Good day, ladies and gentlemen, welcome to the Sabra Health Care REIT Third Quarter 2019 Earnings Conference Call. This call is being recorded. I would now like to turn the call over to Michael Costa, EVP Finance. Please go ahead, Mr. Costa.
Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition, and investment plans, our expectations regarding our financing plans, and our expectations regarding our future financial position and results of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31st, 2018, and in our Form 10-Q for the quarter ended March 31st, 2019, as well as in our earnings release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.
We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the investor section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the investors section of our website. With that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.
Thanks, Mike. Happy Halloween, everybody. We closed our new credit facility of $2.2 billion recently. We also did our second investment-grade bond issuance following the quarter end. That one was dramatically more successful than the first one, simply because it was the first one. That was with 10-year paper versus five-year paper on the first, and really was a function of how well the ones that we did in May have traded up since then. We feel really great about that and certainly a tangible benefit from the merger and the other activity that we've gone through. We've also brought our debt-to-EBITDA down to 5.7. That's inclusive of the unconsolidated JV. By year-end, we'll be at or below our target of 5.5 times, positioning us to go into 2020 with the strongest balance sheet since the inception of Sabra.
We finally had some investment activity of $20 million, which includes our first investment in the addiction space, two facilities. We're working on some other opportunities there as well. We'll see if those things become realized or not. We feel good about the space. As most people know, it's a relatively new space. Reimbursement with the insurers is quite good. There are specialized Medicaid rates as well in a number of states. None of our peers are in the space at this point. It's a very fragmented space, not easy to find deals. Hopefully for Sabra, being the first ones in, we'll develop a reputation being a good capital partner to folks in that space. It's a space that has a lot of tailwinds and also makes a lot of sense relative to our investment in the behavioral space as well. We continue to look for opportunities there.
We're starting to see some activity in skilled nursing for the first time. Our pipeline is about $600 million, our acquisition pipeline. Still primarily senior housing, but again, we are starting to see some skilled nursing opportunities. We anticipated that for a while. Hopefully, this is the beginning of something good relative to some opportunities there. In terms of senior housing, pricing's still pretty high, although I would say that the bids that we lose on, we're not losing by the same margin that we've lost before. Maybe that's a signal for pricing getting a little bit better, but I think it's too soon to make any definitive statement on that, and it's primarily the private equity funds that are bringing most of the competition there. In terms of Enlivant, we're knee-deep in the process now of exploring a new JV partner, as well as potential options as well.
We expect to have our decisions made and a deal done by year-end. It'll take some time to close after that because the change in ownership will also trigger changes of ownership from a regulatory perspective. It'll take several months after we announce what the deal is for that to happen. We can't get into specifics on what we're negotiating right now because we're in the middle of those negotiations, but we feel good about the process and where it's been going and where we think it'll conclude at. Our skilled operators, they're about a month in, well, actually a full month in right now on PDPM. No disruptions with any of our operators. They continue to feel really good about the opportunity. They're being pretty cautious relative to projections at this point. They want to get a little bit more time under their belt.
We are seeing some signs of some better rates. Again, it's very early, so we're just pleased at this point, I think, that all of our operators have transitioned into PDPM without any disruptions to their operations. Moving on to our operating results. Our EBITDA coverage was flat sequentially for skilled nursing and senior housing. Our hospital coverage was up. A reminder on the hospitals, most of our hospitals are the behavioral hospitals. We have some children's hospitals, and that comprises the bulk of our hospital portfolio. We have one acute hospital, LTAC, and an IRF as well, but it's primarily behavioral and a couple of children's hospitals. Our same-store occupancy ticked up for skilled and for senior housing. It was down for hospitals.
The population that we have in the specialized hospitals, a lot more dynamic relative to front door activity, how short the length of stay is, and sometimes the unpredictability of that length of stay. Our operators do a really fantastic job managing expenses, so you see strong coverage, sometimes regardless of occupancy moving up and down. Of our top 10, the notable drop was Avamere. I know everybody sort of picked up on that. That drop was specifically due to their ancillary businesses. Their facility performance was stable. They went through a complete overhaul of their IT systems and their ancillary businesses, and unfortunately, and I've certainly seen this as an operator, when you go through a huge IT conversion, sometimes you take your eye off the ball a little bit. It really hurt the performance of those ancillary companies.
We expect that to improve as we go into 2020. That piece will be down for a little while. Again, we view them as a very good operator, and we have no concerns about them going forward, and certainly no concerns relative to rent. In terms of our wholly owned managed portfolio in the Enlivant JV, Talya will get into specific details on that, but we showed strong cash and a wide margin growth, both sequentially and quarter-over-quarter, as well as RevPOR growth, while occupancy was down somewhat, and Talya will give you some explanation. There's some positive signs on occupancy over the last few weeks, and one of the things that we feel good about with our senior housing operators is that they stay focused on rate and expenses, and they don't give up rate for occupancy.
We think over the long haul, that's a much better strategy to have. With that, I will turn the conference call over to Talya.
Thank you, Rick. I will provide an update on our managed portfolio. In the third quarter of 2019, approximately 17.2% of Sabra's annualized cash net operating income was generated by our managed senior housing portfolio. Approximately 57% of that relates to communities managed by Enlivant, and 32% relates to Holiday managed communities. The balance includes our Canadian portfolio and three small care communities in the U.S. On a same-store, year-over-year basis, the managed portfolio, which excludes the Holiday assets, had solid results in the third quarter compared with the third quarter of 2018. Revenue increased by 3.3%, cash net operating income increased by 13.3%, and revenue per occupied unit, excluding the non-stabilized assets, was up 6.6%.
This performance builds on the news we shared in the second quarter, when we reported same store results with a 3.1% increase in revenue, 3.6% increase in cash net operating income, and 4.7% increase in revenue per occupied unit. Our portfolio of communities that largely target the middle market in secondary cities in the U.S. and Canada is delivering positive results in the current cycle, rebounding from last year's performance when the impact of the flu was felt across all senior housing communities. For some detail. The Enlivant joint venture portfolio, 170 properties of which Sabra owns 49%, showed steady improvement. Average occupancy for the quarter was 81.4%, 0.9% lower on a stabilized same store year-over-year basis. Revenue per occupied unit was $4,307, 6.9% higher on a stabilized same store year-over-year basis. This is the highest RevPOR that we have seen since we made the investment.
Same store cash net operating income for the quarter rose 15.3% year-over-year and 7.8% sequentially. Importantly, cash NOI margin was 26.7%, up from 23.9% on a same store year-over-year basis. Similar to RevPOR, the best margin we have seen since we made the investment. Year to date, the Enlivant joint venture's cash NOI was 9.2% higher than in the same period in 2018. Enlivant's dynamic pricing model was rolled out this summer to drive occupancy. The JV portfolio experienced 126 move-ins in the third quarter, more than in any other previous quarter, providing real measurable success of this initiative. The biggest impact was seen in those communities with occupancy below 85%, and even more so, those communities with occupancy below 70%.
For the 19 communities that had 64.9% average occupancy in the third quarter, October occupancy was 67.4%, and spot occupancy at month-end is 70.9%, a six-point increase over the third quarter period. Our original objective in taking a minority stake in the portfolio included being positioned to ultimately own 100% by buying out our partner TPG's interest. This summer, we began the process of identifying a potential partner to co-invest with Sabra so that we could jointly own 100% of the portfolio. That process continues with several investors keenly interested in the opportunity. Now to the results of the wholly owned managed portfolio. Sabra's wholly owned Enlivant portfolio of 11 communities traded 2018's occupancy surge for meaningful increases in rate, resulting in higher net operating income and margins. Occupancy was 88.8%, which was 1.9% off of the prior quarter and lower on a year-over-year basis by 6.8%.
The dynamic pricing initiative has had an impact here as well, even with the portfolio being relatively stabilized. October occupancy came in at 89.7%, and spot occupancy is 90.2%, up 1.4% from the third quarter period. Revenue per occupied unit rose to $5,526, a 1.7% increase over the prior quarter and 11.5% over the prior year. Cash NOI was up 7.8% on a year-over-year basis, and year-to-date cash NOI was 5.7% higher than in the same period in 2018. Enlivant typically sends out annual rate increase letters to its tenants in the fall to go into effect in October. This year, the average rate increase achieved for eligible residents is 5.2% in both the JV as well as our owned portfolio.
We transitioned our Holiday portfolio from our net lease to managed portfolio at the start of the second quarter, so this is the second time that we are reporting community-level statistics. Portfolio occupancy was 88.6% in the quarter, slightly lower than 89.1% in the prior quarter. Revenue per occupied unit rose to $2,483, a slight increase over the prior quarter, and cash net operating income rose 4.8% sequentially. We continue to look for middle market-oriented independent living communities where we believe the Holiday management team is well-suited to assume management, including opportunities within the Sabra portfolio. Sienna Senior Living manages eight retirement homes in Ontario and British Columbia for Sabra. In the third quarter of 2018, the eight properties managed by Sienna showed steady operating and financial results with 89.8% occupancy, slightly up from 89.6% in the prior quarter.
RevPOR was $2,261, which was 1.8% above the prior quarter and 4.1% higher on a same-store year-over-year basis. Cash NOI was up 15.6% on a year-over-year basis and 4.1% sequentially. Notably, cash NOI margin was 40%, up from 35% on a same-store year-over-year basis. Sienna continues to maintain occupancy in a narrow band and tight expense controls, resulting in consistent operating results. We continue to look for attractive acquisition opportunities in Canada, where the dynamic within senior housing is quite different from the U.S. and development capital is more disciplined in many markets. With that, I will turn over the call to Harold Andrews, Sabra's Chief Financial Officer.
Thank you, Talya. This quarter, we continued our efforts to improve our balance sheet and cost of capital. On September 9th, 2019, we closed on our previously announced $2.2 billion credit facility amendment, which lowered our cost of permanent debt by 18 basis points to 3.91% and provided $2.7 million of annual interest savings based on our outstanding borrowings as of the end of the quarter. The amendment also improved our debt maturities laddering by extending the maturity for the revolver by two years to September 2023 and created additional laddering of our term loans with various maturities through September 2024. Throughout the quarter, we continued our de-levering efforts through the sale of 4.2 million shares of common stock under our ATM program, generating net proceeds of $89.9 million.
These proceeds allowed us to pay down our revolving credit facility by $75 million and reduce our net debt to adjusted EBITDA ratio, including our unconsolidated joint venture, from 5.76 times as of June 30th, 2019, to 5.7 times as of September 30th, 2019. We expect to continue this de-levering effort through the fourth quarter, targeting a net debt to adjusted EBITDA ratio inclusive of our unconsolidated joint venture debt of at or below 5.5 times. These activities improved other key credit metrics compared to the second quarter of 2019. Interest coverage improved 0.35 times, increasing to 4.97 times. Fixed charge coverage improved 0.26 times, increasing to 4.72 times. Total debt to asset value improved 1%, decreasing to 38%. Finally, in October 2019, we issued $350 million of 3.9% senior unsecured notes due 2029 and redeemed all $200 million of our outstanding 5.375% senior unsecured notes due 2023.
This refinancing is expected to result in $1.9 million of annual interest savings, and on a pro forma basis, reduced our cost of permanent debt to 3.81% as of September 30, 2019. This was our second offering into the investment grade market in a five-month span, and it was again met with tremendous demand and excellent execution. We have now completed the refinancing of all of our high-yield debt instruments, and along with the amendment to the credit facility, have reduced our debt maturities through the end of 2022 by over $2.4 billion, including the full availability on the revolver. This completes our balance sheet refinancing activities for the foreseeable future and puts us in an excellent position to take advantage of our investment-grade balance sheet as we fund our growth into the future. Now for a few comments about the financial performance for the quarter.
For the three months ended September 30th, 2019, we recorded revenues and NOI of $149.8 million and $130.4 million respectively, compared to $219.4 million and $198.2 million for the second quarter of 2019. These decreases are primarily due to the $66.9 million of lease termination income recognized in the second quarter related to the transition of the Holiday communities to our senior housing managed portfolio. FFO for the quarter was in line with our expectations at $85.8 million, and on a normalized basis was $90.1 million, or $0.47 per share. FFO was normalized primarily to exclude $1.6 million of unreimbursed triple-net operating expenses, $1.5 million of straight-line rent receivable write-offs, and $0.6 million loss on extinguishment of debt we recognized in connection with the amendment of our credit facility. This compares to normalized FFO of $84.7 million, or $0.46 per share in the second quarter of 2019.
AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses, was also in line with our expectations at $87.7 million, and on a normalized basis was $89.7 million, or $0.47 per share. AFFO was normalized primarily to exclude $1.6 million of unreimbursed triple-net operating expenses. This compares to normalized AFFO of $83.9 million, or $0.46 per share in the second quarter of 2019. For the quarter, we did record net income attributable to common stockholders of $23.3 million, or $0.12 per share. Our G&A costs for the quarter totaled $8.7 million, including $3.2 million of stock-based compensation expense. Recurring cash G&A costs of $5.3 million were 4.4% of our NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G&A costs to average approximately $5.8 million.
Our interest expense for the quarter totaled $29.3 million, compared to $33.6 million in the second quarter of 2019. This quarter-over-quarter reduction was driven by a combination of lower total debt of $77.1 million and lower overall borrowing costs from our refinancing activities and the decline in the LIBOR borrowing rate during the quarter. Borrowings under the unsecured revolving credit facility bore interest at 3.17% at September 30, 2019, a decrease of 48 basis points from the second quarter of 2019. Interest expense includes $2.5 million and $2.8 million of non-cash interest for the third and second quarter of 2019, respectively. During the quarter, we recognized a $14 million impairment of real estate related to three vacant skilled nursing facilities and four senior housing communities.
The impairment associated with the four senior housing communities of $10.6 million being impacted by our decision to sell these assets rather than fund operations in the future in an effort to achieve a stabilized level of performance. We did not recognize any revenues from these assets during the quarter. We were in compliance with all of our debt covenants as of September 30, 2019, and in addition to the metrics I mentioned previously, unencumbered asset value to unsecured debt increased from 246% to 253% quarter-over-quarter, and secured debt to asset value remained at 2%. As of September 30, 2019, we had total liquidity of $829.4 million, consisting of unrestricted cash and cash equivalents of $29.4 million and available funds under our revolving credit facility of $800 million.
We reaffirm our previously issued 2019 guidance, which reflects our stated goal of reducing our net debt to adjusted EBITDA ratio to no more than 5.5 times. With respect to our same-store cash NOI growth rate expectations, we expect our Enlivant joint venture to be in the upper half of the 6%-12% range and our wholly owned portfolio to be in the lower half of the 3%-6% range. These expectations are driven in large part by the 5.2% annual rate increase achieved in the two Enlivant portfolios effective October 1st, 2019. Finally, on October 30th, 2019, the company announced that its board of directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on November 29th, 2019 to common stockholders of record as of November 15th, 2019. With that, I will open it up to Q&A.
Yeah. Just before we do that, I just want to make one other comment. We see a lot of postings about negative SHOP results for facilities that are in secondary markets. We obviously have a lot in secondary markets, and we just aren't experiencing that. I think it's very market specific. We certainly have some markets here or there that experience a little bit more difficulty with new entrants in the line. Generally speaking, I think the performance of the SHOP portfolio shows that we just don't see that across the board in our portfolio. We view those markets as extremely stable, and labor costs are lighter, and you've got smaller buildings, obviously, so impact of occupancy up or down by a couple of patients is a little bit more insignificant. We tend to see more stability there.
With that, I will turn it over to Q&A.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Trent Trujillo with Scotiabank. Your line is open.
Hi. Good morning. Just looking at your top operator list for skilled nursing, EBITDA coverage declined across that group, and since the trailing 12-month metric, it implies that the most recent period saw more material decline. At the segment level, you reported stable coverage, the implication is the balance of the portfolio and your smaller operators may have improved materially. Can you maybe bridge that gap or explain that difference?
Yeah, I'll kick it off, and then Rick can add to it. Keep in mind that Avamere and Genesis, which are a part of the top 10, those are not included in those coverage ratios because they have a material corporate guarantee. The portion of the portfolio that would've declined, that portion of the decline is not reflected in the stable occupant, excuse me, coverage that we show in the overall portfolio. There may be some of that, but those two are excluded.
Yeah. In terms of the trailing 12 on a number of those top 10s, both of them just came down pretty incrementally, so we're not concerned about that. I would say that, as headwinds persisted, they had some stronger performances in the earlier quarters, and as those drop off, it's affected them a little bit. Nothing going on with any of those operators that we have concerns about. With the market basket increase in October 1st and PDPM, we expect to see improvement in those operators.
I guess, sticking with PDPM, Rick, I know you mentioned you had some comments in your prepared remarks. I know it's still early days, but can you maybe talk a little bit more about how it's been received, how your operators have adjusted to the new model, if there's maybe anything left from a learning curve perspective? Any additional color would be appreciated.
Yeah. I think, as I said, there was no disruption at all. They had months really to prepare for it, which was really helpful. One of the things that made the transition a little bit easier, I think, for the good operators, is that there are, prior to PDPM, in every skilled nursing facility, there was some percentage of patients that had some serious nursing issues that the old system just wouldn't allow you to bill for. They didn't bill for it because they were never going to get reimbursed for it. That allowed the operators to have a population that already existed in those facilities to start focusing on training, particularly relative to coding and setting up new clinical protocols.
The coding is really one of the biggest issues, because coding has shifted from therapists doing coding to nurses doing coding, and that's not something historically that they've done that much of. It's a much simpler system, obviously, than RUGs with 56 categories. In terms of going forward, I think a couple of things will happen to sort of fuel improvement as we go forward. I think people will get better at coding. I'm sure, in fact, I know that on day one, even though there were no disruptions, it's not like everybody was hitting on all cylinders on day one. So it's going to take some time for that to get better. In terms of concurrent and group therapy, I think our operators are being pretty cautious about not just moving as much in there as quickly as possible.
Certainly, the regulators would look at that as a red flag, so I think they're being cautious on that. I think growth in concurrent and group therapy will happen slowly over a period of time. You'll see continued improvement there as well. Of course, one of the issues that's very hard to quantify, really impossible to quantify, you can quantify cost savings. To the extent that operators have stayed away from certain kinds of patients because they weren't going to get reimbursed, that door is now open, which will help certainly the hospitals quite a bit because they've had a whole host of people sitting there that skilled nursing facilities wouldn't take simply because they wouldn't get reimbursed. That's going to shift the population as well.
That should also have some impact on length of stay because those patients will have a longer length of stay than the short-term rehab patients. That's really the single biggest thing I think that changes here is that we've gone from a reimbursement system that solely incentivized operators to go after short-term rehab patients, which then in fact created industry headwinds. If that's all you're doing, you're going to see continued shortening length of stay, which is going to lower your occupancy and exacerbate all your other issues. The other system actually created some of the headwinds and actually a significant percentage, I think, of the headwinds that have impacted the industry these last few years. Hopefully that gives you at least some information.
That's very good color. Thank you. Just one more, if you don't mind. Rick, you mentioned more skilled nursing opportunities in your acquisition pipeline, but I think you also previously mentioned you're not really interested in particularly large skilled nursing portfolios because that might push the perception of Sabra to be classified as a SNF REIT. But if the earnings yields are more attractive in that space and your peers seem to be active in acquiring, and you're currently trading in a discount multiple to those peers, what's the negative stigma, in your opinion, of being viewed by some as a SNF REIT if it means you're investing for earnings accretion?
Well, one, we are going to do skilled deals, and we will do portfolio deals. We may not do multi-billion dollar portfolio deals, but we'll do portfolio deals. With our senior housing exposure increasing and our skilled exposure where it is, we can afford to do, we think, a sizable number of deals without becoming a skilled REIT and going back to 75-plus% skilled exposure. The negative to us really, as much as we love the asset class is you're completely dependent upon sentiment based on one asset class by the market. With all due respect to the market, sentiment swings, and when it's negative, it's usually too negative. When it's positive, it's usually too positive.
To have sentiment based on more than one asset class, because we invest in the long term, and senior housing's got a really bright future ahead of it, we think it's a little bit more advantageous to have some diversity in asset class. No one should take that as meaning that we aren't focused on doing skilled nursing and more than just ones and twos. That's kind of what we're seeing now. To do portfolios that are $ several hundred million, we absolutely would entertain doing that. We still think we'll be able to keep balancing the portfolio by doing that. Earnings accretion is something that we're going to be laser-focused on for next year. This year, we've really prepared the company and positioned the company to take advantage of those kind of opportunities.
Clearly, it's the one question that everybody has, is how much growth are we going to have going forward? It's the right question. We're not going to be stubborn about it and forego opportunities that we think are good. If it pushes our skilled exposure up maybe a little bit more than we'd like in the interim, we have complete confidence that as we do other deals and our cost of capital continues to improve, as you note with the existing discount, that we'll always be in a position to be able to balance the portfolio more later on. Expect us to take advantage of the opportunities that are out there on the skilled side.
Appreciate that. Thank you very much.
Yeah.
Our next question comes from Nick Joseph with Citi. Your line is open.
Thanks. Deleveraging continues to occur as you laid out, but what's left to do in terms of actually getting to that target? Is it additional equity or more EBITDA growth driven?
I'm sorry, what was the first part of the question? What is it going to take, additional equity to get to the leverage-
Execution, getting to the leverage target, really. Is there additional equity that you're contemplating, or is it just organic growth getting there?
No, it's primarily driven by continuing to issue equity under the ATM program. You'll see us continue to do that. We'll obviously make that announcement in the fourth quarter, but that's the main driver.
We've been consistent. We've said that from the day we issued guidance and built it in the guidance. There's nothing new or unusual there. Nor is there any sort of spiked amount that we're going to have to do. The amount of equity that we're going to be raising on the ATM through the end of the year, at this point, isn't that material any longer.
Thanks. That's helpful. Then just on core FFO guidance, you reaffirmed guidance, and previously you'd indicated that you're trending towards the low end of the range. Does that comment still stand, or are things trending differently now?
No, I think on the AFFO, we're still trending toward the high end. On FFO, we're still trending toward the low end. Again, the reason for that trending toward the low end was because we removed about $0.04 of straight line rents when we moved tenants to a cash basis from an accrual basis. We didn't update that specific comment. I think we've got some opportunity for that to be higher than that. Obviously, the issue for us as far as nailing down the number is we have the cash basis tenants, and certainly timing of collecting cash can have an impact on earnings, more so than it would if you were booking stuff on a straight line basis. Then the managed portfolio obviously has some upside from where we forecasted it as well.
We still feel comfortable with the total range, but I would expect that it's still true. We've had to pull out $0.04 of AFFO, and so we have to overcome that to hit the high end of the range.
Thanks.
Sure.
Our next question comes from Jonathan Hughes with Raymond James. Your line is open.
Hey, good morning out there on the West Coast.
Hey, Jon.
Morning. I appreciate the earlier commentary on the EBITDAR coverage decline at Avamere. I know you're not concerned there. Are you able to give us facility level EBITDAR coverage for their portfolio? Remind us when those leases mature.
Yeah. Facility level coverage is actually pretty similar to the fixed charge coverage. That's a pretty close number at this point. The difference that got lost is with those ancillary companies from the 122 down to the 111. In terms of the lease expirations on Avamere, we've got quite a way to go on that.
Yeah. It's not for many years.
Yeah. It's probably five years out, something like that.
It's actually beyond that. It doesn't look like it matures before 2027.
There you go, 2027. One of the things that they're waiting to hear on Avamere, because it's really the issue that affects them the most, is what's going to happen with Washington State Medicaid rates. Washington State is talking about doing a rate increase next year, and hopefully we'll have news on that sometime in the first quarter. As everybody knows, they haven't been doing that up to this point. Now they're up to 19 facilities being closed in the state. That's 10% of the facilities in the state have closed for financial reasons. There's probably at least another 5% coming. That's a pretty huge number in one state. They're going to start to have access problems in certain markets.
Once we see what happens with the Medicaid rates in Washington State, we'll know whether we want to do anything differently. When I say we, that means just really as a capital partner to Avamere. One of the things that is appealing to them is they're starting to see more opportunities for facilities being sold at extremely distressed levels. If you can pick them up at the right price, even in that environment, that might be a good way for them to go. They're considering that. I think none of us want to see them do anything, and they don't really want to do anything until really two things occur. One, we see the impact of PDPM on the facilities, and secondly, we know one way or another whether there'll be a rate increase in the state of Washington. Stay tuned for that.
That's really their single biggest issue. The ancillary issue with the IT conversion, that'll pass, but it's really Washington State.
Okay. That's helpful. Switching over to the managed portfolio. Occupancy has declined a little bit there, yet NOI growth has been really strong, driven by the rate increases and expense savings. I'm just trying to understand, with rate increases, wouldn't you need to provide more services and in turn, higher expenses? I'm just trying to better understand what is going on within those portfolios.
Sure. This is Talya. When we talk about the rate increases, we're talking about room and board rate increases. That doesn't correlate to a change in service delivery and care. The care rates have continued to be delivered as needed per the individual, but the basic room and board rate has been what we focused on in terms of the increase.
Yeah. Our operators don't have exceedingly high acuity levels. I think it's going to continue to creep up over time, and there'll be more opportunity on the level of service rates on top of the room and board going forward. As Talya said, that's not the driver at this point. I think, as Talya noted, on Enlivant, they've taken a much more sort of scalpel-like approach to things and have stratified the portfolio, and the lower stratifications are really starting to show some nice occupancy increases, and that should have more of a disproportionate impact because of how low they are to begin with.
Okay. That's helpful. Maybe just one last one for Rick. You talked about seeing more SNF deals in the pipeline. I know it's too early to tell on the impact of PDPM. Has that altered your underwriting process for SNFs? Meaning, as you look a bit further out on the horizon, are you underwriting SNFs using overly conservative assumptions in case CMS, say, several years down the road, might cut reimbursement rates like they did in 2011 if overall margins begin to significantly improve, and they look to recoup some costs? I'd love to hear your thoughts there.
Yeah. Our underwriting approach is 1.5 coverage on skilled, and the cap rate, depending on the quality of the facility and the market and the operator and all that, could be 8.5-9+. I don't think that that changes, and I think that gives some breathing room. A couple of things that I think are different now versus what happened with the clawback in 2011. One, it was a really poorly designed system, and the amount of additional money beyond CMS projections or additional Medicare expenditures to facilities from the government beyond CMS projections was relatively egregious. I don't think that there's any way with PDPM that you're going to see that same level again. Secondly, the other timing issue that was really horrible back then, and certainly it can happen again, is the clawback was during the Great Recession.
You may not recall, but at the time, within about 48 hours of the final rule coming down, the clawback was supposed to be half of what it was, and the industry thought, just from a pure math perspective, that the actual clawback was about twice as much as it should have been. It was a recession, and the White House was looking for money, and there was just sort of nothing we can do about it. I think operators have longer memory than investors do, with all due respect. They remember what happened, and I think to my comment earlier, that's why you're not going to see from the good operators, and I would include all of ours in that bucket because we've had the conversations. You're not going to see the good operators go from 0% concurrent group therapy to 25%, which is the max.
You may see some guys do that out there, and I think they'll get in trouble if they do that. Most of the operators that we've talked to are smarter than that, and they're going to be much more judicious, because they don't want a scenario where they're looking at a clawback a few years down the line. If there is some adjustment, it's more of a marginal adjustment and a tweaking to the system than what happened in 2011. I just think people are really mindful of it, and I do think this is a much better designed system. The fact that, I think we all would have liked to have seen some pilots out there, but CMS didn't want to do that.
The fact that the industry was engaged at every step of the way in putting the system together with CMS and giving them input and feedback, I think creates a much different environment for that than it was with RUG-IV.
Got it. Okay. Appreciate all the color.
Yep.
Our next question comes from John Kim of BMO Capital Markets. Your line is open.
Thank you. Just to follow up on the seniors housing managed facility performance. Can you just elaborate on how you were able to push room and board rates in the face of new supply? What we're hearing from some of your peers is that with new communities out there being aggressive on incentives, it's really hard to push rates and, at the same time, not lose too much occupancy. Can you provide some more color?
Sure. This is Talya. First of all, the bulk of our managed portfolio, frankly, sits in the joint venture, because that's 170 properties, which we have 49% economic exposure. Those properties, as well as many others in our portfolio, are not in markets where there has been significant overbuilding and additional new supply. The competitive forces are not uniformly spread across all markets. The news that we hear about new supply, oversupply, et cetera, are specific to certain markets, and within that, probably more narrowly within certain sub-markets. We have found that in the secondary and even some of the tertiary locations in which we have communities in the managed portfolio, we have not had anywhere near the kind of pressures that some others are experiencing in, call it, the primary markets. There are some markets where we have seen some pressure.
The Dallas metro area, we have seen some pressure from significant addition of new supply across the spectrum of cost has impacted some of our Enlivant assets, but generally, that's not been the case. The other thing I'll add is a focus on middle market becomes really interesting in this part of the cycle because you really see how a product that targets a certain price point that probably is not economic to build to today, if you started construction, that product has a large target market that needs that product and can't afford a product that needs $10,000 a month rent in order to break even.
Yeah, I'll make a couple of other comments. All of Talya's comments also apply to our triple-net senior housing portfolio as well. Look, I think the market tends to like to look at things as if everything's monolithic. The secondary markets are this, the high urban markets are this, and it's just not the way it is. You've got to look at the specific portfolios and where they're located and who the operator is. The operator makes a difference. I think the quality of services provided by our operators has a lot to do with why they've been able to push rate the way they have. Their resistance to discounting, in the long run, I think will really pay off. Look, you've got 50% of the middle-class elderly will not be able to afford senior housing in our country.
We happen to have a lot of product, a lot of assets in our portfolios where, to Talya's point, it is going to be affordable. Look, we underwrite these things, as you know, for 10 to 15 years, and we're holding up pretty well right now in a tough environment. As the recovery becomes realized over the next couple of years, we'll be in that much better shape. This stuff just isn't monolithic.
Sure. What was the catalyst, though, to get the double-digit rate increase this quarter, though? Was it purely the revenue management system or just pushing rate and being willing to give up some occupancy? I'm just wondering what the exact catalyst was.
Well, on our Enlivant wholly owned portfolio, first of all, it's 11 properties, so it's a small set there that we're talking about. They really pushed occupancy at the expense of I'm sorry, they flipped that. They really pushed rate at expense of occupancy, and they did so by intent. They were at, like, 95.6% occupancy a year ago, and they were willing to go below that and really drive the rate.
Look, their expense controls are better. One of the ways to think about Enlivant, I'll just say in terms of my experience as an operator, having done turnarounds and BKs and stuff is, those first few years, there's a lot of low-hanging fruit, so you're sort of improving your results in leaps and bounds. You start getting to the point where it's a lot more fine-tuning, and that's where we see Enlivant doing a really nice job of looking at everything on a market-specific basis, stratifying their efforts so they can allocate resources differently, and then getting better at their expense controls over time as well as they start putting new systems in place. They're not close to done, particularly on the new systems part.
We've already conveyed to them that a lot of the IT initiatives that they are looking at embarking on in 2020, EMRs and the like, that we will be a partner with them in doing that. There's an awful lot that can still get done from a fine-tuning perspective, but I appreciate the fact that they, and actually our other operators, too, it's not just them, are really focused more on the long term when it comes to rate versus just occupancy and giving discounts.
Given the strong performance, I'm sure you feel more comfortable with the joint venture assets and your balance sheet and cost of capital improving at the same time. Do you still need to pursue a joint venture partner for the buyout of existing partner? Why not just go back to Plan A?
Look, it's still going to be less dilutive to bring a partner in, regardless of what that percentage is at, than to write a check for the full 51%, and still retain our ability to exercise whatever the remainder is of that % of ownership of the portfolio. We're still in the middle of negotiations, so we'll kind of see how it goes. Our focus right now. It may not be a new joint venture partner. It may be a new arrangement with TPG.
Is your intention still to own a majority stake?
Oh, that's always been our stated intention, and we said that on the second quarter call on August 9th. It's always been our intention to go from 49% to some majority.
Great. Thank you.
Yeah.
Our next question comes from Rich Anderson with SMBC. Your line is open.
Thanks. Good morning. Just finishing up on Enlivant, I didn't quite get it. Are they in low-hanging fruit phase still, or are they in fine-tuning, or are they transitioning to fine-tuning from low-hanging?
I would say they've stratified the portfolio in terms of marketing and allocation of resources. There are portions of the portfolio, about close to a couple of dozen buildings, that there's still a lot of low-hanging fruit.
Right.
There's sort of a middle tier where they're not quite low-hanging, you need a bigger ladder, but you're not quite just at fine-tuning. You've got a big chunk of the portfolio where it really is fine-tuning. That's really where they've shifted, where they've taken a more holistic, historically a more holistic effort towards improving the portfolio because there were so many issues with it when they got it. Now getting it to the point where they can look at it and say, "Okay, we're in pretty good shape over here." Not going to take our eye off the ball, obviously, but there's a different level of resource management that's needed with this percentage versus this percentage because these guys are already over 85% occupancy. This group's over 75%. This group's under 70%.
Right. Okay. The IT initiatives, what was that? Did John say revenue management? Is that what that was?
It's Electronic Medical Records, is really probably the biggest one.
Okay.
Because everything's still paper. That'll improve efficiencies and expenses quite a bit.
Okay.
It should help. It's an intangible about how that kind of stuff helps occupancy, but to the extent that you have systems in place that better allow you to show what your outcomes are to your referral sources, then that helps with occupancy.
Okay. This might be a yes or no question, but is there anything predetermined about the cap rate when you're addressing the process of taking out TPG, or partially or fully, or is this all market driven? That could be a yes or no question.
Yeah. As we've stated before, our current arrangement with TPG has a floor on the option price.
Okay.
That's part of the discussion. I think that would be the right way to think about it, depending on performance. There is a cap rate in place under our current option. We're still kind of working with, talking with them, and kind of in that context of what's already in place.
Yep. Okay. Rick, maybe one of the main messages that you've been talking about the last few quarters is sort of turn down the fire hose in terms of external growth and make it a story much easier to understand. Today, do you find yourself kind of striking a balance between that message and also starting to use your currency a bit more incrementally beyond just using the ATM to de-lever?
Yeah. One, this is an important point, people tend to think because you're so busy with things that you're not focused on other things. We're finishing the restructuring, we're focused on the balance sheet, so we're not focused on doing acquisitions. We've always been completely focused on getting some acquisitions done this year. We've had an active pipeline. We have a full investment team that's just focused on that and not distracted by anything else. We just haven't found opportunities that have been interesting or frankly affordable, particularly on the senior housing side. I think as most have seen, there haven't been that many opportunities outside of a couple of portfolios and some of the stuff that we've been selling on the skilled nursing side.
I think the main message for us was whatever we happen to get done from an investment perspective this year wouldn't be complicated. We just want it to be uneventful in terms of that. Whatever it is we get done, people just look at it and say, "Oh, yeah, that makes sense." Even though we'd like to ramp up our growth going into 2020, we need to do that. It's with that mindset. We've had a lot of noise, and it doesn't matter that it's for the right reasons and it got us to a good place. We had a lot of noise for quite a while, and we don't want that going forward. It's made it really difficult for people to understand the story. It just takes too much work.
This has been a nice period of time, I think, for people to kind of see who we are post all the activity that we had, look at how the balance sheet's changed, how diversity of tenants have changed, all that stuff. We can get back to growing in a more routine way. Maybe another way to put it is, we don't want to be in a position where we're going to announce a deal that's so complex, we're going to have to have a conference call to talk about it and try to explain to you guys why it is we're doing it.
Okay. Last question from me. The whole Avamere thing with the tech rollout and eye off the ball and all that sort of stuff, it seems to me a fair amount of operators can be easily distracted if the environment around them isn't perfectly sterile. I'm wondering, how can you play a role in avoiding this in the future? In other words, these are your partners, if something's coming down the pike that is potentially disruptive, can you sort of get ahead of it somehow as their landlord and say, "Keep your eye on the ball," and be a partner in that regard? Is that something that you think you can do from the REIT perspective, are you just sort of beholden to these types of dynamics that happen from time to time?
It's somewhat challenging when you've got triple-net. I would say this, when it came to PDPM, I think we were as active a partner as a REIT can possibly be. A lot of dialogues, making referrals to resources that could be helpful. I think we were really active from that perspective there. Our operators conference was helpful as well because it provided a forum to talk about all those things for our operators to share best practices with each other. I think in terms of that, we've done that, and look, all the credit goes to our operators for having a period of time with PDPM where they haven't seen a disruption. I think, certainly, at least on the margin, we've been helpful there. When it comes to doing things like IT rollouts and stuff, look, I've been there, and it's frustrating as hell, Rich.
It takes a lot, and people do take their eye off the ball. I've seen it a gazillion times, and you have to have some level of trust in your operators. I think what compounded the issue at Avamere was the gentleman who was the founder and chair and CEO of Avamere had really taken a back seat and had other management running the company, and he is fully engaged now. He's made a number of senior management changes. He's running it on a day-to-day basis again, which we, by the way, think is a really good thing. I think it probably didn't help that at the same time, they were going through a transition with their software systems, with the ancillary companies. They were going through senior management changes at the same time, which just compounded it.
Got you. Okay. Thanks very much.
Yep.
Our next question comes from Steven Valiquette with Barclays. Your line is open.
Thanks. Good morning, everyone. Thanks for taking the question. Your overall comments so far around PDPM for SNF operators have certainly been helpful. I guess I'm just curious to hear more specifically whether or not the therapy utilization per average patient was already coming down within the industry. Rick, it sounds like from your comments that there may already be an initial read that some higher acuity patients are already being funneled into SNFs, because now the reimbursement is more appropriate, kind of as you talked about. I guess I'm curious, would those higher acuity patients be taken from a pool of patients that would normally go to LTACs and/or IRFs, or would they be coming from somewhere else? Thanks.
Yeah. I know we're sort of new to each other, but others will recall me saying this. I think any changes to reimbursement system that make it create more equality from a reimbursement perspective helps SNFs and hurts LTACs and IRFs. There have been a number of studies done by MedPAC that show IRFs, at the exorbitant Medicare rates that they get, have no better outcomes than skilled has had at the rates that they've had. We've got a number of operators that do things that happen in LTACs on a regular basis, only because they happen to be in states where there are specialized rates that do it. You couldn't do that under normal Medicare and Medicaid rates. I think they get these patients from hospitals, where hospitals haven't had a place to discharge them to because LTACs aren't in that many markets.
They're in, what, five states or something like that. Even though if you look at the map on IRFs, they're in a lot more states, they're actually concentrated in a relatively small number of states. There are a lot of markets out there where the hospitals have had no choice but to sit with these patients because they didn't even have an LTAC or an IRF to send them to. In those markets where we have high acuity skilled nursing facilities that compete with LTACs and IRFs, I definitely believe that they can impact the occupancy in those other asset classes.
Okay. At the very beginning, when you talked about just getting no disruption at the very beginning of your prepared comments, there was a little more color around that. Again, should we take that to mean, though, that there's just, hey, there's no problems, but maybe there's no change in therapy trends yet? I guess I'm just curious, are you or are you not seeing already that therapy's coming down maybe per average patient, or are you not seeing that yet?
We're not really seeing that yet, and that goes to my earlier comments of specifically where I think our operators are being really careful. There's no reason if the day before PDPM, you were billing 600 minutes for a patient, and the next day it's 400, and you have them in group therapy, and it's the same exact patient. I think our operators, in all of their discussions with us, are being really careful about that. I think that any decrease in the level of therapy utilization is going to be over a period of time, and it's going to be rational. As they start ramping up their services to other kinds of patients, they'll be able to manage that balance, we believe, in a way that'll be net positive. Stay tuned, I think we'll see more over the next few months.
I've been consistent, I think, in saying that even though we've been really positive about PDPM, that we've believed all along it was going to take a good six months to really see some super tangible impact across a number of operators on PDPM. By the time we issue first quarter earnings in 2020, we may be in a position to provide some snapshots of coverage for our operators, because on a trailing 12 basis, you're not going to see it till a year from now, right? If we're seeing improvement, we want to be able to show that. We'll keep an eye on that, and to the extent that we want to make some additional disclosures that would be helpful to everybody in the supplemental, then we'll do that. One other comment I want to make in terms of opportunity.
When I say no disruption, I think there are a number of operators where there has been disruption, particularly the small mom-and-pop operators or just the less sophisticated operators, and they're going to start feeling some pain pretty quickly. Specifically, if you weren't prepared for PDPM, and you didn't enhance your MDS function, and your nurses weren't trained appropriately and all that, and come October 1st, you're billing rates that are lower than what the level of care requires for those patients, then when that money starts coming in in 30-45 days, that's going to make for a really tough Thanksgiving. I think there's some percentage of operators out there that are going to be feeling some pressure sooner than later.
In terms of whether they have to do something about that, it depends on the operator and how much cash they've got in the bank and how much time they can buy themselves and all that sort of stuff. It goes to why a lot of us thought that there'd be more skilled opportunities prior to PDPM because there'd be some level of awareness on the part of certain operators that they're just done, they're ready to get out. That wasn't the case. It appears that there are a lot of operators that we don't think are prepared that thought, "Oh, gee, everybody said this is great, so if we hang around on October 1st, we're just going to be making more money." It just doesn't work that way.
Okay. All right. That's perfect. Appreciate the extra color. Thanks.
Yeah.
Our next question comes from Joshua Dennerline with Bank of America Merrill Lynch. Your line is open.
Hey, guys. Just one question from me. You mentioned the dynamic pricing systems on your seniors housing managed portfolio. How should we think that plays out as far as rate and occupancy going forward? Like, will occupancy keep dipping as they keep pushing rate, or do you think that has trended out at this point and it's more balanced mix going forward?
I think that the opportunity is going to differ depending on how you tranche the portfolio. That goes to Rick's point earlier when he explained how Enlivant does tranche its portfolio by occupancy and other metrics. I think the dynamic pricing model has been and probably should continue to be particularly effective in the lowest strat of occupancy, where there's the greatest opportunity to add occupancy, and that has a disproportionate economic benefit at that point, in terms of covering fixed costs, et cetera. I think it will be additive to the other tranches of occupancy on units that might have been typically harder to lease or such.
When we've talked about spot occupancy before, Dan, it's really been spot. Since they've really fully engaged this new initiative, we're looking at five to six weeks now where we've actually seen some real improvement. It just feels better. A lot of people are really concerned about what the flu season's going to be this year based on what we've seen happen in Australia. We'll see how that goes. If they can continue this current trend going into that, they'll be in a lot better position than they would've been otherwise to get through it.
Interesting. Thanks, guys. That's it from me.
Our next question comes from Daniel Bernstein with Capital One. Your line is open.
Great. I guess good morning for you, still good afternoon for me. My question goes back to the Enlivant portfolio, the JV portfolio. You're pushing rate at 81% occupancy. Is that an indication that that portfolio is kind of stable at that occupancy? Typically, you don't push rate until, in senior housing, till you get close to 90%. I'm just trying to understand the dynamics on rate growth within that portfolio. Maybe there's some assets that are high that are pushing rate even above what you're showing. Just trying to understand the nuances there.
I think it's more a function of, as their reputation is improved in those communities, they can continue to push rate and push occupancy at the same time. I don't think they're mutually exclusive. I just think it's a little bit different with a portfolio that had been in turnaround mode for quite a while. Talya, do you want to add?
Yeah. My only comment is it's sort of. Your question is best answered with granular detail. We're talking about a portfolio of 170 properties, and occupancy is not the same across them, and neither is rate.
Right.
That's where the complexity, the dynamic comes forward. There are properties that are well occupied and there's room to push rate, and that's the focus. There's a tranche of properties where occupancy is a big opportunity, and that's the one I referenced when I talked about what we'd seen specifically in terms of the leap in spot occupancy on the lowest tranche of occupied assets. There, the focus is getting people in and raising occupancy as opposed to driving rate specifically.
Okay. Is there a general strategy at Enlivant, and maybe your other operators too, we saw some of the whole-owned assets to drive rate over occupancy? By the way, I think that's a good strategy. Is that a general strategy you folks are using within your portfolio? Obviously, in some other portfolios and some other REITs, it's clear that they're driving occupancy over rate.
Yeah, we don't have any operator. To the extent that they can drive rate, they want to do that. They don't want to compromise that under any circumstances. They think that the long-term impact of compromising on that is more negative than staying with a little bit lower occupancy for a period of time. Okay.
Let me add-
Oh, sorry. Go ahead.
Let me add one nuance, and I think Rick has said this, but I want to make sure it's understood. The dynamic pricing model is not a discount model. It is not about discounting or free rent in your fourth, fifth, and sixth month. It's not that. It's actually evaluating specific units in the buildings and understanding what would be the range of pricing that would be possible, and assist the team in making decisions and getting those units occupied.
Okay. I guess my last question would be, I missed a little bit of the earlier call, so I might have missed some of your comments on PDPM. Has there been any discernible, I guess, feedback from operators of, I guess, maybe a little bit easing labor pressure now that you can free up some of your nurses to actually do nursing instead of paperwork under PDPM? I mean, just trying to understand some of the, I guess, expense savings and labor pressures that have been there. Are you actually seeing some of that discernible benefits under PDPM?
I think it's going to be more on the therapy side, because to the extent that you're going to have some percentage of people in group and concurrent therapy, you're going to need less therapists, which there's a big therapy shortage, that's really helpful on a number of different levels, which is why you hear the therapy association screaming about PDPM. On the nursing side, look, they've got to do coding now, they've got some other stuff to do. There have been some regulatory burdens that have been lifted. You're not having to do assessments as often. Maybe there's a little bit more care time there, it's kind of more on the margin, Dan.
All right. That's all I had. I appreciate all the color. Thank you. Yeah.
Our next question comes from Tayo Okosanya with Mizuho. Your line is open.
Tayo, welcome back. Tayo?
Tayo, your line is open. Please check your mute button. Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is open.
Thanks.
Yeah, so much for the big shout-out to Tayo, huh? He didn't show up.
Leaving you hanging. I'm sure he'll come back. Thanks. Just a quick one. Can you provide facility-level SNF coverage, including all your tenants? Four-wall coverage with Avamere and the others?
No, we haven't historically disclosed that. I think our approach to coverage has been that we give the coverage for those that don't have guarantees, and then when we provide the top 10, the intent there is to give investors and everybody a really clear picture of our primary and most significant tenants and where their coverage stands. We've never published that and haven't talked about that in public. Yeah, the guarantees are too critical to us. Look, the reality is there actually was a time way back in the early days where we were showing both, and all it did was create confusion, and people always then like to look at the lower number. The fixed charge coverage is the number that we get paid on. That's what we're going to show for those few tenants, and we don't have very many of them.
Two of them. We only have two of them anyway, Lukas, that we do that for.
Great. Thank you.
Yep.
Thank you. I'm currently showing no further questions at this time. I'll let turn the call back over to Rick Matros for closing remarks.
Well, thanks everybody for your time today. For those that have kids, I hope you guys have fun trick-or-treating tonight. We're all around and available for follow-up questions. Have a great day. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.