Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q3 2018 Earnings Conference Call November 6, 2018 1:00 PM ET
Michael Costa - EVP, Finance
Rick Matros - Chairman and CEO
Talya Nevo-Hacohen - EVP, Chief Investment Officer and Treasurer
Harold Andrews - CFO
Chad Vanacore - Stifel
Tayo Okusanya - Jefferies
Richard Anderson - Mizuho Securities
Daniel Bernstein - Capital One
John Kim - BMO Capital Markets
Justin Devery - Bank of America
Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Third Quarter 2018 Earnings Conference Call. This call is being recorded.
I would now like to turn the call over to Michael Costa, EVP, Finance. Please go ahead, Mr. Costa.
Thank you. Before we begin, I want to remind you that we will be making forward-looking statements and 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 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 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 explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors Section of our website at www.sabrahealth.com. Our Form 10-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.
Thanks, Mike, and thanks everybody for joining us today. I’ll do my normal overview and then turn it over to Talya to talk about managed portfolios. And then, Harold will follow that with the income statement balance sheet comments. And then, we’ll go to Q&A from there. So, let me start off with guidance. Guidance has been adjusted primarily for the pending Senior Care Centers sale and an update to our managed portfolio to reflect year-to-date performance, which has been hampered by the flu season earlier this year, primarily driven by the Enlivant joint venture.
However, the Enlivant joint venture’s current performance is doing well both in terms of occupancy and rate given a substantial rate increase effective in October and nice increases is an occupancy as well putting REVPOR in good shape. As it pertains to Senior Care Centers, as we went through, as we had discussions and reduce some of the notes last night. I wanted to first address the reasons for our not discussing any deferral in our Q2 call. First, they had the ability to pay rent and we were actually in the midst of negotiation so that would happen.
Senior Care Centers has been unhappy with the buyer that we had at the table initially because the buyer didn’t want to retain them as tenants. And so holding back on the rent was really a way for them to try to create some pressure points to affect our decision making on who we go with. The problem was their buyer didn’t have terms that were palatable for us. The current buyer that we are working with a deal on that we expect to close early after the first of the year is willing to keep them as a tenant and at least some of the properties.
So that decision provided a different level of cooperation at least for some period of time. Senior Care Centers and the board attempted to bring in a new financing source for OpCo. We’ve met with that financing source directly. We do think that they were legit. We’ve been directly -- we've been negotiating directly with the board most recently and not with management. But as of last week, it became clear that they just couldn’t pull it off despite best efforts.
So historically, we’ve always gotten out ahead of issues and have been transparent, and most of you know us and know that to be the case. It simply wasn’t the case in this particular circumstance that we were in a position to talk about the default at the time we had the Q2 call because we had different expectations as to outcome. And the reality is and speaking for myself, with all the workouts and turnarounds and restructurings I have done, it's always complex and it never followed the path that you expected to follow.
But the point is for us it’s the end result that really matters. And this issue in terms of the fourth quarter and not receiving rent from senior care is a short-term issue. We’re still getting where we want to go and it doesn’t have any impact on going forward, so it’s a short-term issue. And one of the other things I want to note is, there was one note that talked about recent dilutions from the sales of Senior Care Centers in 2019. That’s not even an issue. We have been talking about Senior Care Centers from month now.
And what we talked about is the benefits of divesting Senior Care Centers. And so to recap those benefits from our perspective in certainly people can agree or disagree, the benefits from our perspective are pretty simple. We divest on our largest operator. We strengthen our top 10. We get our skilled exposure to 55% which is 18 slower and about 18 month period more it was at the time of the merger and give us a much more balanced portfolio.
We've reduce our exposure to Texas our largest state, which also happens to be the one state where there is an oversupply of skilled nursing beds in a number of markets due to new product. And Texas also has one of the weakest Medicaid systems in the country. And so, as we spent time on this over the past two months and even early than that, we still started talking about with the investment community.
The continued instability of management and inability to execute really validated the concerns that we had early this year that we need to do something about the senior care portfolio. So that's where we add on it and I’m hopefully, that clarifies what our thinking was. Obviously, we will be happy to address that more in Q&A to the extent anybody has questions. But again, we had solid reasons for waiting as we waited to announce it on this particular earnings call.
Now let me move on to our acquisition pipeline. Our acquisition pipeline currently stands at 350 million. It's primarily senior housing so that trend continues. We've been talking about that every quarter. The environment remains unchanged. Private equity is continuing to pricing high. Much of the product that we see is not stabilized or is recycled or both.
And we're not seeing much good skill product and I really believe that that's a function of the skilled operators are buying everything all of us are selling, but they're not putting reasonable assets on the market because everybody sees the light at the end of the tunnel both in terms of the demographic in terms of decreasing supply and in terms of the positive benefits of PDPM reimbursements system that’s going go into effect next October.
My guess is over the course of the next year particularly with the mom-and-pops, we'll probably see more products come to market as a number of the smaller providers determine that they don't have the wherewithal or the desire to go through the transition that is going to be required to go through to be successful post-PDPM. So, we'll kind see how that grows.
Now move on to operating metrics. Our skilled nursing portfolio continues to outperform national trends. Occupancy is now improved sequential quarters and is up 30 basis points this quarter to 82.6%. Skilled mix is up again as well 60 basis points to 39.1%. Our EBITDA and rent coverage is stable with operating stats slightly down at 1.3 and same-store is slightly up at 1.32. All of our skilled operators are in the midst of preparing for PDPM and without exception seen as a positively reimbursement shift for the space.
Our triple-net senior housing occupancy was down 30 basis points to 85.7% with the EBITDA rent coverage stable at 1.07. Our managed portfolio occupancy improved 90 basis points to 84.7 again, primarily driven by the continued progress that Enlivant is making with that portfolio. Talya will provide detailed operating stats through that portfolio.
Our top 10 tenants outside of Senior Care Centers was essentially uneventful with the exception of Signature Health, which was up to 1.47 that increase which was pretty supplemented, was a result of post restructure and analysis of their income statement and liabilities, and making it changes that where appropriate because of the restructuring and how that wash through the income statement.
So Signature Health actually is higher than we anticipated. It would be when we decided to go ahead with that restructuring. And then Cadia is down to 1.33, and as we discussed I think last couple of quarters, it continued to transition operations from a former operator. They'll will be a little bit softer while, but they are very good operators. We have no concerns about them going forward.
The last thing I want to discuss before turning it over Talya is Holiday. I am sure everybody saw the NHI release, so we've all been having conversations with Holiday, and as I think all of know from commutes I've made on a consistent base over the past few years, we like the Holiday assets. We think the management team has a very good job there. They have had really high escalators. We're also conclusive in that. And those escalators really make it difficult for them to get their head above water despite the fact that they continue to perform well.
That said, we don’t have any intention of cutting the rents or restriking the leases on any long-term basis. And our -- if we do anything with Holiday and Holiday team, it would be more likely flipping it to a managed agreement. But whether we do that with Holiday or with another operator, we haven't made that final determination yet. Part of really determination really has nothing to do with the Holiday management team who as I said, we think really highly of, but none of this really have any sense of what Fortress' agenda is as it pertains to Holiday.
So in terms of making a long term commitment relative to extending the lease with new rents and escalators, we're just not willing to choose to take that gamble. So, we'll make the decision shortly, and again, we'll like the portfolio. We may sell a few facilities. It's not going to be that material. But at this point, our inclination is to flip it into managed agreement.
And with that, I'll turn it over to Talya.
Thank you, Rick. I'll provide some comments about the operating results and statistics for our managed portfolio. First, I will address the properties in Canada and those in the U.S. breaking up the wholly-owned properties from the 172 joint venture property to manage by Enlivant and co-owned in a joint venture with TPG.
At the end of the third quarter, Sabra owned 10 homes in Canada, 8 of which were independent living and 2 of which are assisted living in memory care communities. Sienna Senior Living manages 8 independent living facilities in Ontario and British Columbia and 1 assisted living property in Ontario. The assisted living property in Ontario was sold subsequent to the end of the quarter, so it is included in these statistics.
In the third quarter of 2018, the 9 properties managed by Sienna saw a 90.3% occupancy which was flat compared to the preceding quarter with spot occupancy at the end of the October of 92.1%. The property that has now been sold has a largest number of beds in the quarter, which was offset by an increase of a movement at the other properties.
34.3% cash net operating income margin compared to 37.7% in the preceding quarter. This change was attributable to slightly lower our occupancy at two smaller properties. In one case, an uptick of debt coupled with new competition providing low rate is a lease up tactic pressured occupancy. And in the other case, a roof leak and subsequent repair took 4 suites out of the service.
The operating leverage of the smaller communities with 66 suites each made a downtick in occupancy translate to margin pressure. Both of these disruptions are temporary in nature and appear to be in the past now. Result of the wholly-owned Enlivant portfolio, 11 properties located in Pennsylvania, West Virginia and Delaware continued to performed well. We have seen a trend in occupancy increases coupled with stable rate.
Average occupancy grows 150 basis points to 95.6% compared with 94.1% in the preceding quarter, which itself is a140 basis point increase over the prior quarter. Year-over-year, occupancy has grown 5.5% which was 650 basis points more than the industry average. Revenue per occupied unit was $4,955, slightly lower than the preceding; however, as Rick mentioned, rate increases of approximately 5.5% has been implemented during October 2018.
Cash NOI margin was 27.6%, 1.4% lower than the prior quarter. That is in the context of 2.2% and 3.8% margin increases in the prior two quarters so still a strong performance year-to-date. And now the Enlivant joint venture. In January 2018, Sabra also acquired a 49% interest in joint venture with TPG, which owns 172 properties located in 18 states across the United States, all managed by Enlivant. The Enlivant JV properties had solid quarter with higher occupancy driving revenue.
Average occupancy for the quarter was 81.8%, a 130 basis points tick up over the prior quarter. Revenue per occupied unit was $4,017 which was flat to the prior quarter, solidifying the rebound from the top flu season. Cash NOI margin was 23.7% flat to the prior quarter.
When we segment the portfolio, this portfolio by occupancy, we see significant occupancy increase in those communities with lower occupancy, specifically the segment that has less than 70% occupancy which saw a 370 point increase occupancy, quarter over quarter. There is still room for improvements and the Enlivant team is allocating human and capital resources to solidify gains across the portfolio.
I will now turn the call to Harold Andrews, Sabra's Chief Financial Officer.
Thank you, Talya. Before I get into the numbers, I want to provide a quick update on Senior Care Centers as that situation has implications from the third quarter results and our revised 2018 guidance that I will be discussing.
During the third quarter, we entered into a non-binding letter of intent to sell of the 36 skilled nursing facilities and 2 senior housing communities currently leads to Senior Care Centers for aggregate sales price of $405 million inclusive of potential earned out opportunity of $27.5 million. The sale of the facilities is subject to entry by the parties into a definitive purchase and sale agreement as well as the completion by the potential purchaser of due diligence and other customary closing conditions to be included in the definitive agreement.
We expect to execute a purchasing sale agreement in the coming weeks and complete the sale in early 2019. During the quarter, we issued notices of default and lease termination to Senior Care Centers due to non-payment of rents under the terms of the master leases. As a result, Senior Care Centers is currently operating facilities on a month-to-month basis. Negotiations to receive partial rents till the date of sale of the assets continued until early November. And as of November 2nd, negotiations ended and no agreement was able to be reached.
As such, we have assumed we will receive no additional rent payments beyond what has been recorded through September 2018. During those negotiations, deposits were used to pay contractual rents to ensure that no actions by Senior Care Centers could impede our access to those amounts. Unpaid and unrecorded cash rents totaled $1.9 million as of September 2018. No straight-line rents have been recorded since May of 2018 triggered by the signing of a previously executed purchase and sale agreement to sell the assets.
Now onto the numbers. For the 3 months ended September 30, 2018, we recorded revenues and NOI of a $151.8 million and a $147.9 million, respectively, compared to a $111.8 million and a $106.7 million for the third quarter of 2017. These increases are primary due to revenues in NOI generated from the properties acquired in the CCP merger and the Enlivant transactions. Revenues and NOI declined compared to the second quarter of 2018 by $14.5 million and $14.8 million respectively.
These declines are primarily attributed to the acceleration of lease intangible amortization, totaling $6.3 million associated with lease restricting. Lower rent of $4.7 million due to Genesis and other asset sales and a decrease in recognize rent related to Senior Care Centers of $2.8 million comprised of $1.9 million of cash contractual rents and $0.9 million of straight-line rents. Cash NOI for our managed portfolio including our share of Enlivant joint venture was $13.5 million for the quarter, down $0.4 million from the second quarter.
Revenues were up by $0.2 million related primarily to increases in occupancy. Our operating expenses were up $0.6 million primarily related to payroll and admin-related expenses. FFO for the quarter was $88.8 million and on a normalized basis was $106.5 million or $0.60 per share. FFO was normalized to exclude a net $10.9 million provision for doubtful accounts for loan losses primarily related to reserves on straight line rents. Additional normalizing items included in the quarter include $6.3 million primarily related to the acceleration of the below market lease intangible amortization associate with the lease acquired in the CCP merger that was restructured during the quarter and $0.4 million of CCP merger in transition costs.
So, this is $6.3 million non-cash charge for the lease restructured is associated with the tenant that was part of the previously announced CCP portfolio repositioning. This normalized FFO compares to 70.3 million or $0.63 per share of normalized FFO for the third quarter of 2017. AFFO which excludes from FFO merger and acquisition costs in certain non-cash revenues and expenses was $97.3 million and on a normalized basis was $97.9 million or $0.55 per share. This compares to normalized AFFO of $67.6 million versus $0.60 per share for the third quarter of 2017.
Compared to the second quarter 2018, normalized FFO and normalized AFFO per share declined by $0.01 and $0.02, respectively. This decrease is primarily the results of the $1.9 million of unpaid and unrecorded contractual with followed by Senior Care Centers in September of 2018 and loss rents associated with Genesis asset sales of 4 million.
For the quarter, we recorded net income attributable to common stockholders of $35.2 million compared to $12.5 million in the third of 2017. Our G&A cost for the quarter totaled $8 million and included the following, 2.4 million of stock compensation, $0.3 million of CCP related transition costs, $0.3 million of non-recurring legal and payroll costs, and our recurring cash G&A cost of $5.2 million with 3.5% although of NOI for the quarter which is in line with the prior quarter.
We do expect our quarterly recurring cash G&A run rate to be approximately 5.4 million to $5.7 million per quarter. During the quarter, we recognized a net $8.9 million provision for doubtful accounts or loan losses comprised of a $7.9 million provision for straight line rental income primarily related to the termination of the master lease with Senior Care Centers to lease and the transfer of 5 facilities to new operator, and a $1 million increase in loan loss reserves.
Our interest expense for the quarter totaled $37.3 million compared to $24.6 million in the third quarter of 2017. Included in interest expense was $2.6 million of non-cash interest expense compared to $2 million in the third quarter of 2017. As of September 30, 2018, our weighted average interest rate excluding borrowings under the unsecured revolving credit facility and including our share of Enlivant joint venture debt was 4.22%.
Borrowings under the unsecured revolving credit facility bore interest at 3.51% at September 30, 2018, which is an increase of 17 basis points over the second quarter of 2018. We sold 3 scale nursing facilities during the third quarter for gross proceeds of $13 million, resulting in a nominal aggregate net gain on sale.
During the quarter, we made investments totaling $34.7 million with the weighted average initial cash yield of 7.25%, including a $25 million investment related to 2 senior housing communities from our proprietary product line with an average cash lease yield of 7%. These investments were funded with available cash of $10.2 million and 24.5 million of funds held by exchange accommodation titleholders. As of September 30, 2018, we had total liquidity of $417.1 million, comprised of currently available funds under our revolving credit facility of $381 million in cash and cash equivalents of $36.1 million.
In addition, restricted cash as of September 30, 2018 included $90.1 million held by exchange accommodation titleholders, which may be used to fund future real estate acquisitions. We were in compliant with all of our debt covenants as of September 30, 2018 and continue to maintain a strong balance sheet with the following credit metrics which incorporate among other things, aggregate CCP rent reductions of $28.2 million and $19 million of Genesis rent reductions.
Net debt to adjusted EBITDA of 5.5 times, net debt to adjusted EBITDA including unconsolidated joint venture debt of 5.94 times, interest coverage of 4.18 times, fixed charge coverage 3.88 times, total debt to asset value 50%, secured debt to asset value 8% and unencumbered asset value to unsecured debt of 214%.
On November 5, 2018, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per common share. The dividend will be paid on November 30, 2018 to common stockholders of record as of the close of business on November 15, 2018.
A few quick comments related to our updated 2018 outlook, we have lowered our per share and normalized FFO and normalized AFFO expectations by $0.22 and $0.15, respectively, at the midpoint. These declined are primarily attributed to the following. The anticipated loss of revenues from Senior Care Centers portfolio lowering normalized FFO by $0.13 and normalized AFFO by $0.09.
The update of our expectations for senior housing investment management portfolio lowering normalized FFO by $0.05 and normalized AFFO, by $0.04. And finally, revisions to the timing of investments and dispositions during the year, including the impact on interest expense related to the balances outstanding under revolving credit facility, lowering normalized FFO by $0.02 and normalized AFFO, by $0.01.
Finally, a quick update on Genesis asset sales, we continue to make great progress toward the completion of the sales. During the quarter, we closed our one additional asset sales and subsequent to September 30th, we sold two additional facilities for our gross sales proceeds of $5.4 million, leaving 16 facilities to be sold.
All remaining assets are under purchase and sale agreement, and 13 of the16 are scheduled to close in the fourth quarter, generating $75.7 million of proceeds. The remaining three facilities are still in the HUD approval process and are expected to close in the first quarter of 2019 generating $33.2 million of proceeds.
These anticipated sales together with the previously completed sales are expected to trigger residual rents to us $10.4 million per year for 4.28 years after each sale closing. Ultimately, we expect to have total continuing cash rents from Genesis including residual rents generated from sold assets of approximately $20.8 million or 3.7% of our current annualized cash NOI.
With that, I we'll open it up to Q&A.
[Operator Instructions] Our first question comes from the line of Chad Vanacore with Stifel. Your line is open.
So given what you've laid out about negotiations with Senior Care. Is there reasonable expectation you’ll collect on 4Q eventually?
Look, I think there’s some chance, but at this point given where we’re at in the process with them and the fact that we’ve exhausted a lot of opportunities and pathways are getting paid some, I would say it’s less than 50% likelihood that we will get paid any rent.
Chad, I wouldn’t bet on it and look, we're in a position now we just going to exercise all of our legal remedy. We've issued termination notices and we'll have control of the issue. And look, we’re not happy about this, but the fact of the matter is our goal going into 2019 was following -- 2018 rather was following all the activity in 2017 was to execute on all of our initiatives, which included portfolio restructurings and divestitures and the integration of the merger. And then go into 2019 with a clean slate.
All of that is on track maybe falls into January, but it’s all on track. So nothing has really changed in terms of the big picture. This is something that we need to prefer to avoid and we extended a lot of factors I think you've heard through again Senior Care Centers and the Board as many opportunities as possible to get to a different place despite that efforts, they weren’t able to do that. But this is a short-term issue. And so again, I’m not happy about it. But it doesn’t change anything that we’ve said in terms of what we'll do and where we’re going to be going into 2019.
So last quarter, you’re pretty upfront that the facility level coverage was under one times on these facilities. Was there anything that changed from Q2 to Q3 in terms of fundamental performance to these drop off a cliff? Are they pretty steady state?
They’re actually pretty steady state, but if you go back to my initial comments earlier in the year, when I first started talking about Senior Care Centers. My concern was when we look at the portfolio, we saw a lot of upside because there is just basic blocking and tackling that isn’t happening in this portfolio. And so for the buyer, we think they have a really nice opportunity as they do because they’re going to re-tenant it in all likelihood more than one operator. And with the good operator in that portfolio overtime, it should perform well.
The concern that we had was in the interim. We saw a tremendous instability of management and inability to execute our things that we see is operationally basic and there are very many changes in a better position to assess that in our team. And so, it’s just and as these past months have gone on, we haven’t seen their ability to execute and prove it all we have seen continued stability in the management team and so in another world, right.
And so, even if we were to consider keeping it re-tenanting, the operations, the buildings ourselves with different operators, I think for us in terms of where we are from an organizational development perspective, we need to get it behind us rather than try to ride it and look to end up for the upside over the next couple years even though that in fact maybe there. Sentiments have gotten a little bit more positive and skilled, and we continue to get more calls than about doing why aren't we doing more skilled deals.
But we have always said that, it's all about who are operators are. And so by getting backed down to 55%, and all things being equal if you do well other investment activity, once you trigger the Enlivant JV, that a 50% that gives us plenty of room to do skilled deals with operators that really fit our profile and still have a nicely balanced portfolio. So it just gives us a lot of play in that regards. So for us, we rather let someone else get the upside with the portfolio with different operators, we call it a day and a move on.
Just one more quick question. So in the contemplated sale of Senior Care Centers, is seller financing still on the table? Or is it structured as just a straight sale?
So, the answer is it is on the table if it's necessary. I think it would likely be a very short-term bridge financing while the buyer lines up more permanent, I should say permanent but longer term bridge financing to get the assets picking to HUD. My sense right now is that it's probably unlikely the seller financing will be part of the deal, but it is still on the table.
We also have a backup fire that we know just in the event that something squarely should happen here.
Our next question is from Tayo Okusanya with Jefferies. Your line is open.
So, on Senior Care, I think you mentioned that you have a backup buyer in case the current deal does not close. I'm just curious, how quickly that -- that sounds like the Plan B, but just curious how quickly than could get executed should that scenario actually end up happening?
It would definitely stretch that up probably another 90 days. So, you will still get it done, you will still get it done with a portion of the year left. So, you get it done in the early part of the year, but it would definitely stretch it out 90 days, would be my guess.
I mean an additional quarter or so, if we [Multiple Speakers].
Right now, we are looking for this to close relatively early after the first of the year. And so, we are going to know as we believe before that, if there is any issue here so we would get that as a process started before then right.
That sounds right.
Yes, you get what, I am sorry.
The second question is for Talya. I think again the commentary you provided on senior housing during the quarter was helpful. I guess what I'm still struggling with is the piece of the guidance reduction related for senior housing. That reduction still seems fairly large to me just given some other commentary around the quarters. So I'm just curious, are you expecting a dramatically worse outlook for you managed portfolio in 4Q versus 3Q?
No, I think I will let Harold speak to the details on guidance. But I think generally what you’re seeing is that the driver of 2018 results is going to be Enlivant joint venture, right? And the first quarter results were significantly off because of flu. And so even though the subsequent quarters have been improving on a quarter-over-quarter basis, there’s still an inability to catch up with what was originally forecast. Harold, if you want to add?
I’ll be able to add to that Talya. If you go back to second quarter -- excuse me, first quarter, when we put out our initial guidance and even through the second quarter, there was some expectation of possibility that the performance would continue to far exceed the original growth prospects and make up that difference. And secondarily, when you look at our original guidance, we had, call it, an $0.08 range. And so at that time, the performance was still within the range with where our guidance was at. As we’ve now seen third quarter losses improve over first quarter and pretty much in line with second quarter numbers because of this, this portfolio has a fair amount of ramp up in occupancy, consistent over time and expectations resetting that down a little bit, it just wasn’t able to completely make that up. So you are seeing combination of the first couple of months being below expectations and then the second half like seeing the first month still being slightly behind because of the growth expectations that were in that original guidance number. So what they’ve reforecasted this quarter where we got comfortable with the resetting of the baseline of occupancy and where it’s going to grow, we’re seeing the nice growth in occupancy relative to lower starting point and therefore you see adjustment to guidance.
Got you. Okay. That makes sense. One more if you could indulge me. So I know it’s early to start talking about 2019 guidance. But when I kind of think about Senior Care, the asset sales happening, the rest of the Genesis sales happening, you might do something with Holiday, which may have some little bit of diluted impact on ‘19. Should we be thinking about ‘19 as an earnings growth number or no -- earnings growth year or no, will you kind of overlay on that your acquisition outlook?
Well, I think a couple of things, one -- and we will give guidance, when we normally give it which is usually the latter half of January and you are right on your comment on Holiday, that’d be pretty minimal. But we just need to make our final decisions on that. So I think we don’t know what the acquisition environment is going to look like next year, once the table is reset for us which has been obviously our plan along going into 2019 with these divestitures and alike, we’re clearly -- that's the base that we’re going to grow from, whether we can grow enough that you will have good comps on a year-over-year basis, it just depends on the environment. We’ve got some built-in things that we can look forward to, we’ve got -- because it’s a big number, we have about another 100 million coming in on the development pipeline and if we -- right now based on forecasting it looks like we would pull the trigger on Enlivant sort of the end of the 2019, early 2020. It’s possible that we can do it earlier and that’s approximately another 400 million. So -- and so we’ve got -- and obviously that would impact the full year 2019 target, but at least on a run rate basis, it would look -- it would start -- looks pretty good. So we’ve got about 0.5 billion that we can look forward to, it’s more of a timing issue on kind of thing and one of the things to consider on pulling the trigger on Enlivant assuming the trajectory continues as we currently see it, as you pull it even sooner, you’d obviously be pulling it at a lower cap rate, it’s actually just a timing issue but you’d also be writing a lot more growth sooner than later as well. So, it’s just something interesting for us to think about and talk about internally. But it’s really hard to say what the actual investment environment will look like next year. I mean we all know what it’s been like this year. I do think like there will be more skilled products available that will be attractive as we get closer to PDPM and operators make decisions that they just don’t want to go through it. But I don’t have any level of confidence that things are going to change on the senior housing side relative to having any rationality on pricing from the private equity guys.
And our next question comes from the line of Rich Anderson with Mizuho Securities. Your line is open.
So now that you’ve exhausted the security deposit with Senior Care, let’s just stop them from filing and sort of disrupting the process of selling?
Well, I think that I don’t want to get into all the legal stuff around them filing, whether they file or not. But I think from our perspective, terminating the leases is a big part of preparing for wherever mutuality occurs there, to give us as much of an opportunity around transition the portfolio quickly irrespective of what step Senior Care Centers may feel like they need to take
And that was a critical piece for us. Obviously we’ve done this a lot before even before Sabra in other situation. So that’s why that piece was critical. And when they were really trying to make progress on bringing in the new financing source for OpCo we were willing to give them a forbearance to buy them the time that they needed so we could have a more cooperative process that at least gets some maintenance and -- but we did -- we never trusted that that would happen. And so we had already thought about what we needed to do, assuming that they might think about filing to protect ourselves and make sure that we can just continue to expedite and get itself behind us.
Turning to CCP, you came out of that estimating a $33 million rent cut. You did better than that ultimately I think that you said $28 million. How did these assets sort of get loss in that process, because essentially these probably should have been cut during that exercise unless you disagree with that statement?
Yes, no, yes. We do disagree with it. So it wasn’t part of it. Because when we looked at doing any sort of rent relief or the federal for anybody, one of the first things we looked at, what are you guys doing, what are you doing to help yourselves before we help you? Are you some of that we want to be in partnership with on a long-term basis? And their senior management team consisted of one person and then they brought a COO and they still didn’t have a CEO and we had met with them several times early on after the merger was completed. And they presented to us really exactly what we expected to see. This is what we think that we can do to improve the operations of the business and when we -- and it was the same list of things that we had Rich, same things that I would do if I was in an operator. So it really was very logical and made complete sense. And so our attitude at that point was, if you guys are executing this stuff and you still have some issues but we would really see you doing everything you should be doing, that's going to give us a much greater comfort level in doing something may be to help you guys have a little bit more breathing room.
But as 2018 continued to go by we didn’t see any of that occurring, none of it, none of it And then when they made the final executive change there, it actually showed more destabilization as a result of that instead of increased stabilization as a result of that. So if you think it’s like a car, right, I mean how old is your car, how often you’re going to throw bad money after bad money? And so that was really our assessment. So we held back for that reason. Does that make sense?
Yes. And then lastly, if I can just switch to Signature, can you give an update in terms -- I don’t know where it's at with the process with the malpractice issues and all that because I think that there was no more sort of adjustments that it might be in the future despite having done the restructuring that has to get resolved before you kind of had a final sort of steady state situation. Can you just give us that update?
Yes, no, everything has been done at Signature. The pick-up that you saw in rent coverage was a result of because of all the settlements with the liability claims which happened in conjunction with the restructure that we did with the two other partners, they were -- and combined with the reform that occurred in Kentucky, they were then able to go and assess what their liability should truly be. And so they did that and they reassessed those liabilities at a level that reflects the changing environment and all the settlements they went through and that's where the pick-up was that ran through on a year-to-date basis. And so that was it, but it was really just nothing new had to happen. They just needed the time to do that assessment and make sure they got it right.
I want to add just for clarity purposes, the rent increase -- I am sorry the coverage increase that you see there is not a one-time pick-up. That’s a big dumping of -- a reduction of reserve, it’s the overinflated coverage. That actually represents the right amount of accruals that should have occurred on the P&L during its trailing 12-month period. There is actually more reserve reduction on the balance sheet that are not included in that catch up, so I think the point is that 147 coverage is meant to be truly indicative of the coverage they actually had during that period not with some one-time catch up in it.
So you’re signing off on Signature and moving on?
We signed off on Signature the day we and Omega and their sponsor.
No, I know, I’m saying, I’m trying to achieve but anyways that one is resolved.
Our next question is from Daniel Bernstein with Capital One. Your line is open.
It sounds like you have a Plan B backup buyer. Is there a Plan C if you can’t sell the assets for whatever reason, do you have other operators that would be interested in the assets?
Yes, so that’s actually -- that's really a good question. So this is theoretical but obviously we’ve discussed it all here because when you go into any sort of work out a restructuring you need to have several plans obviously, so these facilities are going to have new operators in them, probably under any circumstance. And so we feel it is highly unlikely that even with the buyer or the buyers there’s going to be one operator that takes the whole portfolio on, there will be two, three, four something like that. We -- and the operator that are being talked to by our buyer are operators that we think really highly of. And so if it fell through Plan B the situation that we’ve been in, we have a portfolio that was then comprised of just call it three operators, just to take a number. So then we reduced our 10% NOI exposure to three different operators with about 3% NOI exposure, so that’s a much improved situation for us. The question will be at that point in time, okay you’ve got some operators in there that you like, are you willing to write it even though it’s going to take some time for them really to get the operations where they need to be or you want to actually run a process and sell it because we never really -- we ran a process, we ran a process that covered the brokers, how they break the portfolio up and sell in pieces, similar to what we did with Genesis. So we were able to identify buyers that really want to take the whole thing up. So that's the conversation that we would have and it may not even be all the way in or all the way out we may say, okay we will stay with these assets and these one or two operators and sell the others. So I think the worst case scenario for us puts us in a much better place than we are now because we will have different operators in place. It’s just a function of do we want to retain it? How long will it take for them to get it where it needs to be? Do we want to exercise the patients with that or go ahead and sell it anyway and get down to that close to 50% balanced deal and kind of take it from there. Does that make sense?
Yes, it does make actual sense like Plan C, D and you may be too.
Yes, I mean you need to do that. So we wanted to make sure that under any circumstances, we would be in a much better place than we are today with them and we feel completely confident that that will be the case regardless of the outcome.
Okay. Assuming you sell the assets RIDEA becomes effectively not the largest tenant, but your largest portion of individual I guess operator manager with Enlivant, what kind is your propensity at this point given where we are in cycle, construction and demographics to add more RIDEA how much would you want to do that? And in particular kind of thinking that in terms of Holiday as well, would you go up to 20% RIDEA, 30% RIDEA? If you could given your pipeline Senior Housing and maybe Holiday needs to be converted to RIDEA. So I am just trying to understand your -- the limits of that particular bucket?
So we’re going to be there as soon as we pull the trigger Enlivant anyway, right? And the incrementally higher with Holiday. So you’re going to be 25-ish plus to begin with. And in terms of the cycle, because the bulk of our RIDEA would be Enlivant, the cycle isn’t really that applicable to them, because they picked up an under managed portfolio and have been improving operationally. So it’s always different when you go into that situation than if it was -- if they acquired a stabilized portfolio. So that was one of the things that was really attractive to us about the Enlivant TPG deal and they’re performing. They’re showing us that they can get with things they can go. And the rate increases that they were able to implement in the environment that we’re in, and were three months ahead of January 1st, because they were supposed to be for 2019, I think says a lot about the quality of the products they’ve developed and the markets that they’re in.
So now that aside, in terms of future deals, I think we all see a trend in Senior Housing towards RIDEA against triple net lease. We’re going to -- as we look at those deals, we’re going to have to look at every situation and really understand the market, understand where those operations are in the cycle. We don’t expect to see a demographic pick up on Senior Housing next year and maybe not even in 2020. So it could be early 2021, maybe a little bit sooner than that. But call it the next two years for sure. And we expect to see sooner than that is still just because of the health issue related to 85 years old and 90 years old, a bit of that into Skilled Nursing I think first. So it can be very situation specific. And we’re going to have to have a real comfort level that there’s upside in terms of shop growth, any deal that we do relative to the cycles at that point in time in the markets that they’re in. Because one of the things I think that we are mindful of is once absorption occurs, say over the next couple of years and we already see that traditional lenders aren’t lending. The development projects that we see are being financed not by your traditional guys and none of them are penciled and -- but once absorption happens, the question is have the traditional lenders learned their lessons and are they going to be a little bit more careful about what they do? And if that’s the case, that’s great, when you talk to them, that’s what they say or …
Do they ever?
Right. As everybody has really short time, and in 2021 there’s going to be a whole lot of building again and you’ll have a window for shop growth, right? Because by the time that stuff gets built and you reset and all that, you’re probably looking at 2024, so you got a window there. But those are all the things that we think about taking into consideration. We will not take it for granted that anybody is going to behave rationally.
And Rick just real quick. are you indifferent between A, B assets, primary markets, secondary markets and obviously Enlivant is kind of secondary markets. Are you really just indifferent to primary markets or secondary just situational?
Yes, we are indifferent, it sounds just kind a little bit funny to me because when you are in a secondary market that's got a robust population with a good regional health system and almost by definition it's a B product, in that market it's an A product. So yes, so we are indifferent, but we look at penetration rates, the regional hospital system is a big factor for us when we look at secondary communities and obviously the population growth. So we look at all those things and -- but yes we’re indifferent.
[Operator Instructions] Our next question comes from the line of John Kim with BMO Capital Markets. Your line is open.
On the Senior Care sale, how achievable is the earn-out, anything you could share as far as the metrics you need to get to hit it and is it all or nothing?
It is not all or nothing and look it will depend, it will require the portfolio to perform at a higher level than it’s performing at today but keep in mind that portfolio performance has declined since we completed the CCP merger. So you need to get back to kind of where it has been performing prior to that time period. I’d hate to put a handicap on it, but there is a reasonable expectation that we’ll get some earn-out payment, but it's still there is no that it can be assured.
And John it's not going to happen in the next 12 months, even with the really good operator it's going to take him a while longer to get the portfolio where it needs to be. But we clearly see the possibility there.
Okay, and Rick you mentioned a potential option B as far as the buyer and other options as well. Do you think it will be at a similar price or what pricing would be compromised?
No I think pricing would be a little bit lower with the buyer. I think by definition they are in a different position, right? And look we may wait and see if it's -- if they’re -- once they are re-tenanted what it looks like at that point before we go with the buyer B because with operators in place a better path for us maybe to sell them with better operators in place and get a better price other than just sort of buyer B. So that's something that we would probably think long and hard about and might be really worth taking a little bit more time to do.
It sounds like on Holiday you maybe going the RIDEA route but would you mention that you thought one of the issues with them was the high escalators and their leases. Can you just describe what the escalators are in your portfolio with them and is that something that you can just address as far as resetting those escalators?
Yes, so escalator is at 3.5%.
Yes, I think that they are now new.
Yes. They were 4%. So and all of us that did those Holiday deals that four or five years ago, did the same thing, right? We all paid a handsome price and in exchange got pretty heavy escalators that kicked down after a several years but are still sort of above market. And so when I talk really with admiration about the Holiday team, this is a team that's managed through those escalators, completely changed their business model without any downturn performance but because those escalators even after ticking down are so high, it just sort of chokes them and we don’t think just bringing the escalators down it will be enough for them, and certainly that isn’t the case when you look at the NHI release, NHI released today. So if it was as simple as just bringing the escalators down to something more reasonable, I think that we would absolutely entertain that but it’s not. And again we’re not willing to give a rent cut with that kind of dilution and have even a longer-term relationship with an entity that controls that with agenda we have we can get clarity on.
Alright, okay. And then the final, I guess the few part question on your acquisition pipeline of 250 million, can you break down that pipeline between RIDEA and triple nets, how much you expect to close either this year or first quarter next year? And if it is triple net, a part of it is, can you just describe some of the general terms underwriting as far as the coverage, lease yields and escalators?
I will try to answer that for you. The pipeline that Rick described is with some of the deals that we are reviewing right now. So it would be premature for me to have a conversation about whether they are RIDEA or leases or what the terms are, because we’re processing them, we’re reviewing them. There are some that we’ve issued letters of intent and are waiting to hear whether our offer is of interest to the seller. I will tell you more globally that most sellers right now are private equity or REITs selling into the market and not operators initiating sale leaseback transaction and that, that nature of the sellers into the market are -- is resulting in most yields being structured as management contracts with operators either the operators are currently in place with those assets or being brought in buyers. It’s just a different nature of transaction. We have continued to execute leases on many of our -- many of the deals that we’ve undertaken and we’ve obviously talked about those that we’ve structured as management agreements.
And how much of the pipeline do you expect to close on either this year or the first quarter?
It would be hard for me to speculate.
Not much, I mean the pipeline is always a moving target between last quarter when it was really light at 200 and today it actually hit at 900 at one point. So you’re always doing the work and you’re always doing the underwriting and we talk about our pipeline just so its clear, we don’t include in that pipeline every deal that come to us, we only include in that pipeline deals that we think may be viable enough to spend time doing the underwriting analysis and then potentially make offers on them. So we’re doing work on all the stuff, but as we’ve seen all year and I think as you’ve seen from our peers as well, you can put a competitive bidding but you just can't get there. So I think with the existing pipeline it’s going to be pretty much what we've all seen all year, it’s not going to be a lot of actual consummated deals that come out of that. We may be wrong and it maybe -- as Talya said we can’t handicap, it’s not possible in this environment.
And our next question comes from the line of Juan Sanabria with Bank of America. Your line is open.
Hi. This is Justin on for Juan this morning. I just had a quick question on Avamere. If you could just give us an update on them and what gives you guys confidence in them as a tenant and that they won’t require a rent cut in the near future?
We talked about Avamere before, I don’t know why you’re raising the questions. I mean, their rent coverage has been stable, as we’ve talked about before, they’re a good company, they’re a strong company, they have one piece of the portfolio that’s problematic in that 60, 40s in Washington State, Medicaid rates are just horrible in that state. They’re looking at closing one facility. The rates in Washington are so bad that a number of the operators either have gone under there because Avamere is in such a strong position with their overall portfolio, their tactical approach in Washington is just to hang in there and wait it out, and pick up occupancy of continued facilities that don’t make it. So we think it’s a good strategy and there’s never been a conversation about a rent cut. So -- and we’ve talked about this on the past couple of earnings calls with Avamere as well. And so you may not have been on those calls, right? Nothing has changed. There shouldn’t be a question with that.
Thank you. I’m not showing any further questions. I’ll now turn the call back over to Rick Matros with closing remarks.
Thanks for joining us today. We appreciate it. There were some complexities through the quarter. Hopefully, we’ve provided some clarity to some of your questions that folks had. As also we’re available for additional questions and follow-up calls. We will be heading out to NAREIT in a few hours. I know we’d be seeing a lot of you guys at NAREIT and look forward to seeing you there. Thanks very much. Have a good day.
Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.