Good day, ladies and gentlemen, welcome to the Sabra Health Care fourth quarter 2018 earnings conference call. This call is being recorded. I would now like to turn over the call to Michael Costa, Executive Vice President, 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-K for the year ended December 31st, 2018, that was filed with the SEC this morning, as well as in our earnings press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC this morning.
We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances. You should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-K, earnings release, and supplement can also be accessed in the Investors section of our website. With that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.
Thanks, Mike. Thanks for joining us, everybody, today. I'll start off by making a couple of comments about guidance. Tal will get into the details. The guidance primarily reflects everything that we've been talking about and doing over the recent past. The primary difference between all the dispositions and how that affects guidance is the assumption that we're going to be de-levering the balance sheet, which, look, when you reset the table, 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. As we sit here today, we're a few weeks away from completing the repositioning of the portfolio. 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 de-lever the balance sheet. We did put an assumption in the guidance that we will be de-levering the balance sheet over the course of the year. Again, as you reset the table, it is 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 our acquisition pipeline and the competitive environment. Our acquisition pipeline has increased pretty dramatically since the end of the year, where it started at about $200 million. Today, it is about $1 billion. There is a lot of senior housing in there, primarily senior housing, but we are starting to see more skilled deals, and that is where we expect to get some things done this year.
We expect to see that continue to increase. In terms of the environment, we do not 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 what they have been for a long time. That is relatively stable, and we do not expect that to change either. In terms of our operational results, our operational results were pretty stable for the quarter. Our senior housing occupancy and coverage was flat. Sequentially, our skilled occupancy was flat sequentially. Our skilled mix was up by 50 basis points. Our skilled EBITDA rent coverage was slightly down. That is really accounted for by one 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 have settled down, and we expect them to rebound. We have no concerns about that tenant. They have a good operating team. We do not expect any changes in rent going forward. Looking at January on a standalone basis, they have bounced back to about 125, so we expect them to continue to improve over the course of 2019. Our managed portfolio did very well, and Talya will provide the details on that, and that is attributable to primarily two of our operating partners, Enlivant and Sienna. Again, Talya will get into the detail on that. With that, Talya, 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. As of December 31st, 2018, Sabra had over $1 billion 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 three provinces in Canada, and the balance represents three assisted living and memory care communities in the United States. First, I will discuss Enlivant's fourth quarter results. Sabra's wholly owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia, and Delaware, continues to perform very well and outperformed 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%, compared with 95.6% in the preceding quarter after multiple sequential quarters of occupancy growth.
This decline was offset by more than 6% revenue growth. Revenue per occupied unit rose to $5,441, nearly 10% higher than the preceding quarter, which reflects not only the implementation of the 5.5% annual rate increase that was placed in the fourth quarter, but also higher effective rates throughout the communities. Cash NOI margin was 32.1%, 1.5% higher than the prior quarter and much higher than the 23% margin in the fourth quarter of 2017. The Enlivant joint venture portfolio, 172 properties located in 18 states across the U.S., of which Sabra owns 49%, finished 2018 with strong results after being impacted by the flu last winter.
Average occupancy for the quarter was 81.7%, in line with the previous quarter of 81.8%, and revenue per occupied unit was $4,230, a 5.3% increase over the previous quarter, again reflecting that the annual rate increase in the fourth quarter did not come at the expense of occupancy. Cash NOI margin was 25.5%, 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 plants 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 fourth quarter, Sabra owned eight retirement homes and one assisted living and memory care community in Canada.
Sabra sold a ninth community, an assisted living property in Ontario, during the first quarter, and it is excluded from these statistics. Sienna Senior Living manages the eight retirement homes in Ontario and British Columbia. In the fourth quarter of 2018, the eight properties managed by Sienna had 92.4% occupancy, which was two percentage points higher than the preceding quarter, and 38.7% cash NOI margin compared to 35.7% in the preceding quarter, an increase of three percentage points. Sienna continues to focus on revenue growth in the portfolio, which has a direct impact on NOI margin at these occupancy levels. There are four remaining managed properties in Sabra's portfolio, an assisted living and memory care community in Calgary operated by BayBridge, and three assisted living and memory care buildings in Wisconsin and Minnesota operated by Pathway Senior Living, two of which are in lease up.
I will now turn over the call to Harold Andrews, Sabra's Chief Financial Officer.
Thanks, Talya, and thanks, everybody, for joining the call today. For the three months ended December 31st, 2018, we recorded revenues and NOI of $139.2 million and $136.6 million respectively, compared to $166.5 million and $160.5 million for the fourth quarter of 2017. These decreases to revenues and NOI are primarily due to the impact of dispositions in 2018, the $19 million Genesis rent cut effective January 1st, 2018, and lost rental revenues from Senior Care Centers during the fourth quarter of 2018. Revenues and NOI also declined compared to the third quarter of 2018 by $12.6 million and $11.3 million respectively.
These declines are primarily attributed to a decrease in recognized cash rents related to Senior Care Centers of $12.5 million, which was partially offset by strong revenue and cash NOI growth in our managed portfolio, including our share of the Enlivant joint venture of $2.3 million and $1.6 million respectively. FFO for the quarter was $48.2 million and on a normalized basis was $90.2 million, or $0.50 per share. FFO was normalized to exclude $28.8 million, primarily related to the write-off of a straight line of rents receivable associated with the Holiday Lease, which is expected to be transitioned to a managed portfolio in 2019, and a $2.9 million loss on extinguishment of debt primarily associated with the prepayment of a $98.5 million secured bridge to HUD loan associated with the Senior Care portfolio to be sold in 2019.
Additional normalizing items during the quarter include $5.2 million related to the acceleration of above-market lease intangible amortization associated with assets transitioned to new operators during the quarter, $4.3 million of non-managed property operating expenses consisting primarily of property taxes paid on behalf of Senior Care Centers, and $0.3 million of CCP merger and transition costs. AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses, was $77.3 million, and on a normalized basis was $83.8 million, or $0.47 per share, normalized for items consistent with the FFO normalizing items. Compared to the third quarter of 2018, normalized FFO and normalized AFFO per share declined by $0.10 and $0.08 respectively. These declines are primarily the result of the unpaid and unrecorded contractual rent owed by Senior Care Centers during the fourth quarter.
For the quarter, we recorded a net loss attributable to common stockholders of $19.4 million, which among the items eliminated from normalized FFO of $42 million, includes a loss on sale of real estate of $14.2 million. G&A costs for the quarter totaled $11.3 million and included the following: $4.3 million of non-managed property operating expenses incurred in connection with the transition of properties to new operators, $1.4 million of stock-based compensation expense, $0.3 million of CCP related transition costs, and $20.3 million of non-recurring legal expenses. Recurring cash G&A costs of $5.2 million or 3.8% of NOI for the quarter, in line with the prior quarter. Our interest expense for the quarter totaled $37.2 million compared to $32.2 million in the fourth quarter of 2017. Included in interest expense is $2.6 million of non-cash interest expense, compared to $2.5 million in the fourth quarter of 2017.
As of December 31st, 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 31st, 2018, an increase of 24 basis points over the third quarter of 2018. We sold 15 skilled nursing facilities, two senior housing facilities, and one senior housing managed facility during the fourth quarter of 2018 for gross proceeds of $91.6 million, bringing our total aggregate sales in 2018 to 58 assets for total gross proceeds of $382.6 million. During the quarter, we made investments totaling $39.2 million with a weighted average actual cash yield of 7.4%, including $26.3 million related to one senior housing community from our proprietary development pipeline with a net cash yield of 7.47%.
These investments were funded with available cash of $18 million and $21.2 million of funds held by exchange accommodation title holders. As of December 31st, 2018, we had total liquidity of $426 million, comprised of currently available funds under a revolving credit facility of $376 million and cash and cash equivalents of $50 million. We were in compliance with all of our debt covenants as of December 31st, 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, 3.7 times. Total debt to asset value, 49%. Secured debt to asset value, 7%, and unencumbered asset value to unsecured debt of 222%.
On February 5th, 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 28th, 2019 to common stockholders of record as of the close of business on February 15th, 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-$2.10. Normalized FFO, $1.86-$1.94. AFFO, $2.00-$2.08. And normalized AFFO, $1.81-$1.89. Critical to understanding our expectations for 2019 is understanding our commitment to de-levering the balance sheet to under five and a half times inclusive of our share of Enlivant joint venture debt and under five times exclusive of our share of Enlivant joint venture debt.
Our leverage currently stands at 6.12 times inclusive of the JV debt, which is higher than historical levels, in part due to the loss of EBITDA from our Senior Care portfolio of $20.9 million. We expect to accomplish this goal 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-$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 1st, 2019 for $282.5 million. Collection of $5.7 million of post-petition rent from Senior Care Centers pursuant to a settlement agreement entered into Senior Care Centers on February 15th, 2019.
Total impairment and transition costs for Senior Care Centers of $69.3 million. All being excluded from normalized FFO and normalized AFFO. Termination of our Holiday Retirement master lease and concurrent entry into a management agreement with Holiday effective April 1, 2019, triggering the receipt of $57.2 million of cash consideration on April 1, 2019, in connection with the lease termination. This termination fee is excluded from normalized FFO and normalized AFFO. Same-store cash NOI improvement in our wholly owned senior housing managed portfolio of 3%-6%, and in our Enlivant joint venture of 6%-12%. We did not include any speculative acquisition activity in 2019, but do include $142 million of acquisitions, primarily from our proprietary pipeline, closing primarily during the fourth quarter of 2019. These acquisitions are expected to provide an initial annual cash yield of 7.6%.
Under further assumptions, other asset dispositions totaling $300 million, resulting in a loss on sale of approximately $85 million. Such dispositions currently have associated annualized cash NOI of $18.6 million. These dispositions include the remaining three 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. I'll provide a quick update on the Genesis asset sales. We are near completion of these sales, with only three facilities remaining to be sold. During the quarter, we sold 15 assets for total gross proceeds of $81 million. The remaining three are still in the HUD approval process, which was delayed due to government shutdown earlier this year. We expect those sales to close in the second quarter.
Upon completion of these sales, we expect residual rents to total $10.4 million per year for 4.28 years after each sale closing. We expect to have total continuing cash rents from Genesis, including residual rents generating from sold assets, of approximately $20.8 million or 4% of our current annualized cash NOI. With that, I'll open it up to Q&A.
Thank you. Ladies and gentlemen, if you have a question at this time, press star and the number one key of your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Again, to ask a question, just press star and one. 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. 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?
Yeah. A couple of things. One, I actually can't elaborate. It's personal. I prefer to keep it that way. Certainly it was unexpected. When we bought the portfolio, we also saw a really strong bench and really strong operating team, and the fact that David Ellis has sort of regrouped and they were able to promote from within in terms of the new CEO, I think showed that. Look, it just threw them off their game a bit. We see them rebounding, and it was actually a nice tick up in January. We don't foresee any issues with that. If I could share more, Jon, I would. It's just too personal.
Yeah. No, that's fair enough. What about the rest of the team? Is it largely in place too, or is it a whole replacement of the C-suite there?
No, everybody else is in place.
Okay. Looking at the $300 million 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 5 on the gross book value. I guess, what's the composition of that $385 million gross book value in terms of owned assets and loans, and when were those investments made?
This is Harold. Jon. Basically, about two-thirds of those assets being sold, as I kind of made the comments on the call, were from Care Capital legacy acquisitions. Two-thirds of it's that. About a third of it, or I should say about 25%, are related to Sabra historical legacy assets that were bought going back probably for the most part three or four years. 11% of that number are the Genesis assets. The yield is really as strong as it is to a large extent because of the 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. It is primarily skilled nursing assets, and stuff that went back to the Care Capital acquisition.
Okay. That's helpful. Earlier you did mention guidance and the earnings guidance, it does include dilution from equity raises. Can we expect you to issue around the current $19 share price? How do you think about using that throughout the year? Yes.
I think we'll wait a little while. We've had a lot of noise around the stock. Just like we saw in the third quarter, 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. We should be able to bounce back given the discount that we're trading at. Look, we think the two 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 was growing itself and the issues that it created for itself as a result of that. We're almost done. We're weeks away.
That'll be behind us, and people can expect a lot more predictability and more of a quiet kind of tone around the company. The leverage with the other piece. I think, from our perspective, getting that leverage down and having some quiet time after we finish the Senior Care Centers sales on April 1st 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. 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.
Yeah. I'll get that to you offline. I don't 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. I will say this, a lot of those assets that are maturing in 2020 are part of the assets that are being sold this year. A big chunk of that is already anticipated going away and won't require any re-tenanting. 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. Our next question comes from Chad Vanacore with Stifel. Please go ahead. Your line is open.
Thank you, and good morning, all. Just I want to go back to North American. That coverage dipped significantly from last quarter. It went from 1.25 to 1.09. Can we get some more details on what's happening outside the management change to what's happening operationally to create that drag? Plus, they're located in California and Washington. Washington's a tough environment. Maybe give us a split of the NOI in Washington versus California, and then how have those facilities performed?
Yeah. There isn't much of a difference there. Washington facilities actually perform pretty well. The drop looked deep because their underwritten coverage. When we do an acquisition, we underwrite the map for a period of time, and then that starts tailing off. That's really what accounted for the drop. They didn't have that big a drop. If you look at the last 6 months, it's been a more steady decline once the CEO left. 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. No real difference between California and Washington.
Yeah, and I think it's primarily expense related as well. Their occupancy and their rates are very strong. They continue to be strong. It is just a little bit of the distraction, I think, around expense management.
Yeah, which is one of the reasons they rebounded in January, because if your issue's on the expense side, not 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.
Would those expenses be more labor related, say, some temp labor usage?
No. It's really all over the map. Supply costs, food, medical 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 eye off the ball. It may not be a good excuse, but it's reality. We see it happen all too often. They're getting it together, and we really don't have any concerns. Chad, you know us well enough. If we have concerns about an operator, we start raising the flag pretty early. We did that with Senior Care, we did that with Genesis, we've done that with others. We just don't see that here.
Okay. Just thinking about your usage cash, you're willing to take some dilution in order to delever. Why is delevering a better use of cash than reinvestment in 2019?
We plan on doing both. Our leverage ticked up. It's higher. It's above the level that we'd like it to be. We certainly want to get a stable outlook again back from Fitch. We expect that to happen. We think all that's important. We think potentially getting an upgrade from Moody's is important as well. All of that stuff affects your cost of capital. We think that's really important. 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 the growth perspective to keep their leverage low.
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. That allows us to do more investment.
All right. Just one more question, just on the senior housing managed portfolio. You put out some pretty good expectations for 2019. Rate in the quarter was up pretty significantly on a RevPOR basis. What kind of occupancy rate assumptions are you making in 2019 for that portfolio?
For the Enlivant wholly owned portfolio, which 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. We think it's a very strong portfolio. For purposes of forecast,
Yeah, when you look at the numbers inclusive of the joint venture, you do see a steady increase in occupancy over the course of 2019. Remember, this portfolio was acquired underperforming. When we entered into the joint venture, it's obviously well below where stabilized occupancy should be. There's some tick up in occupancy over the course of 2019, but it's nothing dramatic.
If you think about it in a couple of different pieces, Chad, you've got the wholly owned portfolio, which has exceptionally
occupancy. It's effectively almost fully occupied once you're over 90%. You've got to temper your expectations there. As Harold said, the joint venture is different because it was a whole turnaround. In the wholly owned, we'll be tempering our expectations in terms of what we're putting in guidance in the assumptions. On the JV, which is still picking up speed, we've got some assumptions there that there will be occupancy increases.
All right. I'll make that it, and I'll hop back in 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, 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&P, who reaffirmed our ratings and put us on stable. They don't have the same level of concern that Fitch indicated.
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. It's not going to be an immaterial amount, but it'll be something that we'll do over the course of 2019. We've got lots of time to get it done. As Rick said, the timing is something we'd like to do sooner or later, but we're going to wait till make sure the stock price makes some sense.
Using the ATM and to match funds, it's the cheapest way to do that, and it's the least disruptive way to do that. Again, as Harold said, we'll be patient with it and prudent about it.
Okay. Nothing that you'd 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%-12%, and I know you had some easier comps from the flu season. What are the other variables do you see as far as hitting the low and the high end of that guidance range?
It's not so much that there are other variables, 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. It's really difficult to predict how much improvement they're going to have. It's really because it's in turnaround mode that we have a wider range.
If you hit that 6%-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 first quarter of next year.
Okay, great. Thank you.
Yep.
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.
Good morning.
Appreciate the prepared comments on variability and 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. That's an important point. 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 uptake. When the occupancy of the industry is as low as it is, call it 82%, you've got really nowhere to hide. That next patient that you get in, that's a complete pull-through to the bottom line. You have a disproportionate positive impact on any additional patient at this point. Secondly, you're going to see much more supply decline. The industry, actually, over the next several years, is probably going to have access issues, which bodes well for the industry. It'll be interesting to see how the government tries to deal with it.
You've got declining supply, increasing demographics, you have PDPM happening October 1st, 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. I think the headwinds are dissipating. Beyond that, though, we're operators by background. We spend 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. It's not too difficult from our perspective to get comfortable with an operator.
That's why, with a couple of operators in the past, I think relatively early on, we were very concerned, and we started sort of waving a red flag, but in the case of, say, North American, that's also one of the reasons that we're comfortable that they'll be able to rebound and continue to be a good tenant for us going forward.
I 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 a, 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. Maybe could you talk about the environment in that state since it's your largest? 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.
There are two primary factors that create a difficult environment in Texas. One is it's one of the worst Medicaid rate systems in the country. 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 there's not a CON, it very rarely pencils. 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. As a result of that, there's been a lot of building in Texas.
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. I think that even if Senior Care Centers hadn't started completely blowing up the way it had, we would've looked to reduce our exposure. That just would've made the decision easier, we'll be cutting our exposure in half. 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.
Sabra, as well as some of the other REITs and a number of the operators, are working with the American Health Care Association as well as the Texas Health Care Association on that lobbying effort, and I think we've made a strong case, and we'll continue to make inroads there. Whether or not it happens or not, remains to be seen. If it does happen, it's going to be much, much better for the industry. The operators that we continue to work with in Texas will obviously then do much better. I think for us, even if that were to happen, we had 18% exposure to Texas. Even in a better operating environment, that's an awful lot of exposure in one particular geographic region.
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. 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.
Yep.
Thank you. Our next question comes from Michael Lewis with SunTrust. Please go ahead. Your line is open.
Hi, Rick. Thank you. I wanted to ask, the low end of your normalized AFFO guidance is right on top of the dividend. You're gonna be issuing some more equity at a yield that's about 9.5%. I guess the question 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 gonna see growth in the dividend, everybody can count on it being stable.
Okay, great. 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, when we look at their performance against their forecast, first quarter of 2020 looks to be realistic. As we spend the rest of 2019 getting our leverage down some, that'll put us in a better position to pull that trigger at the appropriate time.
Lastly, I just wanted to ask a big picture question. I actually asked this of one of your peers on their call. George Hager at Genesis said earlier this month at a conference that the restructuring 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'll work itself out and you'll get past?
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 gave him waivers on defaults. That was really disappointing to hear. I think everything's about culture in this business. There have always been some times where there have been some downtime. There actually have been less downtimes than uptimes over the course of this business for the last 35 years. I know for me as an operator, we never looked at ourselves as victims of the environment. If there are headwinds, everybody's 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. All of our operators have 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 that they're good operators. In other cases, they haven't needed help. It was really disappointing to hear that, and again, given how much the REITs have helped them, if not for the REITs, the company would be bankrupt.
All right. Thank you for answering my questions.
Yeah, have a good one.
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. I just wanted to understand a little bit about your thoughts about increasing Medicaid census in the space, and then maybe anything particular with your portfolio that is kind of bucking that trend.
Yeah. One, to us, skilled mix is the most important indicator of whether an operator really understands the business, because the higher your skilled mix is, it means that you are going for the higher acuity patient, and it 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.
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. There are points in time where operators will admit more Medicaid patients just to help occupancy, 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 lengths of stay. The industry is a lot different now than it was even 10 years ago. Most Medicaid patients in skilled nursing today have a much shorter length of stay than Medicaid patients in skilled nursing 10 years ago, say.
There's less danger of that happening now than happened in the past. When you had low occupancy, that was always a fine line to 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. Every operator is a little bit different. There isn't exactly a wrong or right to it. Over the long haul, you do not want to see Medicaid increasing at the expense of Medicare and insurance.
Okay. I guess we'll see what happens, too, when PDPM comes in, and they'll incentivize people to do the high acuity, right?
Right, because it's going to be on the nursing side, not just the rehab side. 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. That's really one of the benefits of PDPM. You're going to get out of that sort of vicious cycle.
I did have a question on that and rehab and PDPM. It seems to me that margins should go up on rehab. We've been hearing a little bit about operators maybe bringing rehab back in-house. Are your operators looking to bring rehab back in-house if they were third-party? Two, I presume that's a positive impact on lease coverage or corporate coverage and just wanted to get your thoughts on that.
A number of our operators were already in-house. That's a trend that started really over the last 15+ years. Before that, almost everybody outsourced rehab. The reason everybody used to outsource rehab and it changed was that rehab was a huge variable in terms of revenue. It wasn't a predictable sort of line of business. Once the RUG system got developed, when you had RUG-IV come in in 2006, 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. In terms of the margin issue under PDPM for rehab, it's definitely a positive because they're bringing back concurrent and group therapy.
Even though it's capped at 25%, when concurrent and group therapy had been around, really until several years ago, the industry experience was about 26%. They capped it basically at the experiential level. Remember, you're still going to want to wrap your nursing patients because the rehab rates aren't going to be exactly what they were. 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. The fact that you're going to have concurrent and group therapy, rather than have any of that decline come straight to the bottom line, concurrent and group therapy gives you the opportunity to mitigate that and improve your margin.
I think you're going to have margin improvement from concurrent and group therapy. You're going to have margin improvement from having a broader palette of patients to go after, some of which will have a longer length of stay, because you're not just going to be going after short-term rehab patients. The fact that you're getting rid of the minute system completely makes things a lot simpler as well because you're going to a simple case mix system. If you look at the recent changes in home health reimbursement, that's also more of a case mix system.
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 have always looked 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.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, just press star and one. Our next question is from Nick Joseph with Citi. Your line is open.
Thanks. For the $69 million of expected impairment charges and transition costs in guidance in 2019, what's the assumed breakdown between the two?
Talya, it's about $60 million assumed of an impairment or loss on sale, the balance is the transition cost. A big chunk of that being property taxes that will still need to be paid on that portfolio.
Thanks.
You bet.
Thank you. Our next question is from Lukas Hartwich 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 $5.7 million?
It is larger than the $5.7 million. It affects a note that was outstanding. They just asked us not to give any more specifics while we're waiting for court approval, it is more than that.
Do you have a rough idea of timing?
It's only good news.
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.
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 the leases, so we pulled that stuff out, which was the majority of what we had to deal with.
Right. 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 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. We'll see, but most of the experience that we've had with Medicaid, and it's not really even Sabra experience, going to my experience as an operator and really going back probably over 20 years, the managed Medicaid rates have been pretty close to the state Medicaid rates that have been in place, but we'll see. Little hard to predict.
Great. Thank you.
Yeah.
Thank you. This concludes our Q&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. Harold and Talya and I and the team are available for any additional conversation offline. We'll be heading to the Wells Conference tomorrow and look forward to seeing a bunch of you guys there. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.