U.S. Markets close in 5 hrs 8 mins

Edited Transcript of SBRA earnings conference call or presentation 9-Aug-18 5:00pm GMT

Q2 2018 Sabra Health Care REIT Inc Earnings Call

IRVINE Sep 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Sabra Health Care REIT Inc earnings conference call or presentation Thursday, August 9, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Harold W. Andrews

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

* Michael Costa

Sabra Health Care REIT, Inc. - EVP of Finance

* Richard K. Matros

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

* Talya Nevo-Hacohen

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

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

Conference Call Participants

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

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director and Analyst

* 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

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

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

* Richard Charles Anderson

Mizuho Securities USA LLC, Research Division - MD

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

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

Presentation

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

Operator [1]

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

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Second Quarter 2018 Earnings Conference Call. This call is being recorded. I would now like to turn the call over to Michael Costa, EVP, Finance. Please go ahead, Mr. Costa.

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

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

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

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, and our expectations regarding our future financial position and result of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2017, and in our Form 10-Q that was filed with the SEC yesterday as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included in 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.

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

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

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

Thanks, Mike, and thanks for joining us, everybody. After I make my comments, I'll turn the call over to Talya Nevo-Hacohen, our CIO; and she'll turn it over to Harold Andrews, our CFO; and then we'll go to Q&A after that. So to kick the call off, I just want to note that our guidance is affirmed. We'll likely be adjusting it probably in the third quarter call as we have a little bit more clarity, which we should have at that point on the timing of the Senior Care Centers sales process, and I'll update everybody on that a little bit more, a little bit further into the call.

CMS issued their final rule affirming the October 1, 2.4% market basket increase and the implementation of PDPM in October of 2019. The final rule was consistent with the proposed rule, so it was obviously good news for the Skilled Nursing space.

Moving on to our acquisition pipeline. It's lighter than usual at this point, a little bit over $200 million. Almost all of it is Senior Housing, and a lot of the product that we're seeing on the Senior Housing side is not stabilized product. We're also seeing deals come back because they're being retraded, none of which at this point is leading to an expansion in cap rates, but hopefully that will happen as these trends continue to -- continue, which we expect to see.

In terms of Skilled Nursing, we're not seeing much in the way of Skilled Nursing deals. While operators are obviously buying all the assets at Sabra and some of our peers are selling, they seem to be holding onto the good assets that they currently operate in. I think everybody in this space is seeing the light at the end of the tunnel and want to hold on to these assets to get some upside. The assets that we do see in the Skilled Nursing space, we dismiss out of hand. And the way we work our pipeline is, if we're willing to do any level of work on it, it all goes into the pipeline, and we see where it takes us. But the Skilled Nursing deals that we've seen to date have been pretty unattractive even from a turnaround perspective. So we dismiss them out of hand.

That said, we do expect to see more come into market. It's just a little bit hard to tell when. I think with all the changes in the reimbursement model, we're going to start to see the smaller traditional long-term care providers determine that it's in their best interest to get out of the business and that will provide some opportunities for our operating partners to grow and for us to grow with them.

We also continue to see private equity. Despite the retrading that we're seeing in some of the recycled deals, we continue to see private equity bid on senior housing properties at prices that we think are just much too high with forecast that we think are not achievable. So that's sort of the environment that we see today.

Moving on to operating metrics. Our skilled nursing occupancy has now moved up 2 quarters in a row. So that's obviously a good thing. It's kicked up only incrementally, obviously, but I think given the decline over the last few years, having 2 sequential quarters, where occupancy has increased is obviously a good thing. Our skilled mix moved up much more dramatically, 70 basis points to 39.1%, also we think a good sign that we're getting closer to the bottom here. Our EBITDAR coverage was slightly down to 1.27x, but other than Senior Care Centers, we don't see any trends with our operators that cause us any concern, and we've been very consistent, I think, all along over these past few quarters talking about the fact that -- at least from our perspective, that we may not be at bottom, but we're close to bottom. And I think the -- some of the decline in coverage, which is pretty minimal in almost every case and the minimal increase in occupancy go to that. I'll make a couple of comments about some of our operators.

In terms of Signature Health, we're seeing an upward trend over the last couple of months in coverage and performance, and I think that's to be expected. It's been a rough couple of years for those guys, and getting to the conclusion of the restructuring really was a huge diversion for the management team. So these past 6 to 8 weeks is really the first opportunity they've had in a long time to focus on nothing but the business. So we feel good about that. In terms of Avamere. Avamere's performance actually has been very consistent. Their problem is the buildings that they have in Washington State, which has exceedingly low Medicaid rates and as much as 25% of the operators of the facilities in the State of Washington are in some real trouble. Avamere's strategic focus is -- given the size of the company and the strength of the company, they're a very healthy company, but they're going to basically wait this out and hopefully benefit from some of the fall out that will occur with some of the other operators. And they were expecting or hoping that there was going to be an increase in Washington State Medicaid rates as a result of the struggle the operators are having, but that didn't occur. However, they also have a presence in Oregon, and Oregon, unexpectedly, is increasing Medicaid rates by 5%, both this year and next year. So that's going to help the Avamere portfolio overall, even though they'll continue to have some issues in Washington for a while. In terms of Cadia, we're pleased with the progress that they're making, transitioning the other facilities that they've taken over for us. But they are still going through transition, so we expect that to be another several quarters before their coverage starts to improve, but that said, it's pretty strong as it is. So there are some event-driven things with some of our operators, but there are no sort of consistent trends that cause us any concern.

In the case of Enlivant, they've recovered very nicely off of the first quarter flu season. The last couple of months have been their 2 best months that they've had, not just since we've owned them, but they're 2 best sequential months since they acquired that portfolio. We don't think that over the course of the whole year, regardless of the uptick, that they'll completely compensate for the hit they took with the flu in the first quarter, but on a run rate basis, they look really good and are right on plan in terms of meeting our expectations.

Our own managed portfolio is performing well overall with occupancy at 92.1%, and Talya will provide some more detail on that as -- when I turn the call over to her. Want to talk about Senior Care Centers just for a minute. So we've moved on to another buyer. We started losing confidence in the buyer that had been talking to, to close the deal, and we have the construct of an offer with a buyer that we have a relationship with. This is a buyer who was our largest buyer of Genesis assets. We've closed 2 tranches of Genesis assets with them. So we feel much better about going down the path with this particular buyer rather than the previous buyer. That said, we've been talking about this for quite some time. So now we're getting some other offers logged in as well. And there are offers outside of the Genesis buyer, who is a private equity buyer, and we've never disclosed their name at their request. The other interested parties are all parties that everybody on this call would know. But at this point, our bent is to really try to work through this with the buyer of -- the private equity buyer that has closed the Genesis assets with us. So there seems to be very good interest in the portfolio. We still expect this to be a 2018 event, although quarterly it'll be more towards the end of the year than before then. And one other comment I just want to make about Genesis, they had a good earnings call, so we're pleased to see that for them. On a pro forma basis, their fixed charge coverage is actually 1.22x, and that's pro forma for the restructuring, not the 1.20x that we reported. We reported the actual fixed charge coverage. And one final comment, and that's on Holiday. I think everybody saw the coverage there with the new senior deal on the restructuring there that pulled new senior out of the guarantor sub and -- that we're in and some of our peers are in, and so that improved their coverage to 1.15x.

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

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

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

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

Thank you, Rick. I will provide some color about the operating results and statistics for our managed portfolio. First, I'll address the properties in Canada, then those in the United States, breaking up the wholly-owned properties from the 172 joint venture properties managed by Enlivant and co-owned by Sabra with TPG.

Sabra owns 10 homes in Canada, 8 of which are independent living and 2 of which are assisted living and memory care communities. Sienna Senior Living manages 8 independent living properties in Ontario and British Columbia and 1 assisted living community in Ontario. The Sienna's focus has been on building and retaining occupancy and engaging with the local community in each location to solidify the property's position in the community. In the second quarter of 2018, the 9 properties managed by Sienna saw a 90.3% occupancy compared to 91.9% occupancy in the preceding quarter, with a decline attributable primarily fluctuation in occupancy in 1 building which was not fully offset by occupancy pickups at the other 8 communities. However, traffic is strong coming out of the winter months and has increased in the spring and summer months due to special events in focused marketing efforts. We achieved -- Sienna achieved a 37.7% cash net operating income margin compared to 40.6% in the preceding quarter, but slightly higher than budgeted for the quarter reflecting Sienna's ability to manage expenses.

Moving to the U.S., where we have 14 wholly-owned properties with 2 operators, Enlivant and pathway to senior living (sic) [Pathway to Living]. Results at the wholly-owned Enlivant portfolio, 11 communities located in Pennsylvania, West Virginia and Delaware surpassed expectations in the second quarter of 2018.

We're seeing robust increases in occupancy for the strong pull-through to net operating income. Average occupancy rose 140 basis points to 94.1% compared with 92.7% in the preceding quarter, which was itself a 110 basis point increase over the prior quarter. This is 600 basis point higher occupancy than was forecast for the portfolio to achieve through 2021. Revenue per occupied unit increased to $5,090 a month, which is 2% higher than the preceding quarter. And cash NOI margin was 29%, just 2.2% higher than the prior quarter and more than 4% higher than budgeted.

In January 2018, Sabra also acquired a 49% interest in a joint venture with TPG, which owns 172 properties in 18 states across the United States, all managed by Enlivant. The Enlivant JV properties had a solid quarter with higher rates driving revenue. Average occupancy for the quarter was 80.5%, essentially flat compared to the preceding quarter, but what was -- what has happened subsequent to quarter-end is important to note.

As of the end of July, spot occupancy was 82%, which is a pickup of 150 basis points, importantly, after a tough flu season that drove move outs, move-ins have increased by 375%, creating leasing momentum heading into the second half of 2018.

Revenue per occupied unit was $4,051 per month, rebounding from the slight dip in the prior quarter and nearly back to Q4 pre-flu season revenue. Cash NOI margin was 23.8% compared to 25.8% in the preceding quarter, driven by increased medical and Workmen's Comp claims and our costs associated with new leadership position. We continue to see positive trends in the Enlivant portfolio, which has exposure across the country. So 172 communities include results of communities in stronger markets as well as more challenging markets experiencing wage pressures or oversupply. In sum, we believe that the Enlivant team has the talent and the tactics to improve the operations of this portfolio as a whole.

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

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

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

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

Thanks, Talya. For the 3 months ended June 30, 2018, we recorded revenues and NOI of $166.3 million and $162.7 million, respectively, compared to $64.7 million and $60.3 million for the second quarter of 2017. These increases are due predominantly to revenues and NOI generated from the properties acquired and the CCP merger and the Enlivant transactions. FFO for the quarter was $104.5 million, and on a normalized basis was $109.7 million, or $0.61 per share. FFO was normalized to exclude $5.5 million of capitalized costs related to a preferred stock issuance that we wrote off in connection with the June 1, 2018, preferred equity redemption. This write-off was reflected as additional preferred stock dividend at our current quarter segment of income.

Additional normalizing items during the quarter include $0.4 million of CCP merger and transition-related costs and a net $0.8 million recovery of doubtful accounts and loan losses. This normalized FFO compares to $36.4 million, or $0.55 per share in the second quarter of 2017, a per share increase of 10.9%.

AFFO, which excludes from FFO merger and acquisition costs and certain noncash revenues and expenses was $98 million, and on a normalized basis attributes to similar items as normalized FFO was $102.8 million, or $0.57 per share. This compares to normalized AFFO of $35.2 million, or $0.53 per share in the second quarter of 2017, a per share increase of 7.5%.

For the quarter, we recorded net income attributable to common stockholders of $193.6 million compared to $18 million for the second quarter of 2017.

G&A cost for the quarter totaled $9.3 million and included the following: $0.3 million of CCP-related transition costs and $2.7 million of stock-based compensation expense. Recurring cash G&A costs were 3.4% of NOI for the quarter. We expect our quarterly recurring cash G&A run rate to be approximately $5.4 million per quarter through the end of 2018.

During the quarter, we recognized a $0.7 million recovery of doubtful accounts and loan losses, which were primarily related to the collection of $1 million of previously reserved receivables from the guarantors of our former Forest Park - Frisco hospital investment. This was offset by $0.3 million of general reserves related to straight-line real income and loan losses.

The $1 million collection of Forest Park - Frisco receivables is excluded from our normalized FFO and normalized AFFO. To date, we've collected $2.2 million, all of which was excluded from normalized FFO and AFFO. We expect to collect an additional $4 million to $5 million over the next several quarters.

Our interest expense for the quarter totaled $36.8 million compared to $15.9 million in the second quarter of 2017. Included in interest expense is $2.5 million of noncash interest expense compared to $1.7 million in the second quarter of 2017. As of June 30, 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 4.18%.

Borrowings under the unsecured revolving credit facility bear interest at 3.34% at June 30, 2018, an increase of 21 basis points over the first quarter of 2018. We recognized an aggregate net gain on sale of real estate of $142.9 million during the second quarter of 2018, as a result of the sale of 32 Skilled Nursing facilities and 4 Senior Housing communities.

During the quarter, we made investments of $57.2 million with a weighted average initial cash yield of 7.59%, including $41.9 million invested in 4 Senior Housing communities with an average cash yield of 7.7%. These investments were funded with cash held and borrowings under our revolving credit facility.

As of June 30, 2018, we had total liquidity of $362.6 million, comprised of currently available funds under our revolving credit facility of $324 million and cash and cash equivalents of $38.6 million. In addition, restricted cash as of June 30, 2018, included $174.4 million held by exchange accommodation title holders, which may be used to fund future real estate acquisitions.

We were in compliance with all of our debt covenants as of June 30, 2018 and continue to maintain a strong balance sheet with the following pro forma credit metrics, which incorporate, among other items: aggregate CCP rent reductions of $28.2 million and the $19 million Genesis rent reduction; net debt-to-adjusted EBITDA of 5.53x; net debt-to-adjusted EBITDA, including unconsolidated joint venture debt, 5.99x; interest coverage of 4.14x; fixed charge coverage of 3.88x; total debt-to-asset value, 50%; secured debt-to-asset value, 8%; and unencumbered asset value to unsecured debt, 216%.

On June 1, 2018, we redeemed all 5,750,000 shares of our Series A preferred stock at a redemption price of $25 per share, plus accrued and unpaid dividend for an aggregate payment of $146.3 million. As a result of the redemption, the company incurred a charge of $5.5 million owing to the write-off of the original issuance costs of the Series A preferred stocks.

On August 8, 2018, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. Dividend will be paid on August 31, 2018, to common stockholders of record as of the close of business on August 18, 2018. Following a quick update on the Genesis asset sales. We made great progress toward completing Genesis asset sales this quarter, closing on 27 property sales and generating gross proceeds of $235.9 million.

Currently, Genesis represents 5.4% of our annualized cash NOI, this is down from 8.5% in the first quarter. Of the remaining 19 facilities we're selling, 5 are currently under a contract for sale with expected total gross sales proceeds of $40.4 million, and 14 are under letter of intent with expected total gross sales proceeds of $75.8 million. These anticipated sales together with the previously completed Genesis sales are expected to trigger residual rents to us of $10.4 million per year.

Our agreement with Genesis provides for residual rents to be paid to Sabra for 4.28 years following the sale of each facility. We expect all but one of these sales will occur over the remainder of 2018, the expected delay of one being due to a potentially longer HUD approval process. Ultimately, we expect to have total continuing cash rents from Genesis, including residual rents generated from the sold assets of approximately $20.8 million, or 3.7% of our current annualized cash NOI.

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

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from the line of Juan Sanabria from Bank of America.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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

Just hoping you could talk a little bit about Senior Care. I saw that you switched the disclosure to your corporate guarantee. So I was hoping maybe if you can provide the facility level coverage? And if you have at the bed count as well?

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

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

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

Yes. So you're right, we did -- we're now presenting the fixed charge coverage versus the individual facility level coverage. And as you can imagine, with the fixed charge coverage of around 1.02x, I think is where we're at right now, the facility level coverage is now a little bit below 1x.

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

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

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

And Juan, just to give you a little bit more color in terms of sort of our take on the company even though coverage has been low for quite some time, it was consistent. So in other words, it wasn't getting better, it wasn't getting worse. They were just sort of plodding along and -- but it's clearly the instability and lack of management that's been going on for months now. They just finally hired a CEO 5 weeks ago, has clearly impacted the business, and even though they'd added a senior operator last fall, the execution wasn't happening.

And so what we saw in the last couple of months in terms of the performance, just further strengthened our resolve, if you will, to move the portfolio out. Hopefully, the new CEO will be able to turn things around, but I think given all the instability in the company and how it's impacting their performance, and typically, when new CEOs come into situations like that, there's going to be further shakeup, at least that's always been my experience. And so while we certainly hope that he'll get things turned around, we're just not willing to wait it out at this point. There's way too many advantages to us to move the Senior Care portfolio out, as we've talked about reducing our exposure in Texas, getting our skilled exposure along with the Genesis sales to a point where it actually will be lower than it was before the CCP merger. So for us, it doesn't change. It doesn't change our path. It just reinforces that we were on the right path, to begin with.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [5]

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

Okay. And are you still contemplating financing the purchase for a potential acquire or...

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

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

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

Yes. So that was the construct that we were looking at with a previous buyer, and it's the construct that we're still looking at. We like the idea of providing some seller financing for a couple of reasons: one, it'll still reduce our exposure dramatically, but give us much better debt coverage than the operational coverage that we see today; it buys the new owner time to take the portfolio to HUD, otherwise the sales process would be a lot longer; and then obviously, it allows us to manage the impact on earnings and also manage the rate at which proceeds come in. We've got so many proceeds coming in from Genesis to be able to space this out since we obviously need to redeploy all these proceeds that allows us to manage that process as well.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [7]

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

Okay. And just curious on your comments about stabilization in Skilled Nursing, but at the same time, you juxtaposed that saying you expect to shake out with the change to PDPM from some existing long-term owners. How do we -- how are those 2 kind of statements in line with seemingly some distress coming with some long-term owners, but being positive on the long-term implications with PDPM?

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

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

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

Well, I think most of the tenants that we have and our peers have aren't your traditional moms-and-pop tenants. So I think most of the tenants that we all have, and then if you look at Ensign there and a couple of other guys out there, these are smart operators that have been preparing for the future, have been moving up the acuity scale, have strong skill mix. So you all don't have very much visibility through the traditional moms-and-pops, which is still a pretty decent percentage of the overall skilled sector. So I just -- you just don't have that much visibility there. So in terms of what you do have visibility to which are the tenants that all the REITs have, in Ensign and Genesis, there's a separation there. So you shouldn't see that fall out with the tenants that we all have. And again, there's going to be a tenant here or there that's still working through stuff. As I said, we're not quite all the way there yet. But in terms of the opportunities that our guys will have to acquire some of these older traditional facilities that they'll then modernize both from a physical plan perspective and modernize from an operational perspective, think that will be a good opportunity. Does that make sense?

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [9]

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

It does. And if I -- if you wouldn't mind, one last quick one. Do you have the EBITDAR coverage for Avamere, the facility level?

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

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

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

It's slightly below -- I don't have it on the top of my head, but it's just slightly below the fixed charge coverage. It's still pretty solid. There is no issues with those guys on yet.

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

Operator [11]

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

Our next question comes from the line of Jonathan Hughes from Raymond James.

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

Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [12]

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

So Rick, you did touch on the investment landscape at the start of the call and mentioned the senior care potential buyer. Would that be a single portfolio deal or piecemeal over the next several quarters? And would you be open to selling those 38 properties to multiple parties if that one single buyer didn't take them all?

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

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

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

Yes. No, that's a great question. So it's a single portfolio deal. The reason we haven't chose yet to run a process is because there just seems to be a lot of interest in the single portfolio. If for some reason we started believing that we wouldn't get a single portfolio deal done, the reason to run a process would be exactly that. Running a process would allow us much more easily to break the portfolio up into say 3 or 4 pieces, whatever it happens to be, similar to what we did with Genesis. So if you think about Genesis, that's exactly that would -- what would happen with Senior Care. Clearly, if we can sell the entire portfolio at one piece, we can get that done more quickly then with greater certainty of closing than if we're selling it in multiple tranches.

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

Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [14]

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

Okay. And then so just looking at coverage at senior care, it's about 1x. So say, if you sold out on some implied market level, say at 1.3 or 1.4x coverage that would suggest, say, like $400 million to $500 million of potential proceeds. Is that the right way to think about it around the ballpark of regional -- reasonable expectations, if you can comment on that?

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

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

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

Sure. I mean, I think, as we had talked about before, we were seeing offers and prices that were very attractive, given where assets trade in Texas, and we still feel like the offers that we're looking at are also very positive. I think part of the challenge that we've had and we're continuing to work through is identifying where those operations should ultimately be relative to a stabilized management team in order to determine an appropriate value. So your thinking is right in that analysis. The question is, given that the performance that they've had in their operations to date, identifying where the proper run rate is going forward, and that's part of what we're working through with the new buyers we're talking to.

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

Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [16]

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

Yes. Okay. And then just one for Talya on Enlivant. And I'm sorry, I didn't get all the numbers taken down that you mentioned, but it sounded like you were saying occupancy within that JV is 3 years ahead of underwriting, did I hear that correctly?

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

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [17]

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

Occupancy in the wholly-owned properties is ahead -- well ahead of what was budgeted for now and for several years, as you just said. Not the joint venture. So the joint venture was basically had a dip with the flu season and has emerged from that blip and has actually recovered healthily. So subsequent to the close of the quarter, they've actually moved up an additional 150 basis points to 82% occupancy there.

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

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

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

So the JV is basically where we expect them to be. It just took a little bit longer because of the flu season, and then the own portfolio is ahead of where we thought it would be.

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

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

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

Okay. Got it. And then sticking with the JV, just one more and then I'll hop off, but I know there's a path to 100% ownership there over the next couple of years. Could that time line move up, obviously, as you've got these proceeds coming in from Genesis and potential senior care center sale? And I mean, if -- your views on that industry are that we're kind of bottoming and bouncing along, wouldn't maybe gaining full ownership earlier and catching more of that upside make sense, given you're going to have all these proceeds coming in?

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

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

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

It's certainly a possibility. One thing I would add to that, Jonathan, is that if you'll remember there is a floor in what we can -- in what we will pay for that. And so to some extent, if you were to trigger it really early, you're not going to be -- you're going to be having a lower yield until you achieve that higher level. So there is that piece to consider. It's not like we're immediately going to capture every bit of upside based on performance today, if that makes sense.

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

Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [21]

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

Yes.

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

Operator [22]

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

Our next question comes from the line of Chad Vanacore from Stifel.

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

Chad Christopher Vanacore, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [23]

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

All right. I've just got one for you there, Rick. So you've come out, you've shown some relative enthusiasm for Skilled Nursing, but maybe a little less -- little more cautious on the Senior Housing side, we'll say. Now are you expecting senior nursing operators or skilled -- sorry, skilled nursing operators to improve performance in second half '18 versus the first half this year? And then where you see the largest gains is the occupancy rate, managing costs or something else that we're not considering? What do you think is really going to drive the improvement?

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

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

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

So I don't think we're going to see it in 2018. I've been consistent, I think, all along saying that this is a 2019 event, and it could be a couple of quarters into 2019. I mean, there will be some incremental improvement because of the market basket. We always love October in that business because it's a 31-day month and it's the one month -- the first month to get the market basket, so you capture it all. So that's our favorite month of the year. But other than that, I think, it's more an event or an improvement that we'll see next year, plus you're going to have all the operators preparing for the transition to PDPM. So I think it's a later part -- the second half of 2019 event. The improvement is going to be, I think, primarily in occupancy. I think the industry, by and large, does a really good job and always has done a good job controlling costs. Obviously, labor's been an issue. But labor's always been an issue. It's exacerbated by the fact that you don't have a business that's at 90% occupancy, it's dropped down to the low 80s. And so there's sort of nowhere to hide when your occupancy is that low. So as occupancy starts to improve next year, then that will make it easier to manage labor expenses just because you'll have more of that revenue to work with. And in terms of rate, that's probably more of a 2020 event, simply because PDPM is going into effect October 1 of 2019. So in the fourth quarter of 2019, we should start to see some changes in mix and rate as a result of that, but you're really not going to have a full impact of that obviously until you get to 2020 because it's only one quarter in 2019. So to sort of recap, we see improvement coming in 2019, probably a couple of quarters into 2019, although we think things will continue to stabilize as we've been seeing. Up to that point, the initial improvement will come from occupancy. The secondary improvement after PDPM goes into place, will be on mixing rate.

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

Operator [25]

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

Our next question comes from the line of Rich Anderson from Mizuho Securities.

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

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [26]

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

So if I could maybe draw another comparison between what you've done with Genesis and what you're thinking about doing with Senior Care. The sentiment towards Skilled Nursing has, at least that, has gotten better over the past 6 to 12 months. How would you describe your conversations for Genesis assets that have yet to close, that you're still negotiating relative to those that happened in 2017? And how is that playing into your process with Senior Care? Do you find that people are a bit more sanguine toward the space and that's helping pricing to some degree?

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

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

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

Yes. I think it's fair to say that because most of the buyers are buyers that are already in the business, they're either operators on the ground or they're financers who're like the one that we referred to that we're working with, that are affiliated with other operating entities. So they understand the business really well. And compared to 2017, where we had no idea what was going to happen with reimbursement, there was all that conversation about RCS-1, which we thought was an improvement, but was, as it turned out, much more complex than PDPM is going to be. So now that we are where we are in the latter half of 2018, and even with some of the slippage in coverage that you saw really across the space pretty much this earnings season, it's really slowed down quite a bit. And so people see that. They understand the business. They know it. So they feel more positive about it. So I think in terms of Senior Care Centers, they see a business that even all those positives aside should organically benefit from stronger management. And then if you add those other positives to it that are more a function of what's happening in the environment, then that makes that portfolio more attractive than, I think, it would have been in 2017.

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

Richard Charles Anderson, Mizuho Securities USA LLC, Research Division - MD [28]

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

Okay. You mentioned private equity has been aggressive towards Senior Housing, which has sort of locked you out of some of that -- those deals. Would you be able to make a statement similar or is there anything to extrapolate the Skilled Nursing side as it relates to private equity? Or is that there's -- that's just a completely different animal for them?

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

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

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

Yes, I think it's a completely different animal. Talya, do you have anything to add?

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

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

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

Okay, that's all I need here. And as far as the timing of senior care, to what degree are you -- I understand that you had a buyer in place, but are you also, perhaps not -- not that you're dragging your feet, but you also want to line up a use of proceeds, to what degree are you sort of a participant or sort of dictating the process? Because you as a REIT, you want to make sure that you have a use of proceeds at least to some degree line up over and above the seller financing idea?

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

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

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

I wouldn't say we're dictating the process. We certainly have a preference. And in terms of which buyer we're focusing on currently, a buyer that is more amenable to the structure that we want, which does allow us to manage earnings better and manage proceeds coming in and deployment of those proceeds, we prefer to work with that buyer. That said, we want to move the portfolio out, and that's the #1 priority. So we're not going to be sort of stubborn about it. And if it turns out that the best buyer is a buyer that just wants to buy the whole thing for cash, then we're not going to -- we wouldn't dismiss that because we prefer to sort of manage this whole thing better. And I think we have an opportunity to manage it better. And look, most everybody is going to want to take this to HUD because, as you know, the long-term rates are just phenomenal. So unless someone's really got that kind of access to cash to pay you for all cash and can live with that for a while, because the HUD process, that's going to take -- it could take 9 months, it could take 15 months. So it's always a matter of when, not if. But when measured in HUD standards, it's like a dog's life. So to the extent that we can be helpful which also, obviously, helps us, we'd like to do it that way.

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

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

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

Okay. And last question for Harold. When you think about Genesis and the residual rent that you're going to book in the next 4-plus years, does it actually work out from a value perspective better for you so you get lesser proceeds, but you get this income stream over the next 4 years? I'm wondering if $15 million less proceeds is less value than the $10 million -- I imagine it is. I mean, I imagine it works better for you as a company to have those residual proceeds and lesser proceeds -- residual rent and lesser proceeds from the sales at the point of the event. Is that a true statement?

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

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [33]

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

I think that you could definitely make that argument, Rich. And that's precisely why we structured it that way because our negotiation with Genesis was they had an ask of a rent cut, and we knew that the rent cut was going to get them to the coverage they were looking for, but we felt like there was some risk there in our ability to exit assets at that coverage. And so we said, we'll give you that rent cut now, but what we're going to ask in return is we don't take any risk on selling assets. We're going to be basically made whole for many lower purchase price we get because buyers want more coverage. So the intent was to at least, at a minimum, make it -- us neutral, but I think you can make an argument that it's actually a positive to us. Yes.

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

Operator [34]

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

Our next question comes from the line of Tayo Okusanya from Jefferies.

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

Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [35]

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

Question for you, Rick. I mean, you take a look at the mix data and where occupancies are kind of industry-wide. Yes, you kind of just take a look at that occupancy, you make some assumptions about mix and things like that, and it just strikes me that there has to be a lot of SNFs out there or SNF operators who are just not making any money at this point. So when you kind of take a look at that, I guess, you're talking about things getting better in '19, but when I take a look at just that number, it just strikes me that there should be a fair amount of mom -- whether it's a mom-and-pops or whoever it is, who are currently in a lot of trouble that may not make it to '19. Do you think that's a fair statement?

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

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

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

Yes. So I think a couple of things, Tayo. I look at that SNF data with a little bit of skepticism from NIC only because this was a really unusual year in terms of the flu season. Historically, Senior Housing gets slammed by the flu and skilled nursing operators benefit from the flu. But I think as everybody now knows, this spring was so bad, I think, we hear that only 20% of the people that received vaccinations actually worked. And so for the first time this year, we saw skilled nursing operators restrict admissions rather than admit these patients because of their high level of concern that admitting these patients would cause basically an epidemic and they'd lose control of their back door. So we've never seen that before. So we think that the decrease in occupancy, I think, they showed sequential occupancy decrease in fourth quarter to first quarter. We think it was because of the flu season. So I'm not sure that you're going to continue to see that. We'll see obviously. But in terms of the mom-and-pops, yes, I agree with you. I'm not sure they're going to -- you're going to see a bunch of little bankruptcies. But -- because most of these guys have little or no debt service, but you're going to see them selling their facilities because you're absolutely correct, they're -- it's still a high percentage, could be -- the mom-and-pops could still be 1/3 of the industry. And so that is a legitimate component of the NIC data that brings the numbers down and it's hard to see those guys making any money. I think it's been getting worse every year because if you think about it, these are primarily Medicaid jobs. And so really going back to, what, 2006 or '07 was the last time that you saw Medicaid rate increases, I'm talking on an aggregate basis. It's obviously different in every state. But prior to 2008, you were still seeing 3% Medicaid increases kind of all over the place. And since then, it's been anywhere. It was sort of flat through the recession, and it's sort of 1% to 1.5% on an aggregate basis across 50 states since then. So when you look at your costs increasing and you're not doing much in the way of rehab or complex nursing or anything like that where you're going to get more Medicare and then higher rates, you're trying to exist on a declining revenue base with your costs increasing. So -- and I think the fact that for a lot of these mom-and-pops it's a generational business, they've owned these assets for a really long time, they don't have much, if anything, in the way of debt service. So that's allowed them survive. But this shift to PDPM, it's a big shift, right? I mean, you're talking about you're going to change how you're doing business, the mix of business; how you bill; you got to make software changes. Really it's going to -- it's considerable, if you think about an operator who just has run things one way forever and ever. It's a really -- it's really a lot to think about. So I just think that, that's going to create more -- as I said, more opportunity and these are the guys that are going to be going -- that will be -- not necessarily -- I shouldn't say going under, but wanting to get out of the business however that happens.

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

Operator [37]

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

Our next question comes from the line of Daniel Bernstein from Capital One.

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

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [38]

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

You have a lot of buyers looking at your assets in the Senior Care side, does that -- and pricing seems to be probably pretty good out in the market right now still. The cap rates have been backed up. Is it -- I think you want to go ahead and kind of reevaluate your portfolio even further and maybe sell some more assets at this point, beyond on what you've already announced?

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

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

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

Yes, yes, yes. No, I get it. Not really. I mean, we have operators that are looking at selling some individual assets within their portfolio, whereas Avamere may sell or close the building. You've got Wingate is in the process of moving 4 of their assets actually to another operator, so we actually may wind up rotating those with a different operator. So we've got a number of those situations where it's just sort of tweaking existing portfolios. But as I look at our tenants as sort of a whole, we haven't looked at any particular tenant beyond what we've already talked about and said we just don't think these guys can make it, or we're concerned about them making it, or we just don't want to wait as long as that's going to take for them to make it. And so we want to move them out of the portfolio. So -- yes, so I don't think, again, other than tweaking things here or there, which is as much the operator wanting to do it, as it is us, I just don't see much else happening.

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

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [40]

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

Okay. That's fair. And then on the pipeline, it sounds like it's mostly turnaround value-add type of properties in the Senior Housing side. I noted that maybe from the tone it didn't sound like you were too interested in there -- in those assets. But if you were, would you consider moving that to RIDEA structure? Should we expect maybe for you to do more RIDEA or some other kind of operating joint venture type of structure in the Senior Housing space?

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

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [41]

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

So -- this is Talya. I would suggest that -- to you that RIDEA is very situation specific. From our perspective, that could be an opportunity, but there's nothing that we've looked at so far that we have seen and felt was worth the risk of turning into a RIDEA structure and because we believe there was a fairly achievable turnaround in a reasonable time horizon. A lot of these so-called value-add and turnarounds are properties that have reached -- a not very robust occupancy level and revenue level because of the issues around oversupply. And that is going to take time to resolve itself.

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

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [42]

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

That's why we -- I made the comment, I think, in my closing written in the press release that the upside in Senior Housing we think lags behind the Skilled Nursing, because you do have that oversupply issue, which outside of the state of Texas just doesn't exist in Skilled Nursing. So it's just going to take longer. And probably should have noted earlier. The other dynamic -- I think, it was to Tayo's question maybe. The other dynamic that we've really liked is not just the increase in occupancy that we see in Skilled Nursing and the reimbursement system, but you're going to have continuing decline in supply. As some of these mom-and-pops continue to get out of the business and existing operators buy those facilities, they're going to have to modernize those facilities. And when they modernized those facilities, they're going to be taking a lot of beds out of service. So you buy a 45-year-old 100-bed facility, by the time you modernize it and have more semiprivates and privates and more common space, that 100-bed building may be 75 or 80 beds. And so you're going to see a lot more of that over the next few years, so I think the demographic trend combined with the decline in supply bode really well for the Skilled Nursing space.

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

Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [43]

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

Are you going to be willing to take the risk to buy those Medicaid heavy mom-and-pop assets and then put money into it right upfront within a lease? Or are you thinking maybe you'll help fund the operators via loans or some other kind of capital to get those assets to the right place and then maybe buy the assets later on? Just thinking about how over a couple of years how that consolidation might work.

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

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

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

I think we'd be willing to take the risk. One, I think, we're pretty good at accepting that risk. But for us it's going to come down to -- it's not really an obsolescence factor, even in an old skilled nursing facility, if it's in the right market and has the right operator. So sometimes you go into those things and you may structure an earn-out or something like that so the operators can get in there at a lower rent and then you have an opportunity to have a higher rent as the business improves. But I don't see us, kind of as we're sitting here today, funding an operator and then buying it later on, I think, we'd go in with the operator and watch them turn that around. So -- and I think for -- certainly, for me, in my experience and some of the other folks on our team, who've been in the operating world for a long time, my whole career was built on turnarounds. So we really like those kind of opportunities. We haven't seen very many good opportunities like that recently, but I think it's fair to assume that we may see more of those going forward.

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

Operator [45]

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

(Operator Instructions) Our next question comes from the line of Smedes Rose from Citi.

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

Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [46]

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

Earlier in the year, you had talked about potentially refinancing, I think, up to $700 million, and it got kind of postponed, I think, due to a split rating. And I was just wondering if you could just talk about any recent conversations or upcoming conversations with the rating agencies and maybe how you're thinking about refinancing opportunities at this point?

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

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

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

Yes. Sure. So the answer is, we definitely were looking at it back in November once we completed the Care Capital transaction. And at that time, the market was such that we had our eye on being able to refinance our existing bonds and have some nice accretion from that transaction, given where interest rates were. Since that time, interest rates really haven't cooperated both kind of on a macro basis, and it's improved somewhat here more recently. But also in some specific situations around some things with some of our peers, some issues they had around tenant coverages and things back in November that really forced us to put that on the back burner. So it wasn't specific to being split rate that we pulled back. I think where we're at today is as we think about what's going to differentiate us further from some of the expectations that worry Skilled Nursing REITs, which again when our Skilled Nursing exposure was over 70%, it was pretty hard to argue that, that was a comparison that should be made. So I think the thing that we're looking at now is as we continue to divest sort of our Skilled Nursing assets based on recent conversations with the one rating agency, who currently does not have us an investment-grade rating company. Today, will go long ways to getting us over the -- over that hurdle and become investment grade so we're no longer split rated and thereby remove kind of that issue for investors such that we think we can have better execution and further differentiate ourselves from being a SNF REIT. So our position right now is that we're going to be opportunistic, and we're continuing to have conversations with the agencies as well as educating the high-grade investors to the Sabra story and the progress that we're making, and then we'll look for the opportunity to do so. Because, again, we don't -- we're not compelled to do anything here in the short term given we've got couple of years before those bonds come due. And so we think there is enough catalyst in our strategy that will allow us to further improve our spreads and our comparisons to some of our peer companies and get something done that will be accretive.

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

Operator [48]

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

Our next question comes from the line of Lukas Hartwich from Green Street advisers.

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

Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [49]

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

I just have a quick one. The gap between skilled EBITDARM and EBITDAR coverage has winded over the past couple of quarters. I guess, it looks like management fees are going up. Can you talk about that? Is that just noise or is there something structural that's changing there?

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

Richard K. Matros, Sabra Health Care REIT, Inc. - Chairman, President & CEO [50]

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

No, there's nothing structural at all. There shouldn't be much noise there. So maybe we could spend some time in the offline and take a look at what you're looking because nothing's really changed.

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

Operator [51]

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

Our next question comes from the line of Todd Stender from Wells Fargo.

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

Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [52]

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

Rick, you made a comment on turnaround opportunities. I don't know if you've addressed this, but does that strategy work with the Senior Care portfolio? You might be taking a write-down should you sell it. But what about if you swapped out the operator? Just getting a sense. And if you like the real estate or maybe there's some CapEx you'd have to put in, just your thoughts?

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

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

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

Yes. No, it's -- that's actually a really good question, and we thought about it. But Texas is one of the tougher skilled nursing states. We have other operators in Texas and they're actually -- they're holding their own, and which is in stark contrast, I think, to Senior Care Centers. But they don't have as many buildings there. So I think for us, look, if we sell this and some new operator goes in there and turns it around, kind of more power to them is really our attitude. We -- you want to see everybody be successful in the business. But I think for us, Texas is a big state for us even though there is a huge lobbying effort going on to have the Medicaid system change in the fall of 2019. It failed last time. And so even though, I think, the effort's good, we don't know what's going to happen there. There continues to be new building going on in Texas. So maybe if we -- maybe we had 10% exposure there to the state and not 17% or 18% whatever it is, we'd feel a little bit differently. But it's just a lot of exposure to one state that's got some challenges. But again, it's a fair question because we have operators in Texas that's doing lot better than Senior Care Centers. But I think for us to get our skilled mix back down into the mid-50s gives us a lot more play even in terms of skilled opportunities if we see some operators that we really like so that we can do some more of those kinds of deals without it really impacting our exposure. I just think there's just too much benefit to us there. And if you back to look at -- if you go back and look at how well we traded before we kicked up its housing to over 70%, even though we got a lot of other benefits out of all those transactions, we just think we're better off staying on that path.

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

Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [54]

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

Okay. And just kind of a high-level question. Private equity has proven to be the primary buyer of Senior Housing, especially what the REITs are disposing off. What changes that? What gets the REITs get back in the market? Is this -- it just seems like a longer cycle. Do we have to see operator distress within the private equity portfolios going into next year and beyond? Is it a cost of equity that the REITs have to get a better advantage of and they've to work through all their disposition so far? What brings the REITs backs in and maybe pushes private equity out?

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

Talya Nevo-Hacohen, Sabra Health Care REIT, Inc. - Executive VP, CIO & Treasurer [55]

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

This is Talya. I'll tell you, I think, on the private equity side, what pushes them out is one -- at least 2 things. One is change in the cost of debt is going to make a difference on their leveraged IRR outcome. And then two, I think that private equity has been behind a lot of the development initiatives, and I think that exits that don't meet expectations is going to have a significant chilling effect on ongoing investment by private equity. When that starts to really prove out in a significant fashion, we're still waiting to see that, but I think it's starting to happen. I think the REITs have been collectively on the sidelines watching this and waiting for it to play out, poised with prudent portfolios and ready to move forward more strategically at a better cost.

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

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

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

And the other comment I'd make, Todd, in terms of your reference to cost of equity to the REITs, I don't really see that as a determining factor, because the way private equity is valuing these businesses on future earnings that, I think, for most of us we just don't see is realistic, that's not really a cost of -- that's not a cost of equity issue. I don't think even if all things were equal that you would see the REITs paying up the way some of these guys are paying up, and not just on assets that are leasing up, but on stabilized assets, that you look at them and there's no reason to believe that, that hockey stick in revenue improvement is ever going to occur. So I just think -- I think the REITs are a lot more disciplined. I think that private equity just has a ton of money that they have to put to work. So -- but I think it's more focus -- more a matter of discipline on the part of us and our peers.

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

Operator [57]

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

Our final question is a follow-up from the line of Juan Sanabria from Bank of America.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [58]

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

Just 2 quick ones. Rick, the improvement that you expect in skilled nursing coverage in '19, is that something fundamental driven, mix shift? Or is that more just clawing back the lost occupancy from the flu this year?

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

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

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

It's not necessarily -- it's occupancy and not necessarily clawing back from the flu. The occupancy has been dropping since about 2013. I think we're going to finally start to see some of the benefit of the demographic, and I just think it comes in a little bit sooner to the Skilled space and the Senior Housing space just because of the health issue. And if you go back to when the boomers were born and you sort of run that thing forward, it starts becoming apparent in terms of admissions we think in 2019, and it's not going to be a big wave. It's going to be incremental. But incremental -- when you've got occupancy as low as it currently exists in the space, incremental is really a big deal because your costs are currently fixed. You've got -- you have no levers left to pull, you've got no place left to hide, so you get that extra patient for that extra 2 patients and that's just a straight pull-through to the bottom line. So we're not anticipating a big new demographic wave, but we think there's going to be an incremental improvement from a demographic starting sometime in 2019 that will then continue on a regular basis.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [60]

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

Okay. And then maybe just lastly a question for Harold. Just curious as to why you guys don't deduct CapEx to arrive at the AFFO? And if you could just give us a sense of what you're budgeting from a CapEx perspective for the RIDEA portfolio?

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

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [61]

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

Yes. It's a good question, Juan. Historically, we've just not had any significant CapEx. So we're going to take another look at the definition of AFFO. I know a lot of people include CapEx because it -- as it becomes more material, it is something we should consider. And I think it's somewhere around $10 million a year is kind of our budget for the Enlivant portfolio CapEx.

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

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

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

Yes. So it's just a matter of circumstance Juan.

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

Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [63]

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

Okay. And the $10 million is your pro rata share for the joint venture?

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

Harold W. Andrews, Sabra Health Care REIT, Inc. - Executive VP, CFO, Secretary & Principal Accounting Officer [64]

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

No, that's the full amount. Our pro rata share would be half of that.

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

Operator [65]

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

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rick Matros, Chairman and CEO, for any further remarks.

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

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

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

Thank you, and thanks for joining us today. We appreciate it. As always, we're available for follow-up conversations. We're very accessible and if we don't talk to you in the near term, we hope everybody enjoys the remainder of the summer. Thanks.

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

Operator [67]

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.