Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT third quarter 2018 earnings conference call. This call is being recorded. I would now like to turn the call over to Michael Costa, EVP Finance. Please go ahead, Mr. Costa.
Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition, and investment plans, 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 December 31st, 2017, and in our Form 10-Q that was filed with the SEC yesterday, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.
We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during 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 Investor Relations section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the Investors section of our website. with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.
Thanks, Mike, and thanks, everybody, for joining us today. I'll do my normal overview and then turn it over to Talya to talk about our managed portfolio, and then Harold will follow that with our income statement and balance sheet comments. then we'll go to Q&A from there. let me start off with guidance. Guidance has been adjusted primarily for the pending senior care center sale and an update to our managed portfolio to reflect year-to-date performance, which had been hampered by the flu season earlier this year, primarily driven by the Enlivant joint venture. However, the Enlivant joint venture's current performance is doing well, both in terms of occupancy and rate, given a substantial rate increase effective in October, and nice increases in occupancy as well, putting RevPAR in good shape.
As it pertains to Senior Care Centers, as we went through, as we had discussions and reviewed some of the notes last night, I wanted to first address the reasons for our not discussing any default in our Q2 call. First, they had the ability to pay rent, and we were actually in the midst of negotiations so that that would happen. Senior Care Centers had been unhappy with the buyer that we had at the table initially because the buyer didn't want to retain them as tenants. So, holding back on the rent was really a way for them to try to create some pressure points to affect our decision-making on who we would go with. The problem was their buyer didn't have terms that were palatable to us.
The current buyer that we are working with the deal on that we expect to close early after the first of the year, is willing to keep them as a tenant in at least some of the properties. So that decision provided a different level of cooperation, at least for some period of time. Senior Care Centers and the board attempted to bring in a new financing source for OpCo. We've met with that financing source directly. We do think that they were legit. We've been negotiating directly with the board most recently and not with management. As of last week, it became clear that they just couldn't pull it off despite best efforts. So historically, we've always gotten out ahead of issues and been transparent, and most of you know us and know that to be the case.
It simply wasn't the case in this particular circumstance that we were in a position to talk about the default at the time we had the Q2 call because we had different expectations as to outcome. The reality is, and speaking for myself, with all the workouts and turnarounds and restructurings I've done, it's always complex, and it never follows the path that you expect it to follow. But the point is for us, it's the end result that really matters. This issue in terms of the fourth quarter and not receiving rent from Senior Care Centers is a short-term issue. We're still getting where we want to go, and it doesn't have any impact going forward. So it's a short-term issue.
One of the other things I want to note is there was one note that talked about dilution from the sale of Senior Care Centers in 2019. That's not a new issue. We've been talking about Senior Care Centers for months now. What we've talked about is the benefits of divesting Senior Care Centers. So to recap, those benefits from our perspective, and certainly people can agree to disagree, the benefits from our perspective are pretty simple. We divest our largest operator, we strengthen our top 10, we get our skilled exposure to 55%, which is 18 points lower in about an 18-month period from where it was at the time of the merger, and gives us a much more balanced portfolio.
We reduce our exposure to Texas, our largest state, which also happens to be the one state where there is an oversupply of skilled nursing beds in a number of markets due to new product. Texas also has one of the weakest Medicaid systems in the country. As we've spent time on this over the past few months and even earlier than that, when we first started talking about it with the investment community, the continued instability of management and inability to execute really validated the concerns that we had earlier this year that we needed to do something about the senior care portfolio. That's where we'll add on it, and hopefully that clarifies what our thinking was. Obviously, we'll be happy to address that more in Q&A to the extent anybody has questions.
Again, we had good, solid reasons for waiting as we've waited to announce it on this particular earnings call. Let me move on to our acquisition pipeline. Our acquisition pipeline currently stands at $350 million. It's primarily senior housing, that trend continues. We've been talking about that every quarter. The environment remains unchanged. Private equity is continuing to keep pricing high. Much of the product that we see is not stabilized or recycled or both.
We're not seeing much good skilled product, and I really believe that that's a function of the skilled operators are buying everything all of us are selling, but they're not putting reasonable assets on the market because everybody sees the light at the end of the tunnel, both in terms of the demographic, in terms of decreasing supply, and in terms of the positive benefits of the PDPM reimbursement system that's going to go into effect next October. My guess is over the course of the next year, particularly with the mom-and-pops, we'll probably see more product come to market as a number of the smaller providers determine that they don't have the wherewithal or the desire to go through the transition that's going to be required to go through to be successful post PDPM. We'll kind of see how that goes.
I'll move on to operating metrics. Our skilled nursing portfolio continues to outperform national trends. Occupancy has now improved three sequential quarters and is up 30 basis points this quarter to 82.6%. Skilled mix is up again as well, 60 basis points to 39.1%. Our EBITDA rent coverage is stable, with operating stats slightly down at 1.3 and same store is slightly up at 1.32. All of our skilled operators are in the midst of preparing for PDPM and without exception see it as a positive reimbursement shift for the space. Our triple net senior housing occupancy was down 30 basis points to 85.7%, with EBITDA rent coverage stable at 1.07. Our managed portfolio occupancy improved 90 basis points to 84.7%, again, primarily driven by the continued progress that Enlivant is making with that portfolio. Talya will provide detailed operating stats for that portfolio.
Our top 10 tenants outside of Senior Care Centers was essentially uneventful with the exception of Signature HealthCARE, which was up to 1.47. That increase, which was pretty substantive, was a result of post-restructure analysis of their income statement and liabilities and making the changes that were appropriate because of the restructuring and had that wash through the income statement. Signature HealthCARE actually is higher than we anticipated it would be when we decided to go ahead with that restructuring. Cadia Healthcare is down to 1.33, and as we discussed, I think the last couple of quarters, they continue to transition operations from a former operator. They'll be a little bit soft for a while, but they're very good operators. We have no concerns about them going forward. The last thing I want to discuss before turning it over to Talya is Holiday Retirement.
Sure everybody saw the NHI release. We've all been having conversations with Holiday Retirement, and as I think all of you know from comments I've made on a consistent basis over the past few years, we like the Holiday Retirement assets. We think the management team has done a very good job there. They've had really high escalators. We're all sort of complicit in that. Those escalators really make it difficult for them to get their head above water, despite the fact that they continue to perform well. That said, we don't have any intention of cutting the rents or restriking the leases on any long-term basis. If we do anything with Holiday Retirement and the Holiday Retirement team, it will be more likely flipping it to a managed agreement. Whether we do that with Holiday Retirement or with another operator, we haven't made that final determination yet.
Part of that determination really has nothing to do with the Holiday Retirement management team, who, as I said, we think really highly of. None of us really have any sense of what Fortress's agenda is as it pertains to Holiday Retirement. In terms of making a long-term commitment relative to extending the lease with new rent and escalators, we're just not willing to take that gamble. We'll make a decision shortly. Again, we like the portfolio. We may sell a few facilities. It's not going to be that material. At this point, our inclination is to flip it into a managed agreement. With that, I'll turn it over to Talya.
Thank you, Rick. I will provide some comments about the operating results and statistics for our managed portfolio. First, I will address the properties in Canada, then those in the U.S., breaking out the wholly owned properties from the 172 joint venture properties managed by Enlivant and co-owned in a joint venture with TPG. At the end of the third quarter, Sabra owned 10 homes in Canada, eight of which are independent living and two of which are assisted living and memory care communities. Sienna Senior Living manages eight independent living facilities in Ontario and British Columbia and one assisted living property in Ontario. The assisted living property in Ontario was sold subsequent to the end of the quarter. It is included in these statistics.
In the third quarter of 2018, the nine properties managed by Sienna saw 90.3% occupancy, which was flat compared to the preceding quarter, with spot occupancy at the end of October of 92.1%. The property that has now been sold had the largest number of move-outs in the quarter, which was offset by an increase in move-ins at the other properties. 34.3% cash net operating income margin, compared to 37.7% in the preceding quarter. This change was attributable to slightly lower occupancy at two smaller properties. In one case, an uptick of deaths coupled with new competition providing low rates as a lease-up tactic pressured occupancy, and in the other case, a roof leak and subsequent repair took four suites out of service. The operating leverage of the smaller communities with 66 suites each made a downtick in occupancy translate to margin pressure.
Both of these disruptions are temporary in nature and appear to be in the past now. Results at the wholly owned Enlivant portfolio, 11 properties located in Pennsylvania, West Virginia, and Delaware, continue to perform well. We have seen a trend in occupancy increases coupled with stable rates. Average occupancy rose 150 basis points to 95.6%, compared with 94.1% in the preceding quarter, which itself is a 140 basis point increase over the prior quarter. Year-over-year, occupancy has grown 5.5%, which is 650 basis points more than the industry average. Revenue per occupied unit was $4,955, slightly lower than the preceding quarter. However, as Rick mentioned, rate increases of approximately 5.5% have been implemented during October of 2018. Cash NOI margin was 27.6%, 1.4% lower than the prior quarter.
That is in the context of 2.2% and 3.8% margin increases in the prior two quarters, still a strong performance year-to-date. The Enlivant joint venture. In January 2018, Sabra also acquired a 49% interest in a joint venture with TPG, which owns 172 properties located in 18 states across the United States, all managed by Enlivant. The Enlivant JV properties had a solid quarter with higher occupancy driving revenue. Average occupancy for the quarter was 81.8%, a 130 basis point pickup over the prior quarter. Revenue per occupied unit was $4,017, which was flat to the prior quarter, solidifying the rebound from the tough flu season. Cash NOI margin was 23.7%, flat to the prior quarter.
When we segment this portfolio by occupancy, we see significant occupancy increases in those communities with lower occupancy, specifically the segment that has less than 70% occupancy, which saw a 370 basis point increase in occupancy quarter-over-quarter. There is still room for improvement, the Enlivant team is allocating human and capital resources to solidify gains across the portfolio. I will now turn over the call to Harold Andrews, Sabra's Chief Financial Officer.
Thank you, Talya. Before I get into the numbers, I want to provide a quick update on Senior Care Centers, as that situation has implications for the third quarter results and our revised 2018 guidance that I will be discussing. During the third quarter, we entered into a non-binding letter of intent to sell the 36 skilled nursing facilities and two senior housing communities currently leased to Senior Care Centers for an aggregate sales price of $405 million, inclusive of a potential earn-out opportunity of $27.5 million. The sale of the facilities is subject to entry by the parties into a definitive purchase and sale agreement, as well as the completion by the potential purchaser of due diligence and other customary closing conditions to be included in the definitive agreement. We expect to execute a purchase and sale agreement in the coming weeks and complete the sale in early 2019.
During the quarter, we issued notices of default and lease termination to Senior Care Centers due to non-payment of rents under the terms of the master leases. As a result, Senior Care Centers is currently operating the facilities on a month-to-month basis. Negotiations to receive partial rents through the date of sale of the assets continued until early November. As of November 2nd, the negotiations ended and no agreement was able to be reached. As such, we have assumed we will receive no additional rent payments beyond what has been recorded through September 2018. During those negotiations, deposits were used to pay contractual rents to ensure that no actions by Senior Care Centers could impede our access to those amounts. Unpaid and unrecorded cash rents total $1.9 million as of September 2018.
No straight-line rents have been recorded since May of 2018, triggered by the signing of a previously executed purchase and sale agreement to sell the assets. Now on to the numbers. For the three months ended September 30th, 2018, we recorded revenues and NOI of $151.8 million and $147.9 million respectively, compared to $111.8 million and $106.7 million for the third quarter of 2017. These increases are primarily due to revenues and NOI generated from the properties acquired in the CCP merger and the Enlivant transactions. Revenues and NOI declined compared to the second quarter of 2018 by $14.5 million and $14.8 million respectively.
These declines are primarily attributed to the acceleration of the lease intangible amortization totaling $6.3 million associated with the lease restructurings, lower rents of $4.7 million due to Genesis and other asset sales, and a decrease in recognized rent related to Senior Care Centers of $2.8 million, comprised of $1.9 million of cash contractual rents and $0.9 million of straight-line rents. Cash NOI for our managed portfolio, including our share of the Enlivant joint venture, was $13.5 million for the quarter, down $0.4 million from the second quarter. Revenues were up by $0.2 million related primarily to increases in occupancy, while operating expenses were up $0.6 million, primarily related to payroll and admin related expenses. FFO for the quarter was $88.8 million, and on a normalized basis was $106.5 million, or $0.60 per share.
FFO was normalized to exclude a net $10.9 million provision for doubtful accounts and loan losses, primarily related to reserves on straight-line rents. Additional normalizing items in the quarter include $6.3 million, primarily related to the acceleration of above-market lease intangible amortization associated with the lease acquired in the CCP merger that was restructured during the quarter, $0.4 million of CCP merger and transition costs. This $6.3 million non-cash charge for the lease restructure is associated with a tenant that was part of the previously announced CCP portfolio repositioning. This normalized FFO compares to $70.3 million or $0.63 per share of normalized FFO for the third quarter of 2017. AFFO, which excludes from FFO merger and acquisition costs and certain non-cash revenues and expenses, was $97.3 million, and on a normalized basis was $97.9 million or $0.55 per share.
This compares to normalized AFFO of $67.6 million or $0.60 per share for the third quarter of 2017. Compared to the second quarter of 2018, normalized FFO and normalized AFFO per share declined by $0.01 and $0.02 respectively. This decrease is primarily the result of the $1.9 million of unpaid and unrecorded contractual rent owed by Senior Care Centers in September 2018, and loss rents associated with Genesis asset sales of $4 million. For the quarter, we recorded net income attributable to common stockholders of $35.2 million, compared to $12.5 million for the third quarter of 2017.
Our G&A costs for the quarter totaled $8 million and included the following: $2.4 million of stock-based compensation, $0.3 million of CCP-related transition costs, $0.3 million of non-recurring legal and payroll costs, and our recurring cash G&A cost of $5.2 million, or 3.5% of NOI for the quarter, which is in line with the prior quarter. We do expect our quarterly recurring cash G&A run rate to be approximately $5.4 million-$5.7 million per quarter. During the quarter, we recognized a net $8.9 million provision for doubtful accounts and loan losses, comprised of a $7.9 million provision for straight-line rental income, primarily related to the termination of the master lease with Senior Care Centers facilities and the transfer of five facilities to a new operator, and a $1 million increase in loan loss reserves.
Our interest expense for the quarter totaled $37.3 million, compared to $24.6 million in the third quarter of 2017. Included in interest expense is $2.6 million of non-cash interest expense, compared to $2 million in the third quarter of 2017. As of September 30, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of Enlivant joint venture debt, was 4.22%. Borrowings under the unsecured revolving credit facility bore interest at 3.51% at September 30, 2018, which is an increase of 17 basis points over the second quarter of 2018. We sold three skilled nursing facilities during the third quarter for gross proceeds of $13 million, resulting in a nominal aggregate net gain on sale.
During the quarter, we made investments totaling $34.7 million with a weighted average initial cash yield of 7.25%, including a $25 million investment related to two senior housing communities from our proprietary pipeline with an average cash lease yield of 7%. These investments were funded with available cash of $10.2 million and $24.5 million of funds held by exchange accommodation titleholders. As of September 30, 2018, we had total liquidity of $417.1 million, comprised of currently available funds under our revolving credit facility of $381 million and cash and cash equivalents of $36.1 million.
In addition, restricted cash as of September 30, 2018, included $90.1 million held by exchange accommodation titleholders, which may be used to fund future real estate acquisitions. We were in compliance with all of our debt covenants as of September 30, 2018, and continue to maintain a strong balance sheet with the following credit metrics, which incorporate, among other things, aggregate CCP rent reductions of $28.2 million and $19 million of Genesis rent reductions. Net debt to adjusted EBITDA of 5.5 times. Net debt to adjusted EBITDA, including unconsolidated joint venture debt of 5.94 times. Interest coverage of 4.18 times. Fixed charge coverage 3.88 times. Total debt to asset value 50%. Secured debt to asset value 8%, and unencumbered asset value to unsecured debt of 214%. On November 5th, 2018, the company announced that its board of directors declared a quarterly cash dividend of $0.45 per common share.
The dividend will be paid on November 30th, 2018, to common stockholders of record as of the close of business on November 15th, 2018. A few quick comments related to our updated 2018 outlook. We have lowered our per share normalized FFO and normalized AFFO expectations by $0.22 and $0.15, respectively, at the midpoint. These declines are primarily attributed to the following. The anticipated loss of revenues from the Senior Care Centers portfolio, lowering normalized FFO by $0.13 and normalized AFFO by $0.09. The update of our expectations for managed senior housing portfolio, lowering normalized FFO by $0.05 and normalized AFFO by $0.04. Finally, revisions to the timing of investments and dispositions during the year, including the impact on interest expense related to the balances outstanding on the revolving credit facility, lowering normalized FFO by $0.02 and normalized AFFO by $0.01.
Finally, a quick update on the Genesis asset sales. We continue to make great progress toward the completion of these sales. During the quarter, we closed on one additional asset sale, and subsequent to September 30th, we sold two additional facilities for a gross sales proceed of $5.4 million, leaving 16 facilities to be sold. All remaining assets are under purchase and sale agreements, and 13 of the 16 are scheduled to close in the fourth quarter, generating $75.7 million of proceeds. The remaining three facilities are still in the HUD approval process and are expected to close in the first quarter of 2019, generating $33.2 million of proceeds. These anticipated sales, together with the previously completed sales, are expected to trigger residual rents to us of $10.4 million per year for 4.28 years after each sale closing.
Ultimately, we expect to have total continued cash rents from Genesis, including residual rents generated from sold assets, of approximately $20.8 million or 3.7% of our current annualized cash NOI. With that, I will open it up to Q&A.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Chad Vanacore with Stifel. Your line is open.
Hey, Chad. You there, Chad? We can't hear you.
If your phone's on mute, please unmute. Can you hear us, Mr. Vanacore?
I can hear you. Can you hear me?
Yes, we can hear you now. Go ahead.
Okay. Given what you laid out about negotiations with Senior Care, is there a reasonable expectation you'll collect on 4Q rent eventually?
Look, I think there's some chance, at this point, given where we're at in the process with them and the fact that we've exhausted a lot of opportunities and pathways to getting paid some, I would say it's less than 50% likelihood that we'll get paid any rent.
Yeah. Chad, I wouldn't bet on it. Look, we're in a position now where we're just going to exercise all of our legal remedies. We've issued termination notices. We'll have control of the issue. Look, we're not happy about this. The fact of the matter is our goal going into 2019 was following all of the 2018 rather, was following all the activity in 2017, was to execute on all of our initiatives, which included portfolio restructurings and divestitures and the integration of the merger. Then go into 2019 with a clean slate. All of that is on track. Maybe it falls into January. It's all on track. Nothing has really changed in terms of the big picture.
This is something that we would have preferred to avoid. We expended a lot of effort, I think as you've heard, to give Senior Care Centers and the board as many opportunities as possible to get to a different place. Despite best efforts, they weren't able to do that. This is a short-term issue. Again, I'm not happy about it. It doesn't change anything that we've said in terms of what we're going to do and where we're going to be going into 2019.
Last quarter, you were pretty upfront that at the facility level, coverage was under one times on these facilities. Was there anything that changed from 2Q to 3Q in terms of fundamental performance? Did these drop off a cliff? Are they pretty steady state?
No, they're actually pretty steady state. If you go back to my initial comments earlier in the year when I first started talking about Senior Care Centers, my concern was, when we looked at the portfolio, we saw a lot of upside because there's just basic blocking and tackling that isn't happening in this portfolio. For the buyer, we think they have a really nice opportunity as they do, because they're going to re-tenant it, put with, in all likelihood, more than one operator. With a good operator in that portfolio, over time, it should perform well. The concern that we had was, in the interim, we saw tremendous instability of management and inability to execute on things that we see as operationally basic. There aren't very many teams that are in a better position to assess that than our team.
As these past months have gone on, we haven't seen their ability to execute improve at all. We've seen continued instability in the management team just sort of, kind of in a nether world, right? Even if we were to consider keeping it and re-tenanting the operations of the buildings ourselves with different operators, I think for us, in terms of where we are from an organizational development perspective, we need to get it behind us rather than try to ride it and look for the upside over the next couple of years, even though that in fact may be there. Sentiment has gotten a little bit more positive on skilled, and we continue to get more calls now about, why aren't we doing more skilled deals. We've always said that it's all about who our operators are.
By getting back down to 55%, and all things being equal, if you did no other investment activity, once you triggered the Enlivant JV, you're down to 50%. That gives us plenty of room to do skilled deals with operators that really fit our profile, and still have a nicely balanced portfolio. It just gives us a lot of play in that regard. For us, we'd rather let someone else get the upside with the portfolio with different operators. We call it a day and move on.
All right, just one more quick question. In the contemplated sale of Senior Care Centers, is seller financing still on the table, or is it structured as just a straight sale?
The answer is, it is on the table if it's necessary, and it would likely be a very short-term bridge financing while the buyer lines up more permanent, I shouldn't say permanent, but longer-term bridge financing to get the assets taken to HUD. My sense right now is that it's probably unlikely that seller financing would be part of the deal, but it is still on the table.
All right, thanks.
We also have a backup buyer that we know just, in the event that something squirrely should happen here.
Our next question is from Omotayo Okusanya with Jefferies. Your line is open.
Hey, Tayo.
Hi. Hey, how are you, sir?
Good, thanks.
Good. On senior care, I think you just mentioned that you have a backup buyer, in case the current deal does not close. I'm just curious how quickly that sounds like a plan B, but just kind of curious how quickly that could get executed, should that scenario actually end up happening.
It would definitely stretch it out probably another 90 days. You'd still get it done, and you'd still get it done with a good portion of the year left, so you'd get it done in the earlier part of the year, but it would definitely stretch it out 90 days, would be my guess.
Gotcha. I guess, about an additional quarter or so if we have to find another buyer on the-
Yeah, remember too, right now we're looking for this to close relatively early after the first of the year, we're going to know, we believe before then, if there's any issues here. We would get that other process started before then, right? It's not like Yeah, you get what I'm saying.
Yep. Okay. The second question is for Talya. I think, again, the commentary you provided on senior housing during the quarter was helpful. I guess what I'm still struggling with is the piece of the guidance reduction related to senior housing. That reduction still seems fairly large to me, just kind of given some of the commentary around the quarter. I'm just curious, are you expecting a dramatically worse outlook for your managed portfolio in four Q versus three Q?
No, I think I'll let Harold speak to the details on guidance, I think generally what you're seeing is that the driver of 2018 results is going to be the Enlivant Joint Venture, right? The first quarter results were significantly off because of flu. Even though the subsequent quarters have been improving on a quarter-over-quarter basis, there's still an inability to catch up with what was originally forecast. Harold, do you want to-
The only thing I would add to that, Tayo, is if you go back to first quarter, when we put out our initial guidance
Even through the second quarter, there was some expectation or possibility that the performance would continue to far exceed the original growth prospects and make up that difference. Secondarily, when you looked at our original guidance, we had a, call it an $0.08 range. At that time, the performance was still within the range of where our guidance was at. As we've now seen, third quarter, while it has improved over first quarter and pretty much in line with the second quarter numbers, because this portfolio has a fair amount of ramp-up in occupancy consistent over time and expectations, resetting that down a little bit, it just wasn't able to completely make that up.
You're seeing the combination of the first couple of months being below expectations, and then the second half, while exceeding the first month, still being slightly behind because of the growth expectations that were in that original guidance number. Once they reforecasted this quarter, and we got comfortable with the resetting of the baseline of occupancy and where it's going to grow, we're seeing the nice growth in occupancy, but it's at a lower starting point, and therefore you see the adjustment to guidance.
Got you. Okay. That makes sense. One more if you could indulge me. I know it's early to start talking about 2019 guidance, but when I think about Senior Care, the asset sales happening, the rest of the Genesis sales happening, you might do something with Holiday, which may have a little bit of dilutive impact on 2019. Should we be thinking about 2019 as an earnings growth number, or no? Or earnings growth year, or no? Where you kind of overlay on that your acquisition outlook.
I think a couple of things. One, we will give guidance when we normally give it, which is usually the latter half of January. You're right in your comment on Holiday. It'll be pretty minimal, but we just need to make our final decisions on that. I think we don't know what the acquisition environment is going to look like next year. Once the table is reset for us, which has been obviously our plan all along going into 2019 with these divestitures and the like, we're clearly. That's the base that we're going to grow from. Whether we can grow enough that you'll have good comps on a year-over-year basis just depends on the environment. We've got some built-in things that we can look forward to. This isn't a big number. We have about another $100 million coming in on the development pipeline.
If we, right now, based on forecasting, it looks like we would pull the trigger on Enlivant sort of the end of 2019, early 2020. It's possible that we could do it earlier. That's approximately another $400 million. Obviously, that wouldn't impact the full year 2019 total, but at least on a run rate basis, it would start to look pretty good. We've got about a half a billion that we can look forward to. It's more of a timing issue on that kind of thing. One of the things to consider on pulling the trigger on Enlivant, assuming the trajectory continues as we currently see it, do you pull it even sooner? You'd obviously be pulling it at a lower cap rate, but that's really just a timing issue, but you'd also be riding a lot more growth sooner than later as well.
It's just something interesting for us to think about and talk about internally. It's really hard to say what the actual investment environment's going to look like next year. I mean, we all know what it's been like this year. I do think that there'll be more skilled product available that will be attractive as we get closer to PDPM and operators make decisions that they just don't want to go through it. I don't have any level of confidence that things are going to change on the senior housing side relative to having any rationality on pricing from the private equity guys.
Got you. All right. That's helpful. Thank you.
Yes.
Our next question comes from the line of Rich Anderson with Mizuho Securities. Your line is open.
Hey, Rich.
Thanks. Morning. Now that you've exhausted the security deposit with Senior Care, what's to stop them from filing and sort of disrupting the process of selling?
I think, I don't want to get into all the legal stuff around them filing, whether they file or not, I think from our perspective, terminating the leases was a big part of preparing for whatever eventuality occurs there to give us as much of an opportunity around transitioning the portfolio quickly, irrespective of what steps Senior Care Centers may feel like they need to take.
That was a critical piece, Rich. I mean, obviously, we've done this a lot before, even before Sovereign and other situations. That's why that piece was critical. When they were really trying to make progress on bringing in a new financing source for OpCo, we were willing to give them a forbearance to buy them the time that they needed so we could have a more cooperative process and at least get some rent payments in. We never trusted that that would happen. We had already thought about what we needed to do, assuming that they might think about filing to protect ourselves and make sure that we can just continue to expedite and get the sale behind us.
Okay. Turning to CCP, you came out of that estimating a $33 million rent cut. You did better than that. Ultimately, I think you said $28 million. How did these assets sort of get lost in that process? Essentially, these probably should have been cut during that exercise, unless you disagree with that statement.
No, we do disagree with it. It wasn't part of it because when we look at doing any sort of rent relief or deferral for anybody, one of the first things we look at are what do you guys do? What are you doing to help yourselves before we help you? Are you someone that we want to be in partnership with on a long-term basis? Their senior management team consisted of one person, then they brought a COO in, but they still didn't have a CEO in. We had met with them several times early on, after the merger was completed. They presented to us really exactly what we expected to see. This is what we think that we can do to improve the operations of the business, and it was the same list of things that we had, Rich.
It's the same things that I would do if I was in an operator. It really was very logical and made complete sense. Our attitude at that point was, if you guys execute on this stuff and you still have some issues, but we really see you doing everything that you should be doing, that's going to give us a much greater comfort level in doing something maybe to help you guys have a little bit more breathing room. As 2018 continued to go by, we didn't see any of that occurring. None of it. When they made the final executive change there, we actually saw more destabilization as a result of that instead of increased stabilization as a result of that. It's like a car, right?
I mean, how old is your car and how often are you going to throw bad money after bad money, right?
That was really our assessment.
Okay.
We held back for that reason. Does that make sense?
Yeah, that's fine. Lastly, if I could just switch to Signature, can you give an update in terms-- I don't know where it's at with the process with the malpractice issues and all that, because I think if there was one more sort of adjustment that might be in the future, despite having done the restructuring that had to get resolved before you kind of had a final sort of steady state situation. Can you just give us that update?
Yeah. No, everything's been done at Signature. The pickup that you saw in rent coverage was a result of because of all the settlements with the liability claims, which happened in conjunction with the restructure that we did with the two other partners, combined with the tort reform that occurred in Kentucky-
They were then able to go in and assess what their liability should truly be. They did that, and they reset those liabilities at a level that reflects the changing environment and all the settlements that they went through, and that's what the pickup was that ran through on a year-to-date basis-
Okay
their portfolio. That was it. Nothing new had to happen. They just needed the time to do that assessment and make sure they got it right.
Rick, one thing I want to add to that for clarity purposes, the coverage increase that you see there is not a one-time pickup that's a big reduction of reserves, that's over-inflated coverage. That actually represents the right amount of accruals that should have occurred on the P&L during its trailing 12-month period. There was actually more reserve reductions on the balance sheet that are not included in that catch-up. I think the point is that 147 coverage is meant to be truly indicative of the coverage they actually had during that period, not with some one-time catch-up in it.
You're signing off on Signature HealthCARE, moving on?
Yeah, we signed off on Signature HealthCARE the day we and Omega Healthcare Investors and their sponsors
No, I know. I mean, I'm saying it tongue in cheek, but that one is resolved.
Right.
Full stop.
Yep. Full stop.
Okay. That's all I got. Thanks.
That's the second time in 24 hours you've used that.
Our next question is from Daniel Bernstein with Capital One. Your line is open.
Hi. Good morning.
Good morning.
Sounds like you have a plan B backup buyer. Is there a plan C if you can't sell the assets for whatever reason? Do you have other operators that would be interested in the assets?
That's a really good question. This is theoretical, but obviously, we've discussed it all here because when you go into any sort of workout or restructurings, you need to have several plans, obviously. These facilities are going to have new operators in them probably under any circumstance. We see it as highly unlikely that even with the buyer or the buyers, there's going to be one operator that takes the whole portfolio on. There will be two, three, four, something like that. The operators that are being talked to by our buyer are operators that we think really highly of. If it sells through A and B, the situation that we'd be in, we'd have a portfolio that was then comprised of just call it three operators, just to pick a number.
We've reduced our 10% NOI exposure to three different operators with about 3% NOI exposure. That's a much-improved situation for us. The question will be, at that point in time, okay, you've got some operators in there that you like, are you willing to ride it even though it's going to take some time for them really to get the operations where they need to be? Or do you want to actually run a process and sell it? Because we never ran a process. If we ran a process, the broker would probably break the portfolio up and sell it in pieces, similar to what we did with Genesis. We were able to identify buyers that really wanted to pick the whole thing up.
That's the conversation that we would have, and it may not even be all the way in or all the way out. We may say, "Okay, we'll stay with these assets and these one or two operators and sell the others." I think the worst-case scenario for us puts us in a much better place than we are now because we'll have different operators in place. It's just a function of, do we want to retain it? How long will it take for them to get it where it needs to be? Do we want to exercise the patience for that or go ahead and sell it anyway and get down to that close to 50% tolerance to skills and kind of take it from there. Does that make sense?
No, that does. It actually sounds like plan C, D, and E, maybe, too.
Yeah. Well, you need to do that. We wanted to make sure that under any circumstances, we would be in a much better place than we are today with them, and we feel completely confident that that will be the case, regardless of the outcome.
Assuming you sell the assets, RIDEA becomes effectively not the largest tenant, but your largest portion of individual, I guess, operator or manager within Enlivant. What's kind of your propensity at this point, given where we are in the cycle, construction and demographics, to add more RIDEA? How much would you want to do that? In particular, kind of thinking that in terms of Holiday as well, would you go up to 20% RIDEA, 30% RIDEA if you could, given your pipeline, senior housing, maybe Holiday needs to be converted to RIDEA. Just trying to understand the limits of that particular bucket.
We're gonna be there as soon as we pull the trigger for Enlivant anyway, right? You'll be incrementally higher with Holiday. You're gonna be 25-ish plus to begin with. In terms of the cycle, because the bulk of our RIDEA would be Enlivant, the cycle isn't really that applicable to them because they picked up an undermanaged portfolio and have been improving it operationally. It's always different when you go into that situation than if they acquired a stabilized portfolio. That was one of the things that was really attractive to us about the Enlivant TPG deal, and they're performing. They're showing us that they can get where we think they can go.
The rate increases that they were able to implement in the environment that we're in and do it three months ahead of January 1st, because it was supposed to be for 2019, I think, says a lot about the quality of the product that they developed and the markets that they're in. Now, that aside, in terms of future deals, I think we all see a trend in senior housing towards RIDEA against triple net lease. As we look at those deals, we're gonna have to look at every situation and really understand the market, understand where those operations are in the cycle. We don't expect to see a demographic pickup on senior housing, next year, and maybe not even 2020. Could be early 2021, maybe it's a little bit sooner than that, but call it the next two years for sure.
We expect to see it sooner than that in skilled, just because of the health issue with 85-year-olds and 90-year-olds will be a little bit of that bleed-in to skilled nursing, I think, first. It's gonna be very situation-specific, and we're gonna have to have a real comfort level that there's upside in terms of shop growth to any deal that we do, relative to the cycle at that point in time and the markets that they're in. One of the things I think that we are mindful of is once absorption occurs, say, over the next couple of years, we already see that traditional lenders aren't lending. The development projects that we see are being financed, not by your traditional guys, and none of them pencil.
Once absorption happens, the question is, have the traditional lenders learned their lesson, and are they gonna be a little bit more careful about what they do, and if that's the case, that's great. When you talk to them, that's what they say.
Do they ever?
Right. Is everybody going to have really short memories, and in 2021, there's going to be a whole lot of building again, and you'll have a window for shop growth, right? By the time that stuff gets built and you lease up and all that, you're probably looking at 2024. You've got a window there. Those are all the things that we think about taking into consideration. We will not take it for granted that anybody is going to behave rationally.
Okay. Just real quick, are you indifferent between A, B assets, primary markets, secondary markets? Obviously, Enlivant is kind of secondary markets, but are you really just indifferent to primary markets versus secondary? It's just situational?
Yeah, we are indifferent. It's something that's kind of a little bit funny to me because when you're in a secondary market that's got a robust population with a good regional health system, almost by definition, it's a B product. In that market, it's an A product. Yeah, we are indifferent, but we look at penetration rates. The regional hospital system is a big factor for us when we look at secondary communities and obviously the population growth. We do, we look at all those things, but yeah, we're indifferent.
Okay. That's all for me. I'll hop off. Thank you.
Yeah.
Our next question. As a reminder, ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone. Our next question comes from the line of John Kim with BMO Capital Markets. Your line is open.
Good morning.
Hey, John.
On the Senior Care sale, how achievable is the earn-out? Anything you could share as far as the metrics you need to get to hit it, is it all or nothing?
It is not all or nothing. Look, it'll depend. It will require the portfolio to perform at a higher level than it's performing at today. Keep in mind that portfolio's performance has declined since we completed the CCP merger. It needs to get back to kind of where it had been performing prior to that time period. I'd hate to put a handicap on it, but there is a reasonable expectation that we'll get some earn-out payment, but it certainly in no way can be assured.
John, it's not going to happen in the next 12 months, even with a really good operator. It's going to take them a while longer to get the portfolio where it needs to be. We clearly see the possibility there.
Okay. Rick, you mentioned a potential option B as far as a buyer and other options as well. Do you think it'll be at a similar price, or would pricing be compromised?
No, I think pricing would be a little bit lower with the buyer B. By definition, you're in a different position, right?
Yeah.
Look, we may wait and see if once they're re-tenanted, what it looks like at that point before we go with a buyer B, because with better operators in place, a better path for us may be to sell them with better operators in place and get a better price rather than just go to buyer B. That's something that we would probably think long and hard about, and might be really worth taking a little bit more time to do.
It sounds like on Holiday, you may be going the RIDEA route. Ricky mentioned that you thought one of the issues with them was the high escalators in their leases. Can you just describe what the escalators are in your portfolio with them? Is that something that you could just address as far as resetting those escalators?
Yeah. Our escalators are 3.5%.
Yeah, I think they are now, yeah.
Yeah. They were 4%. Look, all of us that did those Holiday deals back four or five years ago, did the same thing, right? We all paid a handsome price, and in exchange, got pretty heavy escalators that ticked down after several years, but are still sort of above market. When I talk really with admiration about the Holiday team, this is a team that's managed through those escalators, completely changed their business model without any downturn of performance. Because those escalators, even after ticking down, are so high, it just sort of chokes them. We don't think just bringing the escalators down is going to be enough for them. Right? Certainly, that isn't the case when you look at the NHI release today.
If it was as simple as just bringing the escalators down to something more reasonable, I think that we would absolutely entertain that. It's not, and again, we're not willing to give a rent cut with that kind of dilution and have even a longer-term relationship with an entity that controls them, whose agenda we can't get clarity on.
Right. Okay. Then the final, I guess, a few-part question on your acquisition pipeline of $350 million. Can you break down that pipeline between RIDEA and triple net? How much do you expect to close either this year or first quarter next year? If it is triple net, or part of it is, can you just describe some of the general terms you're underwriting at as far as the coverage, lease yields, and escalators?
Juan, I'll try to answer that for you. The pipeline that Rick described is the sum of the deals that we are reviewing right now. It would be premature for me to have a conversation about whether they're RIDEA or leases or what the terms are, because we're processing them, we're reviewing them. There are some that we've issued letters of intent, and are waiting to hear whether our offer is of interest to the seller. I will tell you more globally, that most sellers right now are private equity or REITs selling into the market and not operators initiating sale leaseback transactions. That nature of the sellers into the market is resulting in most deals being structured as management contracts with operators, either the operators that are currently in place at those assets or being brought in by buyers. It's just a different nature of transactions.
We have continued to execute leases on many of the deals that we've undertaken. We've obviously talked about those that we've structured as management agreements.
How much of the pipeline do you expect to close on either this year or by the first quarter?
It would be hard for me to speculate.
Not much. Look, the pipeline's always a moving target. Between last quarter when it was really light at $200, and today, it actually hit $900 at one point. You're always doing the work and you're always doing the underwriting. When we talk about our pipeline, just so it is clear, we do not include in that pipeline every deal that comes to us. We only include in that pipeline the deals that we think may be viable enough to spend time doing underwriting analysis and then potentially make offers on. We're doing work on all this stuff, but as we've seen all year, and I think as you've seen from our peers as well, you can put a competitive bid in, but you just cannot get there. I think with the existing pipeline, it is going to be pretty much what we've all seen all year.
There's not going to be a lot of actual consummated deals that come out of that. We may be wrong, and it may be, but as Talya said, you cannot handicap it. It is not possible in this environment.
Okay. Thank you.
Thanks, John.
Thank you. Our next question comes on the line of Juan Sanabria with Bank of America. Your line is open.
Hey, Juan.
Hi, this is Justin on for Juan this morning. I just had a quick question on Avamere. If you could just give us an update on them and what gives you guys confidence in them as a tenant and that they won't require a rent cut in the near future.
We've talked about Avamere before. I don't know why you're raising the question. Their rent coverage has been stable, as we've talked about before with Avamere. They're a good company. They're a strong company. They have one piece of their portfolio that's problematic, and that's six facilities in Washington state, because the Medicaid rates are just horrible in that state. They're looking at closing one facility, but the rates in Washington are so bad that a number of the operators either have gone under or are going under there. Because Avamere is in such a strong position with their overall portfolio, their tactical approach in Washington is just to hang in there and wait it out and pick up occupancy off competing facilities that don't make it. We think it's a good strategy, and there's never been a conversation about a rent cut.
We've talked about this on the past couple of earnings calls with Avamere as well. You may not have been on those calls, nothing's changed. It shouldn't be a question there.
Okay, fair enough. That's it for me. Thanks.
Okay, thanks.
Thank you. I'm not showing any further questions. I'll now turn the call back over to Rick Matros with closing remarks.
Thanks for joining us today. We appreciate it. There were some complexities to the quarter, and hopefully we provided some clarity to some of the questions that folks had. As always, we're available for additional questions and follow-up calls. We'll be heading out to Nareit in a few hours, and I know we'll be seeing a lot of you guys at Nareit and look forward to seeing you there. Thanks very much. Have a good day, end the vote. Bye.
Ladies and gentlemen, this does conclude the programming. You may now disconnect.