Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT First 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, our portfolio repositioning and enhancement and our expectations regarding our future financial position and results of operations. These forward looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10 ks for the year ended December 31, 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 ks we furnished to the SEC yesterday. We undertake no obligation to update our forward looking statements to reflect subsequent events or circumstances that you should 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 expectation 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 dotsabrahealth.com.
Our Form 10 Q, earnings release and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.
Thanks, Mike, and thanks for joining us, everybody. So So we get the mood going and get really imagining they're in California while you're listening to us today. So let me first talk about guidance, Harold, we'll get into details, but we had a minor adjustment to guidance that simply reflected a change in timing and taking out the preferred and our existing notes. All other assumptions remain unchanged. I want to talk a little bit about, all the various reimbursement changes.
We have a 2.4% market basket increase effective October 1 this year. Therapy caps were eliminated. That's actually a pretty big deal for the space. Value based payments, we expect overall to be for operators on an aggregate basis to be relatively neutral when it comes to value based payments and provide a little bit more detail that 60% of the space will be winners, meaning that they'll retain some or all of the 2%. The top performers have an opportunity to get a 1% increase in their Medicare rate.
The of the bottom 40 percent, 25% of the bottom will take the biggest hit, but that hit actually will only translate to 0.5% decrease in their NOI. So even for those that don't do well on value based payments, the downside is pretty limited. Not that you ever want to see any decrease
in NOI, but it's a
half a point. The patient driven payment model, so that's PDPM is a simplified system revised from what used to be called RCS-one. It's still revenue neutral, but some of the changes include the following significantly reduce cost to operators estimated at $2,000,000,000 in savings to the industry. The incentives will shift from solely short term rehab to complex nursing. It's a case mix payment system with 5 categories rather than the current 66 RUGS categories.
So a much simplified system, the 5 categories are broken down into physical therapy, occupational therapy, speech therapy, nursing and non therapy ancillary services, which you'll see referred to as NTAS. So therapy rates will be lower than what they were, but there'll be corresponding increases in nursing. Physical therapy and occupational therapy payments will taper down after 20 days. That's up from 14 days in RCS1. Concurrent and group therapy will now be allowed up to 25% of rehab revenues, which will help margins.
The historical utilization level for concurrent and group therapy back when it used to exist was 26%. So the 25% really just reflects the reality of what it always was. When it was in place. Obviously, it's been gone for quite a few years. That's another positive for us.
The reimbursement incentives for nursing will have the important benefit of increasing the percent of skilled nursing patients that have longer length of stays, mitigating the length of stay problems that exist with the focus on short term rehab. So if you just look at the numbers, CMS is going to do an analysis and maybe you guys do as well that's based on the existing population of skilled nursing patients. The key here is that the existing population is going to change. Operators always follow the incentives. We've seen it historically in the past when the new rehab categories were put in, that's where the operators went.
They started admitting and creating clinical protocols to be able to take care of patients with the highest needs on rehab, which really is why so much of the rehab under the current system is in the ultra high and very high categories. So expect to see significant changes in behavior on the part of our operators as they start emphasizing nursing patients and not just solely rehab patients, which will the nursing patients will have a longer length of stay. So that obviously has a dual benefit of mitigating the length of stay issues and focusing on short term rehab and therefore resulting in higher occupancy. The other benefit with this system changes, we'll no longer have minutes obviously because it's going to a case mix system and that should positively impact DOJ investigations. As you all know, the DOJ investigations were based on the assumption that providers had too higher percentage in the ultra high and very high categories and therefore must be doing something wrong.
I'd also note that we've never really seen this level of collaboration between CMS and the industry before. So that's greatly appreciated. It actually started before the current administration. The American Healthcare Association has been involved with CMS and these changes for over 4 years now. But since the administration came into office, the cooperative attitude and working relationship between business and CMS has also increased dramatically.
I'll now just make a comment about our asset divestiture program. Harold will get into the details on it, but all of our asset sales are progressing as previously communicated in both pricing and timing. In terms of our acquisition pipeline, it's currently stands at $400,000,000 It's almost entirely senior housing. The competitive market remains the same as it's been. And at this point, we see cap rates stable.
So both on the skill side and the senior housing side, I think there's been some commentary that there some people have seen in the beginning of some cap rate expansion on senior housing. We haven't seen that to any significant degree at this point. Our focus continues to be on the execution of our divestiture program, our proprietary development pipeline and executing on small deals. We've been shown large deals, but they tend to be both messy and not compelling and we simply have no need to follow that path. By year end, assuming no other skilled divestitures, we'll have our skilled exposure down to 61%.
That's down 13% from August of 2017 and just 4 points higher than where we were pre the merger with CCP. When we think about our skilled exposure, just want to make a note here, it's really more about the operator than it is about the space. So as we look at our current operators and we look at operators, as we look at additional deals going forward, it's really looking for operators who fit
our preferred
profile. Let me move now to our operating results. Skilled occupancy sequentially was 80.9 percent just up a tick. Skilled mix is up 40 basis points at 37.6%. Our EBITDA coverage was 1.33 down from 1.37.
That was specifically due to one of our tenants who took over the operations of another one of our tenants. And while that transition is occurring, their coverage was down some, but their coverage was still 154. It just had been higher before that. So we actually expect that to go up. So we didn't see any trends sort of across the rest of our tenants.
I'll talk a little bit more about that in a couple of minutes. The difference in Signature Health, though, I want to point out because we show coverage of 1.22 on a pro form a basis. So under the current restructured deal where there was a change in rehab pricing and there were also 4 facilities being divested, which we'll get a rent credit from, it would put them at 1.3 and that's what the deal was predicated upon. For senior housing, sequential occupancy was down 50 basis points to 80 point 8 percent, EBITDA coverage was flat at 1.09 percent. On our senior housing managed wholly owned facilities, occupancy was up sequentially to 92.1 percent from 91.7%.
For specialty hospitals, sequential occupancy was 83.4%, up from 79.3%. We saw coverage at 3.45. Occupancy was up and coverage was somewhat lower specifically due to Signature Behavioral Hospitals, which were acquired in 2017 coming into the numbers. They have lower occupancy than lower coverage rather than the other specialty hospitals and usually run about 1.6 times, but they also tend to have higher occupancy. So, and we talk about our all in operating results, not same store because given all the changes in our portfolio over the last year, looking at our overall operating results as opposed to same store makes a lot more sense.
Same store just doesn't make the same level of sense that it did a year ago. And in terms of our top ten, let me make a couple of comments and some things I saw in some of the notes that came out last night. In terms of Genesis going from 1.26 to 1.22, they actually reported a pretty good quarter this morning. But that said, we're getting pretty close to the point where our Old Testament is done with. And so it just doesn't it's just not going to matter much to us anymore, which has been the point of this divestiture program to begin with.
In terms of, Avamere, which was just slightly down, Avamere is doing fine. They've got a strong portfolio. They have 6 facilities in Washington State that they have issues with is in fact all the operators in Washington State have issues because of substantively poor Medicare for Medicaid rates. And I think we'll see 1 of 2 things happen with Washington State. Avenir may sell a facility, or the fixed facilities, so that would help.
But the other thing is there's conversations going on the state legislature, where Medicaid rates are going to be potentially be increased that's being considered. So either that will happen or Avamere will simply wait out some fallout from some of the smaller operators who are really struggling. So we absolutely have no concerns about the Avamere portfolio. It's a small piece of their overall portfolio. They were strong operating.
In terms of holiday, you all may have seen an announcement today from New Senior that they came to a deal with New Senior where these 51 facilities that they have at New Senior will be converted from a triple net lease to managed contracts. That's a good outcome for Holiday. Those 51 facilities have been a burden on the guarantor sub. So from our perspective, that's real positive, it will strengthen the guarantor sub. So it was a constructive deal and I think everybody knows, new senior is going through a process right now and that would also be that new understanding or that new agreement rather and that new structure will help them theoretically in their process as well.
So for us, it was good news. I know the Holiday team feels really good about that negotiation and getting those 51 facilities out of the guarantor sub. And in terms of senior care centers, they ticked down 0.01, that's not really ticking down. They have had no downward trends. Their coverage is not strong as we noted on the last call and we're keeping an eye on them.
Their coverage slightly ticked up, in the current quarter. But look, they're an operator we're keeping an eye on. There is an interested buyer that we're having conversations with. We don't know as we sit here today whether we will get anything done, but it's interesting enough for us to take a look at. And if we were to do that, obviously our skilled exposure would come down more so than what with our exposure in Texas.
On the other hand, with some of the new management changes that are going on, as we said on the last call, there is some real opportunity for them to improve their operations. So we'll see. But we are very open minded to looking at the divestiture of all or some of those assets. And as we if those negotiations start to materialize, we'll keep everybody posted on that. And with that, I'll turn it over to Talia and then Talia will turn it over to Harold and then we'll go to Q and A.
Talia?
Thank you, Rick. This is the first time that we have walked through the results of our managed portfolio on our quarterly earnings call. Until this quarter, when we closed on the Enlivant transaction, the managed portfolio had been very small and consisted primarily of our retirement homes in Canada. So that is where I'll begin my comments. Sabra owns 10 homes in Canada, 8 of which are independent living and 2 of which are assisted living and memory care facilities.
Sienna Senior Living, a publicly traded company on the Toronto Stock Exchange, manages 8 independent living facilities in Ontario and British Columbia and one assisted living property in Ontario for Sabra. The remaining property Maison Calgary is managed by Baybridge Senior Living, a privately held company in that is actually merged with Amica bought Amica last year. Sienna has been managing the homes for the last year and has focused on building and maintaining occupancy and improving the quality of resident services. In the Q1 of 2018, the Sienna managed properties achieved 91.9 percent occupancy compared to 92.7 percent in the preceding quarter, so an 80 basis point decline, which was a direct result of lower traffic in tours because of a harsh flu season. And it achieved 40.6% cash net operating income margin compared to 35.8% in the preceding quarter as a result of tighter cost control and a reversal of a one time accrual.
Maison Calgary, which provides assisted living and memory care services to private pay residents in Calgary, continued to perform well in the Q1 with 92.5 percent occupancy compared to 89.6 percent occupancy in the preceding quarter, mostly through leasing momentum on the assisted living site, and achieved 33.2% cash NOI margin compared to 27.9% margin in the preceding quarter, primarily as a result of lower nursing labor costs. With revenue per occupied unit of just under $7,300 a month, Maison Calgary is a property that provides an alternative for long term care for those who are able to pay privately. Moving to the U. S, of the remaining 14 wholly owned managed properties, 11 are managed by Enlivant and 3 are managed by Pathway to Living, which also leases additional property from Sabra in Green Bay, Wisconsin. The wholly owned Enlivant portfolio located in Pennsylvania, West Virginia and Delaware performed well in the Q1 of 2018.
Average occupancy rose 110 basis points to 92.7% compared with 91.6 percent occupancy in the preceding quarter. Revenue per occupied unit increased to $4,986 per month, which was slightly higher than the preceding quarter and 2.8% higher than underwritten for the quarter, again despite a tough flu season. Cash net operating income margin was 26.8% compared to 23% in the preceding quarter. The 3 Pathway properties, 2 in Central Wisconsin and 1 outside of Minneapolis, which were part of our proprietary development pipeline, total 174 units with a mix of assisted living and memory care. Pathways has been working to improve occupancy and operating performance since taking over these properties from a prior operator.
In the Q1, average occupancy rose to 89.3% from 81.8% at Marsh Field 1. Note that this includes only one property as the other 2 were acquired by Sabra in the Q4 of 2017 and are currently categorized as pre stabilized. Cash NOI margin for all 3 combined was 16.7% in line with the previous quarter. 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 U. S, all managed by Enlivant.
Despite a severe flu season, Enlivant properties did not give up much on occupancy and rates. Average occupancy for the quarter was 80.7 percent compared to 81.3 percent in the preceding quarter and revenue per occupied unit was just under 4,000 dollars per month, which was only 1.2% less and underwritten for the quarter. Cash net operating income margin was 25.8 percent compared to 26.4% in the preceding quarter, reflecting the impact of the revenue items that I reviewed and some non recurring expenses including higher utility costs and snow related costs. Residents at Enlivens properties receive annual increases once a year at the end of the year and management believes that there will be they will be able to continue to push both rate and occupancy. At this level of occupancy, incremental revenue has an outsized impact on margin and we remain optimistic that the Enlivant team will continue to improve overall revenue and net operating income in this portfolio.
I'll now turn the call over to Harold, Andrews, Sabra's Chief Financial Officer.
Thanks,
Talia. For the 3 months ended March 31, 2018, we recorded loans and NOI of $166,100,000 $163,200,000 respectively, compared to $62,700,000 $60,200,000 for the Q1 of 2017. These increases are due predominantly to revenues and NOI generated from the properties acquired in the CCP merger and the Enlivant transactions. Net FFO for the quarter was $113,400,000 and on a normalized basis was $111,600,000 after the exclusion of $1,000,000 of CCP merger and transition related costs, dollars 900,000 net recovery of doubtful accounts and loan losses and $1,900,000 primarily related to non recurring other income, which is $0.63 per share. This normalized FFO compares to $36,400,000 or $0.55 per share of normalized FFO for the Q1 of 2017, a per share increase of 14.5%.
AFFO, which excludes from FFO merger and acquisition costs and certain non cash revenues and expenses was $106,400,000 and on a normalized basis was $104,200,000 after the exclusion of $600,000 of CCP related transition costs, $1,000,000 net recovery of doubtful accounts and loan losses and $1,900,000 primarily related to non recurring other income or $0.58 per share. This compared to normalized AFFO of $35,200,000 or $0.53 per share in the Q1 of 2017, a per share increase of 9.4%. For the quarter, we recorded net income attributable to common stockholders of $59,900,000 compared to $16,300,000 for the Q1 of 2017. G and A costs for the quarter totaled $7,900,000 and included the following: $1,100,000 of stock based compensation expense, $600,000 of CCP related transition costs and $800,000 of operating costs for HealthTrust, the valuation firm that was acquired in the CCP merger, which we sold during this quarter. Recurring cash G and A excluding CCP transition costs and HealthTrust operating expenses were $5,300,000 or 3.3 percent of NOI for the quarter.
We expect our quarterly recurring cash G and A run rate to be approximately $5,200,000 to $5,600,000 per quarter. During the quarter, we incurred charges totaling $1,200,000 of provision for doubtful accounts and loan losses, primarily related to $2,200,000 general reserves related to straight line rental income and loan loss, offset by $1,000,000 recovery of cash rental income. Our interest expense for the quarter totaled $35,800,000 compared to $15,800,000 in the Q1 of 2017. Included in interest expense is $2,500,000 of non cash items compared to $1,600,000 in the Q1 of 2017. As of March 31, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant joint venture debt was 4.1%.
Borrowings under the unsecured revolving credit facility bore interest at 3.13% at March 31, 2018, an increase of 32 basis points over the Q4 of 2017. We recognized a $500,000 net loss on sale of real estate during the Q1 of 2019, primarily associated with the sale of one skilled nursing facility. During the quarter, we invested $477,800,000 on the Aliven assets. In addition, we invested $47,000,000 on 2 skilled nursing transitional care facilities and 1 senior housing community with an average cash yield of 8%. These investments were funded with cash on hand and borrowings under our revolving credit facility.
As of March 31, 2018, we had total liquidity of $435,100,000 comprised of currently available funds under our revolving credit facility of $389,000,000 and cash and cash equivalents of $46,100,000 We were in compliance with all of our debt covenants and continue to maintain a strong balance sheet with the following pro form a credit metrics, which incorporate among other items, aggregate CCP rent reductions of $28,200,000 and investment and disposition activity concluded after quarter end. Net debt to adjusted EBITDA of 5.48 times, net debt to adjusted EBITDA including unconsolidated joint venture debt of 5.97 times, interest coverage of 4.23 times, fixed charge coverage of 3.72 times, total debt to asset value 49%, secured debt to asset value 8%, unencumbered asset value to unsecured debt 2 24%. Regarding our net debt to adjusted EBITDA, I would point out that it includes the full impact of the $19,000,000 Genesis rent reduction and the $28,200,000 impact of the CCP portfolio repositioning. As we complete the Genesis and other planned asset sales, we expect this leverage to decline over the balance of 2018 to around 5.25 times or 5.75 times including unconsolidated joint venture debt. On May 2, 2018, we announced that we will redeem all 5,750,000 outstanding shares of our Series A preferred stock on June 1, 2018.
These shares will be redeemed at a redemption price of $25 per share plus any accrued and unpaid dividends in the amount of approximately $0.445 per share for an aggregate payment of $146,300,000 On May 9, 20 18, 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 May 31, 2018 to common stockholders of record on the close of business on May 21, 2018. I would also note that this dividend is about 78% of our normalized AFFO for the quarter. We have updated our 2018 earnings guidance range as follows on a per share per common share diluted basis. Net income attributable to common stockholders $1.98 to $2.06 FFO $2.48 to $2.56 normalized FFO $2.47 to $2.55 AFFO $2.28 to $2.36 and normalized AFFO $2.27 to $2.35 These updates reflect the revised timing for completing the Series A preferred stock redemption and the elimination of the previously anticipated refinancing of our $500,000,000 of 5.5 percent senior unsecured notes due 2021 $200,000,000 of 5.375 percent senior unsecured notes due 2023 during the second half of twenty eighteen.
Our current expectations for pricing of a 2018 unsecured bond offering to complete the refinancing is not compelling at this time. Accordingly, we will be patient and pursue any such refinancing opportunistically prior to the relevant maturity dates. These changes impacted our guidance range through higher interest expense and preferred stock dividends, as well as the elimination of a loss on extinguisher debt, which impacted net income, FFO and AFFO amounts only. Finally, a quick update on the Genesis asset sales. We continue to make great progress toward completion of the Genesis sales we discussed last quarter.
Of the 46 identified as being marketed for sale last quarter, we have now closed on 6, which generate gross proceeds of $20,500,000 25 are subject to 2 separate purchase and sale agreements for expected aggregate gross proceeds of $254,000,000 and the remaining 15 are under 3 separate LOIs with expected aggregate gross proceeds of $79,800,000 These sales are expected to trigger residual rents to us of $10,200,000 per year for the following 4.28 years as provided for in our agreement with Genesis. All sales are expected to be completed by the end of 2018 with the majority closing by the early part of Q3. Upon completion of the sales, we expect to have continuing annual cash rents from Genesis, including residual rents generated from sold assets of approximately $20,600,000 or 3.7 percent of our annualized cash NOI. And with that, I think we'll open it up to Q and A.
Thank you. And our first question comes from Tayo Okusanya from Jefferies. Your line is open.
Yes. Good afternoon. I think it's good morning over there and congrats on a pretty solid quarter.
Thanks, Kyle.
A couple of quick questions. The first of all, the whole Medicare situation with the 2.4% increase, that all makes sense. Could you give us some commentary just on the Medicaid side, what you're kind of hearing from states as we gear up for the new July 1 fiscal year for most of the states?
Yes, pretty much not much different than it's been. We're not going to see much. We're not going to see much negativity. The Medicaid increases have been really modest the past number of years and I wouldn't expect that to change this year. I mean you've got a couple of states like Washington State which has particularly weak Medicaid rates that are having active discussions because they really see that their operators are struggling in that state.
In Texas, there is a pretty substantive effort going on that the REITs are actually or some of the REITs are actually supporting with the National Trade Association to change the system there. But even if that were to happen, that's they only have elections every 2 years there. So that's a 2019 issue. And as far as every other place, I don't think there's any major sort of efforts going on to change anything in the other states. I think it's going to be business as usual.
Got you. Okay. So that's helpful.
And then second of all, you did make just some passing comments on the new senior transaction with Holiday. I'm just curious, is this something you guys would consider doing with your Holiday portfolio, just kind of given your coverage at 1.12? No.
Well, first of all, remember, I know we have to remind everybody, it's independent living. It's not a healthcare model. And so we underwrote the deal at 1.1 as did our peers who do holiday deals. So they're performing where it was underwritten at. Their EBITDA margins are 40%.
It's a pretty healthy business. So, so no, we don't intend to do that. I think obviously I can't talk to New Senior. I think in this case, while it was something that Holiday wanted to do with New Senior, because it's a positive for their cap structure, I think for New Senior as they go through this process to the extent that potential buyers may not want to hold on to all the assets and holidays are pretty big chunk for them, it gives them kind of an easy out there. So I think it gives them a little bit more flexibility when they talk to buyers.
So So it happened really for some very specific reasons related to that process. And we don't see ourselves doing anything different than holiday. In fact, we would like to do more with holiday. There just haven't been the opportunities. Independent living isn't a huge space as you know in the States, the way it is in Canada.
And there's really almost no new development on independent living. The only development we see that it ever relates to independent living is when guys are building campuses with the full CCRCs or just sort of multi level senior housing, senior housing facilities, they may have some aisle cottages or units.
Okay. That's it for me. Thank you.
Thanks, Kyle.
Thank you. And our next question comes from Juan Sanabria from Bank of America. Your line is open.
Hey, this is Kevin on for Juan.
Hey Kevin. Hey Kevin.
I just had a question regarding Signature. In the press release, you guys mentioned the deferred rent and possibility of resetting the base rent once all the obligations are taken care of. I guess what is the metrics for that? Is it coverage, cash flows or just paying off or paying down the financial claims that they have?
Yes. Thanks for the question. It really is dependent on their future cash flows. And so the first priority is got to get the med malpractice obligations paid, then they got to get the DOJ payments taken care of. And as we structured the deal, every landlord's portfolio is separated into separate silos.
And so we're only looking to the performance of our portfolio to generate cash flow. And the obligations for DOJ and Med Mel is more shared across silos. But once those are taken care of, then the cash flow that our silo generates will then allow us to reset rents as those cash flows improve down the road. So we don't have any expectation that's going to happen anytime soon, but it is something that's there. Think about it more in terms of as the demographics really start to change over the next couple of years and their performance improves from that, then we'll have that opportunity to recoup that.
But we're not making any assumptions about those recoupments at this point.
The other couple of points I'd make on the opportunity for recruitment, even more even in addition to the demographic is, if you think about everything that Signature has gone through with the restructuring, it's been a huge diversion for the senior management team. The senior management team for the first time in a very long time is going to be able to be solely focused on the business. So that's an intangible, but we think that's very helpful. And with all the reimbursement changes, that those would be positive as well. And despite the fact that I think you've seen sort of across the space, everybody's metrics have become a lot more stable on the skilled nursing side, even as they begin to improve, you're still going to see and skilled nursing, which is just going to enhance the occupancy opportunities in addition to the demographics.
So we think there is some real positive there, but as Harold said, nothing's in the numbers because it's Thanks, Kevin.
Thank
you.
Thanks, Kevin.
Thank you. And our next question comes from Smedes Rose from Citi. Your line is open.
Hi, thanks. I just wanted to ask you on the SNF coverage. It came in at 1 point 33, I think. And I think in earlier remarks, you had said you expected it to trend to 1.38 to 1.4 times. Is that something that will happen over the course of the year as the rent reductions continue to kick in?
And also with your positive views on the CMS proposals, do you think that coverage level could go higher relative to that initial expectation?
Yes. So on the first question, in terms of the 133 that's specifically due to one tenant who's got pretty strong coverage at Acadia at 1.54. They've taken over the operation of 1 of our other tenants. And so just the timing of that and regulatory approvals and just going through the amount of time it's going to take to transition and get their systems in place, there's been some decline in Their coverage was quite a bit higher. So it's still strong at 154.
So the 133 has nothing to do with the merger or anything else that we've done. It's specific to that. So we should see that tick up as they start integrating those additional facilities and those operations start improving and it will be a little bit of a slow climb because we report on trailing 12 basis. So, but again, they're really strong operator and even with reduced coverage is still at 154. So, in terms of your second question, so obviously, first of all, we've got until October 2019 before this happens.
And I think what I would expect to see behaviorally based on history is that, operators will start admitting patients and start transitioning before the October 2019 date. So they consider to hit the ground running a little bit more. So by way of example, when that 10 plus years ago, when the new rehab categories came in and the incentive to go after those higher acuity rehab patients in RUG 66 was so apparent, we started seeing operators admit those kinds of patients pre October 1st of that year, even though they weren't getting fully reimbursed for them. So they would have time to acclimate and demonstrate to their referral sources that they could provide the kind of outcomes that their referral sources would look for and they could therefore be a preferred provider. So I think we'll see some of the same behavior over the course of 2019 next year.
But as those changes actually take hold, improved coverage. And I would also note that we currently have operators in certain states where there are robust Medicaid systems. So even though Medicare may not incentivize them to go after more complex nursing patients, pulmonary dialysis, whatever the case may be. The Medicaid system allows them to do that. And within those operators, we're not seeing any length of stay issues because even though they're also focused on taking a short term rehab patients, which inherently have length of stay pressure, They've got a nice percentage of these complex nursing patients that have a much longer length of stay and that mitigates the length of stay on the short term rehab patients.
So I definitely see that as beneficial. And even though it's hard to completely predict timing, when you look at all the combined factors of a better market basket, the elimination of therapy caps, the new system coming in October 2019, a little bit of a bleed in of the demographic probably next year and the continued reduction in supply, it really all bodes well for the space and there's kind of a silly stat out there that I may have mentioned on the last call that says by 2025 the industry will be 100% occupied based on a variety of factors, mostly demographic and supply. So yes, we would expect to see coverage improve over the course of time. Thank you.
I appreciate that. I just wanted to ask you in your outlook for the year, what sort of improvements are you expecting at Enlivant this year? I know it's sort of in it's a turnaround portfolio that you talked about when you bought it. So occupancy a little under 81%. Because it sounded like you'll emphasize or continued occupancy gains, I guess, maybe at the expense of rate or maybe how does that kind of play out over the course of the year?
So I would just say a couple of things. One, rates has not been an issue for them at all. And in the owned portfolio, so the 11 that we own, they're actually well ahead of projections on occupancy. And on the joint venture, they got hit somewhat by the flu, as Talia mentioned in January February, but already saw a nice rebound in March. So we expect occupancy to tick up on a continual basis, but occupancy moves incrementally.
You've got move in the exact and you've got folks leaving obviously. So you're not going to see 3% or 4% increase in a short period of time, but you'll see incremental improvement. And we believe that they will get to industry averages. Tali, is there anything?
No, I think they also have the ability, depending on markets to push rate more or less and it's that's really a function of local market dynamics.
All right. Thank you, guys. Yes.
Thank you. And our next question comes from Chad Vanacore from Stifel. Your line is open.
Hey, good morning all.
Hey Chad.
All right. So, just an update on Senior Care Centers coverage there is pretty thin. So how are those changes proceeding on that portfolio and how are you thinking about it going forward?
So two things. 1, operationally, they're trading order. They ticked up slightly in the Q1, but it's not substantive. So the CEO, the new COO has only been there for, I think, 6 months, something like that. And they're in the middle of doing a CEO search.
They actually had the CFO doing all three positions for quite some time, which just hurts obviously. So there's a lot of when I talk about the blocking and tackling as opposed to sort of industry headwinds because of their issues, in the C suite and the lack of stability there, that's really hurt their strategic direction and their operational results. We do like the new COO, we know him and that's allowed the CFO to get more focused on his specific responsibilities and hopefully they'll conclude the CEO search shortly. So it's really like basic cost controls. It really is blocking and tackling, cost controls, labor management, things that most of our operators really do well at that they've really suffered.
So we expect them to actually to just continue to tread water for a while. So we don't see them declining. They haven't been declining. We just don't expect to see a lot of uplift for most of this year. I think the elimination of therapy caps in the market basket obviously will help, like it will help everybody.
So that's something look forward to until operationally they get their act together. But we do have unsolicited interest from a particular buyer in them as I noted. And so we are exploring that. And so we're very open to doing something in terms of the divestiture of either all or some of those assets. And so we're just sort of keeping an eye on it.
We're trying to be helpful with them in terms of anything that we can do for them from a business plan perspective or resources that we can recommend to them. So that's kind of where it is. So we're not super concerned about anything at this point. They sold the pharmacy, which allow them to pay down a huge chunk of the debt that they have with us. We noted that in our press release.
So I think that was important. And we encourage them to do that. So we feel like there's been a good dialogue with them on the things that they can do to improve their business. So, we do think there'll be improvement. I don't expect to see improvement this year.
And as I said, we'll update everybody on whether this interest that we have in the portfolio is something that we want to act on. And, but Texas is a tough state. It's the one state where there's actually skilled nursing facilities being built. You don't really see that in much of the rest of the country. So that's really as much as we can say on that right now.
So not overly concerned, but we'll keep an eye on it. We'll keep the dollar going and we'll pursue things with this potential buyer.
All right. That's excellent. And then just thinking about the Cadia portfolio, which was formerly operated by NMS, have they largely cleaned up the sins of the past management and then what's left it due to improve those operations?
Yes. So the Cadia portfolio isn't the former NMS portfolio, it's kind of flipped. So the Cadia was actually our first big acquisition when we formed the REIT in December of 2011 and it was actually also in conjunction with our first equity offering. So Acadia took over the NMS facilities and their management team is fully intact. So from a management perspective, it's Cadia that's operating it.
It took a little bit longer than I think everybody liked to get all the regulatory approvals to get the change of ownership done and all that kind of stuff. So the NMS operation suffered a little bit in that time. But we feel good that they're really getting that they're getting their arms around it. We're starting to see incremental improvement. And again, even with sort of the burden of taking on the NMS facilities, which affected sort of the combined coverage of NMS and Cadia, we still got Cadia with all the buildings at 1.54 coverage.
All right. One last quick one for me. After the sales of properties and the repayment of debt that you already outlined in your guidance, what's the best use of incremental cash flow? Is it debt repayment, development pipeline, acquisition, something else?
Yes. Certainly in the short term, we've got some outstanding borrowings on the revolver, so we'll pay those down. And that's really where you see the improvement in our expected leverage over the course of the year, getting that back down to the 5.25 area. That's really driven by taking proceeds from asset sales, paying down the revolver. And then it also leaves us room to be opportunistic in acquisitions.
We could still do a fair amount of acquisitions somewhere between $150,000,000 $200,000,000 still keep our leverage in an area that we're comfortable with. But the first thing will be to pay down debt.
Debt. Okay. Thanks a lot.
You bet. Thanks, Chad.
Thank you. And our next question comes from Eric Fleming from SunTrust. Your line is
open. Hey,
guys. Just wanted to
dig deeper on the decision. So I appreciate the more detail on what's going on with Genesis. But outside of Genesis, where are you at in terms of any additional CCP assets or legacy software assets that you're disposing of?
There's nothing else that we haven't announced that we're considering. We're pretty comfortable with the group of operators we have all in, other than the comments that I made on senior care centers. So I wouldn't expect to see much else from us. As I mentioned earlier, Avamere may sell a facility in Washington State. So you might you may see something incremental here and there, one here and one there.
But in terms of our operators, we don't expect to see much change going forward other than what we already talked about.
Thanks a lot.
Thank you. Our next question comes from Daniel Bernstein from Capital One Securities. Your line is open.
Hi, Daniel.
Hi. I guess, good morning to you. I figure I'll be the one person who asked about the pipeline instead of whatever other properties are moving in and out. So you mentioned you haven't seen really cap rates move at all on seniors. Just generally for seniors and skilled nursing, what are you seeing in terms of the bid ask spread between what you're willing to pay and what the sellers are asking for?
Is that widened at all? Is it coming back in? And maybe what does that portend for investment volume the rest of this year?
So this is Talia. Hi, Dan. So a couple of thoughts. Most of the bidders out there private equity firms of varying sizes and they're buying assets with the expectation of engaging a manager to manage them for call it a 5% or so management fee. So fundamentally, if we're looking at net leasing a property, we're going to be off by somewhere between 10% 30% just on the coverage ratio, because the cap rates that are being applied to 100% of NOI are at the number at our lease cap rate or oftentimes more aggressive than our lease cap rate.
So if you start off with 10% to 30%, we're off by 10% to 30% and then you add on another few call it 10% because of cap rate differences that adds up to the range that we're typically seeing. So somewhere in the order of, I'm going to say 15% to 30% or 40% depending on whether the high end, it depends on whether someone's buying a stabilized asset or the high end of that disparity is when they're buying an asset that's in lease up and there's an expectation that these up will occur and the buyer is buying on that expectation, whereas we're buying it mostly on cash flow.
So that's obviously specific to senior housing debt and it's not as if we're opposed to doing management agreements. There are some operators out there, one of who we do things with right now that we think are very good. It's just that even at that level, the level of pricing, it's just unrealistic. And we think there's going to be some really nice buying opportunities over the next few years for all of us as those things don't pan out the way they're currently being underwritten by the private equity firms. But the other thing I'd say is that for us, it doesn't really matter that much.
I mean, we, as you know, have been really committed to having a relatively uneventful year just executing on these final pieces and most of that is close to completion. We were much better positioned as a company than we were prior to all the activity in 2017, but we also understand that there was so much that we did that it's really taken the market quite some time to absorb it and to see that we actually can things coming in on the proprietary development pipeline. And I would just note there, just as a reminder that those are brand new purpose built senior housing facilities at cap rates that are 7.5% or north of 7.5% rent coverage. So great pricing because of how we structured and when we cut those deals. So that's really going to be the focus.
And I think that should accrue to the benefit of all of our constituents. And as things change and there are different opportunities there, then we'll act on those. We'll have plenty of capital available to continue to get some things done.
Okay. And you're indifferent to managed versus leased, just depends upon where the value is?
Yes, exactly. Yes, you've got to get things on the up, not when they're stabilized. And that's one of the issues that we see because we've obviously seen a lot of the deals that have been underwritten by the private equity groups and the projections that they buy into just are unrealistic from our perspective. We just don't see them happening under any circumstances. So, but if we were to see some opportunities, then yes, great.
We'd be happy to answer it. So it always depends on the opportunity, the operators very specifically and then the market, of course.
Okay. I'll pile on one more thing for you, Dan, and that is while the markets while bidders are being very aggressive, bidders are also very commonly overbidding to get into the mix and then we're trading. So on any given week, we get at least 2 and closer to 5 phone calls on deals that we had bid on where the buyer has where the trade has fallen apart. And I think that most of the time because it's consistent, it's they're falling apart on a re trade on price. So I think the other piece of the equation that's occurring now is, the resetting of seller expectations.
And finally, so there may be some opportunities there for us because it isn't just a reset on price with that particular buyer, it's a credibility issue obviously. So even if we come in a little bit wider, at least a certainty of closing. So but again, to the extent that provides more opportunities for us, they're not going to be huge deals. They're going to be what we said we want to be focused on this year. And that's getting smaller deals done that are accretive and keeping things relatively uneventful.
Okay. So maybe investment yields haven't gone up, but maybe there's a few signs of cracks there in terms of the buyer aggressiveness or the re trades?
Yes. And we've seen some of these cracks for a while. We actually saw some of them last year with recycled deals and busted deals. And we would have expected to see some cap rate expansion already as a result of that. But it looks like it's going to take a cumulative effect of a number of those things happening more frequently.
And so that's both sellers to Talia's point reset their expectations and brokers by the way have to think about their own credibility as well. So, it's brokers resetting some of their own expectations as well as sellers.
Okay. One more quick question, I know it's getting longer. So I agree with you PDPM is going to be very good for the SNF industry, but this year you have a 1% Medicare rate increase, you saw wage pressure. Am I missing something in terms of why should we be positive or confident that lease coverage won't go down further for the industry and maybe different for your portfolio versus the industry? Is there something you're seeing the operators do in terms of mitigating wage pressure or occupancy or skills mix, something that's giving you confidence that it won't get worse?
You said 1% on Medicare, it's
2.4%. I meant for fiscal for this year, you still have only had a 1 percent
Yes, yes. So this
is the year that we're Right, right,
not for next year.
Yes, yes, yes. So I think all those factors you talked about, wage pressures, they've been there and people are trying to manage are still managing through them. And by the way, that's also very market specific. So the larger MSA, the metro areas have more wage pressure than others. The percentage of our portfolio in those large MSAs is relatively small.
But I think even with all those pressures and the lack of good reimbursement increases, we've seen a couple of quarters now, not just with us, but with our peer who's basically all skilled nursing and a couple of others that have large exposure to skilled nursing that things have been stabilizing. We've sort of been we have been saying all along that we expect that things will if we're not close to bottom, if we're not at bottom, we're pretty close to bottom. So I think you make a fair point, but I think the operators have done a pretty good job, in general adjusting to, managing wage pressures. And one of the ways they do that is and we've seen that and seen this in our portfolio is the percentage of contract labor that our operators have used has decreased, because contract labor cost you at least a third more than your in house labor. So we're also seeing a trend and you're going to see this continue, particularly when PDPM comes into place or as it gets closer, where more and more operators are going to go in house on therapy as opposed to having 3rd party contracts.
They have total control over those costs and they get more of the benefit. That's been a trend for quite some time, but we're seeing that trend continue to happen now, but and you'll see that accelerate. So for the 3rd party contract rehab companies, I think it's going to be tougher for them. It's not anything that affects Sabra, I think most of the REITs, but for those operating companies that have those, that historically have driven value, I think that's going to be an issue going forward. So again, I think we're pretty close to bottom.
I think guys will hang in there. So things tick down and I think it'll be in pretty small increments and they'll be able to hang in there until they get the reimbursement increase in October and the therapy caps go away.
It sounds like that maybe risk coverage could tick down a little bit, but if people bring therapy in house and maybe corporate coverage could get better too. Is that the way to think about it? Yes. Okay.
Yes, absolutely. And when we think about our tenant coverage, really because we had that one the issue with the one tenant who was taking over the operations, which we think is a good thing for us, going forward. It was really very specific to that issue. Otherwise, you really wouldn't you would have seen extremely stable sequential coverage on our skilled portfolio.
Appreciate that. Appreciate it. I'll hop off. Thanks.
Thanks, Dan.
Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Rick Matros for any closing remarks.
Thanks everybody for joining us today. I appreciate the time and the support and the good questions. And we're as always, we're available for additional calls with any of you that want to get on the phone with us and look forward to seeing, a bunch of you at REIT Week. Take care.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.