter earnings of 2020, we maybe in a position to provide some snapshots of coverage for operators because on its trailing 12 basis, you're not going to see it till the year from now, right? So, if we're seeing improvement, we won't be able to show that. So, we'll keep an eye on that and to the extent that we want to make some -- additional disclosures that would be helpful to everybody supplemental, then we'll do that.
One other comment I want to make in terms of opportunity. When I said no disruption, I think, there are number of operators where there has been disruption, particularly with small sort of mom-and-pop operators, just a less sophisticated operators and they're going to start feeling some pain pretty quickly.
So, specifically, if you haven’t really -- if you weren’t prepared for PDPM and your nurses, you're going to enhance your NBS function and your nurses weren’t trained appropriately and all that and from October 1st, you're billing rates at a lower than with the level of care requires to those patients, that then that money starts coming 30 to 45 days, that's going to make to a really tough Thanksgiving. So, there is some percentage of operators out there that they're going to be feeling some pressure sooner than later now in terms of whether they have to do something about that, it depends on the operator and how much cash they got in the bank and how much time they can buy themselves and all that sort of stuff goes to why a lot of those -- that will be more skilled opportunities prior to PDPM because there will be some level of awareness on the part of certain operators that they've just done and ready to hear out. But that wasn’t the case. So, -- and it appears that a lot of operators that we don't think are prepared, that -- everybody said this was great, so if you hang around on October 1st, we're just going to be making more money. It's not going to work that way.
Okay. All right, that's perfect. Appreciate the extra color. Thanks.
Our next question comes from Joshua Dennerlein with Bank of America Merrill Lynch. Your line is open.
Hey guys. Just one question from me. You mentioned the dynamic pricing systems on your Senior Housing managed portfolio. How should we think that plays out as far as rate and occupancy going forward? Will occupancy keep dipping as they keep pushing rate or do you think that kind of has trended out? At this point it's more balanced mix going forward?
I think that the opportunity is going to differ depending on how you tranche the portfolio and that goes to Rick's point earlier when you explain how -- and why tranche the portfolio by occupancy and other metrics.
So, I think, the dynamic pricing model is -- has been and probably should continue to be particularly effective in the lowest track of occupancy, whether it's the greatest opportunity to add occupancy and that has a disproportionate economic benefit at that point in terms of covering fixed cost, et cetera. I think it will be additive to the other tranches of occupancy on units that might have been typically harder to lease our search.
Yes, when we talked about spot occupancy before, it's really been spot since they really fully engaged this new initiative. We're looking at five to six weeks now where we've actually seen some real improvement. So, it just feels better, but once you got a lot of people are really concerned about what the flu season is going to do this year based on what we've seen happen in Australia. So, we'll see where that goes, but if they can continue this current trend going into that, there will be a lot better position than they would have been otherwise to get through it.
Interesting. Thanks guys. That’s it for me.
Our next question comes from Daniel Bernstein with Capital One. Your line is open.
Good morning for you, it’s still good afternoon for me. My question goes back to the JV portfolio. You're pushing rate at 81% occupancy. And so is that an indication that that portfolio is kind of stable at that occupancy? And typically, you don't push rate until you get close to 90%. So I'm just trying to understand the dynamics on rate growth within that portfolio? Maybe there’s some assets that are high that are pushing rate even above what you're showing, so just trying to understand the nuances there?
I think it's more a function of, is there reputation is improving community. They can continue to push rate and try to – and push occupancy at the same time. So, lot of things there are mutually exclusive. I think it's -- I just think it’s a little bit different with the portfolio that have been in turnaround mode for quite awhile.
Talya, do you want to…
My only comment is it sort of -- your question is best answered with granular detail and we're talking about the portfolio of 170 properties and occupancy is not the same across and neither is rate. And that's where the complexity of the dynamics comes forward.
So there are properties that are well-occupied and there is push rate and that's the focus and there are property – there’s a tranche of properties where occupancy is a big opportunity and that's the one I referenced when I talked about what we've seen specifically in terms of the leap and spot occupancy on the lower tranche of occupied assets. And there the focus is getting people in and raising occupancy as opposed to deriving rate specifically.
Okay. Is there a general strategy, maybe your other operator too, we saw some of the wholly-owned assets to drive rate over occupancy and by the way, I'm not -- I think, that's a good strategy, but is that a general strategy, you folks are using within your portfolio, obviously, some other portfolio using some other REIT to driving occupancy over rate?
Yeah, I think -- we don't have any operator to the extent that they can drive rate they want to do that, they don't want to compromise that under any circumstances. They think that the long-term impact of compromising on that is more negative than staying with a little bit lower occupancy for a period of time.
Okay.
Let me add one nuance. And I want to make -- I think Rick has said this, but I wanted to make sure it’s understood. The dynamic pricing model is not a discount model. It's not about discounting or free rents in your four to six months, it's not that. It's actually evaluating specific units in buildings and understanding what would be the range of pricing that would be possible and assist the team in making decisions and getting those units occupied.
Okay. And I guess, my last question, would be and I was just a little bit on other calls, so I might missed some of comments on PDPM, but has there been any discernible, I guess, feedback from operators of, I guess, maybe little bit using labor pressure now that you can free up some of your nurses staff will do, nursing instead of paperwork under PDPM. I'm just trying to understand some of the, I guess expense savings and labor pressures that's in there, are you actually seeing some of that discernible benefits under PDPM?
I think it's going to be more on the therapy side because to the extent that you're going to have some percentage of people including current therapy, they’re going to need one therapist, which -- there is a big therapy experts that's very helpful on number of different levels, which is why you hear a Therapy Association screening the PDPM.
But on the nursing side, they got to be coding now, so they got some other stuff to do. There has been – there have been some regulatory burdens that have been lifted, you're not going to do assessment as often, so some maybe there’s a little bit more care time there, but it's kind of more on the margin, Dan.
That’s all I had. I appreciate all the color. Thank you.
Our next question comes from Tayo Okusanya with Mizuho. Your line is open.
Tayo, welcome back. Tayo?
Tayo, your line is open. Please check your mute button.
Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is open.
Thanks.
Coming from the shadow of Tayo…
Leave him hanging. I am sure he will come back. Thanks. Just I got a quick one. Can you provide facility level of fixed coverage, including all your tenants so four wall coverage with add and the others?
No. We haven’t historically disclosed that and I think our approach to coverage has been that we give the coverage for those that don't have guarantees, and then we'll provide top 10. The intent there is to give investors and everybody a really clear picture of our primary and significant tenants where there coverage stand. We have never published that. And calculate…
Yes, the guarantee is to critical to us and the reality is -- there actually was a time way back in the early days we are showing both and all of this would create confusion and people always been like look at the lower number. So the fixed charge coverage is the number that we get paid on so that we're going to show for few -- we have very many of them.
Two of them.
We have two of many ways, Lukas that we do that for.
Thanks. Thank you.
Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Rick Matros for closing remarks.
Thanks, everybody for your time today. For those that have kids, I hope you guys have gone trick or treating tonight. We are all around and available for follow-up questions. Have a great day. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.