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Edited Transcript of SBRA earnings conference call or presentation 25-Feb-19 6:00pm GMT

Q4 2018 Sabra Health Care REIT Inc Earnings Call

IRVINE Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Monday, February 25, 2019 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

* Daniel Marc Bernstein

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

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* John Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - 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 Fourth Quarter 2018 Earnings Conference Call. This call is being recorded.

I would now like to turn over the call to Michael Costa, Executive Vice President of 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 expectations regarding our tenants and operators and our expectations regarding our future financial position and results of operations.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2018, that was filed with the SEC this morning, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC this morning.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, 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 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, and thanks for joining us, everybody, today. I'll start off by making a couple of comments about guidance. Harold will get into the details. The guidance primarily reflects everything that we've been talking about and doing over the recent past. And the primary difference between all the dispositions and how that affects guidance is the assumption that we're going to be delevering the balance sheet, which, look, when you reset the table -- and it's been, for us, it's been an 18-month period of transformation of the company that was necessary given our exposure to Genesis and all their issues at the time.

So as we sit here today, we're a few weeks away from concluding the repositioning of the portfolio. So we feel really good about that, and our focus for the remainder of the year is to keep the noise behind us, have some quiet time and get some deals done and delever the balance sheet. So we did put an assumption in the guidance that we'll be delevering the balance sheet over the course of the year. And again, as you reset the table, it's best to do that and get everything in there so it benefits the company from a long-term perspective.

With that, let me move on to our acquisition pipeline and the competitive environment. Our acquisition pipeline has increased pretty dramatically since the end of the year, where it stood at about $200 million. Today, it's about $1 billion. There's a lot of Senior Housing in there, primarily Senior Housing, but we're starting to see more Skilled deals, and that's where we expect to get some things done this year. And so we expect to see that continue to increase.

In terms of the environment, we don't see anything different from a pricing perspective. On the Senior Housing side, the private equity groups are still keeping pricing at levels that we think are beyond reasonable. Skilled cap rates appear to be what they've been for a long time, so that is relatively stable, and we don't expect that to change, either.

In terms of our operational results, our operational results were pretty stable for the quarter. Our Senior Housing occupancy and coverage was flat sequentially. Our Skilled occupancy was flat sequentially. Our Skilled mix was up by 50 basis points. Our Skilled EBITDA rent coverage was slightly down.

That's really accounted for by one primary tenant, North American. North American, this past summer, had an unforeseen change in management, with their founder and CEO leaving suddenly, and he was very much at the center of things in the company. There have been a number of management changes, all from within. Since then, they've settled down, and we expect them to rebound. We have no concerns about that tenant. They have a good operating team. We don't expect any changes in rent going forward. Looking at January, on a stand-alone basis, they've bounced back to about 1.25x. So we expect them to continue to improve over the course of 2019.

Our managed portfolio did very well, and Talya will provide the details on that, and that's attributable to primarily 2 of our operating partners, Enlivant and Sienna. And again, Talya will get into the detail on that.

So with that, Talya, let me turn it over to you.

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

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Thank you, Rick. I will provide some comments about the operating results and statistics for our managed portfolio. As of December 31, 2018, Sabra had over $1 billion invested in managed Senior Housing communities. Approximately 83% of that capital is invested in assets that are managed by Enlivant, 14% is invested in retirement homes in 3 provinces in Canada, and the balance represents 3 assisted living and memory care communities in the United States.

So first, I will discuss Enlivant's fourth quarter results. Sabra's wholly-owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia and Delaware, continue to perform very well and outperform forecasts. We have seen a steady improvement over the course of 2018, with great growth and continued solid occupancy, driving greater profitability.

Average occupancy declined slightly to 92.6%, compared with 95.6% in the preceding quarter, after multiple sequential quarters of occupancy growth. This decline was offset by more than 6% revenue growth.

Revenue per occupied unit rose to $5,441, nearly 10% higher than the preceding quarter, which reflects not only the implementation of the 5.5% annual rate increase that was placed in the fourth quarter, but also higher effective rates throughout the communities.

Cash NOI margin was 32.1%, [2.5%] higher than the prior quarter and much higher than the 23% margin in the fourth quarter of 2017.

The Enlivant joint venture portfolio, 172 properties located in 18 states across the United States, of which Sabra owns 49%, finished 2018 with strong results after being impacted by the flu last winter. Average occupancy for the quarter was 81.7%, in line with the previous quarter of 81.8%. And revenue per occupied unit was $4,230, a 5.3% increase over the previous quarter, again reflecting that the annual rate increase in the fourth quarter did not come at the expense of occupancy.

Cash NOI margin was 25.5%, a 1.8% increase over the prior quarter. We have agreed that Enlivant will pursue the strategic disposition of certain communities owned by the joint venture where the combination of market, location and physical plant limit the objectives that we, TPG and Enlivant share. In the meantime, we continue to see acquisition opportunities for Enlivant in various markets and are working together to pursue those jointly.

At the end of the fourth quarter, Sabra owned 8 retirement homes and one assisted living and memory care community in Canada. Sabra sold a ninth community, an assisted living property in Ontario during the fourth quarter, and it is excluded from these statistics.

Sienna Senior Living manages the 8 retirement homes in Ontario and British Columbia. And in the third quarter of -- and in the fourth quarter, I apologize, of 2018, the 8 properties managed by Sienna had 92.4% occupancy, which was 2 percentage points higher than the preceding quarter, and 38.7% cash net operating income margin compared to 35.7% in the preceding quarter, an increase of 3 percentage points.

Sienna continues to focus on revenue growth in the portfolio, which is a direct impact on NOI margin at these occupancy levels. There are 4 remaining managed properties in Sabra's portfolio: an assisted living and memory care community in Calgary, operated by BayBridge, and 3 assisted living and memory care buildings in Wisconsin and Minnesota, operated by Pathway Senior Living, 2 of which are in lease-up.

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

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

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Thanks, Talya, and thanks, everybody, for joining the call today. For the 3 months ended December 31, 2018, we recorded revenues and NOI of $139.2 million and $136.6 million, respectively, compared to $166.5 million and $160.5 million for the fourth quarter of 2017. These decreases to revenues and NOI are primarily due to the impact of dispositions in 2018; the $19 million Genesis rent cut, effective January 1, 2018; and lost rental revenues from Senior Care Centers during the fourth quarter of 2018.

Revenues and NOI also declined compared to the third quarter of 2018 by $12.6 million and $11.3 million, respectively. These declines are primarily attributed to a decrease in recognized cash rents related to Senior Care Centers of $12.5 million, which was partially offset by strong revenue and cash NOI growth in our managed portfolio, including our share of the Enlivant joint venture, of $2.3 million and $1.6 million, respectively.

FFO for the quarter was $48.2 million, and on a normalized basis was $90.2 million, or $0.50 per share. FFO was normalized to exclude $28.8 million primarily related to the write-off of a straight line of rents receivable associated with the Holiday lease, which is expected to be transitioned to a managed portfolio in 2019, and a $2.9 million loss on extinguishment of debt primarily associated with the prepayment of a $98.5 million secured bridge-to-HUD loan associated with the Senior Care portfolio to be sold in 2019.

Additional normalizing items during the quarter include: $5.2 million related to the acceleration of above-market lease intangible amortization associated with assets transitioned to new operators during the quarter; $4.3 million of nonmanaged property operating expenses consisting primarily of property taxes paid on behalf of Senior Care Centers; and $0.3 million of CCP merger and transition costs.

AFFO, which excludes from FFO merger and acquisition costs and certain noncash revenues and expenses, was $77.3 million, and on a normalized basis was $83.8 million, or $0.47 per share, normalized for items consistent with the FFO normalizing items.

Compared to the third quarter of 2018, normalized FFO and normalized AFFO per share declined by $0.10 and $0.08, respectively. These declines are primarily the result of the unpaid and unrecorded contractual rent owed by Senior Care Centers during the fourth quarter.

For the quarter, we recorded a net loss attributable to common stockholders of $19.4 million, which, among the items eliminated from normalized FFO of $42 million, includes a loss on sale of real estate of $14.2 million.

G&A costs for the quarter totaled $11.3 million and included the following: $4.3 million of nonmanaged property operating expenses incurred in connection with the transition of properties to new operators; $1.4 million of stock-based compensation expense; $0.3 million of CCP-related transition costs; and $0.3 million of nonrecurring legal expenses. Recurring cash G&A costs of $5.2 million were 3.8% of NOI for the quarter, in line with the prior quarter.

Our interest expense for the quarter totaled $37.2 million, compared to $32.2 million in the fourth quarter of 2017. Included in interest expense is $2.6 million of noncash interest expense, compared to $2.5 million in the fourth quarter of 2017.

As of December 31, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant joint venture debt, was 4.28%. Borrowings under the unsecured revolving credit facility bore interest at 3.75% at December 31, 2018, an increase of 24 basis points over the third quarter of 2018.

We sold 15 Skilled Nursing facilities, 2 Senior Housing facilities and one Senior Housing - Managed facility during the fourth quarter of 2018 for gross proceeds of $91.6 million, bringing our total aggregate sales in 2018 to 58 assets for total gross proceeds of $382.6 million.

During the quarter, we made investments totaling $39.2 million, with a weighted average initial cash yield of 7.4%, including $26.3 million related to one Senior Housing community from our proprietary development pipeline with a net cash yield of 7.47%. These investments were funded with available cash of $18 million and $21.2 million of funds held by exchange accommodation titleholders.

As of December 31, 2018, we had total liquidity of $426 million, comprised of currently available funds under our revolving credit facility of $376 million and cash and cash equivalents of $50 million.

We were in compliance with all of our debt covenants as of December 31, 2018, and continue to maintain a strong balance sheet with the following credit metrics: net debt to an adjusted EBITDA, 5.66x; net debt to adjusted EBITDA including unconsolidated joint venture debt of 6.12x; interest coverage of 4.14x; fixed charge coverage, 3.7x; total debt to asset value, 49%; secured debt to asset value, 7%; and unencumbered asset value to unsecured debt of 222%.

On February 5, 2019, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. The dividend will be paid on February 28, 2019, to common stockholders of record as of the close of business on February 15, 2019.

We also issued our 2019 per share earnings guidance range, which are as follows: net income, $0.24 to $0.32; FFO, $2.02 to $2.10; normalized FFO, $1.86 to $1.94; AFFO, $2 to $2.08; and normalized AFFO, $1.81 to $1.89.

Critical to understanding our expectations for 2019 is understanding our commitment to delevering the balance sheet to under 5.5x inclusive of our share of Enlivant joint venture debt and under 5x exclusive of our share of Enlivant joint venture debt. Our leverage currently stands at 6.12x inclusive of the JV debt, which is higher than historical levels, in part due to the loss of EBITDA from our Senior Care portfolio of $20.9 million.

We expect to accomplish this goal through the further asset sales of 2019, along with the issuance of equity through the equity ATM Program we established this morning. Our 2019 guidance reflects dilution from the issuance of equity under that ATM Program of $0.05 to $0.08 per share.

Additional assumptions in guidance include the following: the previously announced sale of 28 facilities currently operated by Senior Care Centers is completed April 1, 2019, for $282.5 million; collection of $5.7 million of post-petition rent from Senior Care Centers pursuant to a settlement agreement entered into Senior Care Centers on February 15, 2019; total impairment and transition costs for Senior Care Centers of $69.3 million, all being excluded from normalized FFO and normalized AFFO; termination of our Holiday retirement master lease and concurrent entry into a management agreement with Holiday effective April 1, 2019, triggering the receipt of $57.2 million of cash consideration on April 1, 2019, in connection with the lease termination -- this termination fee is excluded from normalized FFO and normalized AFFO; same-store cash NOI improvement in our wholly owned Senior Housing - Managed portfolio of 3% to 6%, and in our Enlivant joint venture of 6% to 12%.

We did not include any speculative acquisition activity in 2019, but do include $142 million of acquisitions, primarily from our proprietary pipeline, closing primarily during the fourth quarter of 2019. These acquisitions are expected to provide an initial annual cash yield of 7.6%.

Under further assumptions, other asset dispositions totaling $300 million, resulting in a loss on sale of approximately $85 million. Such dispositions currently have associated annualized cash NOI of $18.6 million. These dispositions include the remaining 3 Genesis assets, but the vast majority are comprised of legacy Care Capital facilities that we identified for sale as part of the portfolio repositioning, and from a purchase option held by an operator, which were discussed in prior quarters.

Finally, I'll provide a quick update on the Genesis asset sales. We are near completion of these sales, with only 3 facilities remaining to be sold. During the quarter, we sold 15 assets for total gross proceeds of $81 million. The remaining 3 are still in the HUD approval process, which was delayed due to the government shutdown earlier this year. As a result, we expect those sales to close in the second quarter.

Upon completion of these sales, we expect residual rents to total $10.4 million per year for 4.28 years after each sale closing. Ultimately, we expect to have total continuing cash rents from Genesis, including residual rents generating from sold assets, of approximately $20.8 million, or 4% of our current annualized cash NOI.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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Rick, you gave North American coverage into January in your prepared remarks, but can you just elaborate on why the CEO left, since he was such a big part of why you bought that portfolio in late 2017?

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

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Yes, so a couple of things. One, I actually can't elaborate, it's personal. So I'd prefer to keep it that way. But certainly, it was unexpected. But when we bought the portfolio, we also saw a really strong bench and a really strong operating team, and the fact that given they had to sort of regroup and were -- they were able to promote from within in terms of the new CEO, I think, shows that. And look, it just threw them off their game a bit. We see them rebounding, and it was actually a nice tick-up in January. So we don't foresee any issues with that. If I could share more, Jon, I would, but it's just too personal.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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Yes -- no, that's fair enough. But what about, I mean, the rest of the team, is it largely in place too? Or is there kind of a whole replacement of kind of the C-suite there?

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

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No, everybody else is in place.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6]

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Okay. Okay. And then looking at the $300 million of dispositions and loan repayments, in addition to Senior Care Centers, it looks like it's about a 6.62% cap rate on the expected proceeds there in the cash NOI, but more like a sub-5 on the gross book value. I guess, what's the composition of that $385 million gross book value in terms of owned assets and loans? And when were those investments made?

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

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So this is Harold. Basically, about 2/3 of those assets being sold, as I commented on the call, were from Care Capital legacy acquisitions. So 2/3 of it's that. About 1/3 of it, or I should say about 25%, are related to just kind of Sabra historical legacy assets that were bought going back probably, for the most part, 3 or 4 years. And then 11% of that number is -- are the Genesis assets.

So -- and the yield is really as strong as it is, to a large extent, because of the -- a handful of those assets have no operations in them at all. These are operations that were shut down early on when we made the Care Capital acquisition or rents have been reduced. So it is primarily Skilled Nursing assets and stuff that went back to the Care Capital acquisition.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8]

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Okay, that's helpful. And then earlier, you did mention guidance, the earnings guidance, and it does include dilution from equity raises. Can we expect you to kind of issue around the current $19 share price? How do you think about using that throughout the year, the ATM?

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

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I think we'll wait a little while. We've had a lot of noise around the stock, just like we saw in the third quarter when we issued the revised guidance, and it doesn't really matter how much you talk about it until you put numbers out. There's always a reaction. So we should be able to bounce back, given the discount that we're trading at.

And look, we think the 2 things that kind of have impacted us is all the noise we've had, which has been ongoing for quite some time but absolutely necessary from our perspective, to get the company out from under how Genesis was growing itself and the issues that it created for itself as a result of that. So we're almost done. We're weeks away. So that will be behind us, and people can expect a lot more predictability and more of a quiet kind of tone around the company.

And then the leverage was the other piece, and I think, from our perspective, getting that leverage down and having some quiet time after we finish the Senior Care Center sales on April 1 should help us rebound. If you look at us just from a pure valuation perspective, it's still pretty exceptionally cheap, and we've got a very strong balance sheet going forward and a lot of liquidity in the stock, good ratings from the agencies and a much better group of operators than we had 18 months ago, and no single operator that's going to be large enough to affect the narrative of the company.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [10]

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Got it. Okay. That's helpful. And then just one more quick one. The leases that are expiring next year in 2020, what's in that bucket in terms of operator? And what's the facility level coverage on those leases, if you can provide them.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [11]

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Yes, I'll get that. I'll get that to you offline. I don't have all those details with me right here, but we did adjust the way we're disclosing -- just so you know -- the lease maturities, and we're now doing it on a net basis. So you saw that number come down a fair amount this quarter. A lot of those assets that are, I will say this, a lot of those assets that are maturing in 2020 are part of the assets that are being sold this year. And so a big chunk of that is already anticipated going away and won't require any retenanting. But I can get you some more details on that offline.

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Operator [12]

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And our next question comes from Chad Vanacore with Stifel.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [13]

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So just -- I want to go back to North American. That coverage dipped significantly from last quarter, like from 1.25 to 1.09. Can we get some more details on what's happening outside the management change, what's happening operationally to create that drag? Plus, they're located in California and Washington. Washington is a tough environment. Maybe you can give us a split of NOI in Washington versus California, and then how have those facilities performed?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [14]

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Yes, so there isn't much of a difference. Their Washington facility has actually performed pretty well. The drop was -- the drop looked deep because they're underwritten coverage. We report on a -- when we do an acquisition, we report. We underwrote them after a period of time and then that starts tailing off. So that's really what accounted for the drop.

They didn't have that big a drop; if you look at like the last 6 months, it's been a more steady decline once the CEO left. So I'd say the decline started in the summer, and we started seeing some things to rectify it towards the end of the year and started seeing some real improvement in January. But no real difference between California and Washington.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [15]

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Yes, and I think it's all -- I think it's primarily expense-related as well. And their occupancy and their rates are very strong, they continue to be strong. So there is just a little bit of the distraction, I think, around expense management.

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

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Yes, which was one of the reasons they rebounded in January, because if your issue's on the expense side and not on the revenue side, that's a lot easier to fix. They just needed to get some new systems and new controls in place, and the new CEO needed some time to get settled in and address all that.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [17]

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All right. And I mean, would those expenses be more labor-related to, let's say, some temp labor usage?

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

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No. It's really all over the map, supply costs, food, supplies, stuff that's actually -- just it's blocking and tackling, really. I think when you've got someone that's been a founder and CEO and there's a sudden change, like sometimes people take their last (inaudible), and it may not be a good excuse, but it's reality. We've seen it happen all too often. So -- but they're getting it together, and we really don't have any concerns.

And Chad, you know us well enough. If we have concerns about an operator, we start raising the flag pretty early. So we did that with Senior Care, we did that with Genesis. We've done that with others. So we just don't see that here.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [19]

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Okay. Then just thinking about your uses of cash, you're willing to take some dilution in order to delever. So why is delevering a better use of cash than reinvestment in 2019?

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

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Well, we plan on doing both, but our leverage ticked up. It's higher. It's above the level that we'd like it to be. We certainly want to get a stable outlook again back from Fitch, and we expect that to happen. We think all that's important. We think potentially getting an upgrade from Moody's is important as well. So all of that stuff is actually cost of capital. So we think that's really important.

And our leverage may not be that much different than some of the larger guys who are also investment-grade, but we don't necessarily get compared to the larger guys. We get compared to the smaller guys who may not have as much going on from the growth perspective to keep their leverage low. And so we think it's going to accrue to the benefit of our shareholders if we focus on getting that leverage down, because it will improve the cost of capital of the company from our perspective, and that allows us to do more investment.

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Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [21]

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All right. And just one more question. This is on the Senior Housing - Managed portfolio. You put out some pretty good expectations for 2019. Rate in the quarter was up pretty significantly on a REVPOR basis. What kind of occupancy and rate assumptions are you making in 2019 for that portfolio?

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

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For the Enlivant wholly owned portfolio, if this is the one you're referring to, we've actually ticked it back down a little bit on the occupancy and held steady on the REVPOR. But we think it's a very strong portfolio. But for purposes of forecasts, we...

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

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Yes, and when you look at the numbers, inclusive of the joint venture, you do see a steady increase in occupancy over the course of 2019 because, remember, this was -- this portfolio was acquired -- underperforming when we entered into the joint venture, it's obviously well below where stabilized occupancy should be. So there's some tick up in occupancy over the course of 2019, but it's nothing that's -- it's nothing dramatic.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [24]

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And so think about it in a couple of different pieces, Chad. You've got the wholly owned portfolio, which has exceptionally high occupancy. So you just -- it's effectively almost fully occupied once you're over 90%. So you've got to temper your expectations there. As Harold said, the joint venture's different because there was the whole turnaround. So in the wholly owned, we'll be tempering our expectations in terms of what we're putting in guidance and the assumptions. And on the JV, which is still picking up speed, we've got some assumptions that are going to be off [on that same basis].

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Operator [25]

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Our next question comes from John Kim with BMO Capital.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [26]

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On the delevering, was the 5.5x really the focus of Fitch, or were the other rating agencies also focused at this level?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [27]

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No. It's -- it was the -- Fitch was the only rating agency that specifically laid out 5.5x as a target for us. We just had a report put out by S&P, who reaffirmed our ratings and put us on stable. And so they don't have the same level of concern that Fitch indicated.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [28]

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And how much equity do you need to raise this year to get to your 5.5x?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [29]

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Well, it's going to depend on the timing and the amount of dispositions we make. And so it's not going to be an immaterial amount, but it will be something that we'll do over the course of 2019, and we've got lots of time to get it done. So as Rick said, the timing is something we'd like to do sooner than later, but we're going to wait until -- to make sure the stock price makes some sense.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [30]

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And using the ATM, to match funds, it's the cheapest way to do that and it's the least disruptive way to do that. So again, as Harold said, we'll be patient with it and prudent about it.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [31]

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Okay. So nothing in your -- that you can share with us as far as guidance on weighted average shares, like, outstanding for the year?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [32]

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No, not at this time.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [33]

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Okay. On the Enlivant same-store guidance, there is a pretty wide range of 6% to 12%, and I know you have to meet your comps from the flu season. But what are the other variables do you see as far as hitting the low end and the high end of that guidance range?

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

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It's not so much that there are other variables, but you've got a portfolio that's been in turnaround mode. They've done a really good job with it. It had been a steady-state portfolio, it's a little bit easier to predict and you have a tighter range. We know it's going to be really healthy improvement, but it's really difficult to predict how much improvement they're going to have. So it's really because it's in turnaround mode that we have a wider range.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [35]

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And if you hit that 6% to 12% on that portfolio, when do you think you would exercise the option to acquire the remaining portion of it?

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

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Right now, it looks like first quarter of next year.

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Operator [37]

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Our next question is from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [38]

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First, appreciate the prepared comments on variability in operator coverage levels. Maybe from a bigger-picture perspective, could you maybe expand on how you get comfortable with your top operators, or any operator for that matter, given the headwinds that you see in Skilled Nursing?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [39]

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Well, first of all, the headwinds are dissipating. So that's an important point, and we look at a few things that are happening that are tangible. We should start seeing some benefit in the not-too-distant future to at least a slight demographic -- the impact of a slight demographic uptick. And when the occupancy of the industry is as low as it is, call it 82%, you've got really nowhere to hide. So that next patient that you get in, that's a pull-through, that's a complete pull-through to the bottom line. So you have a disproportionate positive impact on any additional patient at this point.

Secondly, you're going to see much more supply decline, and the industry, actually, over the next -- in the next several years is probably going to have access issues, which bodes well for the industry. It will be interesting to see how the government tries to deal with it. But you've got declining supply, an increasing demographic, and then you have PDPM happening October 1, and every single one of our operators has been preparing for it, feels really good about it. I believe it's the best Medicare reimbursement system that the industry has ever had. So I think the headwinds are dissipating.

Beyond that, though, look, where operators buy back -- and we spent a lot of time on our operators, we have a really strong asset management team that's out in the buildings on a regular basis, so seeing things for themselves, having business discussions on a regular basis. We have operational calls also on a regular basis with all of our operators. And we're always reviewing their regulatory reports and their operating trends and all that. So it's not too difficult from our perspective to get comfortable with an operator.

And that's why, with a couple of operators in the past, think relatively early on, we were very concerned, and we started sort of waving the red flag. But in the case of, say, North American, that's also one that we're comfortable that they will be able to rebound and be -- continue to be a good tenant for us going forward.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [40]

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Okay. Appreciate that. I guess, piggybacking on that, Texas has been one of those states that's been highlighted as one of a, I guess, a difficult operating environment. And not necessarily indicative of your portfolio, but we saw one of your peers report some negative news with one of its operators. So maybe could you talk about the environment in that state, since it's your largest, and also appreciating that you've taken steps to reduce exposure there. But just curious about your thoughts on how you're looking at the State of Texas.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [41]

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Yes, so there are 2 primary factors that create a difficult environment in Texas. One is it's one of the worst Medicaid rate systems in the country. And then secondly, unlike the rest of the country, where it's very difficult to build Skilled Nursing even in states that are -- that you can build it, because there's not a C.O.N., it very rarely pencils.

And so outside of Texas, you'll see facilities being built here and there by a company here or there. But you don't see real trends in Texas. There's oversupply in a lot of markets. The regulatory environment is much lighter in Texas than pretty much any other place in the country. And so as a result of that, there's been a lot of building in Texas.

So you combine the oversupply in a number of markets, similar to what we've seen in Senior Housing -- we just don't normally see that in Skilled Nursing -- with weak Medicaid rates, it's not a great combination. So I think that even if Senior Care Centers hadn't started completely blowing up the way it had, we would have looked to reduce our exposure. That just sort of made the decision easier. And so we'll be cutting our exposure in half.

Now the one potential silver lining in Texas is there's a lobbying effort ongoing right now to get a provider tax put in place, which would be voted on in the state legislature in November. And Sabra, as well as some of the other REITs and a number of the operators, are working with the American Health Care Association as well as the Texas Health Care Association on that lobbying effort. And I think we've made a strong case, and we'll continue to make inroads there.

Whether or not it happens or not remains to be seen. If it does happen, it's going to be much, much better for the industry. And so the operators that we continue to work with in Texas will obviously then do much better. But I think for us, even if that were to happen, we had 18% exposure to Texas. So even in a better operating environment, that's an awful lot of exposure in one particular geographic region.

And we made a commitment to ourselves as we started working through the Genesis issues that, whether it's an operating tenant or a state, that we wouldn't allow ourselves to be overly dependent on any one particular state or operator, because there are always certain things that are out of your control. And for us, we got pretty tired of any individual operator or situation controlling the narrative of the company.

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Operator [42]

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Our next question comes from Michael Lewis with SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [43]

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I wanted to ask, the low end of your normalized AFFO guidance is right on top of the dividend. You're going to be issuing some more equity at a yield that's about 9.5%. I guess the question is, is there a scenario where you kind of adjust the dividend? Or is this a silly question at this point?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [44]

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It's never a silly question, right? So we understand the question. We will not be adjusting the dividend. We're not going to see growth in the dividend, but everybody can count on it being stable.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [45]

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Okay. Great. And how about -- how should we think about the likelihood and the timing of buying the remaining interest in the Enlivant JV?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [46]

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Well, the timing is, right now, the way we see it, and when we look at their performance against their forecast, first quarter of 2020 looks to be realistic. And as we spend the rest of 2019 getting our leverage down some, that will put us in a better position to pull that trigger at the appropriate time.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [47]

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Okay. And then lastly, I just wanted to ask a big picture question. I actually asked this of one of your peers on their call. But George Hager at Genesis said earlier this month at a conference that the REIT structure in Skilled Nursing has proven to be a failure. You obviously have some broad experience, but some experience with them specifically.

Do you think there's some truth in that, the kind of blocking and tackling and constantly dealing with tight coverage and issues here? Or do you think it's more operator-specific, and this is something that will work itself out and you'll get past?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [48]

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So I know that George said that. I was really disappointed to hear that, particularly since he had a group of landlords that gave him rent relief, debt relief, and quarter after quarter after quarter gave him laborers on default. So that was really disappointing to hear. I think everything's about culture in this business, and so there always have been some times where there have been some downtimes. There actually have been less downtimes than uptimes over the course of this business in the last 35 years.

And I know, for me, as an operator, we never looked at ourselves as victims of the environment. If there are headwinds and everybody's going through those headwinds, and so you make a decision that you're going to deal with those headwinds better than anybody else. I think if you look at Genesis, every decision they made has put them in the position they're in. It's self-inflicted.

So all of our operators had headwinds to deal with. In some cases, we've given them some help, and we've given them some help because they've demonstrated to us that they've earned it and that they're good operators. In other cases, they haven't needed help. So it was really disappointing to hear that and again, given how much the REITs have helped them. If not for the REITs, the company would be bankrupt.

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Operator [49]

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Our next question is from Daniel Bernstein with Capital One.

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

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I want to ask you about Medicaid mix and your Skilled mix. If you look across the industry, Medicaid mix has been going up. Your Skilled mix actually improved though. So I just want to understand a little bit about your thoughts about increasing Medicaid census in the space, and then maybe some -- anything particular with your portfolio that is kind of bucking that trend.

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

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Yes. So one, to us, Skilled mix is the most important indicator of whether an operator really understands the business, because it -- the higher your Skilled mix is, it means that you are going for the highest-acuity patient and it allows you then to minimize Medicaid.

When you see Medicaid increase, in my experience -- and look, I've done it as an operator as well -- when your occupancy is really low, you may admit Medicaid patients more than you might normally do it, because you've hit that inflection point where you've got no leverage any longer.

And so, as I said earlier about the low occupancy and just even slight improvements in the demographic that disproportionately help your bottom line, if you're at 82% occupancy or 83% occupancy, even if you're in a state where the Medicaid rate is weak, getting that Medicaid patient in, that's a full pull-through to the bottom line. So there are points in time where operators will admit more Medicaid patients just to help occupancy, and they're covering their costs. The key there is you really don't want to do it to the extent that you've admitted too many lower-reimbursed Medicaid patients that have longer lengths of stay.

Now the industry is a lot different now than it was even 10 years ago. A Medicaid patient -- most Medicaid patients in Skilled Nursing today have a much shorter length of stay than Medicaid patients in Skilled Nursing 10 years ago, say. So there's less danger of that happening now than it happened in the past. But it was always -- when you had low occupancy, that was always a fine line to kind of walk.

I think with our operators, they really are focused on very high acuity. I think we've always had about the highest Skilled mix in the space, and they've made decisions that they'd rather just focus on that higher-acuity patient and sort of live with lower occupancy for a little while rather than admit more Medicaid patients.

So everybody -- every operator's a little bit different. There isn't exactly a wrong or right to it, but over the long haul, you do not want to see Medicaid increasing at the expense of Medicare and insurance.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [52]

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Okay. I guess we'll see what happens too when PDPM comes in, and that will incentivize people to do the high acuity, right?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [53]

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That's right, because you're going -- because it's going to be on the nursing side, not just the rehab side. And that's really -- there are a number of benefits to PDPM. I think, from my perspective, the primary benefit is, when you've got a system that's been designed to only incentivize you to go after short-term rehab patients, by definition you're creating your own issues then. You're admitting patients that, while the reimbursement may be good, are going to continue to put more pressure on your length of stay, which obviously brings your occupancy down. So that's really one of the benefits of PDPM, you're going to get out of that sort of vicious cycle.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [54]

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Although I do have a question on that and rehab and PDPM, it seems to me that margin should go up on rehab, and we've been hearing a little bit about operators maybe bringing rehab back in-house.

So I mean, one, is -- are your operators looking to bring rehab back in-house if they were third party? And two, is that -- I presume that's a positive impact on loose coverage or corporate coverage. I just kind of wanted to get your thoughts on that.

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

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Yes. So a number of our operators are already in-house. That's a trend that started really over the last 15-plus years. Before that, almost everybody outsourced rehab. And the reason everybody used to outsource rehab, and it changed, is that rehab was a huge variable in terms of revenue. It wasn't at a predictable sort of line of business.

Once the RUG system got developed, and you had RUG IV come in 2006 and rehab became a lot more predictable, it made sense because you can count on a certain level of revenue and it made sense to bring therapy in-house, where you can completely control the product.

So in terms of the margin issue under PDPM for rehab, it's definitely a positive, because they're bringing back concurrent and group therapy. And even though it's capped at 25%, when concurrent and group therapy had been around really just until several years ago, the industry experience was about 26%. So they capped it basically at the experiential level.

And -- but remember, you're still going to want back the nursing patients, because the rehab rates aren't going to be exactly what they were, and after day 21, you're going to be incentivized to get those patients out of the facilities, otherwise you'll start having a decline in net revenue per patient. So the fact that you're going to have concurrent and group therapy allows -- rather than have any of that decline come straight to the bottom line, concurrent and group therapy gives you the opportunity to mitigate that and improve your margin.

So I think you're going to have margin improvement from concurrent and group therapy and you're going to have margin improvement from having a broader palette of patients to go after, some of which will have a longer length to stay, because you're not just going to be going after short-term rehab patients. And then the fact that you're getting rid of the (inaudible) system completely makes things a lot simpler as well, because you're going through a simple case mix system.

If you look at the recent changes in home health reimbursement, that's also more of a case mix system. So CMS is pushing everybody to a case mix system, which we think is a good thing and over the long haul, will allow CMS to then transition the post-acute state to a neutral site system, which is something that those of us in the Skilled space have always looked forward to. Hope that answers your question.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [56]

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No, no, no. That was great. I guess I have a few more questions, but I'll hop off and talk to you guys later.

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Operator [57]

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(Operator Instructions) And our next question is from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [58]

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For the $69 million of expected impairment charges and transition costs in guidance in 2019, what's the assumed breakdown between the 2?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [59]

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So -- it's Harold. So it's about $60 million assumed of an impairment or loss on sale and about -- and the balance is the transition cost, a big chunk of that being property taxes that will still need to be paid on that portfolio.

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Operator [60]

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And our next question is from Lukas Hartwich with Green Street.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [61]

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Can you provide more color on the size of the Senior Care Center settlement? Is it larger than the $5.7 million?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [62]

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It is larger than the $5.7 million, and it affects a note that was outstanding. They just asked us not to give any more specifics while we're waiting for court approval, but it is more than that.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [63]

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Do you have a rough idea on timing?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [64]

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It's only good news. So...

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [65]

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Right. Right. Do you have a rough timing of when we'll find out how much bigger it is?

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

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I would never predict timing when it comes to bankruptcy court hearings.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [67]

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Fair enough. And then there's --

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [68]

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I mean, we protected ourselves from the bankruptcy, but there are a couple of these last remaining matters that the bankruptcy court has to make the decision on. We just protected ourselves by terminating the leases. So we pulled that stuff out, which was the majority of what we had to deal with.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [69]

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Right. And there are some concern around managed Medicaid. And Rick, I'm just curious what your thoughts are on that issue.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [70]

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It all depends on rate and how they approach it. And we've seen Medicaid -- managed Medicaid products before, and some of them have not been good, and some of them have been good. So I think it's a little bit early on that. So we'll see, but most of the experience that we've had with Medicaid -- and it's not really even Sabra experience, going to my experience as an operator and really going back probably over 20 years, the Medicaid -- the managed Medicaid rates have been pretty close to the state Medicaid rates that have been in place, but we'll see. It's a little hard to predict.

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Operator [71]

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And this concludes our Q&A session for today. I would like to turn the call back to Rick Matros for his final remarks.

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

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Thanks, everybody, for bearing with a long call. I know we've had a lot of moving parts, and we're looking forward, as I know you are, to getting it behind us. And Harold and Talya and I and the team are available for any additional conversation offline. We'll be heading to the Wells conference tomorrow, and I look forward to seeing a bunch of you guys there. Thanks.

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Operator [73]

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And ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.