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Edited Transcript of SBRA earnings conference call or presentation 31-Oct-19 5:00pm GMT

Q3 2019 Sabra Health Care REIT Inc Earnings Call

IRVINE Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Thursday, October 31, 2019 at 5:00:00pm 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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* Daniel Marc Bernstein

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

* Jonathan Hughes

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

* Joshua Dennerlein

BofA Merrill Lynch, 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

* 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

* 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 REIT Third Quarter 2019 Earnings Conference Call. This call is being recorded. I would now like to turn the call over to Michael Costa, EVP Finance. Please go ahead, Mr. Costa.

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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 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, 2018, and in our Form 10-Q for the quarter ended March 31, 2019, as well as in our earnings release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during the 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 including on the -- included on the financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website.

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

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

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Thanks, Mike. Happy Halloween, everybody.

We closed our new credit facility at $2.2 billion. Recently, we also -- in our second investment-grade bond issuance following the quarter-end, that one was dramatically more successful than the first one simply because it was the first one. That was the 10-year paper versus 5-year paper on the first and really was a function how well the ones that we did in May have traded up since then. So we feel really great about that and certainly a tangible benefit from a merger and the other activity that we've gone through.

We've also brought our debt to EBITDA down to 5.7x. That's inclusive of the unconsolidated JV. By year-end, we'll be at or below our target of 5.5x, positioning us to go into 2020 with the strongest balance sheet since the inception of Sabra.

We finally had some investment activity at $20 million, which includes our first investment in the addiction space, 2 facilities. We're working on some other opportunities there as well. We'll see if those things become realized or not, but we feel good about this space. It's -- as most people know, it's a relatively new space. Reimbursement with the insurers is quite good. There are specialized Medicaid rates as well in a number of states. None of our peers are in the states at this point. It's very fragmented space, not easy to find deals, but hopefully for Sabra, being the first ones in, we'll develop a reputation being the capital partners the folks in that space, a space that has a lot of tailwinds. And also makes a lot of sense relative to our investment in the behavioral space as well, we continue to look for opportunities there.

We're starting to see some activity in Skilled Nursing for the first time. Our pipeline is about $600 million. Our acquisition pipeline, still primarily Senior Housing, but again, we are starting to see some Skilled Nursing opportunities. We've anticipated that for a while. Hopefully, this is the beginning of something good relative to some opportunities there.

In terms of Senior Housing, pricing is still pretty high. Although I would say that the bids that we lose are we're not losing by the same margin that we've lost before. So maybe that's a signal for pricing getting a little bit better, but I think it's too soon to make any definitive statement on that. And it's primarily the private equity funds that are bringing most of the competition there.

In terms of Enlivant, we're newbie to the process now, exploring new JV partner as well, potential options as well. We expect to have our decisions made and a deal done by year-end. It will take some time to close after that because the change in ownership will also trigger changes of ownership from a regulatory perspective. So it will take several months after we announce what the deal is for that to happen. So we can't get into specifics on what we're negotiating right now because we're in the middle of those negotiations, but we feel good about the process and where it's been going and where we think it will conclude at.

Our skilled operators, they're about a month in -- well, actually, a full month in right now on PDPM. No disruptions with any of our operators. They continue to feel really good about the opportunity. They're being pretty cautious relative to projection. At this point, they want to give a little more time under their belt. We are seeing some signs of some better rates, but again, it's very early. So we're just pleased at this point, I think, that all of our operators have transitioned into PDPM without any disruptions to their operations.

Now moving on to our operating results. Our EBITDAR coverage was flat sequentially for Skilled Nursing and Senior Housing. Our hospital coverage was up. And a reminder on the hospitals, most of our hospitals are the behavioral hospitals. We have some children's hospitals, and that comprises the bulk of our hospital portfolio. We have one acute hospital, LTAC, and an IRF as well. But it's primarily behavioral and a couple of children's hospitals.

Our same-store occupancy ticked up for Skilled and for Senior Housing. It was down for hospitals. The population that we have in those -- in the specialized hospitals, a lot more dynamic relative to start door activity, how short the length of stay is and, sometimes, the unpredictability of that length of stay. But our operators do really fantastic job managing expenses, so you see strong coverage sometimes regardless of occupancy moving up and down.

Of our top 10, the notable drop was Avamere. I know everybody's sort of picked up on that. That drop was specifically due to their ancillary businesses. Their facility performance was stable. They went through a complete overhaul of their IT systems in their ancillary businesses. And unfortunately, and I certainly have seen this as an operator, when you go through a huge IT conversion and sometimes take your eye off the ball a little bit, then it really hurt the performances of those ancillary companies. We expect that to improve as we go into 2020, but that piece will be down for a little while. But again, we view them as a very good operator, and we have no concerns about them going forward and certainly no concerns relative to rent.

In terms of our wholly owned managed portfolio, the Enlivant JV, Talya will get into specific details on that, but we showed strong cash, NOI margin growth both sequentially and quarter-over-quarter as well as RevPAR growth while occupancy was down somewhat. And Talya will give you some explanation. There's some positive signs on occupancy over the last few weeks. And one of the things that we feel good about with our Senior Housing operators is that they stay focused on rate and expenses, and they don't give up rate for occupancy. If we think over the long haul, that's a much better strategy to have.

And with that, I will turn the conference call over to Talya.

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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'll provide an update on our managed portfolio.

In the third quarter of 2019, approximately 17.2% of Sabra's annualized cash net operating income was generated by our managed Senior Housing portfolio, and approximately 57% of that relates to communities managed by Enlivant, and 32% relates to Holiday-managed communities. The balance includes our Canadian portfolio and 3 small care communities in the United States.

On a same-store year-over-year basis, the managed portfolio, which excludes the Holiday assets, had solid results in the third quarter compared with the third quarter of 2018. Revenue increased by 3.3%, cash net operating income increased by 13.3%, and revenue per occupied unit excluding the nonstabilized assets was up 6.6%. This performance builds on the news we shared in the second quarter when we reported same-store results with a 3.1% increase in revenue, 3.6% increase in cash net operating income and 4.7% increase in revenue per occupied unit.

Our portfolio of communities that largely target the middle market in secondary cities in the U.S. and Canada is delivering positive results in the current cycle, [revamping] from last year's performance when the impact of the flu was felt across all Senior Housing communities.

Now for some details. The Enlivant Joint Venture portfolio, a 170 properties, of which Sabra owns 49%, showed steady improvement. Average occupancy for the quarter was 81.4%, 0.9% lower on a stabilized same-store year-over-year basis. Revenue per occupied unit was $4,307, 6.9% higher on a stabilized same-store year-over-year basis. This is the highest RevPAR that we have seen since we made the investment. Same-store cash net operating income for the quarter rose 15.3% year-over-year and 7.8% sequentially. Importantly, cash NOI margin was 26.7%, up from 23.9% on a same-store year-over-year basis, similar to RevPAR, the best margin we have seen since we made the investment. Year-to-date, the Enlivant Joint Venture's cash NOI was 9.2% higher than in the same period in 2018.

Enlivant's dynamic pricing model was rolled out this summer to drive occupancy. The JV portfolio experienced 126 move-ins in the third quarter, more than in any other previous quarter, providing real measurable success of this initiative. The biggest impact was seen in those communities with occupancy below 85% and, even more so, those communities with occupancy below 70%. For the 19 communities that had 64.9% average occupancy in the third quarter, October occupancy was 67.4%, and spot occupancy at month-end is 70.9%, a 6-point increase over the third quarter period.

Our original objective in taking a minority stake in the portfolio included being conditioned to ultimately own 100% by buying out our partner TPG's interest. This summer, we began the process of identifying potential partner to co-invest with Sabra, so we could jointly own 100% of the portfolio. That process continues with several investors keenly interested in the opportunity.

Now to the results of the wholly owned managed portfolio. Sabra's wholly owned Enlivant portfolio of 11 communities traded 2018's occupancy surge for meaningful increases in rates, resulting in higher net operating income and margin. Occupancy was 88.8%, which was 1.9% off of the prior quarter and lower on a year-over-year basis by 6.8%. The dynamic pricing initiative has had an impact here as well even with the portfolio being relatively stabilized. October occupancy came in at 89.7%, and spot occupancy is 90.2%, up 1.4% from the third quarter period. Revenue per occupied unit rose to $5,526, a 1.7% increase over the prior quarter and 11.5% over the prior year. Cash NOI was up 7.8% on a year-over-year basis, and year-to-date cash NOI was 5.7% higher than in the same period in 2018.

Enlivant typically sends out annual rate increase letters to its tenants in the fall. This year -- to go into effect in October. This year, the average rate increase achieved for eligible residents is 5.2% in both the JV as well as our owned portfolio.

We transitioned our Holiday portfolio from our net leased to manage portfolio at the start of the second quarter, so this is the second time that we are reporting community-level statistics. Portfolio occupancy was 88.6% in the quarter, slightly lower than 89.1% in the prior quarter. Revenue per occupied unit rose to $2,483, a slight increase over the prior quarter, and cash net operating income rose 4.8% sequentially. We continue to look for middle market-oriented independent living communities where we believe the Holiday management team is well suited to assume management including opportunities within the Sabra portfolio.

Sienna Senior Living manages 8 retirement homes in Ontario and British Columbia for Sabra. In the third quarter of 2018, the 8 properties managed by Sienna showed steady operating and financial results, with 89.8% occupancy, slightly up from 89.6% in the prior quarter. RevPAR was $2,261, which was 1.8% above the prior quarter and 4.1% higher on a same-store year-over-year basis. Cash NOI was up 15.6% on a year-over-year basis and 4.1% sequentially. Notably, cash NOI margin was 40%, up from 35% on a same-store year-over-year basis. Sienna continues to maintain occupancy in a narrow band and tight expense controls, resulting in consistent operating results. We continue to look for attractive acquisition opportunities in Canada, where the dynamic within Senior Housing is quite different from the U.S. and development capital is more disciplined in many markets.

With that, I will 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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Thank you, Talya.

This quarter, we continued our efforts to improve our balance sheet and cost of capital. On September 9, 2019, we closed on our previously announced $2.2 billion credit facility amendment, which lowered our cost of permanent debt by 18 basis points to 3.91% and provided $2.7 million of annual interest savings based on our outstanding borrowings as of the end of the quarter. The amendment also improved our debt maturities laddering by extending the maturity for the revolver by 2 years to September 2023 and created additional laddering of our term loans with various maturities to September 2024.

Throughout the quarter, we continued our delevering efforts through the sale of 4.2 million shares of common stock under our ATM Program, generating net proceeds of $89.9 million. These proceeds allowed us to pay down our revolving credit facility by $75 million and reduced our net debt-to-adjusted EBITDA ratio, including our unconsolidated joint venture from 5.76x as of June 30, 2019, to 5.7x as of September 30, 2019. We expect to continue this delevering effort through the fourth quarter, targeting a net debt-to-adjusted EBITDA ratio, inclusive of our unconsolidated joint venture debt, of at or below 5.5x. These activities improved other key credit metrics compared to the second quarter of 2019.

Interest coverage improved 0.35x, increasing to 4.97x. Fixed charge coverage improved 0.26x, increasing to 4.72x. Total debt to asset value improved 1%, decreasing to 38%.

And finally, on October 2019, we achieved $350 million of 3.9% senior unsecured notes due 2029 and redeemed all $200 million of our outstanding 5.375% senior unsecured notes due 2023. This refinancing is expected to result in $1.9 million of annual interest savings and, on a pro forma basis, reduced our cost of permanent debt to 3.81% as of September 30, 2019. This was our second offering into the investment-grade market in a 5-month span, and it was again met with tremendous demand and excellent execution. We have now completed the refinancing of all of our high-yield debt instruments and, along with the amendment to the credit facility, have reduced our debt maturities through the end of 2022 by over $2.4 billion including the full availability on the revolver. This completes our balance sheet refinancing activities for the foreseeable future and puts us in an excellent position to take advantage of our investment-grade balance sheet as we fund our growth into the future.

And now for a few comments about the financial performance for the quarter. For the 3 months ended September 30, 2019, we recorded revenues and NOI of a $149.8 million and a $130.4 million, respectively, compared to a $219.4 million and a $198.2 million for the second quarter of 2019. These decreases are primarily due to the $66.9 million of lease termination income recognized in the second quarter related to the transition of the Holiday communities to our Senior Housing - Managed portfolio.

FFO for the quarter was in line with our expectations at $85.8 million and on a normalized basis was $90.1 million or $0.47 per share. FFO was normalized primarily to exclude $1.6 million of unreimbursed triple net operating expenses, $1.5 million of straight-line rent receivable write-offs and $0.6 million loss on extinguishment of debt we recognized in connection with the amendment of our credit facility. This compares to normalized FFO of $84.7 million or $0.46 per share in the second 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 $87.7 million and on a normalized basis was $89.7 million or $0.47 per share. AFFO was normalized primarily to exclude $1.6 million of unreimbursed triple net operating expenses. This compares to normalized AFFO of $83.9 million or $0.46 per share in the second quarter of 2019. For the quarter, we did record net income attributable to common stockholders of $23.3 million or $0.12 per share.

Our G&A cost for the quarter totaled $8.7 million, including $3.2 million of stock-based compensation expense. Recurring cash G&A costs of $5.3 million were 4.4% of our NOI for the quarter and in line with our expectations. We expect ongoing quarterly cash G&A cost to average approximately $5.8 million.

Our interest expense for the quarter totaled $29.3 million compared to $33.6 million in the second quarter of 2019. This quarter-over-quarter reduction was driven by a combination of lower total debt of $77.1 million and lower overall borrowing cost from our refinancing activities and the decline in the LIBOR borrowing rate during the quarter. Borrowings under the unsecured revolving credit facility bore interest at 3.17% at September 30, 2019, a decrease of 48 basis points from the second quarter of 2019. Interest expense includes $2.5 million and $2.8 million of noncash interest for the third and second quarter of 2019, respectively.

During the quarter, we recognized the $14 million impairment of real estate related to 3 vacant Skilled Nursing facilities and 4 Senior Housing communities. The impairment associated with the 4 Senior Housing communities of $10.6 million being impacted by our decision to sell these assets rather than fund operations in the future in an effort to achieve a stabilized level of performance. We did not recognize any revenues from these assets during the quarter.

We were in compliance with all of our debt covenants as of September 30, 2019. And in addition to the metrics I mentioned previously, unencumbered asset value to unsecured debt increased from 246% to 253% quarter-over-quarter. And secure debt to asset value remained at 2%. As of September 30, 2019, we had total liquidity of $829.4 million, consisting of unrestricted cash and cash equivalents of $29.4 million and available funds under our revolving credit facility of $800 million.

We reaffirmed our previously issued 2019 guidance, which reflects our stated goal of reducing our net debt-to-adjusted EBITDA ratio to no more than 5.5x. With respect to our same-store cash NOI growth rate expectations, we expect our Enlivant joint venture to be in the upper half of the 6% to 12% range and our wholly owned portfolio to be in the lower half of the 3% to 6% range. These expectations are driven in large part by the 5.2% annual rate increase achieved in the 2 Enlivant portfolios effective October 1, 2019.

Finally, on October 30, 2019, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share. The dividend will be paid on November 29, 2019, to common stockholders of record as of November 15, 2019.

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

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [6]

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Yes. And before -- just before we do that, I just want to make one other comment.

We've seen a lot of postings about negative shop results for facilities that are in secondary markets. We obviously have a lot in secondary markets, and we just aren't experiencing that. So I think it's very market specific. We certainly have a market here or there that experience a little bit more difficulty with new entrants in the line. But generally speaking, I think the performance of the shop portfolio shows that we just don't see that across the board in our portfolio. We view those markets as extremely stable. And labor costs are lighter and you've got smaller buildings obviously, so impact of occupancy up or down by a couple of patients is a little bit more significant, but we tend to see more stability there.

So with that, I will turn it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So just looking at your top operator list for Skilled Nursing, EBITDAR coverage declined across that group. And since it's a trailing 12-month metric, it implies that the most recent period saw a more material decline. But at the segment level, you reported stable coverage, so the implication is the balance of the portfolio and your smaller operators may have improved materially. So can you maybe bridge that gap or explain that difference?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [3]

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Yes, I'll kick it off, and then Rick can add to it. But keep in mind that Avamere and Genesis, which are part of the top 10, those are not included in those coverage ratios because they have a material corporate guarantee. And so the portion of the portfolio that would have declined, that portion of decline is not reflected in the stabilized -- in the stable -- excuse me, coverage that we show in the overall portfolio. So there may be some of that, but those 2 are excluded.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [4]

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And in terms of the trailing 12, a number of them are top 10, so most of them just came down pretty incrementally, so we're not concerned about it. But I would say that as headwinds persist, they had some stronger performances in the earlier quarters. And as those drop off, it's affected then a little bit. Nothing going on with any of those operators that we have concerns about. And with the market basket increase on October 1 and PDPM, we expect to see improvement in those operators.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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And I guess sticking with PDPM, Rick. I know you mentioned -- you had some comments in your prepared remarks. I know it's still early days, but can you maybe talk a little bit more about how it's been received, how your operators have adjusted to the new model, if there is anything left from a learning curve perspective? Any additional color would be appreciated.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [6]

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Yes. So I think, as I said, there was no disruption at all. They had months really to prepare for it, which was really helpful. And one of the things that made the transition a little bit easier I think for the good operators is that there are -- prior to PDPM in every Skilled Nursing facility, there was some percentage of patients that had some serious nursing issues that the old system just wouldn't allow you to bill for. So they didn't bill for it because they would never get reimbursed for it. But that allows the operators to have a population that already exists in those facilities to start focusing on trading particularly relative to coding and setting up new clinical protocols. And the coding is really one of the biggest issues because coding has shifted from therapist doing coding to nurses doing coding, and that's not something historically that they've done that much of. But it's a much simpler system obviously that runs with 66 categories.

And so in terms of going forward, I think a couple of things will happen to sort of fuel improvement as we go forward. I think people will get better at coding. I'm sure -- in fact, I know that on day 1, even though there were no disruptions, it felt like everybody was hitting at all cylinders on day 1. So it's going to take some time for that to get better.

In terms of concurrent and group therapy, I think our operators have been pretty cautious about not just moving as much in there, as quickly as possible. And certainly, the regulators were looking at that as a red flag, so I think they're being cautious on that. So I think growth in concurrent and group therapy will happen slowly over a period of time. So you'll see continued improvement there as well.

And then, of course, one of the issues that's very hard to quantify, that is impossible to quantify. You can quantify cost savings. But to the extent that operators have stayed away from certain kinds of patients because they weren't going to get reimbursed. That door's now open, which will help certainly the hospitals quite a bit because it had a whole host of people sitting there that Skilled Nursing facility wouldn't take simply because they weren't going to get reimbursed. And so that may -- that's going to shift the population as well. That should also have some impact on length of stay because those patients will have a longer length of stay than the short-term rehab patients. And that's really the single biggest thing, I think, that changes here is that we got from a reimbursement system that solely incentivized operators to go after short-term rehab patients, which then, in fact, created industry headwinds because if that's all you're doing, you're going to see continued shortening length of stay, which is going to lower your occupancy and exacerbate all your other issues.

So the other system actually created some of the headwinds and actually significant percentage, I think, of the headwinds that have impacted the industry these last few years. So hopefully, that gives you at least some information.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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That's very good color. Just one more, if you don't mind. Rick, you mentioned more Skilled Nursing opportunities in your acquisition pipeline. But I think you also previously mentioned you're not really interested in particularly large Skilled Nursing portfolios because that might push the perception of Sabra to be classified as SNF REIT. But if the earnings yields are more attractive in that space, and your peers seem to be active in acquiring, and you're currently trading in a discount multiple to those peers, what's the negative stigma, in your opinion, of being viewed by some of this SNF REIT if it means you're investing for earnings accretion?

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

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Well, one, we are going to do skilled deals, and we will do portfolio deals. We made it out through multibillion-dollar portfolio deals, but we'll do portfolio deals. With our Senior Housing exposure increasing and our skilled exposure where it is, we can afford to, we think, a sizable number of deals without becoming a skilled deal -- going back to 75-plus percent on skilled exposure. So the negative to us really, as much of we love the asset class, is you're completely dependent upon sentiment based on what asset class by the market. And with all due respect to the market, sentiment swings. And when it's negative, it's usually too negative. When it's positive, it's usually too positive. And so to have sentiment based on more than one asset class because we invest in the long term and Senior Housing has got a really bright future ahead of it, we think it's a little bit more advantageous to have some diversity in asset class. But no one should take that as meaning that we aren't focused on doing Skilled Nursing and more than just 1s and 2s. That kind of what we're seeing now, but to do portfolios that are several hundred million dollars, we absolutely would entertain doing that. And we still think we'll be able to keep balance in the portfolio by doing that.

Earnings accretion is something that we're going to be laser-focused on for next year. This year, we've really prepared the company and positioned the company to take advantage of those kind of opportunities. And clearly, it's the one question that everybody has is how much growth are we going to have going forward. And it's the right question, so we're not going to be stubborn about it and forgo opportunities that we think are good. And if it pushes our skilled exposure up maybe a little bit more than we like in the interim, we have complete confidence that as we do other deals and our cost of capital continues to improve, as you know, with the existing discount, that we'll always be in a position to be able to balance the portfolio more later on. So expect us to take advantage as the opportunities that are out there in the skilled side.

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Operator [9]

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Our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [10]

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Deleveraging continues to occur, as you laid out. What's left to do in terms of actually getting to that target? Is it additional equity or more EBITDA growth driven?

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

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I'm sorry, what was the first part of the question?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [12]

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Was it going to take additional equity or more EBITDA to get to the target?

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [13]

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Execution leading to the leverage target really, is it -- is there additional equity that you're contemplating, or is it extra gain for EBITDA?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [14]

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Yes. So it's primarily driven by continuing to issue equity under the ATM Program. And so you'll see us continue to do that. We'll obviously make that announcement in the fourth quarter, but that's the main driver.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [15]

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And we've been consistent. We've said that from the day we issued guidance and built it in the guidance, so there's nothing new or unusual there. And there is no -- nor is there any sort of spike amount that we're going to have to do. So the number -- the amount of equity that we're going to be raising on the ATM through the end of the year at this point isn't that material any longer.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [16]

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That's helpful. And then just on core FFO guidance, you reaffirmed guidance. And previously, you've indicated that you're trending towards the low end of the range. So does that comment still stand, or are things trending differently now?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [17]

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No. I think on the AFFO, we're still trending towards the high end. On FFO, we're still trending towards the low end. And again, the reason for that trending towards the low end was because we removed about $0.04 of straight-line rents when we moved tenants to a cash basis from an accrual basis. But we do it -- we didn't update that specific comment. I think we've got some opportunity for that to be higher than that. Obviously, the issue for us as far as nailing down the number is we have the cash-basis tenants, and certainly, timing of collecting cash could have an impact on earnings more so than it would if you're booking stuff on a straight line basis. And then the managed portfolio obviously had some upside from where we forecasted it as well. So we still feel comfortable with the total range, but I would expect that it's still true. We've had to pull out $0.04 of AFFO, and so we have to overcome that to hit the high end of the range.

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Operator [18]

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Our next question comes from Jonathan Hughes with Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [19]

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I appreciate the earlier commentary on the EBITDA coverage decline at Avamere. I know you're not concerned there, but are you able to give us facility-level EBITDA coverage for their portfolio and then remind us when those leases mature?

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

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Yes. Facility-level coverage is actually pretty similar to the fixed charge coverage. That's a pretty close number at this point. But the difference that got losses is with those ancillary companies from the 122 down to the 111. So in terms of the lease expirations on Avamere, we've got quite aways from doing that.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [21]

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Yes. It's not for many years.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [22]

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Yes. It's probably 5 years out, something like that.

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

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It will be -- it's actually beyond that. It doesn't look like it matures before 2027.

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

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There you go, 2027. And one of the things that we're waiting to hear on Avamere, because it's really the issue that affects them the most, is what's going to happen with Washington State Medicaid rates? The Washington State has been talking about doing a rate increase next year, and hopefully, we'll have news on that sometime in the first quarter. But as everybody knows, they haven't been doing that up to this point. But now they're up to 19 facilities being closed in the state, that 10% of the facilities in the state have closed for financial reasons. There's probably at least another 5% coming. That's a pretty huge number on one state. So they're going to start to have access problems in certain markets. So once we see what happens with the Medicaid rates in Washington State, we'll know whether we want to do anything differently or -- and when I say we, that means it's just really the capital partner to Avamere. One of the things that is appealing to them is they're starting to see more opportunities for facilities being sold at extremely distressed levels. And if you can pick them up at the right price even in that environment, that might be a good way for them to go. So they're considering that. But I think none of us want to see them do anything and they don't really want to do anything until really 2 things occur: one, we see the impact of PDPM on the facilities; and secondly, we know one way or another whether there'll be a rate increase in the state of Washington. So stay tuned for that. But that's really their single biggest kind of issue. The ancillary issue with the IT conversion, that will pass, but it's really Washington State.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [25]

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Okay. That's helpful. And then switching over to the managed portfolio. Occupancy has declined little bit there, yet NOI growth has been really strong driven by the rate increases and expense savings. I'm just trying to understand. With rate increases, when you need to provide more services and, in turn, higher expenses, I'm just trying to kind of better understand what is going on within those portfolios.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [26]

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Sure. This is Talya. When we talk about the rate increases, we're talking about room and board rate increases, so that doesn't correlate to a change in service delivery and care. So the care rates have continued to be delivered as needed per the individual, but the basic room and board rate has been what we've focused on in terms of the increase.

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

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Yes. And our operators don't have exceedingly high acuity levels. I think it's going to continue to creep up over time, and there'll be more opportunity on the level of service rates on top of the room and board going forward, but that -- as Talya said, that's not the driver at this point. I think as Talya noted, on Enlivant, they've taken a much more sort of scalpel-like approach to things and stratify the portfolio. And the lower stratifications are really starting to show some nice occupancy increases, and that should have more of a disproportionate impact because of how low they are to begin with.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [28]

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That's helpful. And then maybe just one last one for Rick. You talked about seeing more SNF deals in the pipeline, and I know it's too early to tell on the impact of PDPM, but has that altered your underwriting process for SNFs? Meaning as you look a bit further out on the horizon, are you underwriting SNFs using overly conservative assumptions in case CMS, say, several years down the road might cut reimbursement rates like they did in 2011 if overall margins begin to significantly improve and they look to kind of recoup some costs? I'm just -- I'd love to hear your thoughts there.

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

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Yes. So our underwriting approach is 1.5 coverage on skilled. And the cap rate, depending on the quality of the facility and the market and the operator and all that, could be 8.5 to 9 plus. So I don't think that, that changes, and I think that gives some breathing room. But a couple of things that I think are different now versus what happened with the clawback in 2011, one, it was a really poorly design system, and the amount of additional money beyond per CMS projections or additional Medicare expenditures to facilities from the government beyond the CMS projections was relatively egregious, and I don't think that there is any way with PDPM that you're going to see that same level again. Secondly, yes, the timing issue, that was really horrible back then, and certainly, it could happen again, is the clawback was during the great recession. And you may not recall but at the time, within about 48 hours of the final rule coming down, the clawback was supposed to be half of what it was that the industry thought. Just from a pure math perspective, that the actual clawback was about twice as much as it should have been. But it was a recession, and the White House is looking for money, and there was just sort of nothing we can do about it.

Operators -- I think operators have longer memory than investors do, with all due respect, so they remember what happened. And I think, to my comment earlier, that's why you're not going to see from the good operators, and I would include all of ours in that bucket because we've had the conversation. You're not going to see the good operators go from 0% concurrent and group therapy to 25%, which is the max. You may see some guys do that out there, and I think they'll get in trouble if they do that. But most of the operators that we've talked to are smarter than that, and they're going to be much more judicious because they don't want a scenario where they're looking at a clawback a few years down the line. And if there is some adjustment, it's more of a marginal adjustment than being within the system that has happened in 2011. So I just think people are really mindful of it. And I do think this is much better designed system. And the fact that I think we all would have liked to have seen some pilots out there, but CMS didn't want to do that. But the fact that the industry was engaged at every step of the way in putting this system together with CMS and giving them input and feedback, I think it creates a much different environment for that than it was with RUG IV.

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Operator [30]

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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 [31]

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Just a follow-up on the Senior Housing - Managed facility performance. Can you just elaborate on how you're able to push room and board rates in the face of new supply? And what we're hearing from some of your peers is that with new communities out there been aggressive on incentives, it's really hard to push rate and, at the same time, not lose too much occupancy. So can you provide us more color?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [32]

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Sure. This is Talya. So first of all, the bulk of our managed portfolio, frankly, sits in the joint venture because that's a 170 properties, we have 49% economic exposure. Those properties as well as many others in our portfolio are not in markets where there has been significant overbuilding and additional new supply. So the competitive forces have -- are not uniformly spread across all markets. And so the news that we hear about new supply, oversupply, et cetera, are specific to certain markets. And they're, within that, probably more narrowly within certain submarkets. And we have found that in the secondary and even some of the tertiary locations in which we have communities in the managed portfolio, we have not had anywhere near the kind of pressures that some others are experiencing in, call it, the primary markets. There are some markets where we have seen some pressure. The Dallas metro area, we have seen some pressure from significant addition of new supply across the spectrum of costs, which has impacted some of our Enlivant assets, but generally, that's not been the case.

The other thing I'll add is a focus on middle market is -- becomes really interesting in this part of the cycle because you really see how a product that targets a certain price point that probably is not economic to build to today if you started construction. That product has a large market -- target market that needs that product and can afford a product that needs $10,000 a month rent in order to break even.

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

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Yes. I'll make a couple of other comments. All of Talya's comments also apply to our triple net Senior Housing portfolio as well. And look, I think the market tends to like to look at things, and everything is monolithic. So the secondary markets are this. The high urban markets are this. And it's just not the way it is. You got to look at the specific portfolios and where they're located and who are the operators. The operator makes the difference. I think the quality of services provided by our operators has a lot to do with why they've been able to push rates the way they have. Their resistance to discounting in the long run I think will really pay off. And look, you've got a 50% of the middle class elderly will not be able to afford senior housing in our country. And we happen to have a lot of products -- a lot of the assets in our portfolios where, to Talya's point, it is going to be affordable. And so look, we underwrite these things, as you know, for 10 to 15 years, and we're holding it pretty well right now in a tough environment. And so as the recovery becomes realized over the next couple of years, we'll be in that much better shape. But this thing -- this stuff just isn't monolithic.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [34]

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Sure. What was the catalyst though to get the double-digit rate increase this quarter, though? Was it purely the revenue management system or just pushing rate and being willing to give up some occupancy? I'm just wondering what the exact catalyst was.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [35]

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Well, on our Enlivant wholly owned portfolio, first of all, it's 11 properties, so it's a small set there that we're talking about. They gave up -- they really pushed occupancy at the expense of -- so they had put that. They really pushed occupancy, and they really pushed rate at the expense of occupancy, and they did so by intent. So they were at like 95.6% occupancy a year ago, and they were willing to go below that and really drive the rate.

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

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And they've got -- their expense controls are better. One of the ways to think about it, and I would just say it in terms of my experience as an operator having done turnarounds and BKs and stuff, is those first few years, there's a lot of low-hanging fruit. And so you're sort of improving your results in leaps and bounds. Then you start getting to the point where it's a lot more fine-tuning, and that's where we see Enlivant doing a really nice job of looking at everything on a market-specific basis, stratifying their efforts, so they can allocate resources differently and then getting better with their expense controls over time as well as they start getting new systems in place. And they're not close to done particularly on the new systems part. And we've already conveyed to them that a lot of the IT initiatives that they are looking at embarking on in 2020, EMRs and the like, that we will be a partner with them in doing that. So there's an awful lot that can still get done from a fine-tuning perspective, but I appreciate the fact that they -- and actually, our other operators too, it's not just them, are really focused more on the long term when it comes to rate versus just occupancy and giving discounts.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [37]

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Given the strong performance, I'm sure you feel more comfortable with the joint venture assets. And your balance sheet and cost of capital improving at the same time, do you still need to pursue a joint venture partner for the buyout of existing partner? Why not just go back to plan A?

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

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I think it's -- look, it's still going to be less dilutive to bring a partner in regards to where that percentage is at than to write a check for the full 51% so -- and still retain our ability to exercise whatever the remainder is of that percent of ownership of the portfolio. So we're still in the middle of negotiations, so we'll kind of see how it goes, but our focus, but our focus right now -- and it may not be a new joint venture partner. That may be a new arrangement with TPG.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [39]

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Is your intention still to own a majority stake?

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

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That's always been our state of intention. And we've said that on the second quarter call on August 9. It's always been our intention to go from 49% to some majority.

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Operator [41]

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Our next question comes from Rich Anderson with SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [42]

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Just finishing up on Enlivant. And so do you -- I didn't quite get it. Are they in low-hanging fruit phase still? Or are they in fine-tuning? Or are they transitioning to fine-tuning from low hanging?

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

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So they -- I would just say they've now -- they've stratified the portfolio in terms of marketing and allocation of resources. So there are portions of the portfolio, about -- close to a couple of dozen buildings that there's still a lot of low-hanging fruit. Then there's sort of a middle tier, where it's kind of they're not quite low hanging, that you'd need a bigger ladder but you're not quite just at fine-tuning. And then you've got a big chunk of the portfolio where it's really is fine-tuning. So that's really where they've shifted, where they've taken a more holistic -- historically a more holistic effort towards improving the portfolio because there were so many issues when they got it, now getting into the point where they can look at it and say, okay, we're in pretty good shape over here. I'm going to take our eyes off the ball obviously, bet there's a different level of resource management that needed with this percentage versus this percentage because you guys are already over 85% occupancy, this group's over 75%, this group's under 70%.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [44]

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All right. Okay. And the IT initiatives, what was that? Is that -- did John say revenue management? Is that what that was?

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

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It's electronic medical records is really probably the biggest ones because everything is still paper. So that will improve efficiencies and expenses quite a bit and should help on the -- it's an intangible about how that kind of stuff helps occupancy, but to the extent that you have systems in place, that better allow you to show what your outcomes are to your referral sources, then that helps with occupancy.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [46]

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Okay. So this might be a yes or no question. But is there anything predetermined about the cap rate when you're addressing the process of taking out TPG or -- partially or fully? Or is this all market driven? And that could be yes or no question.

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [47]

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Yes. As we've stated before, our current arrangement with TPG has a floor on the option price, so that's part of the discussion. So I think that will be the right way to think about it. Depending on performance, there is a cap rate in place under our current option, so we're still kind of working with -- talking with them and kind of in that context of what's already in place.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [48]

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Yes. Okay. Rick, maybe one of the main message that you've been talking about the last few quarters has sort of turned down the fire hose in terms of external growth and make it a story much easier to understand. But today, do you find yourself kind of striking a balance between that message and also starting to use your currency a bit more incrementally beyond just using the ATM to delever?

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

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Yes. So one, and this is an important point, people tend to think because you're so busy with things, that you're not focused on other things. So we're finishing the restructuring. We're focused on the balance sheet, and so we're not focused on doing acquisitions. We've always been completely focused on getting some acquisitions done this year. We've had an active pipeline. We have a full investment team that's just focused on that and not distracted by anything else. We just haven't found opportunities that have been interesting or, frankly, affordable particularly on the Senior Housing side and because most have seen there haven't been that many opportunities outside of a couple of portfolios and some of the stuff that we've been selling on the Skilled Nursing side. So I think the main message for us is whatever we happen to get done from an investment perspective this year wouldn't be complicated and just want them to be uneventful in terms of that. So whatever it is we get done, people just looked at it and say, yes, that makes sense. And even though we like to ramp up our growth going into 2020, we need to do that, it's with that mindset. We don't want to be -- we've had a lot of noise. And it doesn't matter that it's for the right reasons and it got us to a good place. We had a lot of noise for quite a while, and we don't want that going forward. It's made it really difficult for people to understand the story. It just takes too much work. And so this has been a nice period of time, I think, for people to kind of see who we are post all the activities that we had, look at how the balance sheet's changed, how diversity of tenants have changed, all that stuff, and we can get back to growing in a more routine way. And maybe another way to put it is we don't want to be in a position where we're going to announce a deal that's so complex, that we're going to have to have a conference call to talk about it and try to explain to you guys why we're doing it.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [50]

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Okay. Last question from me. The whole Avamere thing with the tech rollout and eye off the ball, all that sort of stuff, seems to me a fair amount of operators can be easily distracted if the environment around them isn't perfectly sterile. I'm wondering how can you play a role in avoiding this in the future? In other words, these are your partners, and if something is coming down the pike that is potentially disruptive, can you sort of get ahead of it somehow as their landlord and say keep your eye on the ball and be a partner in that regard? Is that something that you think you can do from the REIT perspective? Or do you sort of hold into these types of dynamics that happen from time to time?

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

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Okay. It's somewhat challenging when you got triple net, but I would say this, when it came to PDPM, I think we were as active a partner as a REIT can possibly be, a lot of dialogues, making referrals to resources that could be helpful. So I think we're really active from that perspective there. Our Operators Conference was helpful as well because it provided the forum to talk about all those things, for our operators to share best practices with each other. So I think in terms of that, we've done that. And look, all the credit goes to our operators for having a period of time with PDPM where they haven't seen a disruption, but I think, certainly, at least on the margin, we've been helpful there.

When it comes to doing things like IT rollouts and stuff, look, I've been there, and it's frustrating as hell, Rich. People just -- it takes a lot, and people do take their eyes off the ball. I've seen it a gazillion times. And you have to have some level of trust in your operators. So I think what compounded the issue at Avamere was the gentleman who was the Founder and Chair and CEO of Avamere had really taken a backseat and had other management running the company. And he is fully engaged now. He's made a number of senior management changes. He's running it on a day-to-day basis again, which we, by the way, think is a really good thing. So I think it probably didn't help, but at the same time, they're going through a transition with their software systems with their ancillary companies. They were going through senior management changes at the same time and just compounded it.

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Operator [52]

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Our next question comes from Steven Valiquette with Barclays.

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

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So your overall comments so far around the PDPM for SNF operators have certainly been helpful. So I guess I'm just curious to hear more specifically whether or not the therapy utilization per average patient was already coming downwards in the industry. And then, Rick, it sounds like from your comment that there may already be an initial read that some higher acuity patients are already being followed in the SNFs because now the reimbursement is more appropriate, kind of as you talked about. So I guess I'm curious whether those higher acuity patients would be taken from a pool of patients that would normally go to LTACs and/or IRFs. Or would they be coming from somewhere else?

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

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Yes. So -- and I know we're sort of new to each other, but others will recall me saying this. I think any changes of reimbursement system we've got make it -- create more equality from a reimbursement perspective, helps [his and hers] LTACs and IRFs. There have been a number of studies done by MedPAC that show IRFs, at the exorbitant Medicare rates that they get, have no better outcomes than skilled has had at the rates that they've had. And we've got a number of operators that do things that happen in LTACs on a regular basis only because they happen to be in states where there are specialized rates that do it. You couldn't do that under normal sort of Medicare and Medicaid rates. So yes, I do think -- so I think they get these patients from hospitals that -- where hospitals haven't had a place to discharge them to because LTACs, they aren't in that many markets. They're in, what, 5 states or something like that. And even though -- if you look at the map on IRFs, they're in a lot more states. They're actually concentrated in a relatively small number of states. So there are a lot of markets out there where the hospitals, they've had no choice but to sit with these patients because they didn't even have an LTAC or an IRF to send them to. In those markets where we have high acuity Skilled Nursing facilities that compete with LTACs and IRFs, I definitely believe that they can impact the occupancy in those other asset classes.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [55]

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Okay. And then at the very beginning, when you talked about just getting no disruption and then -- at the very beginning of your prepared comments. And then there was a little more color around that. But again, should we take that to mean now that there's just -- hey, there is no problems, but maybe there's no change in therapy trends yet? But I guess I'm just curious, I mean, are you not seeing the therapies coming down maybe per average patient? Or are you not seeing that yet?

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [56]

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We're not really seeing that yet. And that goes my earlier comments specifically, where I think our operators are being really careful. There is no reason if the day before PDPM, you were billing 600 minutes for a patient, and the next day, it's 400, and you have no group therapy, and it's the same exact patient. So I think our operators, in all of their discussions with us, are being really careful about that. So I think that the -- any decrease in the level of therapy utilization is going to be over a period of time, and it's going to be rational. And as they start ramping up their services to other kinds of patients, they'll be able to manage that balance, we believe, in a way that will be net positive. So stay tuned, but I think we'll see more over the next few months.

And I've been consistent, I think, in saying that even though we've been really positive about PDPM, that we believed all along that we're going to take a good 6 months to really see some super-tangible impact across a number of operators on PDPM. And so by the time we issue first quarter earnings of 2020, we may be in a position to provide some snapshots of coverage for our operators because, on a trailing 12 basis, you're not going to see it until a year from now, right? So if we're seeing improvement, we want to be able to show that. So we'll keep an eye on that and to the extent that we want to make some additional disclosures that would be helpful to everybody in the supplemental, then we'll do that.

One other comment I want to make in terms of opportunity. When I said no disruption, I think there are a number of operators where there has been disruption, particularly with small sort of mom-and-pop operators or just the less sophisticated operators, and they're going to start feeling some pain pretty quickly. So specifically if you haven't really -- if you were prepared for PDPM and your nurses -- you're going to enhance your MDS function, and your nurses weren't trained properly in doing all that, and from October 1, you're billing rates that are lower than what the level of care requires for those patients, that then when that money starts come in, in 30 to 45 days, that's going to make for really tough Thanksgiving. So I think there's some percentage of operators out there that they're going to be feeling some pressure sooner than later now in terms of whether they have to do something about that. It depends on the operator on how much cash they got in the bank and how much time they can buy themselves and all that sort of stuff. It goes to why a lot of us thought that there would be more skilled opportunities prior to PDPM because there'd be some level of awareness on the part of certain operators that they've just done, they're ready to hear out, but that wasn't the case. So it appears that there are a lot of operators that we don't think are prepared, that thought, oh gee, everybody says this is great, so if we hang around on October 1, we're just going to be making more money. It's not going to work that way.

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Operator [57]

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Our next question comes from Joshua Dennerlein with Bank of America Merrill Lynch.

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Joshua Dennerlein, BofA Merrill Lynch, Research Division - Research Analyst [58]

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Just one question from me. You mentioned the dynamic pricing systems on your Senior Housing - Managed portfolio. How should we think that plays out as far as rate and occupancy going forward? Like will occupancy keep dipping as they keep pushing rate? Or do you think that kind of has trended out at this point, and it's more balanced mix going forward?

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [59]

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I think that the opportunity is going to differ depending on how you tranche the portfolio. And that goes to Rick's point earlier when he explained how Enlivant got its tranche at the portfolio by occupancy and other metrics. So I think the dynamic pricing model is -- has been and probably will -- should continue to be particularly effective in the lowest strat of occupancy, where there's the greatest opportunity to add occupancy. And that would have a disproportionate economic benefit at that point in terms of covering fixed costs, et cetera. I think it will be additive to the other tranches of occupancy on units that might have been typically harder to lease or such.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [60]

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Yes. We've talked about spot occupancy before that has really been spot since they've really fully engaged this new initiative, we're looking at 5 or 6 weeks now, and we've actually seen some real improvement. So it just feels better, but we'll see. We've got -- a lot of people are really concerned about the flu season is going to be this year based on what we've seen happen in Australia. So we'll see how that goes. But if they can continue this current trend going into that, they'll be in a lot better position than they would been otherwise to get through it.

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Operator [61]

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Our next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [62]

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My question goes back to the Enlivant portfolio, the JV portfolio. You're pushing rate at 81% occupancy. And so is that an indication that, that portfolio is kind of stable at that occupancy? And typically, you don't push rate until -- in Senior Housing until you get close to 90%, so I'm just trying to understand the dynamics on rate growth within that portfolio. Maybe there's some assets that are high that are pushing rate even above what you're showing, so just trying to understand the nuances there.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [63]

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So I think it's more a function of, as their reputation has improved in those communities, they can continue to push rate and try to -- and push occupancy at the same time. So I don't think they're mutually exclusive. I think it's -- so I just think it's a little bit different with the portfolio that have been in turnaround mode for quite a while. Talya, do you want to add?

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

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I mean my only comment is it's sort of -- your question is best answered with granular details. And we're talking about a portfolio of 170 properties, and occupancy is not the same across them, and neither is rate. And that's where the complexity of the dynamics comes forward. So there are properties that are well occupied, and there's room to push rate, and that's your focus. And there are properties -- there's a tranche of properties where occupancy is a big opportunity, and that's the one I referenced when I talked about the -- what we've seen specifically in terms of the leaping and spot occupancy on the lowest tranche of occupied assets. And there, the focus is getting people in and raising occupancy as opposed to driving rate specifically.

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

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Okay. Is there a general strategy? And it might have been -- and maybe your other operators too, we saw the -- some of the wholly owned assets to drive rate over occupancy. And by the way, I think that's a good strategy. But is that a general strategy folks are using within your portfolio? Obviously, some other portfolios and some other REITs, it's clear that they're driving occupancy over rate. And so I just...

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

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Yes. I think we don't have any operator -- to the extent that they can drive rate, they want to do that. They don't want to compromise that under any circumstances. They think that the long-term impact of compromising on that is more negative than staying with a little bit lower occupancy for a period of time.

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Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [67]

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Let me add one nuance, and I want to make sure -- I think Rick has said this, but I wanted to make sure it's understood. The dynamic pricing model is not a discount model. It's not about discounting or free rent in your fourth, fifth and sixth month. It's not that. It's actually evaluating specific units in buildings and understanding what would be the range of pricing that would be possible and assist the team in making decisions and getting those units occupied.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [68]

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Okay. And I guess my last question would be is -- and I missed a little bit of the earlier call, so I might have missed some of your comments on PDPM. But has there been any discernible, I guess, feedback from operators of, I guess, maybe a little bit easing labor pressure now that you can free up some of your nurses to actually do nursing instead of paperwork under PDPM? I mean I'm just trying to understand some of the, I guess, expense savings and labor pressures that had been there. Are you actually seeing some of that discernible benefits under PDPM?

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

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I think it's going to be more on the therapy side because to the extent that you're going to have some percentage of people in group and concurrent therapies, they're going to need less therapists, which there's a big therapist shortage, so that's really helpful on number of different levels, which is why you hear the therapy associations screening with our PDPM.

But on the nursing side, look, they've to be encoding now, so we've got some other stuff to do. There has been -- there have been some regulatory burdens that have been lifted. You're not having to do assessments as often, so maybe there's a little bit more care time there, but it's kind of more on the margin, Dan.

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Operator [70]

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Our next question comes from Tayo Okusanya with Mizuho.

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

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [71]

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I just got a quick one. Can you provide facility-level SNF coverage including all your tenants, so 4-wall coverage with Avamere and the others?

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [72]

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No. We haven't historically disclosed that. And I think that our approach to coverage has been that we give the coverage for those that don't have guarantees. And then when we provide the top 10, the intent there is to give investors and everybody a really clear picture of our primary and significant tenants and where their coverage stand. But we've never published that and the title of our projects.

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Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [73]

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Yes, the guarantees are too critical to us. And the reality is there actually was a time way back in the early days we were showing those, and all it did was create confusion, and people always then like look at the lower number. So the fixed charge coverage is the number that we get paid on, so that's what we're going to show for those few tenants, and we don't have very many...

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Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO & Secretary [74]

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Two of them.

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

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We only have 2 of them anyway, Lukas, that we do that for.

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Operator [76]

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

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

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Well, thanks, everybody, for your time today. For those that have kids, I hope you guys have fun trick or treating tonight. We are all around and available for follow-up questions. Have a great day. Thanks.

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Operator [78]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.