Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Transcript 2018-Q4

[Operator]

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

I would now like to turn over the call to Michael Costa, Executive Vice President of 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 in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition, and investment plans, our expectations regarding our tenants and operators, 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, that was filed with the SEC this morning, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC this morning. 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 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-K, 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 & CEO]

Thanks, Mike, and thanks for joining us everybody today. I'll start by making a couple of comments about guidance, Harold will get into the details. The guidance primarily reflects everything that we've been talking about and doing over the recent past and the primary difference between all the dispositions and how that affects guidance is the assumption that we're going to be delevering the balance sheet which resets the table and it's been for us -- it's been an 18-month period of transformation in the company that was necessary, given our exposure to Genesis and all their issues at the time.

So as we sit here today, we're few weeks away from completing the repositioning of the portfolio; so if you're really good about that and our focus for the remainder of the year is to keep the noise behind us, have some quiet time and get the deals done, and delever the balance sheet. So we did put an assumption into the guidance that we'll be delevering the balance sheet over the course of the year. And again, as you reset the table it's best to do that and get everything in there so it benefits the company from a long-term perspective.

With that we'll move on to our acquisition pipeline in the competitive environment. Our acquisition pipeline has increased pretty dramatically since the end of the year where it stood at about $200 million, it reached about $1 billion. There is a lot of senior housing in there, primarily senior housing but if we're starting to see more skilled deals and that's where we expect to get some things done this year and so we expect to see that continue to increase. In terms of the environment, we don't see anything different from a pricing perspective on the senior housing side, the private equity groups are still keeping pricing at levels that we think are beyond reasonable, skilled cap rates appear to be if they've been for a long time, so that is relatively stable and we don't expect that to change either.

In terms of our operational results; our operational results were pretty stable for the quarter. Our senior housing occupancy and coverage was flat sequentially, our skilled occupancy was flat sequentially, our skilled mix was up by 50 basis points, our skilled EBITDA rent coverage was slightly down, that's really accounted for by one primary tenant, North American. North American this summer had an unforeseen change in management with their Founder and CEO leaving suddenly and he was very much at the center of things in the company. There have been a number of management changes offering [ph], since then they've settled down and we expect a new rebound, we have no concerns about that tenant there, that's a good operating team, we don't expect any changes in rent going forward. Looking at January on a standalone basis, they have bounced back to about $1.25 [ph]; so we expect them to continue to improve over the course of 2019.

Our managed portfolio did very well and Talya will provide the details on that. I mean that's attributable to primarily two of our operating partners a lot and again, Talya will get to the detail on that.

So with that, Talya let me turn it over to you.

[Talya Nevo-Hacohen, EVP, CIO & Treasurer]

Thank you, Rick. I will provide some comments about the operating results and statistics for our managed portfolio. As of December 31, 2018, Sabra had over $1 billion invested in managed senior housing communities, approximately 83% of that capital was invested in assets that are managed by Enlivant, 14% is invested in retirement homes in three provinces in Canada, and the balance represents three assisted living and memory care communities in the United States.

So first I will discuss Enlivant fourth quarter results. Sabra's wholly-owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia and Delaware continue to perform very well and outperform over the past [ph]. We have seen a steady improvement over the course of 2018 with great growth and continued solid occupancy driving greater profitability. Average occupancy declined slightly to 92.6% compared with 95.6% in the preceding quarter after multiple sequential quarters of occupancy growth; this decline was offset by more than 6% revenue growth. Revenue per occupied unit rose to $5,441, nearly 10% higher than the preceding quarter which reflects not only the implementation of the 5.5% annual rate increase that was placed in the fourth quarter but also higher effective rates throughout the communities.

Cash NOI margins was 32.1%, 1.5% higher than the prior quarter and much higher than the 23% margin in the fourth quarter of 2017. Enlivant joint venture portfolio, 172 properties located in 18 states across the United States of which Sabra owns 49% finished 2018 with strong results after being impacted by the flu last winter. Average occupancy for the quarter was 81.7% in line with the previous quarter of 81.8%, and revenue per occupied unit was $4,230, a 5.3% increase over the previous quarter, again reflecting that the annual rate increase in the fourth quarter did not come at the expense of occupancy.

Cash and line margin was 25.5%, a 1.8% increase over the prior quarter. We have agreed better margin will pursue the strategic disposition of certain communities owned by the joint venture where the combination of market, location, and physical plant limit the objectives that we, PPG and Enlivant share. In the meantime we continue to be acquisition opportunities for Enlivant in various markets and are working together to pursue those jointly [ph].

At the end of the fourth quarter, Sabra owned eight retirement homes and one assisted living and memory care community in Canada. Sabra sold a ninth community in assisted living poverty in Ontario during the fourth quarter and it is excluded from these statistics. Sienna Senior Living manages the eight retirement homes in Ontario and British Columbia, and in the fourth quarter of 2018 the eight properties managed by Sienna had 92.4% occupancy which was 2 percentage points higher than the preceding quarter, and 38.7% cash net operating income margin compared to 35.7% in the preceding quarter, an increase of 3 percentage points.

Sienna continues to focus on revenue growth in the portfolio which has a direct impact on NOI margin at these occupancy levels. There are four remaining managed properties in Sabra's portfolio and assisted living and memory care community in Calgary operated by Bay Bridge [ph], and three assisted living and memory care buildings in Wisconsin and Minnesota operated by Pathway Senior Living, two of which are in Lisa [ph].

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

[Harold Andrews, CFO]

Thanks, Talya and thanks everybody for joining the call today. For the three months ended December 31, 2018 we've record revenues and NOI of $139.2 million and $136.6 million respectively compared to $166.5 million and $160.5 million for the fourth quarter of 2017. These decreases to revenues and NOI are primarily due to the impact of dispositions in 2018. The $19 million Genesis rate cut effective January 1, 2018 and last rental revenues from senior care centers during the fourth quarter of 2018.

Revenues and NOI also declined compared to the third quarter of 2018 by $12.6 million and $11.3 million respectively. These declines are primarily attributed to a decrease in recognized cash rents related to senior care centers of $12.5 million which was partially offset by strong revenue and cash NOI growth in our managed portfolio, including our share of the Enlivant joint venture of $2.3 million and $1.6 million respectively. FFO for the quarter was $48.2 million and on a normalized basis was $90.2 million or $0.50 per share. FFO was normalized to exclude $28.8 million, primarily related to the write-off of a straight line rents receivable associated with a holiday lease which is expected to be transitioned to a managed portfolio in 2019, and a $2.9 million loss on extinguishment of debt primarily associated with the prepayment of a $98.5 million secured bridge to HUD loan associated with the senior care portfolio to be sold in 2019.

Additional normalizing items during the quarter include $5.2 million related to the acceleration of above market lease intangible amortization associated with assets transition to new operators during the quarter. $4.3 million of non-managed property operating expenses consisting primarily of property taxes paid on behalf of senior care centers, and $0.3 million of CCP merger and transition costs.

AFFO which excludes from FFO, merger and acquisition costs, and certain non-cash revenues and expenses was $77.3 million and on a normalized basis was $83.8 million or $0.47 per share normalized for items consistent with the FFO normalizing items. Compared to the third quarter of 2018, normalized FFO and normalized AFFO per share declined by $0.10 and $0.08 respectively. These declines are primarily the result of the unpaid and unrecorded contractual rent owed by senior care centers during the fourth quarter.

For the quarter we recorded a net loss attributable to common stockholders of $19.4 million which are among the items eliminated from normalized FFO of $42 million includes a loss on sale of real estate of $14.2 million. G&A cost for the quarter totaled $11.3 million and included the following; $4.3 million of non-managed property operating expenses incurred in connection with the transition of properties to new operators, $1.4 million of stock-based compensation expense, $0.3 million of CCP related transition costs, and $0.3 million of non-recurring legal expenses. Recurring cash G&A cost of $5.2 million or 3.8% of NOI for the quarter, in line with the prior quarter.

Our interest expense for the quarter totaled $37.2 million compared to $32.2 million in the fourth quarter of 2017. Included in interest expense is $2.6 million of non-cash interest expense compared to $2.5 million in the fourth quarter of 2017. As of December 31, 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 4.28%. Borrowings under the unsecured revolving credit facility bore interest at 3.75% at December 31, 2018, an increase of 24 basis points over the third quarter of 2018.

We sold 15 skilled nursing facilities, two senior housing facilities, and one senior housing managed facility during the fourth quarter of 2018 for gross proceeds of $91.6 million bringing our total aggregate sales in 2018 to 58 assets for total gross proceeds of $382.6 million. During the quarter we made investments totaling $39.2 million with a weighted average of full cash yield of 7.4% including $26.3 million related to one senior housing community from our proprietary development pipeline with a net cash yield 7.47%. These investments were funded with available cash of $18 million and $21.2 of funds held by exchange accommodation titleholders. As at December 31, 2018 we had total equality of $426 comprised of currently available funds under revolving credit facility of $376 and cash in cash equivalents $50. We were in compliance with all of our debt governance as a December 31, 2018 and continue to maintain a strong balance sheet with the following credit metrics.

Net debt to adjusted EBITDA, 5.66x; net debt to adjusted EBITDA including unconsolidated joint venture debt of 6.12x. Interest covered to 4.14 times. Fixed charge coverage 3 times total debt the asset value 49% secured debt to asset value 7% and unencumbered asset value to unsecured debt at 222%. On February 5, 2019 the company announced its board directors to clear a quarterly cash dividend of $0.45 per share of common stock. The dividend on levy paid on February 28, 2019 to common stockholders of record as of the close of business on February 15, 2019. We also issued our 2019 per share earnings guidance range which are as follows. Net income $0.24 to $0.32. FFO, $2.02 to $2.10. Normalized FFO $1.86 to $1.94, AFFO, $2 to $2.08 and normalized at $1.81 to $1.89. Critical to understanding our expectations for $2019 is understanding our commitment to delivering the balance sheet to under 5 and a half times inclusive of our share of Enlivant joint venture debt and under 5 times exclusive of our share Enlivant joint venture debt. And under 5 times exclusive of our sharing live in joint venture debt.

Our leverage currently stands at 6.12 times inclusive of the JV debt, which is higher than historical levels in part due to the loss of EBITDA from our Senior Care portfolio of $20.9 million. We expect to accomplish this goal to the further assets sales in 2019 along with the issuance of equity with the Equity ATM program we established this morning. Our 2019 guidance reflects dilution from the issuance of equity under that ATM program of $0.05 to $0.08 per share. Additional assumptions in guidance include the following. The previously announced sale of 28 facilities currently operated by Senior Care Centers is completed April 1, 2019 for $282.5 million. Collection of $5.7 million of post-petition rent from Senior Care Centers pursuant to a settlement agreement entered into Senior Care Centers on February 15, 2019. Total impairment and transition costs for Senior Care Centers of $59.3 million all being excluded from normalized FFO and normalized AFFO.

Termination of our holiday retirement master lease and concurrent entry into a management agreement with holiday effective April 1, 2019 triggering the receipt of $57.2 million of cash consideration on April 1, 2019 in connection with the lease termination; this termination fee is excluded from normalized FFO and normalized AFFO. Same-store cash NOI improvement in our wholly-owned senior housing managed portfolio of 3% to 6% in our Enlivant joint venture of 6% to 12%. We did not include any speculative acquisition activity in 2019, but do include $142 million of acquisitions, primarily from our proprietary pipeline closing, primarily during the fourth quarter of 2019. These acquisitions are expected to provide an initial annual cash yield of 7.6%, under further assumptions, other asset dispositions totaling $300 million resulting in a loss on sale of approximately $85 million. Those dispositions currently have associated annualized cash NOI of $18.6 million. The dispositions include the remaining three Genesis assets, but the vast majority are comprised of legacy care capital facilities that we identify for sale as part of the portfolio repositioning and from a purchase option held by an operator, which were discussed in prior quarters.

Finally, I'll provide a quick update on the Genesis asset sales. We are near completion of these sales with the only three facilities we may need to be sold. During the quarter, we sold 15 assets for total gross proceeds of $81 million. The remaining three are still in the HUD approval process, which has delayed due to the government shut down earlier this year and as a result, we expect those sales to close in the second quarter. As per completion of these sales, we expect residual rinse to total $10.4 million per year for 4.28 years after each sale closing. Ultimately, expect to have total continuing cash rents from Genesis including residual rinse generating from sold assets of approximately $20.8 million or 4% of our current annualized cash NOI.

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

[Operator]

[Operator Instructions] And our first question is from Jonathan Hughes with Raymond James.

[Jonathan Hughes, Raymond James]

Up there on the West Coast; Rick, you gave North American coverage into January in your prepared remarks, but can you just elaborate on why this CEO left since he was such a big part of why you bought that portfolio in late 2017?

[Rick Matros, Chairman & CEO]

So a couple of things; one, I actually can't elaborate personal, so I prefer to keep it that way. But certainly, it was unexpected, but when we bought the portfolio, we also saw a really strong bench of really showing off when you came to the fact that we've been able to sort of regroup and when they were able to promote from within in terms of the new CEO I think shows. And looking at just threw them off their game a bit, we see them rebounding and it was actually a nice pickup in January. So we don't foresee any issues with that. If I could share more, John, I would but it's just too personal.

[Jonathan Hughes, Raymond James]

Now, that's fair enough. What about -- I mean, did the rest of the team, is it largely in place too or is it kind of a whole replacement of kind of the C suite there?

[Rick Matros, Chairman & CEO]

No, very body else is in place.

[Jonathan Hughes, Raymond James]

Okay. And then looking at the $300 million of dispositions and loan repayments in addition to senior care centers, it looks like it's about a 62-cap rate on the expected proceeds there in the cash NOI but more like a sub five on the gross book value, I guess. What's the composition of that $385 million gross book value in terms of owned assets and loans and when were those investments made?

[Harold Andrews, CFO]

So, this is Harold, John. Basically, about two-thirds of those ads being sold as like how made comments on the call were from a care capital legacy acquisitions. So two-thirds of it sat about a third of it, or I should say about 25% are related to this kind of Sabra historical legacy assets that were bought going back probably for the most part, three or four years, and then 11% of that number are the Genesis assets. And the yield is really as strong as it is to a large extent because of the handful of those assets and have no operations in them at all. These are operations that were shut down. You know, early on when we made the care, capital acquisition or grids have been reduced. So it is primarily skilled nursing assets and stuff that went back to the care capital acquisition.

[Jonathan Hughes, Raymond James]

Okay, that's helpful. And then earlier you did mention guidance, the earnings guidance and does include dilution from equity raises. Can we expect you to kind of issue around the current $19 share price? Just how do you think about using that throughout the year?

[Rick Matros, Chairman & CEO]

I think people will wait a little while. We've had a lot of noise around the stock. Just like we fill in the third quarter, we issued revised guidance, and it doesn't really matter how much you talk about it until you put numbers out here's always a reaction. So we should be able to bounce backs, giving the discount that we're trading at. And we think the two things that kind of have impacted us is [indiscernible], which has been ongoing for quite some time, but it's absolutely necessary from our perspective to get the company out from under how Genesis is growing itself and the issues that are created for himself as a result of that. So, we're almost done where weeks away. So that'll be behind us and people can expect a lot more predictability and more of a quiet kind of tone on the company. And then the leverage with the other pieces. And I think from other prospective out leverage down and having some quiet time after we finish the Senior Care Center shells on April 1 should help us to rebound. If you look at us, just from a pure valuation perspective, it's still pretty exceptionally cheap and we've got a very strong balance sheet going forward and a lot of liquidity in the stock, good ratings from the agencies and a much better group of operators and we had 18 months ago and no single operator that's going to be large enough to affect the narrative of the company.

[Jonathan Hughes, Raymond James]

Got it. Okay. That's helpful. Then just one more quick one. Deletions are expiring next year in 2020 what's in that bucket in terms of operator and what's the facility level coverage on these leashes if you can provide it? Thanks.

[Harold Andrews, CFO]

I'll get that to you offline. I'll have all those details with me right here, but we did adjust the way we're disclosing just so you know the lease maturities and we're now doing it on a net basis. How you saw that number come down a fair amount this quarter. A lot of those assets, I will say that a lot of those assets that are maturing in 2020 are part of the assets that are being sold this year. And so a big chunk of that is already anticipated going away and won't require any re-editing. But I can get you some more details on that offline.

[Operator]

Thank you and our next question comes from Chad Vanacor with Stifel.

[Chad Vanacor]

Thank you, and good morning all. So, I want to go back to North American. That coverage significantly from last quarter, from $1.25 at $1.09. Can we get some more detail on what's happening outside of management change to what's happening operationally to create that drag plus they're located in California, Washington, Washington's and tough environment? Maybe there's a split of the why in Washington versus California and then how are those facilities performed?

[Rick Matros, Chairman & CEO]

Yes. So, there isn't much of a difference there. Washington facilities actually performed pretty well. The drop look deep because there are underwritten coverage. We do an acquisition report, we underwrote them up to include period of time and that [indiscernible]. So that's really what accounted for. The drop ain't had that big drop, if you look at like the last six months in a more steady decline once the CEO left. So, I'd say the decline started in the summer and we started seeing some things rectify towards the end of the year and started seeing some real improvement in January. But no real difference between California and Washington.

[Harold Andrews, CFO]

I think it's primarily expense related as well. And the occupancy and their rights are very strong and it continues to be strong. So it is just a little bit of the distraction I think around expense management.

[Rick Matros, Chairman & CEO]

Which is one of the reasons they rebounded in January because if your issues on the expense side now on the revenue side, that's a lot easier to fix. It just needed to get some new systems and new controls in place and the CEO can kind of get settled in and address all that.

[Chad Vanacor]

All right. I mean, would those expenses be more labor-­related to they say some temp labor usage?

[Rick Matros, Chairman & CEO]

No, it's really all over the map. Supply cost, food supplies, stuff that's actually -- just it's blocking and tackling really. I think when you've got someone that's been a founder and CEO, and there's a sudden change like sometimes people take -- be a good excuse but it's reality, we see it happen all too often. But they're getting it together and we really don't have any concerns. And you know, Chad, you know as well enough, if we have concerns about enough, where do we start rating raising the flag pretty early. We did that with Senior Care, we did that with Genesis, we did that with the others. We just don't see that here.

[Chad Vanacor]

Okay. Then just thinking about your use in this cash, you're willing to take some dilution in order to delevering. Why is delevering a better use of cash than reinvestment of 2019?

[Rick Matros, Chairman & CEO]

Well, we -- but leverage ticked up at a higher -- it's above the level that we'd like it to be. We certainly want to get a stable outlook again back from [indiscernible] and we expect that to happen. We think all of that's important. We think you've got potentially getting an upgrade for Moody's is important as well. So all of that stuff affects your cost to capital. So we think that's really important. And our leverage may not be that much different than some of the larger guys who were also investment grade, but we don't necessarily get compared to the larger guys. We can compare it to the smaller guys who may not have as much going on from the growth perspective to keep their leverage low. So, we think it's going to accrue to the benefit of our shareholders if we focus on getting that leverage down because it will improve the cost of capital of the company from our perspective and that allows us to do more investment.

[Chad Vanacor]

All right. And just one more question, just on senior housing managed portfolio. You put out some pretty good expectations for 2019. Rate in the quarter was up pretty significantly in a brand poor basis. What kind of occupancy rate assumptions some country making in 2019 for that portfolio?

[Talya Nevo-Hacohen, EVP, CIO & Treasurer]

For the [indiscernible] on portfolio the one you're referring to, we've actually picked it back down a little bit on the occupancy and held steady on the Red Pot. But we think it's a very [ph] for purposes of forecast.

[Harold Andrews, CFO]

When you look at the when you look at the numbers as inclusive of the joint venture, you do see a steady increase in occupancy over the course of 2019, because remember this portfolio was acquired underperforming where we've entered into a joint venture obviously well below where stabilized occupancy should be. So there's some pickup in occupancy over the course of 2019, but nothing that -- it's nothing dramatic.

[Rick Matros, Chairman & CEO]

If you think about it in a couple of different pieces, Chad, you've got the wholly-owned portfolio, which has exceptionally high occupancy. It's effectively almost fully occupied one. Over 90%. So you've got to temper your expectations there. As Harold said, the joint venture is different because it was a whole turn around. So, in the wholly-owned, it would be tempering our expectations in terms of what we're putting in guidance in the assumptions and on the JV, which is still picking up speed, we've got some assumptions there that there might be awesome.

[Operator]

Thank you. Our next question comes from John Kim with BMO Capital, please go ahead. Your line is open.

[John Kim, BMO Capital Markets]

Thank you. On the delevering, was the 5.5 times really the focus of Fitch or were the other levering agencies also focusing at this level?

[Harold Andrews, CFO]

Fitch was the only rating agencies a specific way you laid out 5.5 times as a target for us. We just had a report put out by S&P who reaffirmed our ratings and put us on stable. And so, they don't have the same level of concern that Fitch's indicating.

[John Kim, BMO Capital Markets]

And how much equity do you need to raise this year to get your 5.5?

[Harold Andrews, CFO]

Well, it's going to depend on the timing and the amount of dispositions we make. And so, it's not going to be an immaterial amount, but it will be something that we'll do over the course of 2019 and we've got lots of time to get it done. So as Rick said, the timing is something we'd like to do sooner than later, but we're going to wait till made sure the stock price make some sense.

[Rick Matros, Chairman & CEO]

And using the ATM as match funds, it's the cheapest way to do that and it's the least constructive way to do that. So, again, we'll be patient with it and prudent about it.

[John Kim, BMO Capital Markets]

Okay. So, nothing to share as far as guidance on weighted average share outstanding for the year?

[Harold Andrews, CFO]

No, that is done.

[John Kim, BMO Capital Markets]

On the Enlivant same-store guidance there's the pretty wide range of 6% to 12% and I know you have to meet your comps from the flu season but what are the other variables do you see as far as setting the low end and the high end of that guidance range?

[Rick Matros, Chairman & CEO]

It's not so much of your other variables but you've got a portfolio that's been in turnaround mode, did a really good job with it. If it had been a steady state portfolio, it's a little bit easier to predict and you have a tighter range. We know it's going to be really healthy improvement but it's really difficult to predict how much improvement they're going to have. So it's really -- because it's in turnaround mode that we have a wider range.

[John Kim, BMO Capital Markets]

And if you hit that $6 to $12 on that portfolio; when do you think you would exercise the option to acquire the remaining portion of it?

[Rick Matros, Chairman & CEO]

Right now it looks like first quarter of next year.

[Operator]

Our next question is from [indiscernible] with Scotiabank.

[Unidentified Analyst]

Hi, thanks very much and good morning to everyone. First I appreciate we are prepared -- good morning, I appreciate the prepared comments on variability in operator coverage levels. Maybe from a bigger picture perspective, could you maybe expand on how you get comfortable with your top operators or any operator for that matter given the headwinds that you see in skilled nursing?

[Rick Matros, Chairman & CEO]

Well, first of all the headwinds are dissipating, so that's an important point and we look at a few things that are happening that are tangible, we should start seeing some benefit in the not too distant future to at least a slight demographic -- impact of a slight demographic uptake, and when the occupancy of the industry is as low as it is, call it 82%, you've got really nowhere to hide. So that next patient that you get in, that's a pull-through -- that's a complete pull-through to the bottom-line. So you have a disproportionate positive impact on any additional patient at this point. Secondly, you're going to see much more supply decline and the industry actually over the next -- in the next several years is probably going to have access issues which bodes well for the industry, it will be interesting to see how the government tries to deal with it. But you've got declining supply, increasing demographics, and then your PDPM happening October 1st and every single one of our operators has been preparing for it, feels really good about it, I believe it's the best Medicare reimbursement system that the industry has ever had.

So I think the headwinds are dissipating, beyond that look with operators buyback and we spent a lot of time with our operators, we have a really strong asset management team that's out in the buildings on a regular basis. So it sees things for themselves having business discussions on a regular basis, we had operational calls, also on a regular basis with all of [indiscernible] and doing their regulatory report and their operating trends and all that. So it's not too difficult from our perspective to get comfortable with an operator, and that's why with a couple of operators in the past and relatively early on we -- we're very concerned, we started waving the red flag but in the case of North American that's also one that we're comfortable that they will be able to read down and continue to be contended for us going forward.

[Unidentified Analyst]

I guess piggybacking on that; Texas has been one of those states that's been highlighted as one of the -- I guess a difficult operating environment and not necessarily indicative to your portfolio but we saw one of your peers report some negative news with one of it's operators. So maybe could you talk about the environment in that space since it's your largest and also appreciating that you've taken steps to reduce exposure there but just curious about your thoughts on how you're looking at the State of Texas?

[Rick Matros, Chairman & CEO]

So there are were primary factors that create a difficult environment in Texas; one is, it's one of the worst Medicaid rates systems in the country; and then secondly, unlike the rest of the country where it's very difficult to build skilled nursing even in a state that you can't build it because it's not a CLM, it very rarely pencils [ph], and so outside of Texas, you'll see facilities being built here and there by a company here or there but you're not real trends in Texas, there is over-supply in lot of markets, the regulatory environment is much lighter in Texas and pretty much any other place in the country.

And so as a result of that, there has been a lot of building in Texas. So you combine the oversupply in a number market similar to what we've seen in senior housing, we just don't normally see that in field nursing. With weak Medicaid rates it's not a great combination, so I think that even if even a senior care centers hadn't started completely blowing up the way we had, we would have looked to reduce our exposure that just sort of made the decision easier and so we'll be cutting our exposure in half. Now that one potential silver lining in Texas is, there is a lobbying effort ongoing right now to get a provider tax put in place which would be voted on in the state legislature in November, and Sabra as well as some of the other regional operators are working with the American Health Care Association, as well as the Texas Health Care Association on that lobbying effort and I think we've made a strong case, and we'll continue to make inroads there whether or not it happens or not, it remains to be seen.

If it does happen, it's going to be much, much better for the industry; and so the operators that we continue to work with in Texas will obviously then do much better. But I think for us even if that were to happen, we had 18% exposure to Texas, so even in a better operating environment that's an awful lot of exposure in one particular geographic region and we've made a commitment to ourselves as we started working for the Genesis [indiscernible] whether it's an operating tenant or say that we wouldn't allow ourselves to be overly dependent on any one particular state or operator because there are always certain things that are out of your control, and for us, we've got pretty tired of any individual operator or situation controlling the narrative of the company.

[Operator]

Thank you. Our next question comes from Michael Lewis with SunTrust. Please go ahead. Your line is open.

[Michael Lewis, SunTrust]

I wanted to ask, the low end of your normalized AFFO guidance is right on top of the dividend, you're going to be issuing some more equity at a yield that's about 9.5%. I guess the question is, does -- is there a scenario where you kind of adjust the dividend or is this a silly question at this point?

[Rick Matros, Chairman & CEO]

It's never a silly question, right. So we understand the question. We will not be adjusting dividend. We're not going to see growth that is in the dividend, but everybody can count on it being stable.

[Michael Lewis, SunTrust]

And how about -- how should we think about the likelihood and the timing of buying the remaining interest in the Enlivant JV?

[Rick Matros, Chairman & CEO]

Well the timing is right now the way we see it, when we look at their performance against their forecast, first quarter of 2020, looks to be realistic and as we spend the rest of 2019 getting our leverage down on some, that will put us in a better position to pull that trigger at the appropriate time.

[Michael Lewis, SunTrust]

Okay. And then lastly, I just wanted to ask a big picture question, I actually asked this at one of your peers on their call, but George Hager at Genesis said earlier this month at a conference that the REIT structure in Skilled Nursing has proven to be a failure. You obviously have some broad experience or some experience with them, specifically, do you think there is some truth in that, the kind of blocking and tackling and constantly dealing with tight coverage and issues here or do you think it's more operator-specific, and this is something that will work itself out and it will get passed?

[Rick Matros, Chairman & CEO]

So I know that George said that I was really disappointed to hear that, particularly since he had a group of landlords that gave them him rent relief and debt release and quarter-after-quarter-after-quarter gave him waivers on defaults. So that was really disappointing to hear. I think every things with our culture in this business. And so, there always been sometimes where there have been some downtime, they're actually been less downtimes and uptimes over the course of this business for the last 35 years. And I know for me as an operator, we never looked at ourselves as victims of the environment. If there are headwinds and everybody is going through those headwinds, and so you make a decision that you're going to deal with those headwinds better than anybody else.

I think if you look at Genesis, every decision they made has put them in traditional rent, it's self-inflicted. So all of our operatives had headwinds to deal with, in some cases we've given them some help and we've giving them some help because they've demonstrated to us that they've earned it and they're good operators, in other cases they haven't needed help; so it was really disappointing to hear that, and again, given how much the REITs has helped them, if not for the REITs, the company would be bankrupt.

[Operator]

Our next question is from Daniel Bernstein with Capital One.

[Daniel Bernstein, Capital One]

I wanted to ask you about Medicaid mix and your skilled mix if you look across the street [ph], Medicaid mix has been going up, your skilled mix actually improved though. So I just wanted to understand a little bit about -- your thoughts about increasing Medicaid census in the space. And then maybe, some -- anything particular with your portfolio that is kind of bucking that trend?

[Rick Matros, Chairman & CEO]

One, to us skilled mix is the most important indicator of whether an operator really understands the business because it means the higher skilled mix is, it that means that you are going for the higher security patients, and it allows you then to minimize Medicaid. When you see Medicaid increase in my experience, look I've done it as an operator as well; when your occupancy is really low, you may admit Medicaid patients more than you might normally do it because you've hit that inflection point where you've got no leverage any longer. And so as I said earlier about the low occupancy and just even slight improvements in the demographic that disproportionately helped your bottom-line; if your 82% occupancy or 83% occupancy, even if you're in a state where the Medicaid rate is weak, getting that Medicaid patient in, that's a full pull-through to the bottom-line.

So there are points in time where operators will admit more Medicaid patients just to help occupancy on covering their cost. The key there is you really don't want to do it to the extent that you've admitted too many low reimbursed Medicaid patients that have normal length of stay. Now the industry is a lot different now than it was even 10 years ago, and Medicaid patients -- most Medicaid patients in skilled nursing today have a much shorter length of stay than Medicaid patients and skilled nursing 10 years ago say. So there is less danger of that happening now than happening in the past, but it was always when you had little occupancy, that was always a fine line to kind of walk. I think with our operators, they really are focused on very higher acuity [ph], I think we've always had about the highest skilled mix in the space and you they've made decisions that they'd rather just focus on that higher acuity [ph] patient and sort of live with lower occupancy for a little while rather than admit more Medicaid patients.

So everybody -- every operative is a little bit different, there isn't exactly a wrong or right to it but over the long haul you do not want to see Medicaid increasing at the expense of Medicare and insurance.

[Daniel Bernstein, Capital One]

I guess we'll see what happens to when PDPM comes in, and that will incentivize people to do the high acuity [ph] grade.

[Rick Matros, Chairman & CEO]

Yes, right because it's going to be on the nursing side, not just the rehab side. And that's really -- there are a number of benefits the PDPM; I think from my perspective the primary benefit is, when you've got a system that's been designed to only incentivize you to go after short-term rehab patients, by definition you're creating your own issues then; you're admitting patients that while the reimbursement maybe good, I'm going to continue to put more pressure on your length of stay which obviously brings your occupancy down. So that's really one of the benefits of PDPM, you're going to get out of that sort of vicious cycle.

[Daniel Bernstein, Capital One]

Although I did have a question on that and rehab in PDPM, it seems to me that margin should go up on rehab and we've been hearing a little bit about operators maybe bringing rehab back in-house. So I mean, one is, are your operators looking to bring rehab back in-house if they were third-party? And two, is that, I presume that's a positive impact on lease coverage or corporate coverage is the kind -- I want to get your thoughts on that?

[Rick Matros, Chairman & CEO]

So a number of our operators who are already in-house that's a trend that started really over the last 15 plus years, before that almost everybody outsourced rehab and the reason everybody used to outsource rehab and a change is that rehab was huge variable in terms of revenue, it wasn't another predictable sort of line of business. Once the RUG system got developed, when you had RUG-IV come in in 2006 and rehab became a lot more predictable it made sense because you can count on a certain level of revenue, it made sense to bring therapy in-house where you can completely control the product. So in terms of in margin issue under PDPM for rehab, it's definitely a positive because they are bringing back concurrent and group therapy. And even though it's capped at 25% when concurrent and group therapy had been around really just -- really until several years ago, the industry experience is about 26%, so they capped it basically at these -- at the experiential level and, but remember, you're still looking at the Nursing Patients, because the rehab rates are going to be exactly what they were and after day 21, you're going to be incentivized to get those patients out of the facilities otherwise you thought having a decline in net revenue per patient.

So the fact that you're going to have concurrent and group therapy allow rather than have any of that decline come straight to the bottom line, concurrent and group therapy gives you the opportunity to mitigate that and improve your margin. So I think you're going to have margin improvement from concurrent and group therapy and you're going to have margin improvement from having a broader palette of patients to go after some of which will have a longer length of stay, because you're not just going to be going after short-term rehab patients.

And then the fact that you're getting rid of the case mix system completely makes things a lot simpler as well, because you go into a simple case mix system. If you look at the recent changes in home health reimbursement that's also more of a case mix system. So CMS is pushing everybody to a Case Mix System, which we think is a good thing and over the long haul will allow CMS to then transition the Post-Acute space to a neutral site system, which is something that those of us in the Skilled states will always look forward to. Hope that answers your question?

[Daniel Bernstein, Capital One]

No, that was great. I guess I have a few more questions, but what, I'll hop off and talk to you guys later.

[Operator]

[Operator Instructions] Our next question is from Nick Joseph with Citi.

[Nicholas Joseph, Citigroup]

Thanks. For the $69 million of expected impairment charges in transition costs in guidance in 2019, what the assumed breakdown between the two?

[Harold Andrews, CFO]

So it's Harold. So it's about $60 million assumed of an impairment or loss on sale and about -- and the balance is the transition costs, a big chunk of that being property taxes, it will still need to be paid on that portfolio.

[Operator]

Thank you. And our next question is from Lukas [ph] with Green Street. Please go ahead.

[Unidentified Analyst]

Thanks, good morning. Can you define more color on the size of the Senior Care Centers' settlement, is it larger than the $5.7 million?

[Rick Matros, Chairman & CEO]

It is larger than the $5.7 million and it affects a note that was outstanding. They just asked us not to give any more specific follow on, it's a court approval, but it is more than that.

[Unidentified Analyst]

Do you have a rough idea of the timing...

[Rick Matros, Chairman & CEO]

It's totally -- it's totally good news. So.

[Unidentified Analyst]

Right, right. Do you have a rough timing of when we'll find out how much bigger it is?

[Rick Matros, Chairman & CEO]

I would never predict timing when it comes to bankruptcy coherence.

[Unidentified Analyst]

Fair enough. And then there's...

[Rick Matros, Chairman & CEO]

I mean we protected ourselves from the bankruptcy, but there are a couple of the clause remaining matters that the bankruptcy court has to make a decision on. We just protected ourselves by terminating the leases, so we pulled that stuff out, which is the majority of the -- of what we had to deal with.

[Unidentified Analyst]

And there's some concern around Managed Medicaid and, Rick I'm just curious what your thoughts are on that issue?

[Rick Matros, Chairman & CEO]

It all depends on rate and how they approach it. And we see in Medicaid -- Managed Medicaid products before and some of them have not been good and some of those have been good. So I think it's a little bit early on that. So we'll see. But most of the experience that we've had with Medicaid and it's not really even Sabra's experience, going to my experience as an operator and really going back probably over 20 years, the Medicaid -- the Managed Medicaid rates have been pretty close to the State Medicaid rates that have been in place, but we'll see, little hard to predict.

[Operator]

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to Rick Matros for his final remarks.

[Rick Matros, Chairman & CEO]

Thanks, everybody for bearing with a long call, now we've had a lot of moving parts and we're looking forward as I know you are to getting it behind us and Harold and Talya and I and the team here look for any initial conversation offline, we'll be heading to the Wealth Conference Call and just hoping to see a bunch of you guys there. Thanks.

[Operator]

And ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.