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Edited Transcript of SBRA earnings conference call or presentation 24-Feb-20 6:00pm GMT

Q4 2019 Sabra Health Care REIT Inc Earnings Call

IRVINE Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Monday, February 24, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harold W. Andrews

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

* 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

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Conference Call Participants

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* Chad Christopher Vanacore

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

* Connor Serge Siversky

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Daniel Marc Bernstein

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

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Omotayo Tejamude Okusanya

Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Fourth Quarter 2019 Earnings Conference Call. This call is being recorded.

I would now like to turn the call over to your host, Mr. Michael Costa, EVP, Finance. Please go ahead, Mr. Costa.

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

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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 tenants' financial performance; our expectations regarding our financing plans; and our expectations regarding our future financial position and results of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2019, that was filed with the SEC this morning as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC this morning.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances 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 result included on the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-K, earnings release and supplement can also be accessed in the Investors section of our website.

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

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

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Thanks, Mike. Thanks, everybody, for joining us this morning and this afternoon. This morning's song is "See You Again." It's performed by Wiz Khalifa and Charlie Puth at the Lakers game honoring Kobe and Gianna and the other families that were lost in the helicopter crash. And now the Celebration Of Life for all those families is happening at Staples Center, and may their memories be a blessing.

Now I'm on to Sabra. 2019 was the year that we finished our repositioning of the portfolio and did all the things that we did to improve the balance sheet which, going into 2020, is a pretty -- in pretty pristine condition, and Harold will talk more about that. Our story and our focus for 2020 is really simple. And that's getting back to growth and -- based on a very strong platform that we have in place now and the best balance sheet that we've ever had. Activity is starting to pick up. We completed just under $38 million in the fourth quarter of investments and a little bit over $82 million so far -- through the first quarter, rather, of 2020. The average yield of the deals was 7.4%.

We're also getting close to closing a $150 million investment in Senior Housing investment, and that deal will initially be earnings neutral but will be accretive later in the year. Our focus on investments going forward is going to be on high-yield investing, specifically skilled nursing, behavioral and addiction. Incorporated in this year's guidance is our commitment to maintaining the dividend with expected coverage improvement beginning in the latter part of the year.

Moving on to the deal environment. Essentially it's the same as it's been in terms of competition. We're seeing some Senior Housing opportunities at better cap rates. We're starting to see Skilled Nursing volume tick up and that's ticking up at historically stable levels. Our current acquisition pipeline is just under $1 billion, still primarily Senior Housing, but we're seeing more skilled deals and we're also starting to see some behavioral and addiction investment opportunities as well. And we now have relationships with 2 operators in the addiction space. So we don't expect the growth to be rapid there, but it's getting off to a nice start for us.

Moving on to Enlivant. We're not pursuing a new JV. We've determined that it's best to work with TPG to have a simpler solution. The JV solutions that we were looking at were going to add some real complications to our story. And I think as you all know, we've been talking about it for a while. We're trying to keep our story as uncomplicated as possible. We had enough noise with everything that we went through with the repositioning.

Our option to exercise doesn't end until December 31 of this year. We believe we're in a good spot to give it more time as the Enlivant performance continues to strengthen. We would anticipate exercising the option when we see occupancy gains that provide a clear path to accretion from any incremental investment. Until that occurs, we're happy with our current level of investment in the portfolio and don't feel compelled to make any changes. Possible outcome may be a partial takeout with an extended tail in the option for the remainder, minimizing the equity required, again working with TPG. So we'll maintain the current partnerships.

Now moving on to PDPM. I know everybody is curious about the results for PDPM. We're not at a point where we could sort of publish a snapshot, but I would say through the fourth quarter of 2019, we're seeing rate growth net of the market basket at mid-single-digit pretty much across the board. A little bit more, a little bit less with some, but coming in around mid-single digit.

Once we have some more data points, we will be able to provide a snapshot of how that impacts coverage. Hopefully, we'll be able to do that on our first quarter call early in May. One of the things that our operators are still working through that will have a big impact on the improved coverage is the cost reduction

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therapy.

So as we -- as they make more progress on stabilizing those cost reductions, we'll have a much better sense and have a combination of a rate increase and cost reductions go to improving coverage. But we're really pleased with the improvements that we've been seeing relative to PDPM. And there's really been no disruption with any of our operators as they transition to the new system.

Moving now to operations. Our triple -- our triple-net same-store skilled business, occupancy, skilled mix and EBITDA and coverage were stable. For Senior Housing, occupancy and EBITDA and coverage were stable as well. Our top 10 is generally strong. The 3 operators who we have always kept the closest eye on have been Avamere, Signature Health and North American.

Avamere was down sequentially, but they bottomed out in the third quarter. They showed nice improvement in the fourth quarter, that's continuing into the first quarter. So they're actually trending up a little bit more quickly and sooner than we anticipated.

North American Healthcare continues to improve, improve sequentially, is also improving first quarter. Signature Health trended up in the fourth quarter as well and is continuing in the early first quarter. So we feel really good about where our operators are from a coverage perspective, and all else for that matter.

Our same-store shop. Talya will provide all the specific details, but we showed improvement across the board in occupancy margin and REVPOR. The unconsolidated JV with Enlivant and TPG showed occupancy and REVPOR up with a solid margin. And with that, I'll turn it over to Harold.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [4]

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Actually to Talya first.

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

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Talya, I'm sorry, to Talya, yes.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [6]

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Thanks, Rick. I'll provide an update on our managed portfolio. In the fourth quarter of 2019, approximately 17.3% of Sabra's annualized cash NOI was generated by our Managed Senior Housing portfolio. Approximately 57% of that relates to communities that are managed by Enlivant and 31% relates to our Holiday managed communities. The balance includes our Canadian portfolio and 4 assisted living and memory care communities in the U.S.

On a same-store year-over-year basis, the managed portfolio, which excludes the Holiday assets, showed favorable results in the fourth quarter compared with the fourth quarter of 2018. Revenues increased by 2.5%, cash net operating income increased by 2.9% and revenue per occupied room, REVPOR, excluding the nonstabilized assets, was up 4.4%. The year-over-year results aren't as dramatic as they were last quarter when we were comparing third quarter 2019 results to a quarter in 2018 that was recovering from the impact of flu. The impact of the current flu season was already felt in December, resulting in higher move-outs. The context -- this context makes our managed portfolio results seem even more solid, continuing the trend of improving rate, revenue and cash net operating income across the portfolio.

Although the Senior Housing industry continues to feel the pressure of increased supply and higher labor costs, our portfolio of communities that largely targets the middle market in secondary cities in the U.S. and Canada is not as dramatically impacted by these factors because of location, ongoing capital projects to maintain the appeal of the communities to both residents and employees, and the importance of our communities as an important employer in their market.

Before we get into the details of this quarter's results, I will state the obvious. One quarter doesn't make a trend. As in every operating business, there is volatility. So we focus on the direction of results over time while understanding the sources of volatility such as seasonality, flu, changes in the competitive landscape, et cetera. And I encourage you to look at the sequential quarterly results that we include in our supplemental information, where you can begin to track trends in our managed portfolio over time.

Now back to the details. The Enlivant Joint Venture portfolio, 170 properties of which Sabra owns 49%, showed steady improvement. Average occupancy for the quarter was 82.2%, 0.8% higher than the previous quarter and 0.1% higher on a stabilized same-store year-over-year basis.

REVPOR was $4,418, 2.6% higher on a quarter-over-quarter basis and 4.1% higher on a stabilized same-store year-over-year basis. This is the highest REVPOR that we have seen since we made the investment.

Same-store cash net operating income for the quarter rose 1.4% year-over-year and was flat sequentially. Cash NOI margin was 25.7%, in line with the prior year's result. In 2019, the Enlivant Joint Venture's cash NOI was 7% higher than in 2018, driven by top line growth and expense control.

Continuing on to the results of a wholly owned managed portfolio. Sabra's wholly owned Enlivant portfolio of 11 communities continued to drive rates. However, the early start of the flu season impacted occupancy, and therefore margins. Occupancy at 2 of our 11 communities was particularly hard-hit by move-outs related to flu beginning in late November and into early January. Both communities are in strong markets and occupancy is already bouncing back. But in a portfolio of 11 properties, events at 2 communities affect the results of the group.

Fourth quarter occupancy was 89.5%, 0.7% higher than the prior quarter and lower on a year-over-year basis by 3.1% as a result of a spike in deaths and move-outs to higher acuity settings. While January occupancy came in at 86.9% because of the flu, Enlivant is seeing a strong increase in move-ins and is optimistic about momentum on occupancy gains.

REVPOR in the fourth quarter rose to $5,810, a 5.1% increase over the prior quarter and 6.8% over the prior year. Fourth quarter cash NOI was up 10.4% on a sequential basis because of rate increases that went into effect on October 1. And cash NOI was up 2.9% in calendar year 2019 compared with 2018. This outcome is a direct result of occupancy losses being offset by rate increases.

Holiday. We transitioned our Holiday communities from a net lease to managed portfolio at the start of the second quarter of 2019, so we do not yet have year-over-year same-store results to report. In addition, we transitioned our independent living community in Frankenmuth, Michigan, to Holiday in the fourth quarter this year. So I will focus on same-store quarter-over-quarter results excluding the Frankenmuth asset. Portfolio occupancy was 87.8% in the quarter, 0.8% lower than in the prior quarter, and REVPOR was $2,486, in line with the prior quarter. Cash net operating income fell 6.3% sequentially because the third quarter included a favorable adjustment associated with the deferral of referral fees. Excluding this adjustment, cash NOI increased 2.9% sequentially.

Sienna Senior Living manages 8 retirement homes in Ontario and British Columbia for Sabra. In the fourth quarter of 2019, the 8 properties managed by Sienna delivered 88.3% occupancy, which is slightly down from 89.8% in the prior quarter. REVPOR was $2,268, which was flat to the prior quarter and 3.3% higher on a same-store year-over-year basis. Fourth quarter cash net operating income was down 2.7% on a year-over-year same-store basis, but increased by 2.8% in calendar year 2019 compared to calendar year 2018 on a same-store basis, with margins remaining virtually the same in full year 2019 compared with 2018. Sienna continued to maintain occupancy in a narrow band and tight expense controls, resulting in consistent operating results for a stabilized portfolio.

With that, I will now turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

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

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Thanks, Talya. Thanks, everybody, for joining the call today. This quarter, we achieved our objective of lowering our leverage levels to comfortably below our stated target of 5.5x. This effort throughout 2019 resulted in many credit metric improvements compared to December 31, 2018, as follows: Our debt-to-EBITDA -- adjusted EBITDA is down from 6.12x to 5.38x and excluding the JV debt, we're now at 4.89x. Interest coverage up from 4.18x to 5.28x. Fixed-charge coverage up from 4.05x to 5.08x. And debt to asset value down from 43% to 36%. We also lowered our cost of permanent debt, which excludes the revolver, from 4.28% at the end of 2018 to 3.79% at the end of 2019, a 49 basis point improvement generating annual interest savings of approximately $12 million.

During the fourth quarter, we issued 11.5 million shares of common stock under our ATM program, generating net proceeds of $248.4 million. These proceeds were primarily used to repay all outstanding balances under our credit facility and $145 million of our term loans maturing in 2022.

In addition to the improvement of our credit metrics, the full paydown of our revolving credit facility, along with our unrestricted cash and cash equivalents, provides us with over $1 billion of available liquidity, getting us well positioned to take advantage of investment opportunities. Supplementing that liquidity is the $340 million we have available on our ATM stock offering program. The ATM will, among other potential uses, allow us to match fund acquisitions and ensure that we maintain our leverage below the 5.5x long-term target as we grow.

And now for a few comments about the financial performance for the quarter. For the 3 months ended December 31, 2019, we recorded revenues and NOI of $155.8 million and $134.8 million, respectively, compared to $149.8 million and $130.4 million for the third quarter of 2019, increases of 4% and 3.4%, respectively. These increases are driven in part by the acquisitions during the third and fourth quarters and $0.9 million of noncash lease termination income related to the transition of 1 Senior Housing community to our Senior Housing Managed portfolio during the fourth quarter.

AFFO for the quarter was in line with our expectations at $91 million, and on a normalized basis was $95.6 million or $0.48 per share. FFO was normalized primarily to exclude a $5.6 million loss on extinguishment of debt recognized in connection with the redemption of our 5.375% senior unsecured notes that were due in 2023. This compares to normalized FFO of $90.1 million or $0.47 per share for the third quarter of 2019.

AFFO, which excludes from FFO merger and acquisition costs and certain noncash revenues and expenses, was also in line with our expectations at $89.6 million and on a normalized basis was $93.2 million or $0.47 per share. AFFO was normalized primarily to exclude a $3.6 million cash portion of loss on extinguishment of debt recognized in connection with the senior note redemption. This compares to normalized AFFO of $89.7 million or $0.47 per share in the third quarter of 2019.

For the quarter, we recorded net income attributable to common stockholders of $39.7 million or $0.20 per share.

G&A costs for the quarter totaled $5.7 million, including $1 million of stock-based compensation expense. Our recurring cash G&A costs of $4.7 million were 3.5% of NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G&A costs to average approximately $6.5 million.

Our interest expense for the quarter totaled $27.4 million compared to $29.3 million in the third quarter of 2019. This quarter-over-quarter reduction was driven by a combination of lower total debt of $193.1 million and a lower overall borrowing cost resulting from our refinancing activities. Interest expense included $2.2 million and $2.5 million of noncash interest for the fourth and third quarters of 2019, respectively.

During the quarter, we recognized a $2.7 million impairment of real estate, primarily related to one skilled nursing facility expected to be sold in 2020. We did not recognize any revenues from this asset during the fourth quarter.

Other income of $1.7 million for the quarter relates to a settlement from a prior operator. This amount is excluded from normalized FFO and normalized AFFO. During the -- and subsequent to the fourth quarter of 2019, we completed real estate acquisitions of $118.1 million with a weighted average cash yield of 7.4%. Those acquisitions consisted of 5 senior housing communities, including 3 from our development pipeline and $114.3 million, 1 addiction treatment center for $3.8 million. We have committed to invest an additional $18.5 million to complete the construction project for the addiction treatment center, which is expected to be completed in early 2021.

During the fourth quarter of 2019, we completed the sale of 8 skilled nursing/transitional care facilities for aggregate sales proceeds of $7.3 million. These sales were anticipated in our portfolio repositioning plans and further strengthened the portfolio. During the fourth quarter, we recorded revenues from these sold facilities totaling less than $100,000.

We were in compliance with all of our debt covenants as of December 31, 2019. In addition to the metrics I mentioned previously, our unencumbered asset value to unsecured debt increased from 218% to 275% year-over-year and secured debt to asset value remains at 2%.

Finally, getting to our guidance. We achieved our per-share earnings guidance range from 2020 as follows: Net income, $0.81 to $0.91. FFO of $1.69 to $1.79. Normalized FFO, $1.71 to $1.81. AFFO and normalized AFFO, $1.70 to $1.80. We expect our 2020 Senior Housing Managed portfolio's same-store NOI to grow as follows: Wholly owned 4%, unconsolidated joint venture 3%.

With the portfolio repositioning and delevering of the balance sheet we've accomplished in 2019, we're very excited about the prospects of returning to growth. We have included in our guidance expected investments in 2019 totaling $159 million and a weighted average initial cash yield of 7.4%. $82 million of this has already been completed. We did not include any speculative investment activities in our guidance. Furthermore, maintaining debt to adjusted EBITDA at or below 5.5x is built into our performance expectations and will be a critical consideration in our investing activities going forward.

Our guidance includes expected dispositions and loan repayments of $111 million, which consists primarily of the 3 remaining Genesis assets requiring HUD approval and a few remaining asset sales identified in 2019 that are yet to close. We expect both of these to close by the end of the second quarter at a yield of approximately 6.6%.

With the refinancing activities we accomplished in 2019 and the absence of any meaningful debt maturities over the next several years, we do not expect any significant financing activities except as may be related to funding acquisitions. Related to the assumed acquisitions included in our guidance, and our commitment to maintain our leverage below 5.5x, we do include the issuance of $120 million to $140 million of equity on the ATM during the year.

It should also be noted that we have a few leases maturing in 2020, having total annualized revenues aggregating to $12.9 million. Many of these are expected to be renewed and no reduction of rents, and several mature in the fourth quarter of 2020, limiting the impact on 2020 to less than $0.01 per share. The impact of these maturities has been included in our guidance.

One final comment on our 2020 guidance. We expect first quarter 2020 normalized FFO and normalized AFFO to be in the ranges of $0.43 to $0.45 and $0.42 to $0.44, respectively. This decline from Q4 2019 is driven primarily by an increase in the weighted average shares outstanding quarter-over-quarter along with higher G&A costs and timing of collections from our cash basis tenants.

Finally, on February 4, 2020, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on February 28 to common stockholders of record as of February 14.

And with that, I'll turn it back to Rick Matros.

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

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We'll open our Q&A now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nick Yucilo (sic) [Nick Yulico] of Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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First of all, I just wanted to clarify, Rick, when you were talking about PDPM, saying it's a little bit early, but -- to give a snapshot, but I think you said the rate growth net of the market basket was mid-single digit. So does that mean that's inclusive of the benefit of the market basket increase?

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

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No, it excludes the market basket.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Ah. Okay.

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

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It's the pure rate growth from PDPM.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. All right. So I guess, I mean, at this point, granted it's still a little bit early, but any kind of feel for how you think CMS may be viewing the benefit from PDPM? And whether -- at some point it's going to have to address that in terms of some sort of clawback. Any sense that, that would happen in the April notice that goes out?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [7]

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Yes, a couple of comments. One, we all knew that it wasn't going to be revenue-neutral, but it's not egregious the way RUG IV was. RUG IV was double digit. And we're not seeing that, and I don't think we will see that. You may see it in an operator here or there, but certainly not on a continued basis. I actually don't expect a clawback. I think CMS, despite comments, expected some positive growth. And my guess is what they'll do is, at some point in time, do an adjustment go forward -- going forward. So for example, October '21, maybe instead of getting a market basket, we get an update. So my guess is it's more of a go-forward thing, which would be fine. And anything else -- I'll be surprised if anything happens this year, simply because they've already been in the process of writing the initial rules, and there just hasn't been enough data out there. So I just think statistically, technically it's going to be tough to do anything that would be effective October of 2020.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [8]

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For fiscal year '21.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [9]

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But you never know, but that's my -- my best guess is that it wouldn't -- it's not going to be a clawback because its growth isn't going to be unreasonable. But they want to make some adjustment on a go-forward basis, which obviously would be a lot more palatable. The other thing I would note, RUG IV -- it wasn't just that the revenue growth was so extremely high, but it also took place during the Great Recession. So that sort of compounded kind of the issues at the time. So we'll see.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. That's helpful. Just second question is on Enlivant. And I know you said you're not pursuing a new JV. I think you said there's a partial takeout possible. I think that it was just in January that the option opened for TPG to do something with selling their interest. I mean can you just tell us kind of where you're at on the discussions? And if you think at some point this year it will get resolved as to whether you're going to own more of Enlivant or not?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [11]

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Yes. So the only discussions that took place were that both parties, meaning Sabra and TPG, are interested in working together. TPG has been a great partner and has shown some flexibility relative to considering just a partial takeout. So we don't have to write that much of a check and extending the tail on the option. So really, all we're really doing right now is, as you saw in the numbers, we saw some nice occupancy lift going in the fourth quarter, and they've done a good job sort of managing through the flu. So [we] managing that isn't going to take a significant effort. So for us, we want to see a path to accretion here. And at this point, TPG seems to be rolling with us on that. And we'll just sort of take it from there. So as I said in the opening comments, we're pretty comfortable with where we are now. We are really pleased with the additional traction we're seeing with Enlivant. And I would expect something to happen. We're just not -- we're not in a rush.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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And can you just follow up -- can you just remind us how it works in terms of, if you are going to increase your stake in the joint venture, how the valuation of that would work? Is it just a totally new valuation that happens or is it somehow dependent on the price that was originally paid?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [13]

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It's based on the price that was originally paid. So nothing's changed there. There was a -- it's a floor plus 5%.

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Operator [14]

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Our next question comes from Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [15]

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Maybe just following up on that in terms of Enlivant. You obviously have put out your expectations for this year and understand wanting to acquire it accretively. So based off your current expectations, when does that inflection point occur, either from occupancy or an NOI standpoint, to where you think you could actually do it accretively?

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

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We can't pick a time. It's the latter part of the year, probably closer to sometime in the fourth quarter.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [17]

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Okay. That's helpful. And then, Rick, your opening comments, just getting back to growth, obviously you just gave 2020 guidance. So the impact of the share issuance and deleveraging is being felt right now. Is that more of a 2021 comment? Would you currently expect to have earnings per share growth next year?

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

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Yes. I think, yes, in fairness, anything -- everything that we get done this year, particularly the time it takes to close deals, are going to have a much bigger impact on '21 than they will have on '20. So I would expect that the impact on 2020 will be incremental, but will -- but it will help us clearly move into growth mode for '21. And that's why I commented also earlier that we expect dividend coverage to improve in the latter part of the year, when the impact of some of the investments will start taking hold.

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Operator [19]

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Our next question comes from Chad Vanacore of Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [20]

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So I was just thinking about the owned assets in shop. [Your now] holiday occupancy dropped pretty significantly from first half to the second half, about a couple of hundred basis points. So how should we expect that to trend in 2020?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [21]

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They've usually held fairly steady on these assets. So there's some volatility, but I think it will revert to the mean. These are stable -- it's a portfolio of stabilized assets. The only asset that's not stabilized is the one that we transitioned to them that was being run by a different operator, and that's the asset I mentioned in Michigan.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [22]

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Okay. And I'm sorry, Talya, how does that affect the overall?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [23]

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The Frankenmuth asset? I don't think it's included in our numbers because it's not stabilized.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [24]

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Okay. Then just thinking about M&A, you've got $110 million about dispositions that are in there. What about the $150 million acquisitions? Is that skilled nursing that you alluded to? And then what kind of cap rate should we expect?

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

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That's a Senior Housing investment, and we're in the midst of finalizing negotiations on the PSA. So we're not prepared to talk about any specifics relative to the deal.

As I said, it'll be -- initially, it will be earnings-neutral, but expected to be accretive in the latter part of the year.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [26]

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Okay. And then, Rick, you had mentioned about the -- shifting more toward the -- to the skilled nursing side of things, how should we be thinking about that?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [27]

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Well, I think there's been an assumption that we haven't been interested in skilled nursing, which isn't the case. So I just want to emphasize that we are interested in looking at more high-yield investments, that we've done, we think, a really nice job since the CCP merger, rebalancing the portfolio and have plenty of room to grow in the skilled nursing arena without becoming sort of a skilled nursing REIT and still having balance in the portfolio between Skilled Nursing, Senior Housing and the behavioral hospitals and other specialty hospitals.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [28]

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All right. And then just one more. Just the equity issuance part, you said we should expect $120 million to $140 million. Wouldn't that be delevering at this point? And then what would -- what should we expect in terms of, if you end up closing that Enlivant JV second half of the year?

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

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Yes. It's not additional delevering. It's just using the ATM to match fund. So that will use some combination of debt and equity as we do investments this year so that we maintain our leverage at or below our target. And similarly with Enlivant, if we were to exercise that option in part or otherwise, there'll be some combination of debt and equity used so that we maintain our target leverage. Everything is about maintaining the target leverage. So there's no need for us to issue equity just to delever the balance sheet any further. We're just maintaining it where it is.

And using the ATM -- by the way, using the ATM not just to match fund sort of routine investments, which is pretty standard for all of them. We would expect to use the same mechanism to do any -- for anything that we might do on the Enlivant portfolio this year.

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Operator [30]

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Our next question comes from Rich Anderson of SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [31]

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So just back to the JV. Is there something you saw that you observed with the portfolio that caused you to sort of hit the pause a little bit here on making a new -- or an incremental investment in JV? Was it some sort of fundamental thing? Or is it simply thinking about staying simple, put it that way, and not complicating things more? I'm just curious, what do you do if you don't get that occupancy gain that you feel like you need to move ahead and do something incremental? Are you willing to just sit at 49% forever?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [32]

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We're comfortable where we are. Obviously, TPG may feel differently about it. So then they may want to take additional actions once the option is up, if they can find a buyer that can pay that handsome a price. So -- but hitting -- so that's kind of where that's at. But we're comfortable with where we are. In terms of hitting the pause button, it wasn't really so much hitting the pause button, but if you think about, you've got Sabra, Enlivant, you've got TPG owning the operating platform. Now you're going to bring a new JV partner in. You've got issues with aligned incentives. You've got a much more complicated structure, and we really mean what we were talking about all last year. We want to have a more simplified story that's easier for everybody to digest. We have a really good partner in TPG. And so their willingness to work with us is greatly appreciated on our part. And then the other sort of specific thing from the timing perspective was we saw and made some changes relative to their marketing strategy, which resulted in stronger occupancy in the fourth quarter. But we also knew that we were going into what everybody was calling the worst flu season that we've ever had, even worse than 2 years ago, although it looks like it's more short-lived than it was 2 years ago. So to pull the trigger knowing that you're going to have an occupancy decline just didn't make any sense to us. We just want to more prudent than that. So there's no reason for us not to just wait longer until they got through the flu season. And as I said in my opening comments, they did a really nice job managing through that, as our other operators have. So yes, that's it. Does that answer your question?

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [33]

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Okay. Yes, fine. And then moving to PDPM. I have a maybe abstract type of question or something. But everyone recalls RUGs IV and what happened when we -- maybe we got -- everyone got a little fat, dumb and happy, not expecting the reaction that they got from CMS. I'm curious, do you think perhaps the industry will behave more rationally and maybe not try to milk every single dollar and allow this to have some legs, as opposed to maybe going too far too fast and opening up the conversation for a clawback scenario or something like that? Is it possible we can actually have good behavior this time so that doesn't become part of the story?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [34]

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Yes. So a couple of comments, Rich. One, RUG IV was just not well designed. This is a much better designed system. And look, operators approach things pretty simply. They follow the money. And it was such an easy thing to do the way RUG IV was designed. So this -- number one, this has a much better design. But to your other point, yes, I think there's definitely behavioral changes this time. Operators remember every slight that's ever happened in the history of their careers and every cut that's happened in every state in the history of their careers. And so they're really mindful of that. So I'll give you a specific example. Under PDPM, you're allowed to run up to 25% of rehab revenues in [the] concurrent and group therapy. And 26%, by the way, before they took away concurrent group therapy, was industry average. So the cap is very -- is basically where industry average always was. But the industry, and I'll talk about our operators, but we're hearing it elsewhere as well, are very mindful of the fact that CMS is going to look for red flags, and one red flag would be going from 0 concurrent therapy and group therapy on September 30 to 25% kind of overnight when you've been building everything under RUG IV at ultra-high and very high. So we're not seeing that with our operators.

But our operators are telling us. In fact, even when they were talking about transitioning and working on [all the] training programs and coming and doing presentations to us, they all made a point of saying we're not going to go there. We're just not going to grab that much. We're going to be much more prudent. And even -- and look, if you think about that level of discipline, to me it's even more admirable given the headwinds the industry has had, that they're not going to do that. So we're seeing a much slower and smaller gravitation and percentage of concurrent and group therapy than might have been anticipated, given the opportunity to go to 25%. And I expect that we're going to see that pretty much across the board. You're always going to have operators here and there and if they're doing something that's egregious, then let those specific operators pay for it. But I think, yes, I think there have been some lessons learned. And people say investors have short memories. Operators have really, really long memories. So we've been really pleased with the approach they've taken.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [35]

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Okay. Harold, on the leverage side, I know you're inclined to sort of stay in this range, in the mid-5s debt to EBITDA, but wasn't there a call for a long-term number below 5? Or am I forgetting something?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [36]

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No. You're actually not forgetting, Rich. Below 5, and it was always characterized as a long-term goal we would like to achieve. We obviously recognize that being under 5.5x puts us, first of all, in a good spot relative to our other investment-grade peers, and secondarily, puts us in a good standing with the rating agencies. So that's kind of job one. Job two, really, is to manage our earnings growth over time. And so I would say, as we see our cost of capital improve in the future, then that will give us more of an ability to further delever the balance sheet as we see fit, and it would be really nice to get it down to closer to 5 or below 5x. But obviously, we're also very mindful of our need to grow earnings. And so we're very comfortable at that 5.5x or slightly below that for the near term, and then we'll be opportunistic in the future to get it down further.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [37]

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Okay. Last one for me. You guys report DARM coverage. What it would be and what's the difference between that and EBITDAR coverage? And why don't you report it on a dollar basis, just out of curiosity?

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

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Yes. So we always have, so 3 issues. First and foremost, is that some of us who have reported on DAR use an imputed 5% management fee, while others use 4%. And we -- despite the fact that everybody should be aware of that, we were continually dinged, including by rating agencies, for having lower coverage without taking into consideration the difference in management fees. And frankly, we're just kind of over it.

Secondly, we always got negative feedback about the fixed -- about [the bang in] the fixed charge coverage. And by having everybody on the EBITDARM basis now, it's all apples-to-apples, whether or not there's a corporate guarantee. So that should make it a lot more digestible and simple for everybody to understand. And then thirdly, we're not the only ones. So we're not setting a precedent.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [39]

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Is the difference like 1 or 10 basis points or something like that, 20 basis points?

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

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I think for Senior Housing, it's about 20 basis points. For Skilled Nursing, it's probably a little bit more like 35 basis points.

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Operator [41]

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Our next question comes from John Kim of BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [42]

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Rick, in your opening remarks, you mentioned that Avamere, the coverage declined sequentially, but at the same time you saw an improvement in the fourth quarter. Can you just tie those 2 statements together?

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

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Yes, sure. So you might recall, going back to the previous earnings calls, where we talked about Avamere going through a complete change in IT systems, specific to their ancillary businesses, and some of that was really critical to them because they've got a home health business. And home health has a new reimbursement system as well called PDGM, which is similar to PDPM, although for the home health industry, it's widely viewed as a negative because there's a reduction in revenue. So that just created a real disruption. So most of the downturn in their coverage was a function of their ancillary businesses and the impact of that. So we saw them get through that and implement all their new systems. And that, plus the combination of improvement from PDPM, is what contributes to improvement in coverage and the upward trends that we saw in the fourth quarter. In fact, on Friday we had a full detailed operational call with them on the fourth quarter and their early first quarter results. And we're seeing that trend improve in the first quarter as well. The other comment I'll make about Avamere, because I think everybody is aware that the issue really with Avamere on an ongoing basis has been Washington State, which is just -- which has horrible Medicaid rates. 3 more facilities closed recently. So out of about 120 facilities I think there were, total in the State of -- Washington State, there have now been 22 closures. So it looks a lot more positive that there will be a Medicaid rate increase this year, both a rebasing of existing rates and a rate increase for Washington State. So in addition to any improvements that Avamere is seeing from PDPM, they'll get a rate improvement. And again, whether or not it's what everybody wants remains to be seen, but [hope that] it'll be better than it is. So we should continue to see improvement with Avamere.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [44]

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Okay. So do you anticipate selling any assets out of the portfolio or restructuring the leases at all? Or you just think it's going to improve naturally as you mentioned?

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

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We're not restructuring leases. I think if there were no rate increase in Washington State, then we'd sit down with the Avamere team and see if there was anything else we wanted to do there, whether it was selling a facility, they might want to buy back the real estate, but we didn't see a need to rush into that. They're a strong company. And hopefully, now between PDPM and some level of rate increase from Medicaid in Washington State we'll be good. But there's never been any discussion about [rev our] leased.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [46]

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Okay. On the Enlivant transaction, is there anything that you are asked to give up on your end to get the option window increased from TPG?

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

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No.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [48]

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Can you talk about overall on triple net lease transactions or acquisitions in Senior Housing, how difficult it is to structure leases on a triple net basis today? And what are you underwriting as far as coverage and annual escalators?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [49]

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It's Talya. Anything I would tell you would be entirely theoretical, because we hardly ever see an operator that wants to enter into a lease these days. I wouldn't be surprised if sometime in the not distant future the switch will flip and there will be greater interest in leases. But for now, there's almost -- I'd say there's somewhere around 0 interest in entering leases, which is why I can tell you what we would underwrite them as, but it's kind of not reality.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [50]

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Yes, that's fine. Last one for me is, do you have guidance as far as what you think recurring CapEx will be in 2020?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [51]

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Yes. It's actually on the press release, and I want to look it up here. Non-yielding CapEx $21 million, and that's both between our owned managed portfolio and a little bit for the triple-net portfolio, but $21 million for the year.

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Operator [52]

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Our next question comes from Steven Valiquette of Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [53]

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So you touched on this topic a little bit. But just given your comments around PDPM and timing of any CMS adjustments, which were definitely helpful. Just big picture, how much does PDPM impact your overall mindset and strategy for the next 12 to 24 months as to whether you want to be more of a net buyer or a net seller of SNF assets? Does this create a sense of urgency for you one way or the other? Or do you still just look at every SNF property case-by-case regardless of any sort of bigger picture strategy tied to PDPM?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [54]

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So a couple of things. In terms of dispositions, the dispositions were all in the context of the repositioning of the company. So that's basically done other than what's been announced. I mean there may be one here or one there, but it's -- but the programs are done. So for Skilled, we just think Skilled is in for a really nice run. And it isn't just PDPM, it's a combination of several factors. It's PDPM, it's the improvements in demographics which we're starting to see in the Skilled space, ahead of where we're seeing it in Senior Housing. We're not seeing it in Senior Housing yet. And then you're going to continue to have a decline in supply. And that decline in supply comes from both the closures that we're seeing in Washington, in Massachusetts, in Maine and in Wisconsin. And as people then -- current operators buy additional facilities, because most of the facilities in the country are quite old, they modernize them. And when they modernize them, they take beds out of service. So you may buy a 45-year-old 100-bed building and it's got some 3-bed wards, 3-bed wards just don't work with the customers. So you're going to take beds out of service, you're going to add more common space and your 100-bed building may be a 75-bed building.

And then thirdly, you've got a really high percentage of the space is still mom-and-pop. They're struggling already with the transition to PDPM. So there are going to be some buying opportunities there. But some of them also may just exist in markets that don't make sense. So you may see some closures there as well. So you've had, over the last 15-plus years, a pretty significant decline in the number of skilled beds in the country. It kind of leveled out a little bit over the past few years, but you're going to start seeing that decline again, and you're actually going to have access problems. So the combination of a better reimbursement system, improved demographics and declining supply sort of all converge at almost the same time, we think, to set up the skilled space for a really nice run going forward. There are projections out there that show the skilled space almost full by 2025. So our interest is, one, we've always liked the skilled space. We wanted to get some balance back on the portfolio after the CCP merger. And now we see the Skilled space really poised for a nice run.

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Operator [55]

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Our next question comes from Omotayo Okusanya of Mizuho.

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Omotayo Tejamude Okusanya, Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst [56]

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The $150 million senior housing investment that you were talking about earlier on, is there any reason why, one, you didn't include that in guidance? And then two, although it's going to be neutral to earnings when done, I mean you do expect it to be accretive further on. Can you talk about kind of what some of those drivers of accretion will be? And is it a triple net or a shop portfolio?

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

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So a couple of things. It's not in guidance because it's not done and nothing's done until it's done. And if we put it in guidance, it will probably fall apart. Just jinx -- you just sort of jinx yourself. So that's kind of that one. It's a shop portfolio, and we expect -- we're seeing some revenue growth there from an occupancy perspective, but there is inherent rate growth that's in that portfolio that we should see towards the end of the year as well. That rate growth will be the biggest driver.

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Omotayo Tejamude Okusanya, Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst [58]

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Got you. Okay. That's helpful. And then second of all, just from a regulatory perspective, I know we've had a lot of conversation about PDPM. But any thoughts around MFAR and kind of what's the latest with that? And what do you think may ultimately happen with that with CMS?

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

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Yes. So let's talk about it in 2 pieces: provider tax and then the UPL, IGT piece. So from a provider tax perspective, and this may get a little bit more to the reason you guys like, but it should answer all your questions. The whole issue about provider taxes is waiver language, and CMS feeling like there were some games played to provide waivers for certain operating classes within the provider tax environment. There were 20 states prior to 2002 that have provider tax in place. Those waivers are all clean, meaning there's no waiver language. It's about 27 states post 2002 that had different waiver language in it. Of those 27 states, 10 states will have to make some significant changes to clean up the language, none of which any of us think are insurmountable. And a lot of the waiver -- the most problematic waiver language has to do with CRCs being carved out of paying provider taxes. So we think provider taxes are going to be fine. And both with provider taxes, IGT and UPL there -- depending on the circumstances, there are 2 to 3 years to come into compliance. So we think there's plenty of time there. So from a -- so for example, from an underwriting perspective, when it comes to provider tax, we're not going to look at underwriting any differently than we do today. We think all that's going to be fine.

It's a little bit of a different story with UPL and IGT. And there, from a legal perspective, the trade association, the lobbyists think that the industry is in good shape to defend itself on IGT and UPL. From a political perspective, the skilled industry isn't standing just on its own there, it affects the hospital industry. So you'll see joint efforts between the Skilled Trade Association and the American Hospital Association. All that said, you never know what's going to happen in court. There are 3 states, in particular, that have the most vulnerability relative to that. It's Utah, Texas and Indiana. And now in Indiana, 90% of the industry is on IGT. So it would be pretty heavy hit to do something there, which is another reason I think many don't expect it to happen. But I think when it comes to those 3 states, from an underwriting perspective, we would seriously take that into consideration if we were looking at any skilled assets in those 3 states.

We have no exposure in Texas and in Utah. We have -- we're in good shape in Texas. We got our exposure down to 5.7% on the skilled side. It's bigger when you look at our whole exposure because the rest is senior housing. Our operators there are in really good shape. We have one operator with 5 facilities that may struggle with that a little bit. But it's only 5 facilities. And then in Indiana we have 7 facilities, skilled facilities in Indiana. But that's with our operator, Magnolia. We've got a corporate guarantee. They own most of the real estate in that portfolio. So we have no concerns about them sort of weathering the storm in Indiana. So from a Sabra perspective, we're in good shape with our current portfolio, but we would definitely look at those 3 states very, very conservatively from an underwriting perspective.

And you've also got the same 2- to 3-year window for things to get resolved under the -- with IGT and UPL as you do with provider tax.

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Operator [60]

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(Operator Instructions) Our next question comes from Daniel Bernstein of Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [61]

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I'm going to take over the SNF pipeline a little bit. Have you seen any change in the sellers or buyers post PDPM? And would you say most of the pipeline you're looking at is either that mom-and-pops or owner operator? Or is it more institutional JVs or somebody else trying to sell larger portfolios?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [62]

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So let's see -- so I haven't -- we haven't really seen any change since PDPM came into effect, as it relates to an impact on our SNF pipeline of transactions. Most of the transactions that we have seen that have been of scale in the SNF sector have been institutional sellers that either put together a portfolio to sell or are disposing of their bottom quintile, if you will, their problem children. So those are the 2 baskets of portfolios. We are seeing occasional one-off transactions. I think that they are -- and they are non-institutional in nature in terms of the seller and often even the process, and they're still quite competitive. Most of the ones we've seen have been in California. There hasn't been significant deal flow. We expected PDPM to trigger fairly -- within a fairly small window, some sort of increased activity. And I will say, we have not yet seen it. I still believe that we will see it. A lot of the smaller transactions and non-institutional transactions are really generational turnover. They are the -- typically family-owned companies or businesses and the children aren't interested, and either there's a specific event such as a death or an illness, or they're simply retirement and they sell because there's nothing else to do. So those are the things we're seeing.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [63]

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It really sounds like the same environment as a quarter or 2 ago.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [64]

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I think it's -- we're seeing more of those, but we're -- we haven't seen a flood.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [65]

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Okay. And then on Senior Housing, I don't know if I missed it in commentary or other questions, but did you break down the shop growth or guidance for 2020 based on, say, Enlivant versus Holiday and other operators in the portfolio? Just trying to understand how the different portfolios within shop may perform this year versus last year.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [66]

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The way we broke it down, Dan, was just between our wholly owned and in our JV. So you can think about it, the wholly owned is primarily driven by Enlivant. And I don't think that even in our numbers there will be Holiday in that, because Holiday is not part of our same store. So it's really driven by the Enlivant Holiday and then our Canadian portfolio is the vast majority of the owned piece.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [67]

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Am I right to read it that it's effectively then a slowdown in shop growth versus '19? And if so, is that from the -- from your comments on the flu season? Just trying to understand how you're thinking about '20 versus '19 a little bit better.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [68]

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Yes. I mean I think I would say this, that comparing '20 to '19, we had some -- 7% growth on the JV side. We're forecasting slightly below that, probably more in line with just what you would consider a normal nice growth rate. I think in 2019, we had a very good comp compared to 2018 relative to the flu season in 2018. And that's a big part of why it was outsized in 2019 over 2018. So I think you're going to see it kind of normalize. But I think the point being when other operators are expecting declining NOI and declining occupancy, we feel really good about the fact that the occupancy is stable and we should see some nice rate growth, and hopefully some occupancy growth during the year as well.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [69]

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Okay, okay. Didn't want to imply that it's poor numbers, just -- it just [fill rate] slowed down.

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

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Yes.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [71]

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And one last quick question here. What is the dividend policy in terms of, where would you be comfortable? I don't know if you use FFO or FAD payout ratio, but where is -- what's the comfort level point where you would consider raising the dividend?

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

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Getting it back into the 80s, it's on a normalized AFFO basis.

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Operator [73]

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Our next question comes from Connor Siversky of Berenberg.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [74]

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One quick one on Medicare Advantage. Are you seeing any continued pressures on length of stay pertaining to skilled nursing? Or how do you see that developing in the future?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [75]

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Yes. No, we're not. We actually -- Medicare Advantage penetration in the skilled nursing is a pretty small number relative to Medicare Advantage in the over 65-plus population, because all the marketing has been to the healthy elderly. So it's -- from a census perspective, it's sort of mid-to-high single digit, and it's been pretty flat for quite a while, and it's projected to be pretty flat going forward. It's really the next generation of seniors that will enter skilled nursing where you're going to see a much bigger percentage of Medicare Advantage, because they are the ones -- it's the younger elderly that's signing up for it, so -- now in terms of length of stay, there's always going to be pressure there. However, under PDPM, we expect length of stay to be a lot more stable and potentially improve, because you're moving from a system that -- under RUG IV, the system totally incentivized operators to go after short-term rehab patients. So by definition, the system created headwinds for the industry because you're admitting only patients that make it easier for insurers, and case managers generally, to put pressure on length of stay. Under PDPM, while you're still going to be providing services to short-term rehab patients, the shift is really to providing a lot more services to more complex, medically needy patients. And by definition, they have a longer length of stay. It's a lot harder to put pressure on someone who's got complex medical conditions or comorbidities than it is to put pressure on someone who's come in after a knee surgery or a hip surgery.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [76]

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All right. That's very helpful. And then a little bit more on the dividend. I think you mentioned in the prepared remarks that you're going to see some improvement towards the second half of the year. Could you just provide a little more color on what makes up that calculus, and maybe what factors are going to contribute to improved coverage?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [77]

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We have -- primarily, it's going to be from the investment activities that we have this year, which, as I noted earlier, is going to have a much bigger impact on '21, but will start to impact us in the latter part of the year as we start getting deals closed over the next number of months. So that's really the driver. Everything for us is about -- and everybody knows it, everything about us is getting back to growth.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [78]

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And I think you'll also see contribution from our managed portfolio in the latter -- in the fourth quarter of next year because, as you recall, we always see a nice rate increase on the Enlivant portfolio. There will be those rate increases every October 1. And so that's going to also help improve the [dividend] coverage towards the latter part of the year.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [79]

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Got you. And then one final one for me. Somewhat sensationalist articles seemed to come across last week saying that the sale/leaseback system is becoming less attractive for SNF operators. I mean can you provide any color as to why that may or may not be the case?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [80]

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Yes, we haven't seen anything like that. And to do anything other than a triple net on a skilled nursing operator is not something that we would be interested in, and I don't think anyone will be interested. So whether there are skilled nursing facilities out there that are interested, they're not going to find very many takers. The only situation where we've seen anybody do a JV with a skilled nursing operator is with one of the non-traded private REITs. And I think we all knew at that time if any of us that were public had announced that same deal, we would have gotten clobbered.

So look, there's -- to take on that NOI risk and, more than that, it's really a liability risk because we're landlords to our skilled nursing properties. That's it. There's a clear delineation between real estate ownership and the operations. Once you start getting into JVs on the skilled nursing side, then you've opened up the whole liability piece. And I don't think any of us are really up for doing that, because unlike Senior Housing where you can more comfortably do these kinds of things, the level of liability is much greater on the skilled nursing side simply because it's a federal database. And the plaintiffs' attorneys just troll that database all the time. It's all they do, is they just troll the database and file on everything they feel like filing. So that just doesn't exist in the other spaces.

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Operator [81]

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Our next question comes from Lukas Hartwich of Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [82]

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Just a couple of quick ones. I think you said this earlier, but I just wanted to clarify. The tenant-level coverage on Page, I think it's, 7 of your supplemental, that excludes corporate guarantees now?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [83]

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No. The change that we made was for clarification. In the past, when we published our coverage for the portfolio, there were certain tenants that were excluded from that coverage and those were tenants that had corporate guarantee. And now under the new reporting, reporting EBITDARM coverage, there is no tenants that are excluded from those coverage numbers published. Everything is included in our portfolio other than non-stabilized assets in the numbers in coverage going forward. So we've simplified it dramatically and made it all-encompassing.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [84]

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Okay. And so the tenant disclosure on Page 7 still includes the corporate level cash flow in the coverage?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [85]

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It does not. It is the property-level coverage.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [86]

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Got it. Okay. And then just a quick follow-up on the 3 legacy senior care centers assets that you were going to sell last year. I'm just curious, have those closed yet? And I'm curious what the proceeds were ultimately there?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [87]

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Some of those -- I think one of those has closed this year and the other 2 are closed facilities, and so the proceeds are going to be very minimal, a few million bucks. But 1 of the 3 has closed, and I believe 2 of the 3 are yet to be closed with, call it, less than $5 million -- around $5 million in proceeds.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [88]

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Yes, we're just selling the real estate on those. They were the ones that got destroyed with the hurricane.

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Operator [89]

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I'm showing no further questions at this time. I'd like to turn the call back over to Rick Matros for any closing remarks.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [90]

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Thanks, everybody, for their time today, and I'm sure we'll be seeing a lot of you. We've got 4 conferences coming up, including NIC next week. So -- and we're heading out tomorrow to the East Coast. So as always, we're available to everybody for follow-up and look forward to seeing you at the conferences. Thanks very much, and have a great day.

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Operator [91]

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Thank you. Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.