Sabra Health Care REIT Inc (SBRA) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT First 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 in our comments and in response to your questions concerning our expectations regarding our acquisition, disposition and investment plans, our portfolio repositioning and enhancement and our expectations regarding our future financial position and results of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 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 that you should -- 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 expectation -- explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investor Relations 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 for joining us, everybody. So [let me get the mood down and get everybody imagining they're in] California while you're listening to us today.

So let me first talk about guidance, how -- we'll get into details, but we had a minor adjustment to guidance that simply reflected a change in timing in taking out the preferred and our existing notes. All other assumptions remain unchanged.

I want to talk a little bit about all the various reimbursement changes. We have 2.4% market basket increase effective October 1 of this year. Therapy caps were eliminated, that's actually a pretty big deal for this space. Value-based payments, we expect overall to be -- for our operators, on an aggregate basis, to be relatively neutral when it comes to value-based payments, and to provide a little bit more detail, about 60% of this space will be winners, meaning that they'll retain some or all of the 2%, the top performers have an opportunity to get a 1% increase in their Medicare rate. The -- of the bottom 40%, 25% of the bottom will take the biggest hit, but that hit actually will only translate to a 0.5% decrease in their NOI. So even for those that don't do well on value-based payments, the downside is pretty limited, not that you ever want to see any decrease in NOI, but it's half a point.

The Patient Driven Payment Model, so that's PDPM, is a simplified system revised from what used to be called RCS-1. It's still revenue-neutral. But some of the changes include the following: Significantly reduce cost to operators, estimated at $2 billion in savings for the industry; the incentives will shift from solely short-term rehab to complex nursing. It's a case mix payment system with 5 categories rather than the current 66 RUGs categories. So a much simplified system. The 5 categories are broken down into physical therapy, occupational therapy, speech therapy, nursing and non-therapy ancillary services, which you'll see referred to as NTAS. So therapy rates will be lower than what they were, but there'll be corresponding increases in nursing. Physical therapy and occupational therapy payments will taper down after 20 days. That's up from 14 days in RCS-1. Concurrent and group therapy will now be allowed up to 25% of rehab revenues, which will help margins. The historical utilization level for concurrent and group therapy back when it used to exist was 26%, so the 25% really just reflects the reality of what it always was when it was in place. Obviously, it's been gone for quite a few years. That's another positive for us.

The reimbursement in centers for nursing will have the important benefit of increasing the percentage of skilled nursing patients that have longer length of stays, mitigating the length of stay problems that exists with the focus on short-term rehab. So if you just look at the numbers, CMS is going to do an analysis, and maybe you guys do as well, that's based on the existing population of skilled nursing patients. The key here is that the existing population is going to change. Operators always follow the incentives. We've seen it historically in the past. When the new rehab categories were put in, that's where the operators went. They started admitting and creating clinical protocols to be able to take care of patients with the highest needs on rehab, which really is why so much of the rehab under the current system is in the ultra high and very high categories. So expect to see significant changes in behavior on the part of our operators as they start emphasizing nursing patients and not just solely rehab patients, which will -- the nursing patients will have a longer length of stay so that obviously has a dual benefit of mitigating the length of stay issues and focusing on short-term rehab and, therefore, resulting in higher occupancy.

The other benefit with this system change is we'll no longer have minutes, obviously, because it's going to a case mix system, and that should positively impact DOJ investigations. As you all know, the DOJ investigations were based on the assumption that providers had too high a percentage in the ultra high and very high categories and, therefore, must be doing something wrong.

I'd also note that we've never really seen this level of collaboration between CMS and the industry before, so that's greatly appreciated. It actually started before the current administration. The American Healthcare Association has been involved with CMS and these changes for over 4 years now. But since the administration came into office, the cooperative attitude and work relationship between business and CMS has also increased dramatically.

I'll now just make a comment about our asset divestiture program, how we'll get into the details on it, but all of our asset sales are progressing, as previously communicated, in both pricing and timing. In terms of our acquisition pipeline, it currently stands at $400 million, it's almost entirely senior housing. The competitive market remains the same as it's been. And at this point, we see cap rates stable, so -- both on the skilled side and the senior housing side. I think there's been some commentary that they're -- some people have seen the beginning of some cap rate expansion on senior housing. We haven't seen that to any significant degree at this point.

Our focus continues to be on the execution of our divestiture program, our proprietary development pipeline and executing of small deals. We've been shown large deals but they tend to be both messy and not compelling, and we simply have no need to follow that path. By year end, assuming no other skill divestitures, we'll have our skilled exposure down to 61%, that's down 13% from August of 2017, and just 4 points higher than where we were pre the merger with CCP. When we think about our skilled exposure, I just want to make a note here, it's really more about the operator than it is about the space. So as we look at our current operators and we look at operators as we look at additional deals going forward, it's really looking for operators who fit our preferred profile.

Let me move now to our operating results. Skilled occupancy sequentially was 80.9%. Just up a tick. Skilled mix is up 40 basis points at 37.6%. Our EBITDA coverage was 1.33, down from 1.37. That was specifically due to one of our tenants who took over the operations of another one of our tenants. And while that transition is occurring, their coverage was down some, but their coverage was still 1.54, it just had been higher before that. So we actually expect that to go up. So we didn't see any trends sort of across the rest of our tenants. I'll talk a little bit more about that in a couple of minutes.

The difference in Signature Health that I want to point out because we showed coverage of 1.22 on a [pro forma] basis. So under the current restructured deal where there is a change in rehab pricing and there are also 4 facilities being divested, which we're going to [rent credit] from, it would put them at 1.3, and that's what the deal was predicated upon.

For Senior Housing, sequential occupancy was down 50 basis points to 86.8%. EBITDA coverage was flat at 1.09. On our Senior Housing - Managed, wholly-owned facilities, occupancy was up sequentially to 92.1% from 91.7%. For specialty hospitals, sequential occupancy was 83.4%, up from 79.3%, [which leaves] our coverage at 3.45. Occupancy was up and coverage was somewhat lower specifically due to Signature Behavioral hospitals which were acquired in 2017 coming into the numbers. They have lower occupancy than -- lower coverage, rather, than the other specialty hospitals and usually run about 1.6x, but they also tend to have higher occupancy. So -- and we talk about our all-in operating results, not same-store, because given all the changes in our portfolio over the last year, looking at our overall operating results as opposed to same-store mix, a lot more same-store just doesn't make the same level of sense that it did a year ago.

And in terms of our top 10, let me make a couple of comments and some things I saw in some of the notes that came out last night. In terms of Genesis going from 1.26 to 1.22, they actually reported a pretty good quarter this morning. But that said, we're getting pretty close to the point where our old testament is done with, and so it just doesn't -- it's just not going to matter much to us anymore, which has been the point of this divestiture program to begin with.

In terms of Avamere, which was just slightly down, Avamere is doing fine. They've got a strong portfolio. They have 6 facilities in Washington state that they have issues with. In fact, all the operators in Washington state have issues because of substantively poor Medicare -- poor Medicaid rates. And I think we'll see 1 of 2 things happen with Washington state. Avamere may sell a facility, or the 6 facilities, so that may -- that would help. But the other thing is there's conversations going on at the -- with the state legislature where Medicaid rates are going to be -- potentially be increased. That's being considered. So either that will happen or Avamere will simply wait out some fallout with some of the smaller operators who are really struggling. So we absolutely have no concerns about the Avamere portfolio. It's a small piece of their overall portfolio. They're a strong operator.

In terms of Holiday, you all may have seen an announcement today from [Nye Senior] that they came to a deal with Nye Senior where these 51 facilities that they have with Nye Senior will be converted from a triple-net lease to managed contracts. That's a good outcome for Holiday. Those 51 facilities have been a burden on the guarantor sub. So from our perspective, that's a real positive, real strength in the guarantor sub.

So it was a constructive deal. And as I think everybody knows, Nye Senior is going through a process right now and that would also be -- that new understanding -- or that new agreement, rather, in that new structure will help them theoretically in their process as well. So for us, it was good news. I know the Holiday team feels really good about that negotiation in getting those 51 facilities out of guarantor sub.

And in terms of Senior Care Centers, they ticked down 0.01. That's not really ticking down. They had no downward trend. Their coverage is not strong, as we noted on the last call, and we're keeping an eye on them. Their coverage slightly ticked up in the current quarter. But look, they're an operator we're keeping an eye on. There is an interested buyer that we're having conversations with. We don't know, as we sit here today, whether we will get anything done. But it's interesting enough for us to take a look at. And if we were to do that, obviously, our skilled exposure would come down more so [than one with] our exposure in Texas. On the other hand, with some of the new management changes that are going on, as we said on the last call, there is some real opportunity for them to improve their operations. So we'll see. But we are very open-minded to looking at the divestiture of all or some of those assets. And as we -- if those negotiations start to materialize, we'll keep everybody posted on that.

And with that, I'll turn it over to Talya. And then Talya will turn it over to Harold, and then we'll go to Q&A. Talya?

Thank you, Rick. This is the first time that we have walked through the results of our managed portfolio in our quarterly earnings call. Until this quarter, when we closed on the Enlivant transaction, the managed portfolio had been very small and consisted primarily of our retirement home from Canada. So that is where I'll begin my comments.

Sabra owns 10 homes in Canada, 8 of which are independent living and 2 of which are assisted living and memory care facilities. Sienna Senior Living, a publicly traded company on the Toronto Stock Exchange, manages 8 independent living facilities in Ontario and British Columbia, and 1 assisted living property in Ontario for Sabra. The remaining property, Maison Calgary, is managed by BayBridge Senior Living, a privately held company in -- that has actually merged with Amica, [bought] Amica last year. Sienna has been managing the homes for the last year and has focused on building and maintaining occupancy and improving the quality of resident services. In the first quarter of 2018, the Sienna managed properties achieved 91.9% occupancy, compared to 92.7% in the preceding quarter, so a 80 basis point decline, which was a direct result of lower traffic and tours because of the harsh flu season. And it achieved 40.6% cash net operating income margin compared to 35.8% in the preceding quarter as a result of tighter cost control and a reversal of the one-time accrual.

Maison Calgary, which provides assisted living and memory care services to private pay residents in Calgary, continued to perform well in the first quarter with 92.5% occupancy compared to 89.6% occupancy in the preceding quarter, mostly through leasing momentum on the assisted living site, and achieved 33.2% cash NOI margin compared to 27.9% margin in the preceding quarter, primarily as a result of lower nursing labor cost. With revenue per occupied unit of just under $7,300 a month, Maison Calgary is a property that provides an alternative for long-term care for those who are able to pay privately.

Moving to the U.S. Of the remaining 14 wholly-owned managed properties, 11 are managed by Enlivant, and 3 are managed by Pathway to Living, which also leases an additional property from Sabra in Green Bay, Wisconsin. The wholly-owned Enlivant portfolio, located in Pennsylvania, West Virginia and Delaware, performed well in the first quarter of 2018. Average occupancy rose 110 basis points to 92.7% compared with 91.6% occupancy in the preceding quarter. Revenue per occupied unit increased to $4,986 per month, which was slightly higher than the preceding quarter, and 2.8% higher than underwritten for the quarter, again, despite a tough flu season.

Cash net operating income margin was 26.8% compared to 23% in the preceding quarter.

The 3 Pathway properties, 2 in Central Wisconsin and 1 outside of Minneapolis, which were part of our proprietary development pipeline, total 174 units with a mix of assisted living and memory care. Pathway has been working to improve occupancy and operating performance since taking over these properties from a prior operator. In the first quarter, average occupancy rose to 89.3% from 81.8% at Marshfield [one]. Note that this includes only 1 property as the other 2 were acquired by Sabra in the fourth quarter of 2017 and are currently categorized as pre-stabilized. Cash NOI margin for all 3 combined was [16.7%], in line with the previous quarter.

In January 2018, Sabra also acquired a 49% interest in a joint venture with TPG, which owns 172 properties located in 18 states across the U.S., all managed by Enlivant. Despite a severe flu season, Enlivant properties did not give up much on occupancy and rate. Average occupancy for the quarter was 80.7% compared to 81.3% in the preceding quarter, and revenue per occupied unit was just under $4,000 per month, which was only 1.2% less than underwritten for the quarter.

Cash net operating income margin was 25.8% compared to 26.4% in the preceding quarter, reflecting the impact of the revenue items that I reviewed and some nonrecurring expenses including higher utility costs and snow-related cost. Residents at Enlivant's properties received annual increases once a year at the end of the year and management believes that there will be -- they will be able to continue to push both rate and occupancy. At this level of occupancy, incremental revenue has an outsized impact on margin and we remain optimistic that the Enlivant team will continue to improve overall revenue and net operating income in this portfolio.

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

Thanks, Talya. For the 3 months ended March 31, 2018, we reported revenues and NOI of $166.1 million and $163.2 million, respectively, compared to $62.7 million and $60.2 million for the first quarter of 2017. These increases are due predominantly to revenues and NOI generated from the properties acquired in the CCP merger and the Enlivant transactions.

FFO for the quarter was $113.4 million, and on a normalized basis, was $111.6 million after the exclusion of $1 million of CCP merger and transition-related cost, $0.9 million net recovery of doubtful accounts and loan losses, and $1.9 million primarily related to nonrecurring other income, which is $0.63 per share. This normalized FFO compares to $36.4 million or $0.55 per share of normalized FFO for the first quarter of 2017, a per share increase of 14.5%.

AFFO, which excludes from FFO merger and acquisition costs and certain noncash revenues and expenses, is $106.4 million, and on a normalized basis, was $104.2 million, after the exclusion of $0.6 million of CCP-related transition costs, $1 million net recovery of doubtful accounts and loan losses and $1.9 million primarily related to nonrecurring other income, or $0.58 per share. This compared to normalized AFFO of $35.2 million or $0.53 per share in the first quarter of 2017, a per share increase of 9.4%.

For the quarter, we recorded net income attributable to common stockholders of $59.9 million compared to $16.3 million for the first quarter of 2017.

G&A cost for the quarter totaled $7.9 million and included the following: $1.1 million of stock-based compensation expense; $0.6 million of CCP-related transition costs; and $0.8 million of operating costs for HealthTrust, the valuation firm that was acquired in the CCP merger, which we sold during this quarter.

Recurring cash G&A, excluding CCP transition costs and HealthTrust operating expenses, were $5.3 million or 3.3% of NOI for the quarter. We expect our quarterly recurring cash G&A run rate to be approximately $5.2 million to $5.6 million per quarter.

During the quarter, we incurred charges totaling $1.2 million of provision for doubtful accounts and loan losses, primarily related to $2.2 million general reserves related to straight-line [real] income and loan loss, offset by $1 million recovery of cash rental income. Our interest expense for the quarter totaled $35.8 million compared to $15.8 million in the first quarter of 2017. Included in interest expense is $2.5 million of noncash items compared to $1.6 million in the first quarter of 2017.

As of March 31, 2018, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant joint venture debt, was 4.1%. Borrowings under the unsecured revolving credit facility bore interest at 3.13% at March 31, 2018, an increase of 32 basis points over the fourth quarter of 2017.

We recognized a $0.5 million net loss on sale of real estate during the first quarter of 2018, primarily associated with the sale of 1 skilled nursing facility.

During the quarter, we invested $477.8 million on the Enlivant assets. In addition, we invested $47 million on 2 Skilled Nursing/Transitional Care facilities and 1 Senior Housing community with an average cash yield of 8%. These investments were funded with cash on hand and borrowings under our revolving credit facility.

As of March 31, 2018, we had total liquidity of $435.1 million, comprised of currently available funds under our revolving credit facility of $389 million in cash and cash equivalents of $46.1 million.

We were in compliance with all of our debt covenants 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 investment and disposition activity concluded after quarter end; net debt-to-adjusted EBITDA of 5.48x; net debt-to-adjusted EBITDA including unconsolidated joint venture debt of 5.97x; interest coverage of 4.23x; fixed charge coverage of 3.72x; total debt to asset value, 49%; secured debt to asset value, 8%; unencumbered asset value to unsecured debt, 224%.

Regarding our net debt-to-adjusted EBITDA, I would point out that it includes the full impact of the $19 million Genesis rent reduction and the $28.2 million impact of a CCP portfolio repositioning. As we complete the Genesis and other planned asset sales, we expect this leverage to decline over the balance of 2018 to around 5.25x, or 5.75x including unconsolidated joint venture debt.

On May 2, 2018, we announced that we will redeem all 5,750,000 outstanding shares of our Series A preferred stock on June 1, 2018. These shares will be redeemed at a redemption price of $25 per share, plus any accrued and unpaid dividends in the amount of approximately $0.445 per share for an aggregate payment of $146.3 million.

On May 9, 2018, the company announced that its Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. The dividend will be paid on May 31, 2018 to common stockholders of record on the close of business on May 21, 2018. I would also note that this dividend is about 78% of our normalized AFFO for the quarter.

We have updated our 2018 earnings guidance range as follows on a per-share -- per common share diluted basis: Net income attributable to common stockholders, $1.98 to $2.06; FFO, $2.48 to $2.56; normalized FFO, $2.47 to $2.55; AFFO, $2.28 to $2.36; and normalized AFFO, $2.27 to $2.35. These updates reflect the revised timing for completing the Series A Preferred stock redemption and the elimination of the previously anticipated refinancing of our $500 million of 5.5% senior unsecured notes due 2021, and $200 million of 5.375% senior unsecured notes due 2023 during the second half of 2018.

Our current expectations for pricing of a 2018 unsecured bond offering to complete the refinancing is not compelling at this time. Accordingly, we will be patient and pursue any such refinancing opportunistically prior to the relevant maturity dates.

These changes impacted our guidance range through higher interest expense and preferred stock dividends, as well as the elimination of a loss on extinguishment of debt, which impacted net income, FFO and AFFO amounts only.

Finally, a quick update on the Genesis asset sales. We continue to make great progress toward completing -- completion of the Genesis sales we discussed last quarter. Of the 46 identified as being marketed for sale last quarter, we have now closed on 6, which generated gross proceeds of $20.5 million. 25 are subject to 2 separate purchase and sale agreements for expected aggregate gross proceeds of $254 million, and the remaining 15 are under 3 separate LOIs with expected aggregate gross proceeds of $79.8 million. These sales are expected to trigger residual rents to us of $10.2 million per year for the [following 2 -- 4.28 years], as provided for in our agreement with Genesis. All sales are expected to be completed by the end of 2018, with the majority closing by the early part of the third quarter.

Upon completion of the sales, we expect to have continuing annual cash rents from Genesis, including residual rents generated from sold assets of approximately $20.6 million, or 3.7% of our annualized cash NOI.

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

(Operator Instructions) And our first question comes from Tayo Okusanya from Jefferies.

A couple of quick questions. The -- first of all, the whole Medicare situation with the 2.4% increase, that all makes sense, could you give us some commentary just on the Medicaid side, what you're kind of hearing from states as we gear up for the new July 1 fiscal year for most of the states?

Yes, pretty much not much different than it's been. We're not going to see much. We're not going to see much negativity. These Medicaid increases have been really modest the past number of years and I wouldn't expect that to change this year. I mean, you've got a couple of states, like Washington state, which has particularly weak Medicaid rates that are having active discussions because they really see that their operators are struggling in that state. In Texas, there is a pretty substantive effort going on that the REITs are actually -- or some of the REITs are actually supporting with the National Trade Association to change the system there. But even if that were to happen, that's -- they only have elections every 2 years there, so that's a 2019 issue. And as far as every other place, I don't think there's any major sort of efforts going on to change anything in the other states. I think, it's going to sort of be business as usual.

Got you. Okay. So that's helpful. And then, second of all, you did make just some passing comment on the [Nye Senior] transaction with Holiday. I'm just curious, is this something you guys would consider doing with your Holiday portfolio, just kind of given your coverage at 1.12?

No. Well, first of all, remember, I know we have to remind everybody, this is -- it's independent living, it's not a health care model. And so we underwrote the deal at 1.1, as did our peers who do Holiday deals. So they're performing where it was underwritten at. Their EBITDA margins are 40%. It's a pretty healthy business. So no, we don't intend to do that. I think, in the -- obviously, I can't talk for [Nye Senior]. I think, in this case, while it was something that Holiday wanted to do with Nye Senior , because it's a positive for their cap structure, I think, for Nye Senior , as they go through the process, to the extent that potential buyers may not want to hold on to all the assets and Holiday's a pretty big chunk to them, it gives them kind of an easy out there. So I think it gives them a little bit more flexibility when they talk to buyers. So it happened really for some very specific reasons related to that process. And we don't see ourselves doing anything different from Holiday. In fact, we would like to do more with Holiday. There just haven't been the opportunities. Independent living isn't a huge space, as you know, in the States, the way it is in Canada. And there's really almost no new development on independent living. The only development we see that ever relates to independent living is when guys are building campuses whether they're full CCRCs or just sort of multilevel senior housing -- senior housing facilities that may have some IL cottages or units.

And our next question comes from Juan Sanabria from Bank of America.

This is Kevin on for Juan. I just had a question regarding Signature. In the press release, you guys mentioned the deferred rent and possibility of resetting the base rent once all the obligations are taken care of. I guess, what is the metrics for that? Is it coverage, cash flows or just paying off or paying down the financial claims that they have?

Yes, thanks for the question. It really is dependent on their future cash flows. And so the first priority is got to get the med malpractice obligations paid. Then they got to get the DOJ payments taken care of. And as we structure the deal, every landlord's portfolio is separated into separate silos. And so we're only looking to our -- the performance of our portfolio to generate cash flow. And the obligations for DOJ and the med mals is more shared across silos, but once those are taken care of, then the cash flow that our silo generates will then allow us to reset rents as those cash flows improve down on the road. So we don't have any expectation that's going to happen anytime soon, but it is something that's there. Think about it more in terms of as the demographics really start to change over the next couple of years and then performance improves from that, I think we'll have that opportunity to recoup that. But we're not making any assumptions about those recoupments at this point.

The other couple of points I'd make on the opportunity for recoupment, even more -- even in addition to the demographic is if you think about everything that Signature has gone through with the restructuring, it's been a huge diversion for the senior management team. The senior management team, for the first time in a very long time, is going to be able to solely focused on the business. So that's an intangible. But we think that's very helpful. And with all the reimbursement changes, that -- those would be positive as well. And despite the fact that -- and I think you've seen sort of across the space, everybody's metrics have become a lot more stable on the skilled nursing side. Even as they begin to improve, you're still going to see a decline in supply in skilled nursing, which is just going to enhance the occupancy opportunities, in addition to the demographics. So we think there's some real positives there. But as Harold said, nothing's in the numbers because it's impossible to predict both timing and the actual metrics.

And our next question comes from Smedes Rose from Citi.

I just wanted to ask you on the SNF coverage. It came in at 1.33, I think. And I think, in earlier remarks, you had said you expected it to trend to 1.38 to 1.4x. Is that something that will happen over the course of the year as the rent reductions continue to kick in? And also, with your positive views on the CMS proposals, do you think that coverage level could go higher relative to the initial expectation?

Yes. So on the first question, in terms of the 1.33, that's specifically due to 1 tenant who's got pretty strong coverage, that's Cadia at 1.54. They've taken over the operation of one of our other tenants. And so just the timing of that and regulatory approvals and just going through the amount of time it's going to take to transition to get their systems in place. There's been some decline in their coverage. Their coverage was quite a bit higher. So it's still strong at 1.54. So the 1.33 has nothing to do with the merger or anything else that we've done. It's specific to that. So we should see that tick up as they start integrating those additional facilities and those operations start improving, and it will be a little bit of a slow climb because we report on a trailing 12 basis. But again, they're a really strong operator. And even with reduced coverage, they're still at 1.54. So in terms of your second question, so obviously, first of all, we've got until October 2019 before this happens. And I think what I would expect to see behaviorally, based on history, is that operators will start admitting patients and start transitioning before the October '19 date. So they'd consider to hit the ground running a little bit more. So by way of example, when -- back 10-plus years ago, when the new rehab categories came in and the incentive to go after those higher acuity rehab patients in RUG 66 was still apparent, we started seeing operators admit those kinds of patients pre-October 1 of that year, even though they weren't getting fully reimbursed then. So they would have time to acclimate and demonstrate to their referral sources that they could provide the kind of outcome that their referral sources would look for and make it therefore be a preferred provider. So I think we'll see some of the same behavior over the course of 2019 next year. But as those changes actually take hold, I absolutely expect to see improved coverage. And I would also note that we currently have operators in certain states where there are robust Medicaid systems. So even though Medicare may not incentivize them to go after more complex nursing patients, pulmonary dialysis, whatever the case may be, the Medicaid system allows them to do that. And in those -- within those operators, we're not seeing any length of stay issues because even though they're also focused on taking the short-term rehab patients, which inherently have length of stay pressure, they've got a nice percentage of these complex nursing patients that have a much longer length of stay, and that mitigates the length of stay on the short-term rehab patients. So I definitely see that as beneficial. And even though it's hard to completely predict timing when you look at all the combined factors of a better market basket, the elimination of therapy caps, the new system coming in on October '19, a little bit of a bleed in of the demographic probably next year, and the continued reduction in supply, it really all bodes well for this space. And it's kind of a silly (inaudible) that I may have mentioned on the last call that says by 2025, the industry will be 100% occupied, based on a variety of factors, mostly demographic and supply. So yes, we would expect to see coverage improve over the course of time.

I also just wanted to ask you, in your outlook for the year, what sort of improvements are you expecting at Enlivant this year? I know it's sort of a turnaround portfolio that you talked about when you bought it. So occupancy a little under 81%. Because it sounds like you emphasized or continued occupancy gains, I guess, maybe, at the expense of rate. Or maybe how does that kind of play out over the course of the year?

So I would just say a couple of things. One, rates have not been an issue for them at all. And the owned portfolios, the 11 that we own, they're actually well ahead of projections in occupancy. And on the joint venture, they got hit somewhat by the flu, as Talya mentioned, in January, February, but they already saw a nice rebound in March. So we expect occupancy tick up on a continual basis. But occupancy moves incrementally. You've got movement and you've got folks leaving, obviously. So you're not going to see 3% or 4% increase during a short period of time. But you'll see incremental improvement. And we believe that they will get industry averages. Talya, is there anything?

Yes, I think they also have the ability, depending on markets, to push rate more or less. And that's really a function of local market dynamics.

(Operator Instructions) And our next question comes from Chad Vanacore from Stifel.

So just an update on the Senior Care Centers, coverage there is pretty thin. So how are those changes proceeding on that portfolio and how are you thinking about it going forward?

So two things. One, operationally, they basically are treading water. They ticked up slightly in the first quarter but it's not substantive. So the CEO -- the new COO has only been there for, I think, 6 months, something like that. And they're in the middle of doing a CEO search. They actually have a CFO doing all 3 positions for quite some time, which just hurts, obviously. So there's -- a lot of -- when I talk about the blocking and tackling as opposed to sort of industry headwinds, because of their issues in the C-Suite and the lack of stability there, that's really hurt their strategic direction and their operational results. We do like the new COO, we know him, and that's allowed the CFO to get more focused on his specific responsibilities. And hopefully, they'll conclude the CEO search shortly. So it's really -- like basic cost controls, it really is blocking and tackling. Cost controls, labor management, things that most of our operators really do well at, that they've really suffered. So we expect them to actually just continue to tread water for a while. So we don't see them declining, they haven't been declining. We just don't expect to see a lot of uplift for most of this year. I think the elimination of therapy caps in the market basket obviously will help, like it will help everybody. So that's something to look forward to until, operationally, they get their act together. But we do have unsolicited interest from a particular buyer in them, as I noted, and so we are exploring that. And so we're very open to doing something in terms of the divestiture of either all or some of those assets. And so we're just sort of keeping an eye on it. We're trying to be helpful with them in terms of anything that we can do for them from a business plan perspective or resources that we can recommend to them. So that's kind of where it is. So we're not super concerned about anything at this point. They sold the pharmacy, which allowed them to pay down a huge chunk of the debt that they have with us, we noted that in our press release. So I think that was important. And we encourage them to do that. So we feel like there's been a good dialogue with them on the things that they can do to improve their business. So we do think there'll be improvement. I don't expect to see improvement this year. And as I said, we'll update everybody on whether this interest that we have in our portfolio is something that we want to act on. And -- but Texas is a tough state. It's the one state where there's actually skilled nursing facilities being built. You don't really see that in much of the rest of the country. So that's really as much as we can say on that right now. So not overly concerned, but we'll keep an eye on it. We'll keep the dialogue going and we'll pursue things with this potential buyer.

All right. That's excellent. And then, just thinking about the Cadia portfolio, which was formerly operated by NMS. Have they largely cleaned up the sins of the past management? And then, what's left to do to improve those operations?

Yes. So the Cadia portfolio isn't the former NMS portfolio, it's kind of flipped. So Cadia was actually our first big acquisition when we formed the REIT in December of 2011. And it was actually also in conjunction with our first equity offering. So Cadia took over the NMS facilities and their management team is fully intact. So from a management perspective, it's Cadia that's operating it. It took a little bit longer, and I think everybody liked to get all the regulatory approvals to get the change of ownerships done and all that kind of stuff. So the NMS operation suffered a little bit in that time. But we feel good that they're really getting -- that they're getting their arms around it. We're starting to see incremental improvement. And again, even with sort of the burden of taking on the NMS facilities, which affected sort of the combined coverage of NMS and Cadia, we've still got Cadia with all the buildings at 1.54 coverage.

All right. One last quick one for me. After the sales of properties and the repayment of debt that you already outlined in your guidance, what's the best use of incremental cash flow? Is it debt repayment? Development pipeline? Acquisition? Something else?

Yes, certainly, in the short term, we've got some outstanding borrowings on the revolver, so we'll pay those down. And that's really where you see the improvement in our expected leverage over the course of the year, getting that back down to the 5.25 area that's really driven by taking proceeds from asset sales, paying down the revolver. I mean, it also leaves us room to be more opportunistic in acquisitions. We could still do a fair amount of acquisitions somewhere between $150 million and $200 million. [Still] keep our leverage in an area that we're comfortable with. But the first thing would be to pay down debt.

And our next question comes from Eric Fleming from SunTrust.

Just wanted to dig deeper on the [disposition], so I appreciate more detail on what's going on with Genesis. But outside of Genesis, where are you at in terms of any additional CCP assets or legacy sovereign assets that you're disposing of?

There's nothing else that we haven't announced that we're considering. We're pretty comfortable with the group of operators we have all-in, other than the comments that I made on Senior Care Centers. So I wouldn't expect to see much else from us. As I mentioned earlier, Avamere may sell a facility in Washington state. So you may see something incremental here or there, 1 here, 1 there. But in terms of operators, we don't expect to see much change going forward, other than what we already talked about.

Our next question comes from Daniel Bernstein from Capital One Securities.

I figure I'll be the one person who asks about your pipeline instead of whatever other properties are moving in and out. So you mentioned you haven't seen really cap rates move at all in seniors. Just generally for seniors and skilled nursing, what are you seeing in terms of the bid-ask spread between what you're willing to pay and what the sellers are asking for? Has that widened at all? Is it coming back in? And maybe what does that portend for investment volume the rest of this year?

So -- this is Talya. Hi, Dan. So a couple of thoughts. Most of the bidders out there are private equity firms of varying sizes and they're buying assets with the expectation of engaging a [manager to management] for, call it, a 5% or so management fee. So fundamentally, if we're looking at net leasing a property, we're going to be off by somewhere between 10% and 30% just on the coverage ratio, because the cap rates that are being applied to 100% of NOI are at the number -- at our lease cap rate or oftentimes more aggressive than our lease cap rate. So if you start off with 10% to 30%, we're off by 10% to 30%, and then you add on another, call it 10%, because of cap rate differences, that adds up to the range that we're typically seeing, so somewhere in the order of, I'm going to say, 15% to 30% or 40%, depending on whether -- at the high end, it depends on whether someone's buying a stabilized asset. Or the high end of that disparity is when they're buying an asset that's in lease-up and there's an expectation that lease-up will occur and the buyer is buying on that expectation, whereas we're buying it mostly on cash flow.

So that's obviously specific to Senior Housing, Dan. And it's not as if we're opposed to doing management agreements, there are some operators out there, one of whom we do things with right now that we think are very good, it's just that even at that level, the level of pricing, it's just unrealistic. And we think there are going to be some really nice buying opportunities over the next few years for all of us, as those things don't pan out the way they're currently being -- [because of the way] they're currently being underwritten by the private equity groups. But the other thing I'd say is that, for us, it doesn't really matter that much. I mean, we, as you know, have been really committed to having a relatively uneventful year just executing on these final pieces and most of that is close to completion. We have much better position with the company than we were prior to all the activity in 2017, but we also understand that there was so much that we did that it's really taking the market quite some time to absorb it and to see that we actually can execute on everything as we said we would. So we'll continue to look to get some small things done. We've got things coming in on the proprietary development pipeline. And I would just note there, just as a reminder, that those are brand-new, purpose-built senior housing facilities at cap rates that are 7.5% or north of 7.5% rent coverage. So great pricing because of how we structured and when we cut those deals. So that's really going to be the focus. And I think that should accrue to the benefit of all of our constituents. And if things change and there are different opportunities there, then we'll act on those. We'll have plenty of capital available to continue to get some things done.

Okay. And you're indifferent to managed versus leases, just depends upon where the value is on senior (inaudible)?

Yes, exactly. You've got to get things on the up, not when they're stabilized. And that's one of the issues that we see. Because, look, we've obviously seen a lot of the deals that have been underwritten by the private equity groups. And the projections that they buy into just are unrealistic from our perspective. We just don't see them happening under any circumstances. So -- but if we were to see some opportunities, then yes, great, we'd be happy to act on it. So it always depends on the opportunity, the operators very specifically, and then the market, of course.

I'll pile on one more thing for you, Dan, and that is while the markets -- while bidders are being very aggressive, they're also very commonly overbidding to get into the mix, and then re-trading. So on any given week, we get at least 2 and closer to 5 phone calls on deals that we had bid on, where the buyer has -- where the trade has fallen apart. And I think that, most of the time, because it's consistent, it's -- they're falling apart on a re-trade on price. So I think the other piece of the equation that's occurring now is the resetting of seller expectations.

[Yes, and finally on that], Dan, so there may be some opportunities there for us because it isn't just a reset on price with that particular buyer, it's a credibility issue, obviously. So even if we come in a little bit lighter, at least there's certainty of closing. So -- but again, to the extent that provides more opportunities for us, they're not going to be huge deals, they're going to be what we said we want to be focused on this year. And that's getting smaller deals done that are accretive and keeping things relatively uneventful.

Okay. So maybe investment yields haven't gone up, but maybe there's a few signs of cracks there in terms of the buyer aggressiveness or the re-trades?

Yes. And we've seen some of these cracks for a while. We actually saw some of them last year with recycled deals and busted deals. And we would have expected to see some cap rate expansion already as a result of that. But it looks like it's going to take a cumulative effect of a number of those things happening more frequently. And so that's both sellers, to Talya's point, reset their expectations. And brokers, by the way, have to think about their own credibility as well. So it's brokers resetting some of their own expectations as well as sellers.

Okay. And one more quick question, I know it's getting long. So I agree with you that PDPM is going to be very good for the SNF industry. But this year, you saw a 1% Medicare rate increase, you saw wage pressure. Am I missing something in terms of why should we be positive or confident that lease coverage won't go down further for the industry? It may be different for your portfolio versus the industry. Is there something you're seeing the operators do in terms of mitigating wage pressure or occupancy or skilled mix? Something that's giving you confidence that it won't get worse?

You said 1% on Medicare? It's 2.4%.

I meant for fiscal -- for this year, you still have only had a 1% increase.

Oh, yes. (inaudible)

Not for next year.

Yes. So I think all those factors you talked about, wage pressures, they've been there and people are trying to manage or are still managing through them. And by the way, that's also very market-specific. So the larger MSA, the Metro areas have more wage pressure than others. The percentage of our portfolio in those large MSAs is relatively small. But I think, even with all those pressures and the lack of good reimbursement increases, we've seen a couple of quarters now, not just with us, but with our peer who's basically all skilled nursing and a couple of the others that have large exposure to skilled nursing, that things have been stabilizing. We sort of -- we have been saying all along that we expect that things will -- if we're not close to bottom, if we're not at bottom, we're pretty close to bottom. So I think you make a fair point, but I think the operators have done a pretty good job, in general, adjusting to managing wage pressures. And one of the ways they do that and we've seen that and seen this in our portfolio, is the percentage of contract labor that our operators have used, have decreased because contract labor cost you at least 1/3 more than your in-house labor. So we're also seeing a trend, and you're going to see this continue particularly when PDPM comes into place, or as it gets closer, where more and more operators are going to go in-house on therapy as opposed to having third-party contracts, so they have total control over those costs and they get more of the benefit. That's going to trend for quite some time, but we're seeing that trend continue to happen now but -- and you'll see that accelerate. So for the third-party contract rehab companies, I think it's going to be tougher for them. It's not anything that affects Sabra, I think, most of the REIT, but for those operating companies that have those, that historically have driven value. I think that's going to be an issue going forward. So again, I think we're pretty close to bottom. And I think guys will hang in there. So if things tick down, I think it will be in pretty small increments and they'll be able to hang in there until they get their reimbursement increase in October and if therapy caps go away.

And it sounds like that maybe lease coverage could tick down a little bit but if people bring therapy in-house, then maybe corporate coverage could get better, too? Is that the way to think about it?

Yes, yes, absolutely. And when we think about our tenant coverage, really, because we have that one -- the issue with the one tenant who was taking over the operations, which we think is a good thing for us going forward, it was really very specific to that issue. Otherwise, you really wouldn't -- you would have seen extremely stable sequential coverage on our skilled portfolio.

(Operator Instructions) And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Rick Matros for any closing remarks.

Thanks, everybody, for joining us today. I appreciate the time and the support and the good questions. And as always, we're available for additional calls with any of you that want to get on the phone with us, and look forward to seeing a bunch of you at REIT Week. Take care.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.