Good day, ladies and gentlemen, and welcome to the Sabra HealthCare 4th Quarter 2018 Earnings Conference Call. This call is being recorded. I would now like to turn over the call to Michael Costa, Executive Vice President of Finance. Please go ahead, Mr. Costa.
Thank you. Before we begin, I want to remind you that we will be making forward looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, our expectations regarding our tenants and operators and our expectations regarding our future financial position and results of operations. These forward looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10 ks for the year ended December 31, 2018, that was filed with the SEC this morning as well as in our earnings press release included as Exhibit 99.1 to the Form 8 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.sabrahealth.com. Our Form 10 ks, earnings release and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.
Thanks, Mike, and thanks for joining us, everybody, today. I'll start off by making a couple of comments about guidance. Harlan will get into the details. But the guidance primarily reflects everything that we've been talking about and doing over the recent past. And the primary difference between all the dispositions and how that affects guidance is the assumption that we're going to be delevering the balance sheet, which look when you reset the table and it's been for us, it's been an 18 month period of transformation of the company that was necessary given our exposure to Genesis and all their issues at the time.
So as we sit here today, we're a few weeks away from completing the repositioning of the portfolio. So we feel really good about that. Our focus for the remainder of the year is to keep the noise behind us, have some quiet time and get some deals done and delever the balance sheet. So we did put an assumption in the guidance that we'll be delevering the balance sheet over the course of the year. And again, as you reset the table, it's best to do that and get everything in there.
So it benefits the company from a long term perspective. With that, let me move on to acquisition pipeline in the competitive environment. Our acquisition pipeline has increased pretty dramatically since the end of the year where it's stated about $200,000,000 Today, it's about 1,000,000,000 dollars There's a lot of senior housing in there, primarily senior housing, but we're starting to see more skilled deals and that's where we expect to get some things done this year. And so we expect to see that continue to increase. In terms of the environment, we don't see anything different from a pricing perspective.
On the senior housing side, the private equity groups are still keeping pricing at levels that we think are beyond reasonable. Skilled cap rates appear to be that they've been for a long time, and that is relatively stable. And we don't expect that to change either. In terms of our operational results, our operational results were pretty stable for the quarter. Our senior housing occupancy and coverage was flat sequentially.
Our skilled occupancy was flat sequentially. Our skill mix was up by 50 basis points. Our skilled EBITDA rent coverage was slightly down. That's really accounted for by 1 primary tenant, North American. North American, this past summer had an unforeseen change in management with their Founder and CEO leaving suddenly and he was very much at the center of things in the company.
There have been a number of management changes all from within since then. They've settled down and we expect them to rebound. We have no concerns about that tenant. They have a good operating team. We don't expect any changes in rent going forward.
Looking at January on a standalone basis, they've bounced back to about 1.25%. So we expect them to continue to improve over the course of 2019. Our managed portfolio did very well and Todd will provide the details on that. And that's attributable to primarily 2 of our operating partners in Liveit and Ciena. And again, Talia will get into the detail on that.
So with that, Talia, let me turn it over to you.
Thank you, Rick. I will provide some comments about the operating results and statistics for our managed portfolio. Of December 31, 2018, Sabra had over $1,000,000,000 invested in managed senior housing communities. Approximately 83% of that capital is invested in assets that are managed by Enlivant, 14% is invested in retirement homes in 3 provinces in Canada and the balance represents 3 assisted living and memory care communities in the United States. So first I will discuss Enlivant's 4th quarter results.
Sabra's wholly owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia and Delaware continues to perform very well and outperform forecast. We have seen a steady improvement over the course of 2018 with rate growth and continued solid occupancy driving greater profitability. Average occupancy declined slightly to 92.6 percent compared with 95.6 percent in the preceding quarter after multiple sequential quarters of occupancy growth. This decline was offset by more than 6% revenue growth. Revenue per occupied unit rose to $5,441 nearly 10% higher than the preceding quarter, which reflects not only the implementation of the 5.5% annual rate increase that was placed in the Q4, but also higher effective rates throughout the communities.
Cash NOI margin was 32.1%, 12.5% higher than the prior quarter and much higher than the 23% margin in the 4th quarter of 2017. The Enlivant joint venture portfolio, 172 properties located in 18 states across the United States of which Sabra owns 49%, finished 2018 with strong results after being impacted by the flu last winter. Average occupancy for the quarter was 81.7 percent in line with the previous quarter of 81.8% and revenue per occupied unit was $4,230 a 5.3% increase over the previous quarter, again reflecting that the annual rate increase in the 4th quarter did not come at the expense of occupancy. Cash NOI margin was 25.5 percent, a 1.8% increase over the prior quarter. We have agreed that Enlivant will pursue the strategic disposition of certain communities owned by the joint venture where the combination of market, location and physical plant limit the objectives that we, TPG and Enlivant share.
In the meantime, we continue to see acquisition opportunities for Enlivant in various markets and are working together to pursue those jointly. At the end of the Q4, Sabra owned 8 retirement homes and 1 assisted living and memory care community in Canada. Savers sold a 9th community in assisted living property in Ontario during the Q4 and it is excluded from these statistics. Sienna Senior Living manages the 8 retirement homes in Ontario and British Columbia. And in the 3rd quarter of in the Q4, I apologize, of 2018, the 8 properties managed by Sienna had 92.4 percent occupancy, which was 2 percentage points higher than the preceding quarter and 38.7 percent cash net operating income margin compared to 35.7 percent in the preceding quarter, an increase of 3 percentage points.
Sienna continues to focus on revenue growth in the portfolio, which is a direct impact on NOI margin at these occupancy levels. There are 4 remaining managed properties in Sabra's portfolio, an assisted living and memory care community in Calgary operated by Baybridge and 3 assisted living and memory care buildings in Wisconsin and Minnesota operated by Pathway Senior Living, 2 of which are in lease up. I will now turn over the call to Harold Andrews, Sabra's Chief Financial Officer.
Thanks, Talia, and thanks everybody for joining the call today. For the 3 months ended December 31, 2018, we recorded revenues and NOI of $139,200,000 $136,600,000 respectively, compared to $166,500,000 $160,500,000 for the Q4 of 2017. These decreases to revenues and NOI are primarily due to the impact of dispositions in 2018, the $19,000,000 Genesis rent cut effective January 1, 2018 and lost rental revenues from senior care centers during the Q4 of 2018. Revenues and NOI also declined compared to the Q3 of 2018 by 12 $600,000 $11,300,000 respectively. These declines are primarily attributed to a decrease in recognized cash rents related to senior care centers of $12,500,000 which is partially offset by strong revenue and cash NOI growth in our managed portfolio, including our share of the Enlivant joint venture of $2,300,000 $1,600,000 respectively.
FFO for the quarter was $48,200,000 and on a normalized basis was $90,200,000 or $0.50 per share. FFO was normalized to exclude $28,800,000 primarily related to the write off of a straight line rents receivable associated with the holiday lease, which is expected to be transitioned to a managed portfolio in 2019 and a $2,900,000 loss on extinguishment of debt, primarily associated with the prepayment of a $98,500,000 secured Bridge to HUD loan associated with the Senior Care portfolio to be sold in 2019. Additional normalizing items during the quarter include $5,200,000 related to the acceleration above market lease intangible amortization associated with assets transitioned to new operators during the quarter, dollars 4,300,000 of non managed property operating expenses, consisting primarily of property taxes paid on behalf of senior care centers and $300,000 of CCP merger and transition costs. AFFO, which excludes from FFO, merger and acquisition costs and certain non cash revenues and expenses, was $77,300,000 and on a normalized basis was $83,800,000 or $0.47 per share. Normalized for items consistent with the FFO normalizing items.
Compared to the Q3 of 2018, normalized FFO and normalized AFFO per share declined by $0.10 $0.08 respectively. These declines are primarily the result of the unpaid and unrecorded contractual rent owed by senior care centers during the Q4. For the quarter, we recorded a net loss attributable to common stockholders of $19,400,000 which among the items eliminated from normalized FFO of $42,000,000 includes a loss on sale of real estate of $14,200,000 G and A costs for the quarter totaled $11,300,000 and included the following: $4,300,000 of non managed property operating expenses incurred in connection with the transition of properties to new operators $1,400,000 of stock based compensation expense, dollars 300,000 of CCP related transition costs and $300,000 of non recurring legal expenses. Recurring
cash G
and A costs of $5,200,000 or 3.8 percent of NOI for the quarter, in line with the prior quarter. Our interest expense for the quarter totaled $37,200,000 compared to $32,200,000 in the Q4 of 2017. Included in interest expense is $2,600,000 of non cash interest expense compared to $2,500,000 in the Q4 of 2017. As of December 31, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant joint venture debt was 4.28%. Borrowings under the unsecured revolving credit facility bore interest at 3.75% at December 31, 2018, an increase of 24 basis points over the Q3 of 2018.
We sold 15 skilled nursing facilities, 2 senior housing facilities and 1 senior housing managed facility during the Q4 of 2018 for gross proceeds of $91,600,000 bringing our total aggregate sales in 2018 to 58 assets for total gross proceeds of $382,600,000 During the quarter, we made investments totaling $39,200,000 with a weighted average actual cash yield of 7.4 percent, including $26,300,000 related to 1 senior housing community from our proprietary development pipeline with a net cash yield 7.47%. These investments were funded with available cash of $18,000,000 $21,200,000 of funds held by exchange accommodation title holders. As of December 31, 2018, we had total liquidity of $426,000,000 comprised of currently available funds under our revolving credit facility of $376,000,000 and cash and cash equivalents of $50,000,000 We were in compliance with all of our debt covenants as of December 31, 2018 and continue to maintain a strong balance sheet with the following credit metrics. Net debt to adjusted EBITDA, 5.66 times net debt to adjusted EBITDA including unconsolidated joint venture debt of 6.12 times interest coverage of 4.14 times fixed charge coverage 3.7x total debt to asset value 49% secured debt to asset value 7% and unencumbered asset value to unsecured debt of 2 22%.
On February 5, 2019, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. The dividend will be paid on February 28, 2019 to common stockholders of record as of the close of business on February 15, 2019. We also issued our 2019 per share earnings guidance range, which are as follows: net income, $0.24 to $0.32 FFO $2.02 to $2.10 normalized FFO $1.86 to $1.94 AFFO $2 to $2.08 and normalized AFFO $1.81 to $1.89 Critical to understanding our expectations for 2019 is understanding our commitment to delevering the balance sheet to under 5.5x inclusive of our share of Enlivant joint venture debt and under 5x exclusive of our share of Enlivant joint venture debt. Our leverage currently stands at 6.12x inclusive of the JV debt, which is higher than historical levels, in part due to the loss of EBITDA from our senior care portfolio of $20,900,000 We expect to accomplish this goal through the further asset sales in 2019 along with the issuance of equity through the equity ATM program we established this morning. Our 2019 guidance reflects dilution from the issuance of equity under that ATM program of $0.05 to $0.08 per share.
Additional assumptions in guidance include the following: the previously announced sale of 28 facilities currently operated by senior care centers is completed April 1, 2019 for $282,500,000 Collection of $5,700,000 of post petition rent from Senior Care Centers pursuant to a settlement agreement entered into Senior Care Centers on February 15, 2019. Total impairment and transition costs for senior care centers of $69,300,000 all being excluded from normalized FFO and normalized AFFO. Termination of our holiday retirement master lease and concurrent entry into a management agreement with Holiday effective April 1, 2019, triggering the receipt of $57,200,000 of cash consideration on April 1, 2019 in connection with the lease termination. This termination fee is excluded from normalized FFO and normalized AFFO. Same store cash NOI improvement in our wholly owned senior housing managed portfolio of 3% to 6% and in our Enlivant joint venture of 6% to 12%.
We did not include any speculative acquisition activity in 2019, but do include $142,000,000 of acquisitions, primarily from our proprietary pipeline, closing primarily during the Q4 of 2019. These acquisitions are expected to provide an initial annual cash yield of 7.6%. Under further assumptions, other asset dispositions totaling $300,000,000 resulting in a loss on sale of approximately $85,000,000 Such dispositions currently have associated annualized cash NOI of $18,600,000 These dispositions include the remaining 3 Genesis assets, but the vast majority are comprised of legacy Care Capital facilities that we identified for sale as part of the portfolio repositioning and from a purchase option held by an operator, which were discussed in prior quarters. Finally, I'll provide a quick update on the Genesis asset sales. We are near completion of these sales with only 3 facilities remaining to be sold.
During the quarter, we sold 15 assets for total gross proceeds of $81,000,000 The remaining 3 are still in the HUD approval process, which was delayed due to government shutdown earlier this year. As a result, we expect those sales to close in the Q2. Upon completion of these sales, we expect residual rents to total $10,400,000 per year or 4.28 years after each sale closing. Ultimately, we expect to have total continuing cash rents from Genesis, including residual rents generating from sold assets of approximately $20,800,000 or 4% of our current annualized cash NOI. And with that, I'll open it up to Q and A.
Thank
And our first question is from Jonathan Hughes with Raymond James. Please go ahead.
Hey, good morning out there on the West Coast. Rick, you gave North American coverage into January in your prepared remarks, but can you just elaborate on why the CEO left since he was such a big part of why you bought that portfolio in late 2017?
Yes. So a couple of things. One, I actually can't elaborate personal, so I prefer to keep it that way. But certainly it was unexpected. But when we bought the portfolio, we also saw a really strong bench, a really strong operating team.
And the fact that they've been able to sort of regroup and they were able to promote from within in terms of the new CEO, I think shows that. And look, it just threw them off their game a bit, but we see them rebounding and it was actually a nice pickup in January. So we don't foresee any issues with that. If I could share more, John, I would, but it's just too personal.
Yes. No, that's fair enough. But what about I mean, the rest of the team, is it largely in place too? Or is it kind of a whole replacement of kind of the C suite there? No, And
then
looking at the
And then looking at the $300,000,000 of dispositions and loan repayments in addition to senior care centers. It looks like it's about a 6.2% cap rate on the expected proceeds there in the cash NOI, but more like a sub-five on the gross book value. I guess what's the composition of that $385,000,000 gross book value in terms of owned assets and loans and when were those investments made?
So this is Harold. Basically about 2 thirds of those assets being sold, as I kind of made comments on the call, were from Care Capital Legacy Acquisitions. So 2 thirds of it is sad, about a third of it or I should say about 25% are related to this kind of Sabra historical legacy assets that were bought going back probably for the most part 3 or 4 years. And then 11% of that number is are the Genesis assets. So and the yield is really, as strong as it is to a large extent because of the a handful of those assets have no operations in them at all.
These are operations that were shut down early on when we made the Care Capital acquisition or rents have been reduced. So primarily skilled nursing assets and stuff that went back to the Care Capital acquisition.
Okay. That's helpful. And then earlier you did mention guidance and the earnings guidance and it does include dilution from equity raises. Can we expect you to kind of issue around the current $19 share price? How do you think about using that throughout the year?
The ATM.
I think we'll wait a little while. We've had a lot of noise around the stock, just like we saw in the Q3, when we issued the revised guidance, then it doesn't really matter how much you talk about it, until you put numbers out, there's always a reaction. So, we should be able to bounce back given the discount that we're trading at. And we think the 2 things that kind of have impacted us is all the noise we've had, which has been ongoing for quite some time, but absolutely necessary from our perspective to get the company out from under how Genesis is growing itself and the issues that it created for itself as a result of that. So we're almost done.
We're weeks away. So that'll be behind us and people can expect a lot more predictability and more of a quiet kind of tone around the company. And then the leverage was the other piece. And I think from all the study perspective, getting that leverage down and having some quiet time after we finished the senior care center sales on April 1, should help us rebound. If you look at us just from a pure valuation perspective, it's still pretty exceptionally cheap and we've got a very strong balance sheet going forward and a lot of liquidity in the stock, good ratings from the agencies and a much better group of operators than we had 18 months ago and no single operator that's going to be large enough to affect the narrative of the company.
Got it. Okay, that's helpful. And then just one more quick one. The leases that are expiring next year in 2020, what's in that bucket in terms of operator? And what's the facility level coverage on those leases, if you can provide it?
Thanks.
Yes. I'll get that to you offline. I'll have all those details with me right here. But we did adjust the way we're disclosing, just so you know, the lease maturities and we're now doing it on a debt basis. So you saw that number come down a fair amount this quarter.
A lot of those assets that are I'll just I will say this, a lot of those assets maturing in 2020 are part of the assets that are being sold this year. And so a big chunk of that is already anticipated going away and won't require any re tenanting. But I can get you some more details on that offline.
Okay. That sounds good. All right. Thank you for the color. I'll jump off.
Thank you. And our next question comes from Chad Vanacore with Stifel. Please go ahead. Your line is open.
Thank you and good morning all.
So just I want to
go back to North American. That coverage did significantly from last quarter, it went from 1.25 to 1.09. Can we get some more detail on what's happening outside the management change? So what's happening operationally to create that drag? Plus, they're located in California and Washington is a tough environment, maybe give us a split of the NOI in Washington versus California and then how are those facilities performed?
Yes. So there isn't much of a difference. The Washington facilities actually performed pretty well. The drop would seem the drop looked deep because they're underwritten coverage. We report on when we do an acquisition, we report with we under open that for a period of time and then that starts tallying off.
So that's really what accounted for the drop. They didn't have that bigger drop. If you look at like the last 6 months, it's been a more steady decline once the CEO left. So I'd say the decline started in the summer and we started seeing some things rectify towards the end of the year and started seeing some real improvement in January, but no real difference between California and Washington.
Yes, I think it's primarily expense related as well. And their occupancy and their rates are very strong and it continues to be strong. So it is just a little bit of a distraction, I think, around expense management.
Yes, which is one of the reasons they rebounded in January because if your issue is on the expense side, now on the revenue side, that's a lot easier to fix. They just needed to get some new systems and new controls in place and the new CEO needed some time to get settled in and address all that.
All right. And would those expenses be more labor related to, let's say, some temp labor usage?
Yes. It's really all over the map, supply costs, food supplies, stuff that's actually just it's blocking and tackling really. I think when you've got someone that's been a founder and CEO and there's a sudden change like that, sometimes people take their hospital and may not be a good excuse, but it's reality. We've seen it happen all too often. So but they're getting it together and we really don't have any concerns.
And Chad, you know us well enough. If we have concerns about an operator, we start raising the flag pretty early. So we did that with Senior Care, we did that with Genesis, we did that with others. So we just don't see that here.
Okay. Then just thinking about your uses of cash, you're willing to take some dilution in order to delever. So why is delevering a better use of cash than reinvestment in 2019?
Well, we plan on doing both. But our leverage ticked up a tire. It's above the level that we'd like it to be. We certainly want to get a stable outlook again back from Fitch and we expect that to happen. We think all that's important.
We think potentially getting an upgrade from Moody's is important as well. So all of that stuff affects your cost of capital. So we think that's really important. And our leverage may not be that much different than some of the larger guys who are also investment grade, but we don't necessarily get compared to the larger guys. We get compared to the smaller guys who may not have as much going on from a growth perspective to keep their leverage low.
So we think it's going to accrue to the benefit of our shareholders if we focus on getting that leverage down because it will improve the cost of capital of the company from our perspective and that allows
us to do more investment.
All right. And just one more question is on senior housing managed portfolio. You put out some pretty good expectations for 2019. Rate in the quarter was up pretty significantly on a RevPAR basis. What kind of occupancy rate assumptions are you making in 2019 for that portfolio?
For the Enlivant wholly owned portfolio, I think is the one you're referring to. We've actually kicked it back down a little bit on the occupancy and held steady on the RevPOR. But we think it's a very strong portfolio, but for purposes of forecast, we Yes.
And when you look at the numbers as inclusive of the joint venture, you do see a steady increase in occupancy over the course of 2019 Because remember, this portfolio was acquired underperforming. When we entered into the joint venture, it's obviously well below where stabilized occupancy should be. So there's some pickup in occupancy over the course of 2019, but nothing that's it's nothing dramatic.
So think about it in a couple of different pieces, Chad. You've got the wholly owned portfolio, which has exceptionally high occupancy. So you just it's effectively almost fully occupied once you're over 90%. So you've got to temper your expectations there. As Harold said, the joint venture is different because it was a whole turnaround.
So in the wholly owned, we'll be tempering our expectations in terms of what we're putting in guidance and the assumptions and on the JV, which is still picking up speed. We've got some assumptions there that they will be
All right.
I'll make that in and I'll hop back in the queue. Thanks. Thanks.
Thank you. Our next question comes from John Kim with BMO Capital. Please go ahead. Your line is open.
Thank you. On the delevering, was the 5.5 times really the focus of Fitch or were the other rating agencies also focused at this level?
No, it's Fitch was the only rating agency that specifically laid out 5.5 times as a target for us. We just had a report put out by S and P, who reaffirmed our ratings and put us on stable. And so they don't have the same level of concern that Fitch indicated.
And how much equity do you need to raise this year to get to your 5.5?
Well, it's going to depend on the timing and the amount of dispositions we make. And so it's not going to be an immaterial amount, but it will be something that we'll do over the course of 2019. And we've got lots of time to get it done. So as Rick said, the timing is something we'd like to do sooner or later, but we're going to wait to make sure the stock price makes some sense.
And using the ATM to match funds, it's the cheapest way to do that. And it's the least disruptive way to do that. So again, as Tyler said, we'll be patient with it and prudent about it. Okay.
So nothing in your that you share with us as far as guidance on weighted average shares outstanding for the year?
No, not at this time.
Okay.
On the Enlivant same store guidance, there is a pretty wide range of 6% to 12%. And I know you had some easier comps from the flu season. But what are the other variables do you see as far as hitting the low end and the high end of that guidance range?
It's not so much as there are other variables, but you've got a portfolio that's been in turnaround mode. They've done a really good job with it. If it had been a steady state portfolio, it's a little bit easier to predict and you have a tighter range. We know it's going to be really healthy improvement, but it's really difficult to predict how much improvement they're going to have. So it's really because it's in turnaround mode that we have a wider range.
And if you hit that 6% to 12% on that portfolio, when do you think you would exercise the option to acquire the remaining portion of it?
Right now, it looks like Q1 of next year.
Okay, great. Thank you.
Yes.
Thank you. Our next question is from Trent Trujillo with Scotiabank. Please go ahead. Your line is now open.
Hi, thanks very much and good morning to everyone. First, Appreciate the prepared comments on variability in operator coverage levels. Maybe from a bigger picture perspective, could you maybe expand on how you get comfortable with your top operators or any operator for that matter, given the headwinds that you see in skilled nursing?
Well, first of all, the headwinds are dissipating. So that's an important point. And we look at a few things that are happening that are tangible. We should start seeing some benefit in the not too distant future to at least a slight demographic impact of a slight demographic uptick. And when the occupancy of the industry is as low as it is, call it 82%, you've got really nowhere to hide.
So that next patient that you get in, that's a pull through that's a complete pull through to the bottom line. So you had a disproportionate positive impact on any additional patient at this point. Secondly, you're going to see much more supply decline. And the industry actually over the next several years is probably going to have access issues, which bodes well for the industry. It will be interesting to see how the government tries to deal with it.
But you've got declining supply, increasing demographic And then you have PDPM happening October 1, and every single one of our operators has been preparing for it, feels really good about it. I believe it's the best Medicare reimbursement system that the industry has ever had. So I think the headwinds are dissipating. Beyond that though, we're operating by back. We spent a lot of time with our operators.
We have a really strong asset management team that's out in the buildings on a regular basis. Seeing things for themselves, having business discussions on a regular basis. We have operational calls also on a regular basis with all of our operators and we're always reviewing their regulatory reports and their operating trends and all that. So it's not too difficult from our perspective to get comfortable with an operator. And that's why with a couple of operators in the past, think relatively early on, we were very concerned and we started sort of waving the red flag.
But in the case of say North America, that's also one that we're comfortable that they'll be able to rebound and continue to be a good tenant for us going forward. Okay.
Appreciate that. Thank you. Thank you very much. I guess piggybacking on that, Texas has been one of those states that's been highlighted as one of the, I guess, a difficult operating environment and not necessarily indicative of your portfolio, but we saw one of your peers report some negative news with one of its operators. So maybe could you talk about the environment in that space since it's your largest?
And also appreciating that you've taken steps to reduce exposure there. But just curious about your thoughts on how you're looking at the state of Texas?
Yes. So there are 2 primary factors that create a difficult environment in Texas. One is, it's one of the worst Medicaid rate systems in the country. And then secondly, unlike the rest of the country where it's very difficult to build skilled nursing, even in states that you can build it because it's not a CLN, it very rarely pencils. And so outside of Texas, you'll see facilities being built here and there by a company here or there, but you don't see real trends in Texas.
There's oversupply in a lot of markets. The regulatory environment is much lighter in Texas than pretty much any other place in the country. And so as a result of that, there's been a lot of building in Texas. So you combine the oversupply in a number of markets similar to what we've seen in senior housing. We just don't normally see that in skilled nursing with weak Medicaid rates.
It's not a great combination. So I think that even if senior care centers hadn't started completely blowing up the way it had, we would have looked to reduce our exposure. That just sort of made the decision easier. And so we'll be cutting our exposure in half. Now the one potential silver lining in Texas is, there's a lobbying effort ongoing right now to get a provider tax put in place, which would be voted on in the state legislature in November.
And Sabra as well as some of the other REITs and a number of the operators are working with the American Healthcare Association as well as the Texas Healthcare Association on that lobbying effort. And I think we've made a strong case and we'll continue to make inroads there. Whether or not it happens or not, remains to be seen. If it does happen, it's going to be much, much better for the industry. And so the operators that we continue to work with in Texas, will obviously then do much better.
But I think for us, even if that were to happen, we had 18% exposure to Texas. So even in a better operating environment, that's an awful lot of exposure in one particular geographic region. And we made a commitment to ourselves as we started working through the Genesis issues that whether it's an operating tenant or a state that we wouldn't allow ourselves to be overly dependent on any one particular state or operator because there are always certain things that are out of your control. And for us, we got pretty tired of any individual operator or situation controlling the narrative of the company.
Very, very much appreciate that detail. Thank you.
Yes.
Thank you. Our next question comes from Michael Lewis with SunTrust. Please go ahead. Your line is open.
Great. Thank you. I wanted to ask the low end of your normalized AFFO guidance is right on top of the dividend. You're going to be issuing some more equity at a yield that's about 9.5%. I guess the question is, is there a scenario where you kind of adjust the dividend?
Or is this a silly question at this point?
It's never a silly question, right? We understand the question. We will not be adjusting the dividend. We're not going to see growth in the dividend, but everybody can count on it being stable.
Okay, great. And how about how should we think about the likelihood and the timing of buying the remaining interest in the Enlivant JV?
Well, the timing is right now the way we see it and when we look at their performance against their forecast, Q1 of 2020 looks to be realistic. And as we spend the rest of 2019 getting our leverage down some that will put us in a better position to pull that trigger at the appropriate time. Okay.
And then lastly, I just wanted to ask a big picture question. I actually asked this of one of your peers on their call, but George Hager at Genesis said earlier this month at a conference that the REIT structure in skilled nursing has proven to be a failure. You obviously have some broad experience, but some experience with them specifically. Do you think there's some truth in that? The kind of blocking and tackling and constantly dealing with tight coverage and issues here?
Or do you think it's more operator specific and this is something that will work itself out and you'll get passed?
So I know that George said that I was really disappointed to hear that, particularly since he had a group of landlords that gave him rent relief, debt relief and quarter after quarter after quarter gave him waivers on default. So that was really disappointing to hear. I think everything is about culture in this business. And so there always been some times where there have been some downtime. There actually been less downtimes and uptimes over the course of this business for the last 35 years.
And I know for me as an operator, we never looked at ourselves as victims of the environment. If there are headwinds and everybody is going through those headwinds, and so you make a decision that you're going to deal with those headwinds better than anybody else. I think if you look at Genesis, every decision they made has put them in the position they're in, it's self inflicted. So all of our operators had headwinds to deal with. In some cases, we've given them some help and we've given them some help because they've demonstrated to us that they've earned it and they're good operators.
In other cases, they haven't needed help. So it was really disappointing to hear that. And again, given how much the REITs have helped them, if not for everything, if not for the REITs, the company did be bankrupt.
All right. Thank you for answering my questions.
Yes. How's that?
Thank you. Our next question is from Daniel Bernstein with Capital One. Please go ahead.
Hi. Good morning to you on the West Coast. I wanted to ask you about Medicaid mix and your skilled mix. If you look across the industry, Medicaid mix has been going up. Your skilled mix actually improved though.
So I just wanted to understand a little bit about your thoughts about increasing Medicaid census in the space and then maybe some anything particular with your portfolio that is kind of bucking that trend?
Yes. So one, to us skilled mix is the most important indicator of whether an operator really understands the business because it means the higher skill mix is, it means that you are going for the highest acuity patient, and allows you then to minimize Medicaid. When you see Medicaid increase, in my experience, and look, I've done it as an operator as well, when your occupancy is really low, you may admit Medicaid patients more than you might normally do it, because you've hit that inflection point where you've got no leverage any longer. And so as I said earlier about the low occupancy and just even slight improvements in the demographic that disproportionately help your bottom line. If you're at 82% occupancy or 83% occupancy, even if you're in a state where the Medicaid rate is weak, getting that Medicaid patient in, that's a full pull through to the bottom line.
So, there are points in time where operators will admit more Medicaid patients just to help occupancy increase and they're covering their costs. The key there is you really don't want to do it to the extent that you've admitted too many lower reimbursed Medicaid patients that have longer length of stay. Now the industry is a lot different now than it was even 10 years ago. A Medicaid patient most Medicaid patients in skilled nursing today have a much shorter length of stay than Medicaid patients in skilled nursing 10 years ago say. So there's less danger of that happening now than happening in the past, But it was always when you had low occupancy, that was always a fine line to kind of walk.
I think with our operators, they really are focused on very high acuity. I think we've always had about the highest skilled mix in the space. And they've made decisions that they'd rather just focus on that higher acuity patient and sort of live with lower occupancy for a little while rather than admit more Medicaid patients. So everybody's every operator is a little bit different. There isn't extent of Medicare and insurance.
Okay. I guess we'll see what happens to when PDPM comes in, and they'll incentivize people to do the high acuity, right?
Right, because you're going to because it's going to be on the nursing side, not just the rehab side. And that's really there are a number of benefits to PDPM. I think from my perspective, the primary benefit is when you've got a system that's been designed to only incentivize you to go after short term rehab patients by definition, you're creating your own issues then. You're admitting patients that while the reimbursement may be good, are going to continue to put more pressure on your length of stay, which obviously brings your occupancy down. So that's really one of the benefits of PDPM, you're going to get out of that sort of vicious cycle.
Although I did have a question on that and rehab and PDPM. It seems to me that margin should go up on rehab and we've been hearing a little bit about operators maybe bringing rehab back in house. So I mean, one is are your operators looking to bring rehab back in house if they were a 3rd party? And 2, is that I presume that's a positive impact on lease coverage or corporate coverage and just kind of wanted to get your thoughts on that.
Yes. So a number of our operators are already in house. That's a trend that started really over the last 15 plus years. Before that, almost everybody outsourced rehab. And the reason everybody used to outsource rehab and the change is that rehab was huge variable in terms of revenue.
It wasn't a predictable sort of line of business. Once the RUG systems got developed, when you had RUG IV come in 2006 and rehab became a lot more predictable, it made sense because you can count on a certain level of revenue, it made sense to bring therapy in house where you can completely control the product. So in terms of the margin issue under PDPM for rehab, it's definitely a positive because they're bringing back concurrent and group therapy. And even though it's capped at 25%, when concurrent and group therapy had been around really until several years ago, the industry experience is about 26%. So they capped it basically at the experiential level.
And but remember, you still going to look at the nursing patients because the rehab rates aren't going to be exactly what they were. And after day 21, you're going to be incentivized to get those patients out of the facilities, otherwise you'll start having a decline in that revenue per patient. So the fact that you're going to have concurrent and group therapy allows rather than have any of that decline constraint to the bottom line, concurrent to group therapy gives you the opportunity to mitigate that and improve your margin. So I think you're going to have margin improvement from concurrent and group therapy and you're going to have margin improvement from having a broader palette of patients to go after, some of which will have a longer life to stay because you're not just going to be going after short term rehab patients. And then the fact that you're getting rid of the system completely makes things a lot simpler as well because you're going to case mix system.
If you look at the recent changes in home health reimbursement, that's also more of a case mix system. So CMS is pushing everybody to a case mix system, which we think is a good thing and over the long haul will allow CMS to then transition the post acute space to a neutral site system, which is something that those of us in the skilled space would always look forward to. Hope that answers your question.
No, that was great. I guess I have a few more questions, but I'll hop off and talk to you guys later. All right?
Got it.
And our next question is from Nick Joseph with Citi. Your line is open.
Thanks. For the $69,000,000 of expected impairment charges and transition costs in guidance in 2019, what's the assumed breakdown between the 2?
So, Terrell, so it's about $60,000,000 assumed of an impairment or loss on sale and about and the balance is the transition costs, a big chunk of that being property taxes that will still need to be paid on that portfolio.
Thanks.
You bet.
Thank you. And our next question is from Lukas Hartwig with Green Street. Please go ahead.
Thanks. Good morning. Can you provide more color on the size of the senior care centers settlement? Is it larger than the 5,700,000
dollars It is larger than the $5,700,000 and it affects a note that was outstanding. They just asked us not to give any more specifics while we're waiting for court approval, but it is more than that. Do you have
a rough idea of timing?
It's only good news, so.
Right, right.
Do you
have a rough timing of when we'll find out how much bigger it is?
I would never predict timing when it comes to bankruptcy court hearings.
Fair enough.
And then there's I mean, we protected ourselves from the bankruptcy, but there are a couple of these last remaining matters that the bankruptcy court has to make the decision on. We just protected ourselves by terminating leases, so we pulled that stuff out, which was the majority of the of what we had to deal with.
Right. And there's some concern around managed Medicaid. And Rick, I'm just curious what your thoughts are on that issue.
It all depends on rate and how they approach it. And we've seen Medicaid, managed Medicaid products before and some of them have not been good and some of them have been good. I think it's a little bit early on that. So we'll see. But most of the experience that we've had with Medicaid and it's not really even cyber experience going to my experience as an operator and really going back probably over 20 years, the Medicaid, the managed Medicaid rates have been pretty close to the state Medicaid rates that have been in place, but we'll see.
Really hard to predict.
Great. Thank you.
You're welcome.
Thank you. And this concludes our Q and A session for today. I would like to turn the call back to Rick Matros for his final remarks.
Thanks everybody for bearing with the long call. I know we've had a lot of moving parts and we're looking forward as I know you are to getting it behind us. And Harold and Talia and I and the team are available for any additional conversation offline. We'll be heading to the Wealth Conference tomorrow, and as far as seeing a bunch of you guys there. Thanks.
And ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.