U.S. Markets open in 8 hrs 2 mins

Edited Transcript of SBRA earnings conference call or presentation 6-Nov-18 6:00pm GMT

Q3 2018 Sabra Health Care REIT Inc Earnings Call

IRVINE Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Tuesday, November 6, 2018 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Harold W. Andrews

Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer

* Michael Costa

Sabra Health Care REIT, Inc. - EVP of Finance

* Richard K. Matros

Sabra Health Care REIT, Inc. - Chairman, President & CEO

* Talya Nevo-Hacohen

Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Chad Christopher Vanacore

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* John P. Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Charles Anderson

Mizuho Securities USA LLC, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Michael Costa, Sabra Health Care REIT, Inc. - EVP of Finance [2]

--------------------------------------------------------------------------------

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 result 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 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-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.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

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 income statement and balance sheet comments, and then we'll go to Q&A from there.

So let me start off with guidance. Guidance has been adjusted primarily for the pending Senior Care Centers sale and an update to our managed portfolio to reflect year-to-date performance, which has 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 its substantial rate increase effective in October and nice increases in occupancy as well, putting REVPOR 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 have been unhappy with the buyer that we had at the table initially because the buyer didn't want to retain them as tenants. And 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'll 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 and we expect to close early after the first of the year is we 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 directly -- we've been negotiating directly with the board most recently and not with management. But 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.

And 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 the result that really matters. And this issue in terms of the fourth quarter and not receiving rent from Senior Care is a shorter-term issue. We're still getting where we want to go, and this doesn't have any impact going forward. So it's a short-term issue.

And 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. And what we've talked about is the benefits of divesting Senior Care Centers. And 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 at about an 18-month period from where it was at the time of the merger and give 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 and a number of markets due to new product, and Texas also has one of the weakest Medicaid systems in the country.

And so as we've spent time on this over the past few months and even earlier than that, we sort of 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. So that's where we're at 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. But again, we had good, solid reasons for waiting as we've waited to announce it on this particular earnings call.

Now let me move on to our acquisition pipeline. Our acquisition pipeline currently stands at $350 million. It's primarily Senior Housing, so that trend continues. We've been talking about that every quarter. The environment remains unchanged. Private equity continuing to keep pricing high. Much of the product that we see is not stabilized or is recycled or both. And 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 small 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. So we'll kind of see how that goes.

Now I'll move on to operating metrics. Our Skilled Nursing portfolio continues to outperform national trends. Occupancy has now improved 3 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 slightly up at 1.32.

All of our skilled operators are in the midst of preparing for PDPM and without exception is seen as a positive reimbursement shift to 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 Health, which was up to 1.47. That increase, which was pretty supplemented, was a result of post restructure and analysis of the income statement and liabilities and making the changes that were appropriate because of the restructuring and have that wash through the income statement. So Signature Health actually is higher than we anticipated it would be when we decided to go ahead with that restructuring.

And then Cadia 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. So 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 wanted to discuss before turning it over to Talya is Holiday. I'm sure everybody saw the NHI release. So we've all been having conversations with Holiday, 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 assets. We think the management team has done a very good job there. They've had really high escalators were all sort of conclusive in that, and 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.

Our -- if we do anything with Holiday and the Holiday team, it will be more likely flipping it to a managed agreement. But whether we do that with Holiday or with another operator, we haven't made that final determination yet. Part of that determination really has nothing to do with the Holiday management team who, as I said, we think really highly of, but none of us really have any sense of what Fortress' agenda is as it pertains to Holidays. So in terms of making a long-term commitment relative to extending the lease with new rents and escalators, we're just not willing to take that gamble. So we'll make a decision shortly. And again, we like the portfolio. We may sell a few facilities. It's not going to be that material, but at this point, our inclination is to flip it into managed agreement.

And with that, I'll turn it over to Talya.

--------------------------------------------------------------------------------

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [4]

--------------------------------------------------------------------------------

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 up the wholly-owned properties from the 172 joint venture properties managed by Enlivant and co-owned and the joint venture with TPG.

At the end of the third quarter, Sabra owned 10 homes in Canada, 8 of which were independent living and 2 of which are assisted living and memory care communities. Sienna Senior Living manages 8 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. So we did -- it is included in these statistics.

In the third quarter of 2018, the 9 properties managed by Sienna saw a 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 [new events] in the quarter and which was offset by an increase in new events 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 2 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 4 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 of 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 2 quarters. So still a strong performance year-to-date.

Now 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 pick up 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 the portfolio, this portfolio, by occupancy, we see significant occupancy increases in those communities with lower occupancy, specifically the segment that has a less than 70% occupancy, which saw a 370 basis point increase in occupancy quarter-over-quarter. There is still room for improvement, and 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.

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [5]

--------------------------------------------------------------------------------

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 nonbinding letter of intent to sell the 36 Skilled Nursing facilities and 2 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 nonpayment of rents under the term of the master leases. As a result, Senior Care Centers is currently operating facilities on a month-to-month basis. Negotiations to receive partial rents until the date of sale of the assets continued until early November. And as of November 2, 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 totaled $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 onto the numbers. For the 3 months ended September 30, 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 a 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 included -- in the quarter included $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 and then $0.4 million of CCP merger and transition costs. This $6.3 million noncash 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 noncash 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 lost 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 from 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 nonrecurring legal and payroll costs and a 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 to $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 5 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 noncash 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 3 Skilled Nursing facilities during the 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 2 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 5.5x; net debt-to-adjusted EBITDA, including unconsolidated joint venture debt, of 5.94x; interest coverage of 4.18x; fixed charge coverage, 3.88x; total debt-to-asset value, 50%; secured debt-to-asset value, 8%; and unencumbered asset value to unsecured debt of 214%.

On November 5, 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 30, 2018, to common stockholders of record as of the close of business on November 15, 2018.

A few quick comments related to our updated 2018 outlook. We have lowered our per share normalized FFO and normalized AFFO expectation 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 Senior Housing - Managed portfolio, lowering normalized FFO by $0.05 and normalized AFFO by $0.04; and finally, revisions to the timing of investments and dispositions during the year, including the impact on interest expense related to the balances outstanding on a 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 30, we sold 2 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 3 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.

And with that, I will open it up to Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Chad Vanacore with Stifel.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [2]

--------------------------------------------------------------------------------

Yes, can't -- we can't hear you.

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

(Operator Instructions) Can you hear us, Mr. Vanacore?

--------------------------------------------------------------------------------

Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

I can hear you. Can you hear me?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Yes, we can hear you.

--------------------------------------------------------------------------------

Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [6]

--------------------------------------------------------------------------------

Okay. So given what you laid out about negotiations with senior care, is it a reasonable expectation you'll collect on 4Q rent eventually?

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [7]

--------------------------------------------------------------------------------

Look, I think there's some chance. But 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 halfway to getting paid some, I would say it's less than 50% likelihood that we'll get paid any rent.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

Yes, Chad, I wouldn't bet on it. We're in a position that we're just going to exercise all of our legal remedies. We've issued termination notices, and we'll have control of the issue. And look, we're not happy about this, but 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 and then going into 2019 with a clean slate. All of that is on track. Maybe it falls into January, but it's all on track. So nothing has really changed in terms of the big picture. This is something that we prefer to avoid, and we expended a lot of effort, I think you've heard, to give Senior Care Centers and the board as many opportunities as possible to get to a different place. Despite that difference, they weren't able to view that, but this is a short-term issue. And so again, I'm not happy about it, but 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.

--------------------------------------------------------------------------------

Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [9]

--------------------------------------------------------------------------------

So last quarter, you were pretty upfront that the facility-level coverage was under 1x on these facilities. Was there anything that changed from 2Q to 3Q in terms of fundamental performance? Did these drop off a cliff? Or are they pretty steady state?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [10]

--------------------------------------------------------------------------------

No, they're actually pretty steady state. But if you go back to my initial comments earlier in the year when I first started on talking about Senior Care Centers, my concern was when we looked at the portfolio, we saw a lot of upside because it's just basic blocking and tackling that has been happening in this portfolio. And so for the buyer, we think they have a really nice opportunity as they do because they're going to retenant it with, in all likelihood, more than one operator. And 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. And there aren't very many teams that are in a better position to assess that than our team. And so it just -- and 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, and so it's sort of kind of in the netherworld, right? And so even if we were to consider keeping it and retenanting the operations -- 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 fact may be there. And sentiment has gotten a little bit more positive on skilled, and we continue to get more calls there about doing -- why aren't we doing more skilled deals, but we've always said that it's all about who our operators are. And so by getting back down to 55%, and all things being equal, if you did know other investment activity, once you trigger the Enlivant JV, you got a 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. So it just gives us a lot of play in that regard, and so 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.

--------------------------------------------------------------------------------

Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

All right. Just one more quick question. So in the contemplated sale of Senior Care Centers, is seller financing still on the table? Or is it structured as just a straight sale?

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [12]

--------------------------------------------------------------------------------

So 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 will be part of the deal, but it is still on the table.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [13]

--------------------------------------------------------------------------------

We also have a backup buyer that we know just in the event that something squarely should happen here.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question is from Tayo Okusanya with Jefferies.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [15]

--------------------------------------------------------------------------------

So 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 -- that sounds like a plan B. But kind of just curious how that could get executed should that scenario actually end up happening.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [16]

--------------------------------------------------------------------------------

It would definitely stretch it out probably another 90 days. So you'd still get it done. 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. Stretch it out 90 days would be my guess.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [17]

--------------------------------------------------------------------------------

By plus -- so sort of about an additional quarter or so if we were to provide a number between...

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [18]

--------------------------------------------------------------------------------

Yes, but remember, too, right now, we're looking for this to close relatively early after the first of the year, and so we're going to know like, we believe, before then if there's any issues here so we would get another process started before then, right? So it's just like...

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [19]

--------------------------------------------------------------------------------

Got you.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [20]

--------------------------------------------------------------------------------

Yes, you get what I'm saying.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [21]

--------------------------------------------------------------------------------

Yes, yes, yes. 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. So I'm just curious, are you expecting a dramatically worse outlook for your managed portfolio in 4Q versus 3Q?

--------------------------------------------------------------------------------

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [22]

--------------------------------------------------------------------------------

No, I think we -- I'll let Harold speak to the details on guidance. But I think, generally, what you're seeing is that the driver of 2018 results is going to be the Enlivant Joint Venture, right? And the first quarter results were significantly off because of flu. And so 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?

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [23]

--------------------------------------------------------------------------------

The only thing I would add to that, Tayo, is if you take -- if go back to second quarter -- or excuse me, first quarter when we put out our initial guidance, and 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. And secondarily, when we looked at our original guidance, we had, call it, an $0.08 range. And so 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 of 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. So you're seeing the combination of the first couple of months being below expectations and then the second half like seeing the first month still being slightly behind because of the growth expectations that were in that original guidance number. So we're -- once they reforecasted this quarter, 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 in a lower starting point, and therefore, you see the adjustment to guidance.

--------------------------------------------------------------------------------

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Got you. That makes sense. One more if you could indulge me. So I know it's early to kind of start talking about 2019 guidance, but when I kind of think about senior care, the asset sales happening, the rest of the Genesis sales happening, you might do something with Holiday, which may have some -- a little bit of diluted impact on '19, should we be thinking about '19 as an earnings growth number or no -- or earnings growth year or no? Will you kind of overlay on that your acquisition outlook?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Well, I think a couple of things. One -- and we will give guidance when we normally give it, which is usually in the latter half of January. And you're right in your comment on Holiday. It'll be pretty minimal, but we just need to make our final decisions on that. So 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. We've got -- this isn't a big number, but we have about another $100 million coming in on the development pipeline. And if we -- right now, based on forecasting, it looks like we would pull the trigger on Enlivant so that the end of 2019, early 2020 it's possible that we could do it earlier. That's approximately another $400 million. So we've got -- and obviously, that wouldn't impact the full year of 2019, Tayo, but at least on a run-rate basis, it would look -- it would start to look pretty good. So we've got about $0.5 billion that we can look forward to. It's more of a timing issue on that kind of thing, and 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. So it's just something interesting for us to think about and talk about internally. But it's really hard to say if -- what the actual investment environment is 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 products 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. But 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.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And our next question comes from the line of Rich Anderson with Mizuho Securities.

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [27]

--------------------------------------------------------------------------------

So 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?

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [28]

--------------------------------------------------------------------------------

Well, I think -- and I don't want to get into the legal stuff around them filing, whether they file or not. But I think, from our perspective, terminating the leases was a big part of preparing for whatever the 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.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [29]

--------------------------------------------------------------------------------

And that was a critical piece, Rich. I mean, obviously, you know we've done this a lot before, even before Sabra in other situations. So that's why that piece looks critical, and when they were really trying to make progress on bringing 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, but we didn't -- we never trusted that, that would happen. And so 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.

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [30]

--------------------------------------------------------------------------------

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? Because essentially, these probably should have been cut during that exercise unless you disagree with that statement.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [31]

--------------------------------------------------------------------------------

Yes -- no. Yes, we do disagree with it. So it wasn't part of it because when we looked at -- what we look at during any sort of rent relief or deferral for anybody, one of the first things we look at are what you guys doing, 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. And their senior management team consisted of one person, and then they brought a COO in, but they still didn't have CEO in. And we had met with them several times early on after the merger was completed, and 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 when we -- and it was the same list of things that we had, Rich, same things that I would do if I was an operator. So it really was very logical and made complete sense. And so 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. But as 2018 continued to go by, we didn't see any of that occurring, none of it, none of it. And then when they had made the final executive change there, it actually showed more destabilization as a result of that instead of increased stabilization as a result of that. So because -- 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? And so that was really our assessment. So we held back for that reason. Does that make sense?

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [32]

--------------------------------------------------------------------------------

Yes, that's fine. And then lastly, if I could just switch to your 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 that 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?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [33]

--------------------------------------------------------------------------------

Yes -- 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 2 other partners. They were able -- and combined with the tort reform that occurred in Kentucky, they were then able to go in and assess what their liability should truly be. And so they did that, and they reset those liabilities at a level that reflects the changing environment and all the settlements they went through, and that's what the pickup was that ran through our year-to-date basis in that portfolio. So that was it, but it was really just sort of nothing new had to happen. They just needed the time to do that assessment and make sure they got it right.

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [34]

--------------------------------------------------------------------------------

And one thing I want to add to that for clarity purposes. The rent increase -- I'm sorry the coverage increase that you see there is not a onetime pickup. That's a big dumping of -- or reduction of reserves. It's the overinflated 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. So I think the point is that the 1.47 coverage is meant to be truly indicative of the coverage they actually had during out period, not with some onetime catch-up.

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [35]

--------------------------------------------------------------------------------

So you're signing off on Signature, moving on?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [36]

--------------------------------------------------------------------------------

Yes, we signed off on Signature the day we and Omega and their response...

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [37]

--------------------------------------------------------------------------------

No, I know. I'm saying it tongue in cheek. But I mean, it's -- that one is resolved.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [38]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [39]

--------------------------------------------------------------------------------

Full stop?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [40]

--------------------------------------------------------------------------------

Yes, full stop. That's the second time in 24 hours [we've used] that.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question is from Daniel Bernstein with Capital One.

--------------------------------------------------------------------------------

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

It sounds like you have a plan B back up 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?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [43]

--------------------------------------------------------------------------------

Yes. So that's actually a really good question. So -- and so this is theoretical. But obviously, we've discussed it all here because when you go into any sort of work on a restructuring, you need to have several plans, obviously. So these facilities are going to have new operators and then -- probably under any circumstance. And so we see it as highly unlikely that even with a buyer or the buyers, there's going to be one operator that takes the whole portfolio on. There'll be 2, 3, 4, something like that. We -- and the operators that are being talked to by our buyer are operators that we think really highly of. And so if it fell through A and B, the situation that we'd be in, we have a portfolio that would then comprise of just probably 3 operators, just to pick a number. So then we'd reduce our 10% NOI exposure to 3 different operators with about 3% NOI exposure. So 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 to 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 really -- we never ran a process. If we ran a process, they probably -- the broker would probably break the portfolio up and sell it in pieces similar to what we did with Genesis. So we were able to identify buyers that really wanted to pick the whole thing up. So 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 1 or 2 operators and sell the others." So 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 and do we want to excise patients for that or go ahead and sell it anyway and get down to that close to 50% to -- on skilled and kind of take it from there. Does that makes sense?

--------------------------------------------------------------------------------

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Yes, no, that does and actually sounds like plan C, D and E maybe too.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [45]

--------------------------------------------------------------------------------

Yes, well, I mean, you need to do that so 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 would be the case regardless of the outcome.

--------------------------------------------------------------------------------

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Okay. Assuming you sell the assets, RIDEA becomes effectively kind of not the largest tenant but your largest portion of individual, I guess, operator and manager with Enlivant. What's kind of your propensity at this point given where we are in the cycle, construction and demographics, to add more RIDEA? And how much would you want to do that? And in particular, kind of thinking that in terms of Holiday as well, would you go up to 20% RIDEA or 30% RIDEA if you could given your pipeline Senior Housing? Maybe Holiday needs to be converted to RIDEA. So I'm just trying to understand your -- the limits of that particular book.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [47]

--------------------------------------------------------------------------------

So we're going to be there as soon as they pull the trigger for Enlivant anyway, right? And you will be incrementally higher with Holiday. So you're going to be 25-ish plus to begin with. And in terms of the cycle, because the bulk 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. So it's always different when you go into that situation than if it was if they acquired a stabilized portfolio. So that was one of the things that was really attractive to us about the Enlivant and TPG deal. And they're performing. They're showing us that they can get where they think they can go. And the rate increases that they were able to implement in the environment that we're in and do it 3 months ahead of January 1 because they were supposed to be for 2019, I think, says a lot about the quality of the products they developed and the markets that they're in. So now, that aside, in terms of future deals, I think we all see a trend in Senior Housing towards RIDEA against triple-net lease. We're going to have to -- as we look at those deals, we're going to 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. So it could be early 2021. Maybe it's a little bit sooner than that but call it the next 2 years, for sure. We expect to see it sooner than that in skilled just because of the health issue related 85-year olds and 90-year olds. We'll see a bit of that move into Skilled Nursing, I think, for us. So it's going to be very situation specific, and we're going to have a real comfort level that there's upside in terms of shop growth in any deal that we do relative to the cycle at that point in time in the markets that they're in because one of the things, I think, that we are mindful of is once absorption occurs, say over the next couple of years, and 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 penciled, and -- but once absorption happens, the question is, have the traditional lenders learned their lesson? And are they going to 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. Or...

--------------------------------------------------------------------------------

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Do they ever?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [49]

--------------------------------------------------------------------------------

It is -- right. If everybody's going to have really short [run rates], then in 2021, there's going to be a whole lot of building again, and you'll have a window for shop growth, right, because by the time that stuff gets built and you lease up and all that, we're probably looking at 2024. So you've got a window there, but 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.

--------------------------------------------------------------------------------

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Okay. And 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 or just situational?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [51]

--------------------------------------------------------------------------------

Yes, we are indifferent. It's sort of just 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 and almost by definition it's a B product, in that, market it's an A product. So yes. So 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. So we do we look at all those things and -- but yes, we're indifferent.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

And our next -- (Operator Instructions) Our next question comes from the line of John Kim with BMO Capital Markets.

--------------------------------------------------------------------------------

John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [53]

--------------------------------------------------------------------------------

On the senior care sale, how achievable is the earn-out? Anything you can share as far as the metrics you need to get to hit it? And is it all or nothing?

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [54]

--------------------------------------------------------------------------------

It is not all or nothing. And look, it will depend. It will require the portfolio to perform at a higher level than it's performing at today. But keep in mind that, that portfolio's performance has declined since we completed the CCP merger. So 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.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [55]

--------------------------------------------------------------------------------

And it's not -- and 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, but we clearly see the possibility there.

--------------------------------------------------------------------------------

John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [56]

--------------------------------------------------------------------------------

Okay. And Rick, you mentioned a potential option B as far as the buyer and other options as well. Do you think it will be at a similar price? Or would pricing be compromised?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [57]

--------------------------------------------------------------------------------

No, I think pricing would be a little bit lower with a buyer B. I mean, by definition you're in a different position, right? And look, we may wait and see if it's -- if they're -- once they're retenanted 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 maybe to sell them with better operators in place and get a better price rather than just go to buyer B. So 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.

--------------------------------------------------------------------------------

John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [58]

--------------------------------------------------------------------------------

It sounds like on Holiday, you may be going the RIDEA route. But Rick, you mentioned that you thought one of the issues with them was the high escalators and their leases. Can you just describe what the escalators are in your portfolio with them? And is that something that you could just address as far as resetting those escalators?

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [59]

--------------------------------------------------------------------------------

Yes. So our escalator is at 3.5%.

--------------------------------------------------------------------------------

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [60]

--------------------------------------------------------------------------------

Yes, I think they are now. I mean...

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [61]

--------------------------------------------------------------------------------

Yes, but they were 4%. So -- and look, all of us that did those Holiday deals back 4 or 5 years ago did the same thing, right? We all paid a handsome price, in exchange, got pretty heavy escalators that ticked down after several years but are still sort of above market. And so when I talk, really, with admiration about the Holiday team, this is a team that's managed through those escalators completely change their business model without any downturn in performance. But because those escalators even after ticking down are so high, it just sort of chokes them. And I don't -- we don't think just bringing the escalators down is going to be enough for them, right? And certainly, that isn't the case when you look at the NHI release, the NHI released today. So if it was as simple as just bringing the escalators down to something more reasonable, I think that we would absolutely entertain that, but 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 with agenda we have -- we can't get clarity on.

--------------------------------------------------------------------------------

John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [62]

--------------------------------------------------------------------------------

Right, okay. And then a final, I guess, a few-part question on your pipeline, acquisition pipeline $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? And on if it is triple net or part of it is, can you just describe some of the general terms you're underwriting at far as the coverage lease yields and escalators?

--------------------------------------------------------------------------------

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [63]

--------------------------------------------------------------------------------

Well, 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. So 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. And that nature of the sellers into the market are -- is resulting in most deals being structured as management contracts with operators. Either the operators that are currently in place in with those assets or being brought in by buyers, it's just a different nature of a transaction. We have continued to execute leases on many of our -- many of deals that we've undertaken, and we've obviously talked about those that we have structured as management agreements.

--------------------------------------------------------------------------------

John P. Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [64]

--------------------------------------------------------------------------------

And how much of the pipeline do you expect to close on either this year or by the first quarter?

--------------------------------------------------------------------------------

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [65]

--------------------------------------------------------------------------------

It would be for hard for me to speculate.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [66]

--------------------------------------------------------------------------------

Not much. I mean, look, the pipeline is always a moving target. Between last quarter when it was really a light at $200 million and today, it actually hit $900 million at one point. So you're always doing work, and you're always doing underwriting. When we talk about our pipeline, just so it's clear, we don't include 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 to do underwriting analysis and then potentially make offers on them. So we're doing work on all of 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 can't get there. So I think with the existing pipeline, it's 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 it's probably -- you can handicap it. It's not possible in this environment.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

And our next question comes from the line of Juan Sanabria with Bank of America.

--------------------------------------------------------------------------------

Unidentified Analyst, [68]

--------------------------------------------------------------------------------

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.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [69]

--------------------------------------------------------------------------------

Yes, we've talked about Avamere before. I don't why you're raising the questions. I mean, 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 the portfolio that's problematic, and that's 6 facilities in Washington State because the Medicaid rates are just horrible in that state. They're looking at closing one facility. The rates in Washington are so bad that a number of the operators are going to go -- either have gone under or in the process of going under. Because Avamere is just 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 from these facilities that don't make it. So we think it's a good strategy, and there's never been a conversation about a rent cut. So -- and we've talked about this on the past couple of earnings calls with Avamere as well, and so you may have never been on those calls. But...

--------------------------------------------------------------------------------

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [70]

--------------------------------------------------------------------------------

Yes, nothing's changed. So there shouldn't be a question there.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

I'm not showing of any further questions. I'll now turn the call back over to Rick Matros with closing remarks.

--------------------------------------------------------------------------------

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [72]

--------------------------------------------------------------------------------

Thanks for joining us today. We appreciate it. There's some complexity to the quarter. 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 see a lot of you guys in NAREIT and look forward to seeing you there. Thanks very much. Have a good day and vote. Bye.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.