Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT 4th 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 ks for the year ended December 31, 2019, 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 ks 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.sabrehealth.com.
Our Form 10 ks, earnings release and supplement can also be accessed in the Investors section of our website. 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 and this afternoon. This morning's song is See You Again. It was performed by Wiz Khalifa and Charlie Puth at the Laker game honoring Kobe and Gianna and the other families that were lost in the helicopter crash. And now the celebration of life for all those families is happening at Staple Center and may their memories be a blessing.
Now 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 and 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 and the best balance sheet that we've ever had. Activity is starting to pick up. We completed just in the $38,000,000 in the Q4 of investments and a little bit over $82,000,000 so far through the Q1 rather of 2020.
The average yield of the deals were 7.4%. We're also getting close to closing a $150,000,000 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 are 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 at 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 $1,000,000,000 still primarily senior housing, but we're seeing more skilled deals we're also starting to see some behavioral and addiction investment opportunities as well. And we now have relationships with 2 operators in the addiction space.
So we don't expect the growth to be rapid there, but it's getting off to a nice start for us. Moving on to Enlivant. We're not pursuing a new JV. We determined that it's best to work with TPG to have a simpler solution. The JV solutions that we were looking at, we're 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 story as 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 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 takeout with an extended tail on the option for the remainder, minimizing the equity required, again working with CPG. So we'll 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 Q4 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 some, but coming in 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 Q1 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 we as they make more progress on stabilizing those cost reductions, we'll have a much better sense of how the combination of 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 was stable as well. Our top 10 is generally strong. The 3 operators that we always have kept the closest eye on, within Avamere, Signature Health and North American.
Avamere was down sequentially, but they bottomed out in the Q3. They showed nice improvement in the Q4 that's continuing into the Q1. So they're actually trending up a little bit more quickly and sooner than we anticipated. North American healthcare continues to improve, improve sequentially, is also improving Q1. Signature Health trended up in the 4th quarter as well and is continuing in the early Q1.
So we feel really good about where our operators are from a coverage perspective and all else for that matter. Our same store shop, Tali 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.
Thanks, Natalia first. Thanks, Nick. I'll provide an update on our managed portfolio. In the Q4 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 31% relates to our holiday managed communities.
The balance includes our Canadian portfolio and 4 assisted living and memory care communities in the U. S. On a same store year over year basis, the managed portfolio, which excludes the Holiday assets, showed favorable results in the Q4 compared with the Q4 of 2018. Revenues increased by 2.5%, cash net operating income increased by 2.9% and revenue per occupied room RevPOR, 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 Q3 2019 results to a quarter in 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 seem 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 of communities that largely targets the middle market in secondary cities in the U. S. And Canada is not as dramatically impacted by these factors because of location, ongoing capital projects to maintain the appeal of the communities 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. 1 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 sources of volatility such as seasonality, flu, changes in competitive landscape, etcetera. 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, 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 the previous quarter and 0.1% higher on a stabilized same store year over year basis. RevPAR was $4,418 2.6 percent 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 rose 1.4% year over year and was flat sequentially. Cash NOI margin was 25.7 percent in line with the prior year's results. In 2019, the Enlivant Joint Ventures 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 and livened portfolio of 11 communities continued to drive rates.
However, the early start of the flu season impacted occupancy and therefore margin. Occupancy at 2 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 bouncing back, but in a portfolio of 11 properties, events at 2 communities affect the results of the group. 4th 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 the spike in deaths and move outs to higher acuity settings. 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.
RevPOR in the 4th quarter rose to $5,118 a 5.1 percent increase over the prior quarter and 6.8% over the prior year. 4th quarter cash NOI was up 10.4% on a sequential basis because of rate increases going into 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 our net leased, to managed portfolio at the start of the Q2 of 2019, so we do not yet have year over year same store results to report.
In addition, we transitioned our independent living community in Frankenmuth, Michigan to 2 Holiday in the Q4 this year. So I will focus on same store quarter over quarter results, excluding the Frankenmuth assets. Portfolio occupancy was 87.8% in the quarter, 0.8% lower than in the prior quarter and RevPOR was $2,486 in line with the prior quarter. Cash net operating income fell 6.3% sequentially because the 3rd 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 8 retirement homes in Ontario and British Columbia for Sabra. In the Q4 of 2019, the 8 properties managed by Sienna delivered 88.3 percent occupancy, which is slightly down from 89.8% in the prior quarter. RevPAR was $2,268 which was flat to the prior quarter and 3.3% higher on a same store year over year basis. 4th 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 narrowband and tight expense controls resulting in consistent operating results for a stabilized portfolio.
And with that, I will now turn the call over to Harold Andrews, Sabra's Chief Financial Officer.
Thanks, Talia. 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 4.89x.
Interest coverage up from 4.18x to 5 point 2 8x fixed charge coverage up from 4.05x to 5.08x 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 $12,000,000 During the Q4, we issued 11,500,000 shares of common stock under our ATM program, generating net proceeds of $248,400,000 These proceeds were primarily used to repay all outstanding balances under our credit facility and $145,000,000 of our term loans maturing in 2022. In addition to the improvement of our credit metrics, the full pay down of our revolving credit facility along with our unrestricted cash and cash equivalents provides us with over $1,000,000,000 of available liquidity, getting us well positioned to take advantage of investment opportunities. Supplementing that liquidity is a $340,000,000 we have available on our ATM stock offering program. The ATM will among other potential uses 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 3 months ended December 31, 2019, we recorded revenues and NOI of $155,800,000 $134,800,000 respectively, compared to $149,800,000 130 $400,000 for the Q3 of 2019, increases of 4% and 3.4%, respectively. These increases are driven in part by the acquisitions during the 3rd and 4th quarters and $900,000 of non cash lease termination income related to the transition of 1 senior housing community to our senior housing managed portfolio during the Q4. FFO for the quarter was in line with our expectations at $91,000,000 and on a normalized basis was $95,600,000 or $0.48 per share. FFO was normalized primarily to exclude a $5,600,000 loss on extinguishment of debt, recognized in connection with the redemption of our 5.375 percent senior unsecured notes that were due in 2023.
This compares to normalized FFO of $90,100,000 or $0.47 per share for the Q3 of 2019. AFFO, which excludes from FFO merger and acquisition costs and certain non cash revenues and expenses was also in line with our expectations at $89,600,000 and on a normalized basis was $93,200,000 or $0.47 per share. AFFO was normalized primarily to exclude a $3,600,000 cash portion of loss on extinguishment of debt recognized in connection with the senior note redemption. This compares to normalized AFFO of $89,700,000 or $0.47 per share in the Q3 of 2019. For the quarter, we recorded net income attributable to common stockholders of $39,700,000 or $0.20 per share.
G and A costs for the quarter totaled $5,700,000 including $1,000,000 of stock based compensation expense. Our recurring cash G and A costs of $4,700,000 were 3.5 percent of NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G and A costs to average approximately $6,500,000 Our interest expense for the quarter totaled $27,400,000 compared to $29,300,000 in the Q3 of 2019. This quarter over quarter reduction was driven by a combination of lower total debt of $193,100,000 and a lower overall borrowing costs resulting from our refinancing activities. Interest expense included $2,200,000 and $2,500,000 of non cash interest for the 4th and 3rd quarters of 2019 respectively.
During the quarter, we recognized a $2,700,000 impairment of real estate, primarily related to 1 skilled nursing facility expected to be sold in 2020. We did not recognize any revenues from this asset during the Q4. Other income of $1,700,000 for the quarter relates to a settlement from a prior operator. This amount is excluded normalized FFO and normalized AFFO. During this and subsequent to the Q4 of 2019, we completed real estate acquisitions of $118,100,000 with a weighted average cash yield of 7.4%.
Those acquisitions consisted of 5 senior housing communities, including 3 from our development pipeline and $114,300,000 1 addiction treatment center for $3,800,000 We have committed to invest an additional $18,500,000 to complete the construction project for the addition treatment center, which is expected to be completed in early 2021. During the Q4 of 2019, we completed the sale of 8 skilled nursing transitional care facilities for aggregate sales proceeds of $7,300,000 These sales were anticipated in our portfolio repositioning plans and further strengthen the portfolio. During the Q4, 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 31, 2019. In addition to the metrics I mentioned previously, our unencumbered asset value to unsecured debt increased from 2 18% to 2 75% year over year and secured debt to asset value remains at 2%. Finally getting to our guidance.
We issued our 1st year earnings guidance range from 2020 as follows. Net income $0.81 to $0.91 FFO, dollars 1.69 to $1.79 normalized FFO, $1.71 to $1.81 AFFO and normalized AFFO, dollars 1.70 to 1.80 dollars We expect our 2020 senior housing managed portfolios same store NOI to grow as follows: wholly owned 4% unconsolidated joint venture 3%. With the portfolio repositioning and delevering of the balance sheet we accomplished in 2019, we're very excited about the prospects of returning to growth. We have included in our guidance expected investments in 2019 to be $159,000,000 and a weighted average initial cash yield of 7.4%. $82,000,000 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 $111,000,000 which consists primarily of the 3 remaining Genesis assets requiring HUD approval and a few remaining asset sales identified in 2019 that are yet to close. We expect both of these to close by the end of the second quarter at a yield of approximately 6.6%. With the refinancing activities 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 maybe 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 $120,000,000 to $140,000,000 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 $1,000,000 Many of these are expected to be renewed and no reduction of rents and several mature in the Q4 of 2020, limiting the impact on 2020 to less than a $0.01 per share. The impact of these maturities has been included in our guidance. One final comment on our 2020 guidance. We expect Q1 2020 normalized FFO and normalized AFFO to be in the ranges of $0.43 to $0.45 $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 and A costs and timing of collections from our cash basis tenants. Finally on February 4, 2020, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on February 28 to common stockholders of record as of February 14. And with that, I'll turn it back to Rick Matrias.
We'll open our Q and A now. Thank
you.
Our first question comes from Nick Uckelow of Scotiabank. Your line is open.
Thanks. Good morning. First of all, I just want to clarify, Rick, when you're talking about PDPM, I'm 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 digits. So does that mean that's inclusive of the
benefit of the market basket increase?
No, no. It excludes the market basket. Okay. So it's the pure rate growth from PDPM.
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 it's going to have to address that in terms of some sort of clawback. Any sense that would happen in the April notice that goes out?
So a couple of comments. 1, we all knew that it wasn't going to be revenue neutral, but it's not egregious the way RUGS 4 was. RUGS 4 was double digit, and we're not seeing that. I don't think we will see that. You may see it in awkward here or there, but certainly not on a quarterly basis.
I actually don't expect a clawback. I think CMS despite comments expected some positive growth. And my guess is what they'll do is at some point in time do an adjustment going forward. So for example, October 21, maybe instead of getting a market basket, we get nothing. So my guess is it's more of a go forward thing, which should be fine than anything else.
I'll be surprised if anything happens this year simply because they've already been in the process of writing the initial rule and there just hasn't been enough data out there. So I just think kind of statistically, technically, it's going to be tough to do anything that would be effective October of 2020 or fiscal year 2021, but you never know. But that's my best guess is that there wouldn't there's not going to be a callback because the growth isn't going to be unreasonable, but they want to make some adjustment on a go forward basis, which obviously would be a lot more palatable. The other thing I would note, LuxCore, 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.
Think you said there's a partial takeout 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 the 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?
Yes. So the only discussions that took place were that both parties, meaning Sovereign and TPG are interested in working together. TPG has been a great partner and has shown some flexibility relative to considering just a partial takeout. So we don't have to write that much of a check and extending the tail on the option. So really all we're really doing right now is as you saw in the numbers, we saw some nice occupancy lift going in the Q4 and they've done a good job sort of managing through the flu.
So rebounding from that isn't going to take a significant effort. So for us, we want to see a path to accretion here. And at this point, TPG seems to be rolling with us on that and we'll just sort of take it from there. So as I said in the opening comments, we're pretty comfortable with where we are now. We are really pleased with the additional traction we're seeing with Enlivant and I would expect something to happen.
We're just not we're 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's changed there. It was a it's a floor plus 5%.
Okay. Thanks. Very helpful.
Yes. Thank you. Our next question comes from Nick Joseph with Citi. Your line is open.
Maybe just following up on that in terms of Enlivant. You obviously put out your expectations for this year and understand wanting to acquire it accretively. So based off your current expectations, when does that inflection point occur from occupancy or NOI standpoint where 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 Q4.
Okay. Thanks. That's helpful. And then, Rick, your opening comments just getting back to growth. Obviously, you just gave 2020 guidance.
So the impact of the share issuance and deleveraging is being felt right now. Is that more of a 2021 comment? Would you currently expect to have earnings per share growth next year?
Yes, I think, yes, in fairness, 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 2021 than they will have on 2020. So I would expect that the impact on 2020 will be incremental, but it will help us clearly move into growth mode for 2021. And that's why I commented also earlier that we expect dividend coverage to improve in the latter part of the year when the impact of some of the investments will start taking hold.
Makes sense. Thank you.
Yes.
Thank you. Our next question comes from Chad Vanacore of Stifel. Your line is open.
Hey, good morning. So I was just thinking about the owned assets in SHOP. Holiday occupancy dropped pretty significantly from first half to second half, it's about a couple of 100 basis points. So how should we expect that trend in 2020?
They usually held fairly steady on these assets. So there is some volatility, but I think it will revert to the mean. So these are stable it's a portfolio of stabilized assets. The only asset that's not stabilized the one that we transitioned to them that was being run by a different operator and that's the asset I mentioned in Michigan.
Okay. And I'm sorry, Talia, how does that affect the overall?
The Frankenmuth asset, I don't think it's included in our numbers because it's not stabilized.
Okay. Then just thinking about M and A, you've got $110,000,000 about dispositions that are there in there. About the $150,000,000 acquisitions? Is that skilled nursing that you alluded to? And then what kind of cap rate should we expect?
That's a senior housing investment and we're in the midst of finalizing negotiations on our PSA. So we're not prepared to talk about any specifics relative to the deal.
Okay. So
Greg As I said, it will be initially, it will be earnings neutral, but expected to be accretive in the latter part of the year.
Okay. And then Rick, you had mentioned about the shifting more toward the skilled nursing side of things. How should we be thinking about that?
Well, I think there's 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 at more 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 the skilled nursing arena without becoming sort of a skilled nursing REIT and still having balance in the portfolio between skilled nursing, senior housing and the behavioral hospitals and other specialty
All right. And then just one more. Just the equity issuance part, you said we should expect $120,000,000 to $140,000,000 Wouldn't that be delevering at this point? And then what should we expect in terms of if you end up closing that Enlivant JV second half of the year?
Yes. It's not additional delevering. It's just using the ATM to match fund. So that we'll 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 Enlivant, 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's no need for us to issue equity just to de lever the balance sheet any further, just maintaining it where it is. And using the ATM and by the way, using the ATM not just to match funds 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 it there.
Yes. Thanks, Joe.
Our next question comes from Rich Anderson of SMBC. Your line is open.
Hey, 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? Are you willing to just sit at 49% for forever?
We're comfortable where we are. Obviously, TPG may feel differently about it. So they may want to take additional actions once the option is up, if they can find a buyer that can pay that handsome a price. So, but hitting so that's kind of where that's at, but we're comfortable with where we are. In terms of hitting the pause button, it wasn't really so much hitting the pause button.
But if you think about you've got Sabra, Enlivant, you've got TPG owning the operating platform. Now you're going to bring a 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 in TBG 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 results in stronger occupancy in the Q4, but we also knew that we were going into what everybody was calling the worst flu season that we've ever had even worse than 2 years ago, although it looks like it's more short lived than it was 2 years ago. So to pull the trigger, knowing that you're going to have an occupancy decline, just didn't make any sense of. We just want to be more prudent than that. So there's no reason for us not to just wait longer until they got through the flu season.
And as I said in my opening comments, they did a really nice job managing through that as our other operators. So, yes, that's it. Okay. Yes,
fine. And then, so thanks for that. Moving to PDPM, I have a maybe abstract type of question or something, but everyone recalls RUGS 4 and what happened when we maybe we got everyone got a 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 allow this to have some legs as opposed to maybe going too far too fast and opening up the conversation for a clawback scenario or something like that? Is it possible we can actually have good behavior this time so that doesn't become part of the story?
Yes. So a couple of comments, Rich. 1, RUG 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 4 was designed. So this number one, this has a much better design. But to your other point, yes, I think there's definitely behavioral changes this time. Operators remember every slight that's ever happened in the history of their careers and every cut that's happened in every state in the history of their careers.
And so they're really mindful of that. So I'll give you a specific example. Under PDPM, you're allowed to run up to 25% of rehab revenues in the concurrent and group therapy. And 26% by the way, before they took away concurrent group therapy was industry average. So the cap is very basically where industry average always was.
But the industry and I'll talk about our operators, but we're hearing it elsewhere as well, are very mindful of the fact that CMS is going to look for red flags and one red flag would be going from 0 concurrent therapy and group therapy on September 30 to 25% kind of overnight when you've been billing everything under RUGS 4 ultrahigh and very high. So we're not seeing that with our operators. Our operators are telling us in fact, even when they were talking about transitioning and working on the training programs and coming in and doing 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 smaller 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, then 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 have really, really long memories. So, yes, so we've been really pleased with the approach they've 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 a long term number below 5 am I forgetting something?
No, you're actually not forgetting, Rich. Below 5, it was always characterized as a long term goal we would like to achieve. We obviously recognize that being under 5.5x puts us, 1st of all, in a good spot relative to our other investment grade peers, and secondarily puts us into good standing with the rating agencies. So that's kind of job 1. Job 2 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. And it would be really nice to get it down to closer to 5 or below 5 times. But obviously, we're also very mindful of our need to grow earnings. And so we're very comfortable at that 5.5 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 for 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 3 issues. 1st and foremost is that some of us who reported on DAR use an imputed five percent management fee, while others use 4%. And we despite the fact that everybody should be aware of that, we were continually dinged, including by rating agencies for having lower coverage without taking into consideration the difference in management fees and frankly, we're just kind of over it.
Secondly, we always got negative feedback about the fixed charge coverage and by having everybody on EBITDA basis now, it's all apples to apples whether or not there's a corporate guarantee. So that should make it a lot more digestible and simple for everybody to understand. And then thirdly, we're not the only ones, so we're not setting a precedent.
The difference 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.
All I got. Thanks.
Yes.
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 declined sequentially, but at the same time, you saw an improvement in the 4th quarter. Can you just tie those two statements together?
Yes, sure. So you might recall going back to previous earnings calls, we talked about Avamere going through a complete change in IT systems, specific to their ancillary businesses. And some of that was really critical to them because they've got a home health has a new reimbursement system as well called PDGM, which is similar to PDPM, although for the home health industry, it's widely viewed as a negative because there's a reduction in revenues. So that just created a real disruption. So most of the downturn in their coverage was a function of their ancillary businesses and the impact of that.
So we saw them get through that and implement all their new systems and that plus the combination of improvement from PDPM is what contributes to the improvement in coverage and the upward trends that we saw in the Q4. In fact, on Friday, we had a full detailed operational call with him on the Q4 and the early Q1 results. And we're seeing that trend improve in the Q1 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 has horrible Medicaid rates. 3 more facilities closed recently.
So out of about 120 facilities, I think there are 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 a rebasing 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 it's still going to be better than it is.
So we should continue to see improvement with Avamere.
Okay. So do you anticipate selling any assets out of the portfolio or restructuring the leases at all? Or do you just think it's going to improve naturally as you mentioned?
We're not restructuring leases. I think if there were no rate increase in Washington State, then we'd sit down with the Avamere team and see if there was anything else we wanted to do there, whether it was selling the facility, they might want to buy back the real estate, but we didn't see a need to rush into that. They're a strong company and hopefully now between PDPM and some level of rate increase for Medicaid and Washington State will be good. But there's never been any discussion about ReverLease.
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 Talia. Anything I would tell you would be entirely theoretical because we hardly ever see an operator that wants to enter into a lease these days. I wouldn't be surprised if sometime in the not just in future the switch will flip and it will be greater interest in leases. But for now, there's almost I'd say there's somewhere around 0 interest in entering leases, which is why, I can tell you what we would underwrite them at, but it's kind of not reality.
Yes, that's fine. Last one for me is, do you have guidance as far as what you think recurring CapEx will be in 2020?
Yes. It's actually on the press release and I want to look it up here. Non yielding CapEx $21,000,000 and that's both between our own managed portfolio and a little bit for the triple net portfolio, the $21,000,000 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 net seller of SNF assets. Does this create a sense of urgency for you one way or the other?
Or do you still just look at every SNF property case by case regardless of any sort of a bigger picture strategy tied to PDPM? Thanks.
So a couple of things. In terms of disposition, the dispositions were all in the context of the repositioning of the company. So that's basically done, other than what's been announced. I mean, maybe one here, one there, but the program is done. So for skilled, we just think skilled and for a really nice run-in it.
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, facility closures as we're seeing in Washington, in Massachusetts, in Maine, in Wisconsin.
And as people then current operators buy additional facilities, because most of the facilities in the country are quite old, they modernize them. And when they modernize them, they take that data service. So you may buy a 45 year old 100 bed building and it's got some 3 bed wards, 3 bed wards just don't work with the customer. So you're going to take that data service, you're going to add more common space in a 100 plus building, maybe a 75 bed building. And then thirdly, you've got a really high percentage of the space is still mom and pop.
They're struggling already with the transition of PDPM. So there are 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 closures 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 skill space for a really nice run going forward. There are projections out there that show the skill space almost full by 2025. So our interest is, 1, we've always liked the skilled space. We wanted to get some balance back in the portfolio after the CCT merger.
And now we see the skilled space really poised for a nice run.
Okay. That's definitely helpful color. Thanks.
Yes.
Thank you. Our next question comes from Omotayo Okusanya of Mizuho. Your line is open.
Yes, good afternoon, everyone.
Good afternoon.
Hey, how are you Rick? The $150,000,000 senior housing investment that you were talking about earlier on, is there any reason why, 1, you didn't include that in guidance? And then 2, although it's going to be neutral to earnings when done, I mean, you do expect it to be accretive further on. Could you talk about kind of 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 is done until it's done. And if we put it in guidance, it will probably fall apart, you yourself. So that's kind of that one. It's a SHOP portfolio and we expect we're seeing some revenue growth there from an occupancy perspective, but there is inherent rate growth that's in that portfolio that we should see towards the end of the year as well.
That rate growth will be the biggest driver.
Got you. 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 mFAR and kind of what's the latest with that and what you think may ultimately happen with that with CMS?
Yes. So let's talk about it in 2 pieces, provider tax and then the UPL IGT piece. 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 CMS 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 2,002 that had provided tax in place.
Those waivers are all clean, meaning there's no waiver language. It's about 27 states post-two thousand and two 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 is being carved out of paying 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 2 to 3 years to come into compliance.
So we think there's plenty of time there. So from 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, well, 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 is in good shape to defend itself on IGT and UPL.
From a political perspective, the skilled industry is standing just on its own there and affects the hospital industry. So you'll see 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 3 states in particular that have the most vulnerability relative to that. It's Utah, Texas and Indiana.
And now 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 3 states from an underwriting perspective, we would seriously take that into consideration if we were looking at any skilled assets in those 3 states. We have no exposure in Texas and Utah. We have we're in good 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 is senior housing. Our operators there are in really good shape. We have 1 operator with 5 facilities that may struggle with that a little bit, but it's only 5 facilities. And then, in Indiana, we have 7 facilities, skilled facilities in Indiana, but that's with our operator Magnolia.
We've got a corporate guarantee. They own most of their real estate in that portfolio. So we have no concerns about them sort of weathering the storm in Indiana. So from a cyber perspective, we're in good shape with our current portfolio, but we would definitely look at those 3 states very, very conservatively from an underwriting perspective.
Got you.
Thank you. And you've also got the same 2 to 3 year window, for things to get resolved under with IGT and UPL as you do with provider tax.
Got it. Okay.
Thank you. Our next question comes from Daniel Bernstein of Capital One. Your line is open.
Hi, how are you? I want to take over the SNF pipeline a little bit. Have you seen any change in the sellers or buyers post PDPM? And would you say most of the pipeline you're looking at is either that mom and pops or owner operator or is it more institutional JVs or somebody else trying to sell larger portfolios?
So let's see. So I have we haven't really seen any change since PDPM came into effect as it relates to an impact on our SNF pipeline of transactions. Most of the transactions that we have seen that have been of scale in the sniffs sector have been institutional sellers that either put together a portfolio to sell or are disposing of their bottom quintile, if you will, their problem children. So those are the 2 baskets of portfolios. We are seeing occasional one off transactions.
I think that they are and they are non institutional in nature in terms of the seller and often even the process, and they are still quite competitive. But 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 some 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, the 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 they're simply retirement and sales because there's nothing else to do. So those are the things we're seeing.
It really sounds like the same environment as a quarter or 2 ago? I think
it's we're seeing more of those, but we're we haven't seen a flood. Okay.
And on senior housing, I don't know if I missed it in commentary or other questions, but did you break down the shop growth or guidance for 2020 based on, say, Enlivant 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 way we broke
it down, Dan, was just between our wholly owned and then our JV. So you can think about it, the wholly owned is primarily driven by Enlivant. And I don't think that even in our numbers, there is 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 portfolio is the vast majority of the owned piece.
Am I right to read it that it's effectively then a slowdown in shop growth versus 2019? And if so, is that from your comments on the flu season? Just trying to understand how you're thinking about 2020 versus 2019 a little bit better?
Yes. I mean, I think I would say this comparing 2020 to 2019, we had some 7% growth on the JV side, we're forecasting slightly 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 outsized in 2019 over 2018. So I think you're going to see it kind of normalize. 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 and hopefully some occupancy growth during the year as well.
Okay. Okay. Yes. Didn't want to imply that it's poor numbers, it 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 where's 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.
Normalized AFFO. Okay. All right. That's all I have. Thank you for taking the questions.
Thank you.
Thank you. Our next question comes from Connor Stiverski of Berenberg. Your line is open.
Hi, everyone. Thanks for taking my question. One quick one on Medicare Advantage. Are you seeing any continued pressures on length of stay 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 mid to high single digit and it's been pretty flat for quite a while and it's projected to be pretty flat going forward. It's really the next generation of seniors that will enter skilled nursing where you're going to see a much bigger percentage of Medicare Advantage, because they are the ones it's the younger elderly that's 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 stay to be a lot more stable and potentially improve because you're moving from a system that on the drug score, the system totally incentivized operators to go up to short term rehab patients. So by definition, the system created headwinds for 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 to providing a lot more services to more complex medically needy patients. And by definition, they have a long length of stay.
It's a lot harder to put pressure on someone who's got complex medical conditions with comorbidities than it is to put pressure on someone who's come in after a knee surgery or a hip surgery.
All right, thanks. That's very helpful. And then a little bit more on the dividend. I think you mentioned in the prepared remarks that you're going to see some improvement towards the second half of the year. Could you just provide a little more color on what makes up that calculus and maybe what factors are going to contribute to improved 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 2021, but will start to impact us in the latter part of the year as we start getting deals closed over the next number of months. So 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 managed portfolio in the latter in the Q4 of next year. As you recall, we really see a nice rate increase on the Enlivant portfolio. They do those rate increases every October 1. And so that's going to also help improve the dividend coverage toward the latter part of the year.
Got you. And then one final one for me. Somewhat sensationalist article seemed to come across last week saying that the sale leaseback system is becoming less attractive for SNF operators. I mean, can you provide any color as to why that may or may not be the case?
Yes. We haven't seen anything like that. And do anything other than a triple net on a skilled nursing operator is not something that we would be interested in. I don't think anyone would be interested. So whether there are skilled nursing sellers out there that are interested, they're not going to find very many takers.
The only situation where we've seen anybody do a JV with a skilled nursing operator is one of the time traded private REITs. And I think we all knew at that time, if any of us that were public had announced that same deal, we would have gotten a quarter. So look, there's to take on that NOI risk and more than that, it's really a liability risk because we're landlords to our skilled nursing. That's it. It's a clear delineation between real estate ownership and the operations.
Once you start getting into JVs on the skilled nursing side, then you've 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 comfortably do these kinds of things, the level of liability is much greater on the skilled nursing side simply because there's a federal database and the plaintiffs, the plaintiffs attorneys just troll that database all the time. That's all they do. They just troll the database and file whenever they feel like filing.
So that just doesn't exist in the other spaces.
All right. That's all for me. Thanks very much.
Thank
you. Our next question comes from Lukas Hartwich of Green Street Advisors. Your line is open.
Thanks. Just a couple of quick ones. I think you said this earlier, but I just wanted to clarify that the tenant level coverage on page, I think it's 7 of your supplemental, that excludes corporate guarantees now?
No. The change that we made for clarification, in the past when we published our coverage for the portfolio, there were certain tenants that were excluded from that coverage and those were tenants that had corporate guarantees. 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 3 legacy senior care centers assets that you were going to sell last year. I'm just curious, have 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 2 are closed facilities. And so the proceeds are going to be very minimal, a few $1,000,000 But one of the 3 has closed, and I believe 2 of the 3 are yet to be closed with, call it, less than $5,000,000 around $5,000,000 in proceeds.
Yes, we're just selling the real estate at They were the ones that got destroyed with the hurricane.
That's it for me. Thank you.
Yes. 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 4 conferences coming up, including Nick next week. So and we're heading out tomorrow for the East Coast. So as always, we're available to everybody to follow-up and look forward to seeing you at the 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.