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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 Fourth Quarter 2019 Earnings Conference Call. This call is being recorded. I would now like to turn the call over to your host, Mr. 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 tenants' financial performance, 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, 2019, that was filed with 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 Investor 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, thanks everybody for joining us this morning, this afternoon. This morning [indiscernible] and the other families that we lost in the helicopter crash. And now the celebration of life for all those families is happening at Staples Center and may their memories be a blessing. Now I'm on to Sabra. 2019 was the year that we finished our repositioning of the portfolio and did all the things that we did to improve the balance sheet which going into 2020 is a pretty -- in pretty pristine condition, Harold will talk more about that. Our story and our focus for 2020 is really simple and that's getting back to growth and based on a very strong platform that we have in place now, the best balance sheet that we ever had.
Activity is starting to pick up. We completed just in the $38 million in the fourth quarter investments and a little bit over $82 million so far, through the first quarter rather of 2020. The average yield of the deals were 7.4%. We're also getting close to closing a $150 million investment in senior housing investment and that deal will initially be earnings-neutral, will be accretive later in the year. Our focus on investments going forward is going to be on high-yield investing, specifically skilled-nursing behavioral and addiction.
Incorporated in this year's guidance is our commitment to maintaining the dividend with expected coverage improvement beginning in the latter part of the year. Moving on to the deal environment. Essentially it's the same as it's been in terms of competition. We're seeing some senior housing opportunities to better cap rates. We're starting to see skilled nursing volume tick up and that's ticking up at historically stable levels. Our current acquisition pipeline is just under $1 billion, still primarily senior housing, but we're seeing more skilled deals and we're also starting to see some behavioral and addiction investment opportunities as well. And we now have relationships with two operators in the addiction space. So we don't expect the growth to be rapid, but it's getting off to a nice start for us.
Moving on to Enlivant, we're not pursuing a new JV. We determine that it's best to work with TPG to have a simpler solution, the JV solutions that we're looking at, it's going to add some real complications to our story, and I think as you all know, we've been talking about it for a while. We're trying to keep our shortages uncomplicated as possible. We had enough noise with everything that we went through with the repositioning. Our option to exercise doesn't end until the until December 31 of this year. We believe we're in a good spot to give it more time as the Enlivant performance continues to strengthen. We would anticipate exercising the option when we see occupancy gains that provide a clear path to accretion from any incremental investment. Until that occurs, we're happy with our current level of investment in the portfolio and don't feel compelled to make any changes.
Possible outcome may be a partial take out with an extended penalty option for the remainder, minimizing the equity required, again working with TPG will maintain the current partnerships.
Now moving on to PDPM, I know everybody is curious about the results for PDPM. We're not at a point where we could sort of publish a snapshot. But I would say through the fourth quarter of 2019, we're seeing rate growth, net of the market basket at mid-single-digit pretty much across the Board. A little bit more, a little bit less with Sabra coming at around mid-single-digit. Once we have some more data points, we will be able to provide a snapshot of how that impacts coverage. Hopefully we'll be able to do that on our first quarter call early in May. One of the things that our operators are still working through that will have a big impact on the improved coverage is the cost reduction therapy.
So as they make more progress on stabilizing those cost reductions will have a much better sense of how the combination of the rate increase and cost reductions go to improving coverage. But we're really pleased with the improvements that we've been seeing relative to PDPM and there's really been no disruption with any of our operators as they transition to the new system.
Moving now to operations. Our triple net same-store skilled business, occupancy skilled mix and EBITDA coverage were stable. For senior housing, occupancy and EBITDA coverage were stable as well. Our Top 10 is generally strong. The three operators -- we kept closest eye on Avamere, Signature Health, and North American. Avamere was down sequentially, but they bottomed out in the third quarter, they showed a nice improvement in the fourth quarter, that's continuing into the first quarter because they're actually trending up a little bit more quickly and sooner than we anticipated.
North American Healthcare continues to improve, improved sequentially, is also improving first quarter. Signature Health trended up in the fourth quarter as well and continuing in the early first quarter. So we feel really good about where our operators are from a coverage perspective and all else for that matter. Our same-store shop, Talya will provide all the specific details but we showed improvement across the board in occupancy margin and RevPAR, the unconsolidated JV with Enlivant and TPG showed occupancy and RevPAR up with a solid margin.
And with that, I'll turn it over to Harold. I'm sorry, Talya.
Thank you. I'll provide an update on our managed portfolio. In the fourth quarter of 2019, approximately 17.3% of Sabra's annualized cash NOI was generated by our managed Senior Housing portfolio. Approximately 57% of that relates to communities that are managed by Enlivant and 37% relates to our Holiday-managed communities. The balance includes our Canadian portfolio and for assisted living and memory serve communities in US.
On a same-store year-over-year basis, the managed portfolio, which excludes the holiday assets showed favorable results in the fourth quarter compared with the fourth quarter of 2018. Revenues increased by 2.5%, cash, net operating income increased by 2.9% and revenue per occupied room RevPAR excluding the non-stabilized assets was up 4.4%. The year-over-year results aren't as dramatic as they were last quarter when we were comparing third quarter 2019 results to quarter end 2018 that was recovering from the impact of flu.
The impact of the current flu season was already felt in December, resulting in higher move outs. The context -- this context makes our managed portfolio results even more solid continuing the trend of improving rate revenue and cash net operating income across the portfolio. Although the senior housing industry continues to feel the pressure of increased supply and higher labor costs, our portfolio communities that largely targets the middle market in secondary cities in the US and Canada is not as dramatically impacted by these factors because of locations, ongoing capital projects to maintain the communities [ph] for both residents and employees, and the importance of our communities as an important employer in their markets.
Before we get into the details of this quarter's results, I will state the obvious. One quarter doesn't make a trend, as in every operating business there is volatility. So we focus on the direction of results over time, while understanding the source of volatilities to seasonalites through changes in competitive landscape , etc. And I encourage you to look at the sequential quarterly results that we include in our supplemental information where you can begin to track trends in our managed portfolio over time.
Now , back to the details. The Enlivant joint venture portfolio, a 170 properties of which Sabra owns 49% showed steady improvement. Average occupancy for the quarter was 82.2%, 0.8% higher -- 0.8% higher than previous quarter and 0.1% higher on a stabilized same-store year-over-year basis. RevPAR was $4,418, 2.6% higher on a quarter-over-quarter basis and 4.1% 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 was 1.4% year-over-year and was flat sequentially. Cash NOI margin was 25.7%, in line with the prior year's results. In 2019, the Enlivant joint venture's cash NOI was 7% higher than in 2018, driven by top line growth and expense control.
Continuing on to the results of the wholly-owned managed portfolio. Sabra's wholly-owned Enlivant portfolio of 11 communities continued to drive rates. However, the early start of the flu season impacted occupancy and therefore margin. Occupancy at two of our 11 communities was particularly hard hit by move-outs related to flu beginning in late November and into early January. Both communities are in strong markets and occupancy is already bounced back, but in a portfolio of 11 properties invented [ph] two communities effects due to the results of the group.
Fourth quarter occupancy was 89.5%, 0.7% higher than the prior quarter and lower on a year-over-year basis by 3.1% as a result of a spike in depth and move that [ph] to higher acuity setting. While January occupancy came in at 86.9% because of the flu, Enlivant is seeing a strong increase in move-ins and is optimistic about momentum on occupancy gains. RevPAR in the fourth quarter rose to $5,810, a 5.1% increase over the prior quarter and 6.8% over the prior year. Portfolio cash NOI was up 10.4% on a sequential basis because of rate increase declining to [ph] effect on October 1 and cash NOI was up 2.9% in calendar year 2019 compared with 2018. This outcome is a direct result of occupancy losses being offset by rate increases.
Holiday, we transitioned our holiday communities from [Technical Difficulty] to managed portfolio at the start of the second quarter of 2019, so we do not yet have year-over-year same-store results to report. In addition, we transitioned our independent-living community [indiscernible] to Holiday in the fourth quarter of this year. So, I will focus on same-store quarter-over-quarter results excluding the Franklin assets. Portfolio occupancy was 87.8% in the quarter, 0.8% lower than in the prior quarter and RevPAR was $2,486, in line with the prior quarter. Cash net operating income fell 6.3% sequentially, because the third quarter included a favorable adjustment associated with the deferral of referral fees. Excluding this adjustment, cash NOI increased 2.9% sequentially. Sienna Senior Living manages eight retirement homes in Ontario and British Columbia for Sabra.
In the fourth quarter of 2019, the eight properties managed by Sienna delivered 88.3% occupancy, which is slightly down from 89.8% in the prior quarter. Last quarter was $2,268, which was flat to the prior quarter and 3.3% higher on a same-store year-over-year basis. Fourth quarter cash net operating income was down 2.7% on a year-over-year same-store basis, but increased by 2.8% in calendar year 2019 compared to calendar year 2018 on a same-store basis with margins remaining virtually the same in full-year 2019 compared with 2018. Sienna continues to maintain occupancy in a narrow band and tight expense controls resulting in consistent operating results for stabilized portfolio.
And with that I will now turn the call over to Harold Andrews, Sabra's Chief Financial Officer.
Thanks Talya, thanks everybody for joining the call today. This quarter we achieved our objective of lowering our leverage levels comfortably below our stated target of 5.5 times. This effort throughout 2019 resulted in many credit metric improvements compared to December 31 2018 as follows. Our debt-to-EBITDA, adjusted EBITDA is down from 6.12 times to 5.38 times and excluding the JV debt we're now at 4.89 times. Interest coverage, up from 4.18 times to 5.28 times, fixed charge coverage up from 4.05 times to 5.08 times and debt to asset value down from 43% to 36%.
We also lowered our cost of permanent debt, which excludes the revolver from 4.28% at the end of 2018 to 3.79% at the end of 2019, a 49 basis point improvement, generating annual interest savings of approximately $12 million. During the fourth quarter, we issued 11.5 million shares of common stock under our ATM program, generating net proceeds of $248.4 million. These proceeds were primarily used to repay all outstanding balances under our credit facility and $145 million of our term loans maturing in 2022.
In addition to the improvement of our credit metric, the full pay down of our revolving credit facility, along with our unrestricted cash and cash equivalents provides us with over $1 billion of available liquidity, getting us well positioned to take advantage of investment opportunities. Supplementing that liquidity is a $340 million we have available on our ATM stock offering program. The ATM will among other potential users allow us to match fund acquisitions and ensure that we maintain our leverage below the 5.5 times long-term target as we grow. And now for a few comments about the financial performance for the quarter.
For the three months ended December 31, 2019, we recorded revenues and NOI of $155.8 million and $134.8 million respectively compared to $149.8 million and $130.4 million for the third quarter of 2019, increases of 4% and 3.4% respectively. These increases are driven in part by the acquisitions during the third and fourth quarters and $0.9 million of non-cash lease termination income related to the transition of one senior housing community to our senior housing managed portfolio during the fourth quarter. AFFO for the quarter was in line with our expectations at $91 million, and our normalized basis was $95.6 million or $0.48 per share. FFO was normalized primarily to exclude a $5.6 million loss on extinguishment debt, recognized in connection with the redemption of our 5.375% senior unsecured notes that were due in 2023. This compares to normalized FFO of $90.1 million or $0.47 per share for the third quarter of 2019. AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses, it was also in line with our expectations at $89.6 million, and on a normalized basis was $93.2 million or $0.47 per share.
AFFO was normalized primarily to exclude a $3.6 million cash portion of loss on extinguishment of debt recognized in connection with the senior note redemption. This compares to normalized AFFO of $89.7 million or $0.47 per share in the third quarter of 2019. For the quarter, we recorded net income attributable to common stockholders of $39.7 million or $0.20 per share. G&A costs for the quarter totaled $5.7 million including $1 million of stock-based compensation expense, a recurring cash G&A cost of $4.7 million or 3.5% of NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G&A cost to average approximately $6.5 million.
Our interest expense for the quarter totaled $27.4 million compared to $29.3 million in the third quarter of 2019. This quarter-over-quarter reduction was driven by a combination of lower total debt of $193.1 million and a lower overall borrowing cost resulting from our refinancing activities. Interest expense included $2.2 million and $2.5 million of non-cash interest for the fourth and third quarters of 2019 respectively.
During the quarter, we recognized a $2.7 million impairment of real estate, primarily related to one skilled nursing facility expected to be sold in 2020. We did not recognize any revenues from this asset during the fourth quarter. Other income of $1.7 million for the quarter relates to a settlement from a prior operator. This amount is excluded from normalized FFO and normalized AFFO. During this and subsequent to the fourth quarter of 2019, we completed real estate acquisitions of $118.1 million with a weighted average cash yield of 7.4%. Those acquisitions consisted of five senior housing communities, including three from our development pipeline and $114.3 million one addiction treatment center for $3.8 million.
We have committed to invest an additional $18.5 million to complete the construction project for the addition treatment center, which is expected to be completed in early 2021. During the fourth quarter of 2019, we completed the sale of eight skilled nursing transitional care facilities for aggregates sales proceeds of $7.3 million. These sales were anticipated in our portfolio repositioning plans and further strengthened the portfolio. During the fourth quarter, we recorded revenues from these sold facilities totaling less than $100,000.
We were in compliance with all of our debt covenants as of December 31st, 2019. In addition to the metrics I mentioned previously, our unencumbered asset value to unsecured debt increased from 218% to 275% year-over-year and secured debt to asset value remains at 2%.
Finally getting to our guidance. We issued our per share earnings guidance range from 2020 as follows: net income, $0.81 to $0.91; FFO, $1.69 to $1.79; normalized FFO, $1.71 to $1.81; AFFO and normalized AFFO, $1.70 to $1.80. We expect our 2020 senior housing managed portfolio's same-store NOI to grow as follows: wholly owned, 4%; unconsolidated joint venture, 3%. With the portfolio repositioning and de-levering of the balance sheet to be accomplished in 2019, we're very excited about the prospects of returning to growth. We have included in our guidance expected investments in 2019 [Technical Difficulty] $159 million at a weighted average initial cash yield of 7.4%. $82 million of this has already been completed. We did not include any speculative investment activities in our guidance.
Furthermore, maintaining debt to adjusted EBITDA at or below 5.5 times is built into our performance expectations and will be a critical consideration in our investing activities going forward. Our guidance includes expected dispositions and loan repayments of $111 million which consist primarily of the three remaining Genesis assets requiring HUD approval and a few remaining asset sales identified in 2019 that are yet to close. We expect most of these to close by the end of the second quarter at a yield of approximately 6.6%. With the refinancing activities that we accomplished in 2019 and the absence of any meaningful debt maturities over the next several years, we do not expect any significant financing activities, except as may be related to funding acquisitions.
Related to the assumed acquisitions included in our guidance and our commitment to maintain our leverage below 5.5 times, we do include the issuance of $120 million to $140 million of equity on the ATM during the year.
It should also be noted that we have a few leases maturing in 2020 having total annualized revenues aggregating to $12.9 million. Many of these are expected to be renewed and no reduction of rents and several mature in the fourth quarter of 2020 limiting the impact on 2020 to less than $0.01 per share. The impact of these maturities has been included in our guidance.
One final comment on our 2020 guidance. We expect first quarter 2020 normalized FFO and normalized AFFO to be in the ranges of $0.43 to $0.45 and $0.42 to $0.44 respectively. This decline from Q4 2019 is driven primarily by an increase in the weighted average shares outstanding quarter over quarter along with higher G&A costs and timing of collections from our cash basis tenants.
Finally, on February 4, 2020 the Company announced that its Board Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on February 28th to common stockholders of record as of February 14th.
And with that, I'll turn it back to Rick Matros.
We'll open it up for Q&A now.
[Operator Instructions] Our first question comes from Nick Yulico of Scotiabank. Your line is open.
Thanks. Good morning. First of all, I just want to clarify, Rick, when you're talking about PDPM, saying it's a little bit early, but to give a snapshot, but I think you said the rate growth net of the market basket was mid-single digit. So does that mean that's inclusive of the benefit of the market basket increase?
No, it excludes the market basket.
Okay.
So, it's the pure rate growth from PDPA.
Okay. All right. So I guess I mean at this point, granted it's still a little bit early, but any kind of feel for how you think CMS may be viewing the benefit from PDPM and whether at some point you're going to have to address that in terms of some sort of clawback, any sense that that would happen in the April notice that goes out?
Yes, a couple of comments. One we all knew that it wasn't going to be revenue neutral, but it's not egregious the way RUG-IV was. RUG-IV was double-digit and we're not -- and we're not seeing that and I don't think we will see that -- you may see it operated here, but certainly not on a [Technical Difficulty] basis. I actually don't expect a clawback. I think CMS despite comments expected some positive growth and my guess is what they will do is at some point in time do an adjustment go forward -- going forward. So, for example, October 21, [Technical Difficulty] getting a market basket [Technical Difficulty]. So my guess is it's more of a go-forward thing, which would be fine than anything else.
I'll be surprised if anything happens this year simply because they have already been in the process of writing the initial rule and there just hasn't been enough data out there. So I just think sort of statistically, technically it's going to be tough to do anything that would be effective October of 2020 or fiscal year '21, but you never know. But that's my best guess, there wouldn't -- there is not going to be a clawback because growth isn't going to be unreasonable. But I want to make some adjustment on a go-forward basis, which obviously would be a lot more palatable.
The other thing I would note RUG-IV it wasn't just that the revenue growth was so extremely high, but it also took place during the Great Recession. So that sort of compounded kind of the issues at the time. So we'll see.
Okay, that's helpful. Thanks. Just second question is on Enlivant and I know you said you're not pursuing a new JV. I think you said there is a partial take out possible. I think that it was just in January that the option opened for TPG to do something with selling their interest. I mean can you just tell us kind of where you're at on discussions and if you think at some point this year, it will get resolved as to whether you're going to own more of Enlivant or not?
So, the only discussion that's in place where that -- we want to see a path through accretion here. And at this point, TPG seems to be [Technical Difficulty] and we'll just sort of take it from there. So, as I said in the opening comments, we're pretty comfortable where we are now. We are really pleased with the addition of [indiscernible]. And I would expect something to happen which is not -- we are not in a rush.
And can you, just a follow-up, can you just remind us how it works in terms of -- if you are going to increase your stake in the joint venture, how the valuation of that would work. Is it just a totally new valuation that happens or is it somehow dependent on the price that was originally paid?
It's based on the price that was originally paid. So nothing is changed there. There was a, it's 4% plus 5% [ph].
Okay, thanks. Very helpful.
Yes.
Thank you . Our next question comes from Nick Joseph with Citi . Your line is open .
Thanks. Maybe just following up on that in terms of Enlivant, you obviously put out your expectations for this year. And I understand wanting to acquire it accretively. So based of your current expectations, when does that inflection point occur from occupancy or NOI standpoint, where do you think you could actually do it accretively?
We can't pick a time, it's the latter part of the year, probably closer to sometime in the fourth quarter.
Okay, thanks, that's helpful. And then, Rick, your opening comments, just getting back to growth obviously just gave 2020 guidance. So the impact of the share issuance and deleveraging is been felt right now. Is that more of a 2021 comment would you currently expect earnings per share growth next year?
Yes, I think, yes, in fact [ph], anything, everything that we get done this year, particularly the time it takes to close deals are going to have a much bigger impact on '21 then they will have on '20. So I would expect that the impact on 2020 will be incremental. But it will help us clearly move into growth mode for '21. And that's why I comment -- also earlier that, we expect dividend coverage during the latter part of the year when the impact of some of the investments we start taking hold.
Makes sense. Thank you.
Yes.
Thank you. Our next question comes from Chad Vanacore of Stifel. Your line is open.
Hi, good morning. So I was just thinking about the owned assets in shop. Now, holiday occupancy dropped pretty significantly from first half with second half about a couple of hundred basis points. So how should we expect that trend in 2020?
They have usually held fairly steady on these assets. So there is some volatility, but I think [Technical Difficulty] portfolio of stabilized assets. The only asset that's not stabilized is the one that we transitioned to them that was being run by a different operator one of that asset that I mentioned in Michigan.
Okay. And I'm sorry, Talya, how does that affect the overall?
The Frankin [ph] asset, I don't think it's included in our numbers because it's not stabilized.
Okay. Then just thinking about M&A, you've got $110 million about dispositions that are in there. What about the 150 acquisitions. Is that skilled nursing that you alluded to and then what kind of cap ratio should we expect?
That's in senior housing; that's a senior housing investment and we're in the midst of finalizing negotiations with PSA. So we're not prepared to talk about any specifics relative to the deal. As I said, it will be, initially it will be earnings neutral, but expect it to be accretive in latter part of the year.
And then, Rick, you had mentioned about shifting more towards the skilled nursing side of things, how should we be thinking about that?
Well, I think there has been an assumption that we haven't been interested in skilled nursing which isn't the case. So I just want to emphasize that we are interested in looking into high yield investments that we've done. We think a really nice job since the CCP merger rebalancing the portfolio and have plenty of room to grow in its skilled nursing arena without becoming sort of the skilled nursing REIT and still having balance in the portfolio between skilled nursing, senior housing and behavioral hospitals and other specialty hospitals.
All right. And then just one more, just the equity issuance part, you said we should expect $120 million to $140 million, wouldn't that be delevering at this point. And then, what would, what should we expect in terms of if you end up closing than in live in JV second half of the year?
It's not, it's not additional delevering, it's just using the ATM to match fund, so that will use some combination of debt and equity as we do investments this year, so that we maintain our leverage at or below our target. And similarly with live, and if we were to exercise that option in part or otherwise, there'll be some combination of debt and equity used so that we maintain our target leverage. Everything is about maintaining the target leverage. So there is no need for us to issue equity just to delever the balance sheet any further. We just maintain where it is. And by the way, using the ATM not just to match fund sort of routine investments, which is pretty standard for all of us. We would expect to use the same mechanism to do any -- for anything that we might do on the Enlivant portfolio this year.
All right, thanks. I'll leave there.
Yes, Thanks, Chad.
Our next question comes from Rich Anderson of SMBC. Your line is open.
Hi, thanks good morning out there. So just back to the JV, is there something you saw that you observed with the portfolio that caused you to sort of hit the pause a little bit here on making a new incremental investment in JV, was it some sort of fundamental thing or is it simply thinking about staying simple, put it that way and not complicating things more. I'm just curious, what do you do if you don't get that occupancy gain that you feel like you need to move ahead and do something incremental or you willing to just sit at 49% for forever?
We are comfortable where we are, obviously TPG may feel differently about it for them then they want to take additional actions. Once the option is up, they can find a buyer that can pay that had from a [ph] price. But hitting, -- so that's kind of where that asset, but we're comfortable with where we are. In terms of hitting the pause, it wasn't really so much hitting the pause button. But if you think about, you've got Sabra and Enlivant, you've got TPG owning the operating platform, now you're going to bring in new JV partner in, you've got issues with aligned incentives, you've got a much more complicated structure and we really mean what we were talking about all last year. We want to have a more simplified story. It's easier for everybody to digest. We have a really good partner, TPG. And so their willingness to work with us is greatly appreciated on our part.
And then, the other sort of specific thing from the timing perspective was we saw, and made some changes relative to their marketing strategy, which result in stronger occupancy in the fourth quarter, but we also knew that we were going into what everybody in this call know the worst flu season that we were had even worse in two years ago, although it looks it's more short-lived that it was two years ago. So to pull the trigger, knowing that you're going to have an occupancy decline just did it make any sense, we just want [indiscernible]. So there is no reason for us not to just wait longer until they got through the flu season. And as I said in my opening comments, we did a really nice job managing through that as our other operators. Yes, that's it.
Okay. Yes, fine. So, thanks for that. Moving to PDPM, I have a -- maybe abstract type of question or something but, everyone recalls RUGs IV and what happened when we -- maybe we got -- when we got little fat dumb and happy, not expecting the reaction that they got from CMS. I'm curious, do you think perhaps the industry will behave more rationally and maybe not try to milk every single dollar and allowed us to have some legs as opposed to maybe going too far too fast in opening up the conversation for a clawback scenario or something like that. Is it possible we could actually have good behavior at this time so that doesn't become part of the story?
Yes, so a couple of comments, Rich, RUGs IV was just not well designed. This is a much better designed system and look -- operators approach things pretty simply, they follow the money, and it was such an easy thing to do the way RUGs IV was designed. [Technical Difficulty] has a much better design, but your other point, yes, I think it's definitely behavioral changes this time. Operators remember every slides that's ever happened in the history of their careers, at every cut that's happened in every state in the history of their careers, and so they're really mindful of that. So to give you a specific example, under PDPM, you're allowed to run up to 25% as we have revenues in concurrent group therapy, and 26%, by the way, before they took away concurrent and group therapy was industry average.
So the cap is very -- is basically where industry average always was. But the industry -- and I'll talk about our operators, what we're hearing it elsewhere as well, are very mindful of the fact that CMS is going to look to red flags, and one red flag would be going from zero concurrent therapy and group therapy on September 30 to 25% kind of overnight when you've been billing everything on the forward Rockford ultra-high and very high. So we're not seeing that with our operators. Our operators are us, in fact, even when they were talking about transitioning and working on the training programs and coming in during the presentations to us, they all made a point of saying, we're not going to go there. We're just not going to grab that much. We're going to be much more prudent and even -- and look , if you think about that level of discipline, to me, it's even more admirable given the headwinds the industry has had that they're not going to do that.
So we're seeing a much slower and small gravitation and percentage of concurrent and group therapy than might have been anticipated, given the opportunity to go to 25%. And I expect that we're going to see that pretty much across the board. You're always going to have operators here and there, and if they're doing something that's egregious and let those specific operators pay for it, but I think -- yes, I think there have been some lessons learned and people say investors have short memories, operators has really, really long memories. Yes, so we've been really pleased with the approach they have taken.
Okay . Harold, on the leverage side, I know you're inclined to sort of stay in this range in the mid-5s debt to EBITDA , but wasn't there a call for long-term number below 5? Or am I forgetting something?
No , you're actually not forgetting, Rich. Below 5 -- and it was always characterize as a long-term goal we would like to achieve. We obviously recognize that being under 5.5 times puts us, first of all, in a good spot relative to our other investment grade peers, and secondarily puts us in a good standing with the rating agencies. So that's kind of job one. Job two really is to manage our earnings growth over time. And so, I would say, as we see our cost of capital improve in the future, then that will give us more of an ability to further delever the balance sheet as we see fit. It would be really nice to get it down to closer to 5 times or below 5 times. But obviously, we're also very mindful of our need to grow earnings, and so we're very comfortable at 5.5 times or slightly below that for the near term. And then, we'll be opportunistic in the future to get it down further.
Okay. Last one from me. You guys report DARM coverage. What it would be on -- what's the difference between that and EBITDAR coverage and why don't you report it on a DAR basis? Just out of curiosity.
Yes. So we always have -- so three issues. First and foremost is that some of us report it on DAR using imputed 5% management fee, while others use 4%. And we -- despite the fact that everybody should be that, we were continually gained [ph], including by rating agencies, for having lower coverage without taking into consideration the difference in margin fees and frankly we're just kind of over it. Secondly, we've always got negative feedback about the fixed -- not presenting the fixed charge coverage. And by having everybody on the EBITDARM basis now, it's all apples to apples, whether or not there is a corporate guarantee. So that should make it a lot more digestible and simple for everybody to understand. And then thirdly, we'll not be the only ones, so we're setting a precedent.
The difference is like 1 -- or 10 basis points or something like that, 20 basis points?
I think for senior housing, it's about 20 basis points. For skilled nursing, it's probably a little bit more like 35 basis points.
Okay . That's all I've got. Thanks .
Thank you. Our next question comes from John Kim of BMO Capital Markets. Your line is open.
Thanks. Good morning. Rick, in your opening remarks, you mentioned that Avamere, the coverage decline sequentially, but at the same time, you saw an improvement in the fourth quarter. Can you just tie those two statements together?
Yes, sure. So you might recall going back to previous earnings call, we talked about Avamere going through a complete change in IT systems, specific to their ancillary businesses. And some of that was really critical for them because they've got a home health business, and home health has a new reimbursement system as well called PDGM, which is similar to PDPM, although for the home health industry, it's why we view as a negative because it's a reduction in revenues. So, that's just created a real disruption. So most of most of the downturn in their coverage is a function of their ancillary businesses and the impact of that. So we saw them get through that and implement all the earnings systems. And that, plus the combination of improvement from PDPM, is what contributes to their improvement in coverage and the upward trends that we saw in the fourth quarter. In fact, on Friday, we had a full detailed operational call with him on the fourth quarter and their early first quarter results, and we're seeing that trend improve in the first quarter as well. The other comment I'll make about Avamere because I think everybody is aware that the issue really with Avamere on an ongoing basis has been Washington State, which is just -- which had horrible Medicaid rates. Three more facilities closed recently. So out of about 120 facilities, I think there are -- or the total in the State of Washington State, there have now been 22 closures. So it looks a lot more positive that there will be a Medicaid rate increase this year, both the re-basing of existing rates and a rate increase for Washington State. So in addition to any improvement that Avamere is seeing from PDPM, they'll get a rate improvement. And again, whether or not it's what everybody wants remains to be seen, but they're going to be better than it is. So we should continue to see improvement without Avamere.
Okay. So do you anticipate selling any assets out of the portfolio or restructuring the leases at all? Or you just think it's going to improve naturally as you mentioned?
No, we're not restructuring leases. I think if there were no rate increase in Washington State, then we'd sit there with the Avamere team and see if there is anything else you want to do, whether it was selling a facility, they might want to buy back the real estate. But we didn't see a need to rush into that. They are a strong company. And hopefully, now between PDPM and some level of rate increase from Medicaid in Washington State will be good. But there's never been any discussion about lease [ph].
Okay. On the Enlivant transaction, is there anything that you are asked to give up on your end to get the option window increase from TPG?
No.
Can you talk about overall on triple net lease transactions or acquisitions in senior housing, how difficult it is to structure leases in a triple-net basis today and what are your underwriting as far as coverage and annual escalators?
Hi, it's Talya. If anything I would tell you would be entirely theoretical because we hardly ever see an operator that want to enter into lease these days. I wouldn't be surprised if some time in the not distant future, the switch will flip and there will be greater interest in leases. But for now, there is almost -- I'd say there is somewhere around zero interest in entering leases, which is why I can tell you we would underwrite on that, but it not reality.
Yes, that's fine. Last one from me is, do you have a guidance as far as what you think recurring CapEx will be in 2020?
Yes, it's actually on the press release, and I'll look at up here. Non-yielding CapEx, $21 million, and that's both between our own managed portfolio and a little bit for the triple net portfolio, but $21 million for the year.
Great , thank you .
Thank you . Our next question comes from Steven Valiquette of Barclays. Your line is open.
Great. Hello, everybody. Thanks for taking the question. So, you touched on this topic a little bit, but just given your comments around PDPM and timing of any CMS adjustments, which were definitely helpful. Just big picture, how much does PDPM impact your overall mindset and strategy for the next 12 to 24 months as to whether you want to be more of a net buyer or a net seller of SNP assets? Does this create a sense of urgency for you one way or the other? Do you still just look at every SNP property case by case and regardless of any sort of a bigger picture strategy tied to PDPM? Thanks.
So a couple of things in terms of disposition, the dispositions will be on the context of the reposition in the company. So that's basically done, other than what's been announced. I mean, there may be one here, one there, but the program is done. So for skilled, we just think skilled is in for a really nice running, it isn't just PDPM, it's a combination of several factors. It's PDPM, it's the improvements in demographics which we're starting to see in the skilled space, ahead of where we're seeing it in senior housing, we’re not seeing it in senior housing yet, and then, you're going to continue to have a decline in supply. And that decline in supply comes from both closes as we're seeing in Washington and Massachusetts, and Maine and Wisconsin, and its people that are currently operated by additional facilities, because most of the facilities in the country are quite old, they modernize it and when they modernize it, they take that data service. So you may buy a 45-year-old building and it's got some three bed wards, three bed wards just don't work, so you're going to take that data service, you can add more common space [indiscernible] building.
And then, thirdly, you've got a really high percentage of the space that’s still mom-and-pop. They're struggling already with the transition to PDPM, so they're going to be some buying opportunities there. But some of them also may just exist in markets that don't make sense. So you may see some closes there, as well. So you've had over the last 15 plus years, a pretty significant decline in the number of skilled beds in the country. It kind of leveled out a little bit over the past few years, but you're going to start seeing that decline again, and you're actually going to have access problems. So the combination of a better reimbursement system, improved demographics and declining supply sort of all converge at almost the same time, we think to set up the skilled is really nice run going forward, their projections out there that showed it skilled base is almost full by 2025. So, our interest is one, we've always liked the skilled stage. We wanted to get some balance back in the portfolio after the CCP merger, and now we see the scope that’s really poised for a nice one.
Okay, that's definitely helpful color. Thanks.
Thank you. Our next question comes from [indiscernible]. Your line is open.
Yes. Good afternoon, everyone. With the $150 million a year housing investment that you were talking about earlier on, is there any reason why one year didn't include that in guidance? And then two, although it's going to be neutral to earnings, when done, you do expect it to be accretive further on? Can you talk about what some of those drivers of accretion will be? And is it a triple net or a sharp portfolio?
So, a couple of things. It's not in guidance, because it’s not done and nothing's done until it's done. And if we put it in guidance, it will probably fall apart, which is, you know, you just going to jinx yourself. So that's kind of that one. It's a shop portfolio. And we expect -- we're seeing some revenue growth there from the opposite perspective. But there's inherent rate growth that's in that portfolio that we should see towards the end of the year, as well.
Okay. That's helpful. And then second of all, just from a regulatory perspective, I know we've had a lot of conversation about PDPM, but any thoughts around Avamere [ph] and what's the latest with that, and will you tell me what ultimately happened with that, with CMS?
Let's talk about it in two pieces, provider tax and then the UPL IPTP. So from a provider tax perspective, and this may get a little bit more into the weeds than you guys like, but it should answer all your questions. The whole issue about provider taxes is waiver language and seeing that feeling like there were some games played to provide waivers for certain operating classes within the provider tax environment. There were 20 states prior to 2002 that has provided caps in place. Those waivers are all clean, meaning there's no waiver language. So that 27 states post-2002 that had different waiver language in it, of those 27 states, 10 states will have to make some significant changes to clean up the language, none of which any of us think are insurmountable. And a lot of the waiver, the most problematic waiver language has to do with CRC [ph] being carved out of plain provider taxes. So we think provider taxes are going to be fine. And both with provider taxes IGT and UPL, depending on the circumstances, there are two to three years to come into compliance. So we think there's plenty of time there. So for example, from an underwriting perspective, when it comes to provider tax, we're not going to look at underwriting any differently than we do today. We think that's going to be fine. It's a little bit of a different story with UPL and IGT. And from a legal perspective, the Trade Association, the lobbyists think that the industry's in good shape to defend itself on IDT and UPL.
From a political perspective, with skilled industries standing just on its own there, it affects the hospital industry, CRC, joint efforts between the Skilled Trade Association and the American Hospital Association. All that said, you never know what's going to happen in court. There are three states in particular that have the most vulnerability relative to that, it’s Utah, Texas, and Indiana. And in Indiana, 90% of the industry is on IGT. So it would be pretty heavy hit to do something there, which is another reason I think many don't expect it to happen. But I think when it comes to those three states from an underwriting perspective, we would seriously take that into consideration if we're looking at any skilled assets in those three states. We have no exposure in Texas and in Utah. We’re in big shape in Texas, we got our exposure down to 5.7% on the skilled side. It's bigger when you look at our whole exposure, but the rest of senior housing, our operators, they're in really good shape. We had one operator with five facilities that may struggle with that a little bit. But it's only five facilities.
And then in Indiana, we have seven facilities [indiscernible] Indiana. But that's with our operator Magnolia, we've got a corporate guarantee they are most of the real estate network folio. So we had no concerns about them weathering the storm in Indiana. So from the Sabra perspective, we're in good shape with our current portfolio, but we will definitely look at those three states very, very conservatively from an underwriting perspective.
Thank you.
I've also got to say in two to three year window, for things to get resolved with IGT and UPL, as you do with provider tax.
Okay.
Thank you. [Operator Instructions] Our next question comes from Daniel Bernstein of Capital One. Your line is open.
Hi, how are you? I'm going to take over the sniff pipeline a little bit. Have you seen a change in the sellers or buyers post-PDPM and would you say most of the pipeline you're looking at, is that mom-and-pop or owner operator? Or is it more institutional jayvees or somebody else trying to sell larger portfolios?
So, we haven't really seen any change since PDPM came into a fast, as it relates to an impact on our sniff [ph] pipeline of transactions. Most of the transactions that we have seen that have been a scale in the sector have been institutional sellers that either put together portfolio to sell, or are disposing of their bottom quintile if you will, their problem children. So, those are the two baskets of portfolios. We are seeing occasional one-off transactions. I think that they are-- they're non-institutional in nature, in terms of the seller and often even the process, and they're still quite competitive. Most of the ones we've seen have been in California. There hasn't been significant deal flow. We expected PDPM to trigger fairly, within a fairly small window, sort of increased activity. And I will say, we have not yet seen it. I still believe that we will see it. A lot of the smaller transactions and non-institutional transactions are really generational turnover. They are typically family-owned companies or businesses and the children aren't interested and either there's a specific event, such as a death, or an illness, or simply retirement and there's that, because there's nothing else to do, those are the things for selling.
It really sounds like the same environment is a quarter or two ago.
I think it's we're seeing more of those. But we haven't seen a flood.
And then on seniors housing I don't know if I miss it in commentary or other questions, but did you break down the shop growth or guidance for 2020 based on say enliven versus holiday and other operators in the portfolio just trying to understand how the different portfolios within shop may perform this year versus last year?
The waywe broke it down Dan is just between our wholly owned and then our JV. So you can think about it the wholly owned is primarily driven by enlivened, and I don't think that even in our numbers in this holiday in that because holiday is not part of our same store. So it's really driven by the 11th holiday. And then our Canadian portfolios, the vast majority of the out fees [ph].
Am I right to read it that it's effectively then a slowdown and shop growth versus 19? And if so, is that from your comments on the flu season? Just trying to understand how you're thinking about 20 versus 19 a little bit better?
Yes. I mean, I think I would say this, comparing 20 to 19. We had some 7% growth on the JV side, which we're forecasting side below that probably more in line with just what you would consider a normal nice growth rate. I think in 2019, we had a very good comp compared to 2018 relative to the flu season in 2018. And that’s a big part of why it was outside in 2019 over 2018. So I think you're going to see a kind of normalized but I think the point being when other operators are expecting declining NOI and declining occupancy, we feel really good about the fact that the occupancy is stable and we should see some nice rate growth, it will take some occupancy growth for year as well.
Well, okay. They want to imply that it's poor numbers, just felt like slow down. And one last quick question here. What is the dividend policy in terms of where would you be comfortable? I don't know if you use FFO or FAD payout ratio, but what's the comfort level point where you would consider raising the dividend?
Getting it back into the 80s.
Okay, on FFO?
It's on a normalized AFFO basis.
All right. That's all I have. Thank you for taking the questions.
Thank you. Our next question comes from Connor Siversky of Berenberg. Your line is now open.
Hi, everyone. Thanks for taking my question, one quick one on Medicare Advantage. Are you seeing any continued pressures on like the state pertaining to skilled nursing or how do you see that developing in the future?
Yes, no, we're not we actually, Medicare Advantage penetration into skilled nursing is a pretty small number relative to Medicare Advantage, and the over 65 plus population because all the marketing has been to the healthy elderly. So it's from a census perspective. It's sort of hot, mid to high single digit and it's been pretty flat for quite a while and its projected to be pretty flat going forward. It's really the next generation of seniors that will enter skilled nursing we're going to see a much bigger percentage of Medicare advantage, because they're the ones, younger employees that signing up for it. So now in terms of length of stay there's always going to be pressure there, however, under PDPM, we expect length of state to be a lot more stable and potentially improved because you're moving from a system that took on the rug for the system totally incentivize operators to go after short term rehab patients.
So by definition, the system created headwinds to the industry because you're admitting only patients that make it easier for insurers and case managers generally, to put pressure on length of stay. Under PDPM while you're still going to be providing services to short term rehab patients. The shift is really providing a lot more services to more complex, medically needy patients. And by definition, they have a longer length of stay. It's a lot harder to put pressure on someone who's got complex medical conditions with [indiscernible] than it put pressure on someone who's coming in after knee surgery or hip surgery.
Thanks that’s very helpful. And then a little bit more to dividend. I think you mentioned in the prepared remarks. Are you going to see some improvement towards the second half of the year? Could you provide a little more color on what makes up that calculus and maybe what factors are going to contribute to improve coverage?
Primarily, it's going to be from the investment activities that we have this year, which as I noted earlier, is going to have a much bigger impact on 21 but will start to impact us in a lot of parts of the year as we start getting deals closed over the next number of months. So that's, that's really the driver everything for us is about and everybody knows it. Everything about us is getting back to growth.
And I think you'll also see contribution from our manage portfolio in the fourth quarter, as you recall, you will see a nice rate increase on the Enlivant portfolio that do those rate increases every October 1. And so that's going to also help improve the dividend coverage toward a latter part of the year.
Got it. Thanks. And then one final one for me. Somewhat sensationalist article seem to come across last week saying that the sale leaseback system is becoming less attractive for sniff operators. I mean, can you provide any color as to why that may or may not be the case?
We haven't seen anything like that and do anything other than triple net skilled nursing operator is not something that we would be interested in and I don’t think any will be interested. So, whether there are skilled nursing [Technical Difficulty] that they are interested, they're not going to find very many takers. The only situation will anybody do a JV with a skilled nursing operator is traded private leads. And I think we all remember that time if any of us that were public had announced that same deal. To take on that NOI risk and more than that's really a liability risk because we're [Technical Difficulty] clear delineation between real estate ownership and the operations. Once you start getting into JV, on the skilled nursing side, opened up the whole liability piece.
And I don't think any of us are really up for doing that. Because unlike senior housing, where you can more competent do these kinds of things. The level of liability is much greater on the skilled nursing side simply because it's a federal database. And the plaintiffs' attorneys just troll that database all the time. All they do is they just troll the database and file whenever they feel like filing. So that just [Technical Difficulty] doesn't exist in the other spaces.
Alright, that's all for me. Thanks very much.
Thank you. Our next question comes from Lukas Hartwich of Green Street Advisors. Your line is now open.
Thanks. Just a couple quick ones. I think you said this earlier, but I just wanted to clarify the tenant level coverage on page year of your supplemental that excludes corporate guarantees now?
No, the change that we made for clarification in the past when we published coverage for the portfolio, there were certain tenants that were excluded from that coverage and those were tenants that had corporate guarantee. And now under the new reporting EBITDA on coverage, there is no tenants that are excluded from those coverage numbers published, everything is included in our portfolio other than non-stabilized assets in the numbers in coverage going forward, so we've simplified it dramatically and made it all encompassing.
Okay. And so, the tenant disclosure on page 7, still includes the corporate level cash flow in the coverage?
It does not. It is the property level coverage.
Got it. Okay. And then, just a quick follow-up on the three legacy Senior Care Centers assets that you were going to sell last year. I'm just curious if those closed yet and I'm curious what the proceeds were ultimately there?
Some of those, I think one of those is closed this year and the other two are closed facility. So the proceeds are going to be very minimal, a few million bucks. But one of the three has closed I believe, to the three are yet to be close with call it less than 5 million, around 5 million in proceeds.
We're just telling the real estate has. They were the ones that got destroyed with the hurricane.
That's it for me. Thank you.
Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Rick Matros for any closing remarks.
Thanks, everybody for their time today, and I'm sure we'll be seeing a lot of you. We've got more conferences coming up including next week, so we're heading out tomorrow for these co. So, as always, we're available to everybody follow-up and look forward to seeing you at these conferences. Thanks very much and have a great day.
Thank you. Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.