Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Good day, ladies Sherman and welcome to the Sabra Health care read third quarter 2019 earnings Conference call. This call is being recorded I would now like turn the call over to Mike across the easy P. Finance. Please go ahead mr. cost.
Thank you.
Before we begin I want to remind you that we'll be making forward looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition disposition and investment plans, our expectations regarding our financing plans and our expectations regarding our future financial position and results of operations. These forward looking statement.
Based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially including the risk lifted in our Form 10-K for the year ended December 31st 2018, and in our Form 10-Q for the quarter ended March 30, Onest 2019, as well as in our earnings.
Relief.
Included as exhibit 99.1 to the form 8-K, we furnished to the FCC 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.
Addition, references will be made during the call to non-GAAP financial results investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results, including on the fine include on the financials page of the Investor section of our website at Www Dot Sabra health Dot com our.
Form 10-Q earnings release and supplement can also be access in the Investor section of our website and with that let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health care, we like like happy Halloween everybody.
We closed new credit facility to 2.2 billion.
Recently, we also our second investment grade bond issuance following the quarter end that wellness dramatically more successful than the first one simply because it was the person that was a 10 year paper versus five year paper on the first and really was a function how well the ones that we did in may have traded up.
So we feel really great about that and certainly the tangible benefit.
From the merger the other activity that we've gone through.
We've also brought our debt to EBITDA down to 5.7, that's inclusive of the unconsolidated JV by year end will be at or below our target of 5.5 times positioning us to go to 2020 with a strong this balance sheet.
Since inception of Sabra.
We thought we've had some investment activity a 20 million, which includes our first investment in the addiction space two facilities.
We're working on some other opportunities there as well, we'll see that both has become realized or not but we feel good about the spaces.
As most people know, it's relatively new space.
Bursting with insurers is quite good they are specialized Medicaid rates.
As well in a number of states.
None of our peers are in this space at this point.
Very fragmented space not easy to find deals.
But hopefully for sabra being the first ones and will develop reputation things that capital partner to folks.
Let's face it has a lot tailwinds and also makes a lot of central relative to our investment the behavioral space as well we continue to look for opportunities there.
We're starting to see some activity in skilled nursing for the first time, our pipeline is about 600 million our acquisition pipeline still primarily senior housing.
Again, we are starting to see some skilled nursing opportunities.
Anticipated that for a while hopefully this is the beginning of something good relative to some opportunities there.
In terms of senior housing pricing still pretty high.
So I would say that.
Is that we lose our we're not losing by the same margin that we've lost before so maybe that's a signal for pricing going a little bit better, but I think it's too soon to make any definitive statement on that and it's primarily the private equity funds that are bringing up the competition there.
In terms of alive, and where maybe for the process now.
Exploring new JV partner as well as potential options as well we expect to have.
Our decision is made of the deal done by yearend.
Next in time to close after that because the change of ownership will also took a change of ownership it from a regulatory perspective. So it takes several months after.
We announced.
The deal is for that to happen. So we can't get into specifics on what we're negotiating right now because we're in the middle of those negotiations, but we feel good about the process and were aware, it's been going and where we think it will conclude that.
Our skilled operators.
About a month and we'll actually full but right now on PDP.
No disruptions with any of our operators. They continue to feel really good about the opportunity there being pretty cautious relative to projection at this point they want to give a little bit more time under their belt.
We are seeing some signs of some better rates.
But again, it's very early so.
We're just pleased at this point I think.
Of our operators have transitioned into ppm without any disruptions to their operations.
Moving onto our operating results are EBITDAR coverage was flat sequentially, the skilled nursing and senior housing or hospital corporate was up.
Module in the hospital multiple hospitals, where the behavioral hospitals, we have some children's hospital.
And that that comprises the bulk of all of our hospital portfolio, we have learned acute hospital.
Eltek, Illinois, Rep, as well, but it's primarily behavioral and a couple of children's hospitals.
Our same store occupancy ticked up for skilled and for senior housing was down for hospitals. The population that we have in those in the specialty hospitals lot more dynamic relative to product or activity.
Sure Blake This day is and sometimes the unpredictability that like the state, but our operators do really fantastic job managing expenses. So you see strong leasing strong coverage.
Sometimes regardless of occupancy moving up and down.
Of our top 10, the notable Dropless Avalere I know everybody sort of picked up on that backdrop with specifically due to their ancillary businesses their facility performance with stable. They went through a complete overhaul of their IP systems and their ancillary businesses and unfortunately and I certainly see this.
And operator, when you go through.
Huge IP conversion, sometimes take your eye off the ball a little bit than it really hurt the performance of those ancillary companies, we expect that to improve.
We go into 2020, but that piece will be down for a little while but again, we view that as a very good operator, we have no concerns about.
About them going forward and certainly make sure it's relative to rent.
In terms of our wholly owned managed portfolio and the logic JV call you will get into specific details on that we showed strong cash NOI margin growth, both sequentially and quarter over quarter as well as revpar growth, while occupancy was down somewhat and Charlie will give you. Some explanation there are some positive.
Pockets, we over the last few weeks and one of the things that we feel good about with.
Our senior housing operators is that they stay focused on rate.
Fences and they don't give up rate for.
Occupancy, we think over the long haul that's a much better strategy to have and with that I'll turn.
The conference call over to target.
Thank you Rick I'll provide an update on our managed portfolio and the third quarter 2019, approximately 17.2% of fabric annualized cash net operating income was generated by our managed senior housing portfolio and approximately 57% of that relates to communities managed by allotment 32%.
Relates to holiday managed communities the ballot concludes our Canadian portfolio and three small care communities in the United States.
On a same store year over year basis, the managed portfolio, which excludes the holiday assets.
Had solid results in the third quarter compared with the third quarter 2018 revenue increased by 3.3% cash net operating income increased by 13.3% and revenue per occupied units, excluding the non stabilized assets was up 6.6%.
This performance builds on the news we shared in the second quarter. When we reported same store results with a 3.1% increase in revenue, 3.6% increase in cash net operating income and 4.7% increase in revenue per occupied.
Our portfolio of communities that largely target the middle market in secondary cities in the USA and Canada is delivering positive results from the current cycle rebounding from last year's performance on the impact of the flu was felt across all senior housing community.
Now for some detail the enlivened joint ventures portfolio 170 properties of which Sabra owns 49% showed steady improvement.
Average occupancy for the quarter with 81.4 percentage, 0.9% lower on a stabilized same store year over year basis revenue per occupied unit was $4307, 6.9% higher on a stabilized same store year over year basis. This is the highest rep.
Our that we've seen since we made the investments.
Same store cash net operating income for the quarter rose, 15.3% year over year and 7.8% sequentially.
Importantly, cash NOI margin was 26.7% up from 23.9% on a same store year over year basis.
Similar to rest toward the vast margin we've seen since we made the investment year to date Laivins joint ventures cash NOI was 9.2% hires in the same period in 2018.
Enlivens dynamic pricing model was rolled out this summer to drive occupancy the JV portfolio experienced 126 move ins in the third quarter more than any other previous quarter, providing real measurable success of this initiative. The biggest impact was seen in those communities with occupancy but.
Low, 85% and even more so those communities with occupancy below 70%.
For the 19 communities that had 64.9% average occupancy in the third quarter.
Moreover, occupancy was 67.4% and spot occupancy at month end is 70.9% a six point increase over the third quarter period.
Our original objective and taking a minority stake in the portfolio included being positioned to ultimately on 100% by buying out our partner TPG interest. This summer we began the process of identifying potential partner to co invest with Sabra. So we can jointly owned 100% of the portfolio that process continues with.
Several investor is keenly interested in the opportunity.
Now to the results of the wholly owned or managed portfolio.
Average wholly owned and licensed portfolio of 11 communities trait traded 20, eightys occupancy surge for meaningful increases in rate, resulting in higher net operating income in March.
Occupancy was 88.8%, which was 1.9% off of the prior quarter and lower on a year over year basis by 6.8%. The dynamic pricing initiative has had an impact here as well even with the portfolio being relatively stabilized October occupancy came in at 89.7.
Percent and spot occupancy is 90.2% up 1.4% from the third quarter period.
Revenue per occupied unit rose to $5526, a 1.7% increase over the prior quarter add 11.5% over the prior year cash NOI was up 7.8% on a year over year basis and year to date cash and Hawaii.
5.7% higher than in the same period in 2018.
And live and typically sends out annual rate increase letters to its tenants.
In in the fall this year to go into effect in October this year. The average rate increase achieved for eligible residents is 5.2% in both the JV as well as our owned portfolio.
We transitioned our holiday portfolio from our net lease to manage portfolio at the start of the second quarter. So this is the second time that we are reporting community level statistics.
Foleo occupancy was 88.6% in the quarter slightly lower than 89.1% in a prior quarter revenue per occupied unit rose to that rose to $2483, a slight increase over the prior quarter and cash net operating income rose 4.8% sequentially.
We continue to look for middle market oriented independent living communities, where we believe the holiday management team is well suited to assume management, including opportunities within the sovereign portfolio.
CNS senior living manages eight retirement homes in Ontario, and British Columbia for Sabra in the third quarter 2018, the eight properties managed by Sienna showed steady operating and financial results with 89.8% occupancy slightly up from 89.6% in the prior quarter Rep.
Our was $2261, which was 1.8% above the prior quarter and 4.1% higher on a same store year over year basis.
Cash NOI was up 15.6% on a year over year basis, and 4.1% sequentially, notably cash NOI margin with 40% upfront, 35% on a same store year over year basis.
And it continues to maintain occupancy in a narrow band and tight expense controls, resulting in consistent operating results. We continue to look for attractive acquisition opportunities in Canada, where the dynamic within senior housing is quite different from the west and development capital is more disciplined and in many markets with that I will turn over the call to Harold.
Andrew Saab Chief Financial Officer. Thank you tell you.
This quarter, we continued our efforts to improve our balance sheet and cost of capital on September nine 2019, we closed on our previously announced $2.2 billion credit facility Amendment, which lowered our cost of permanent debt 18 basis points to 3.91% and provide a $2.7 million of annual interest.
It is based on our outstanding borrowings as of the ended the quarter.
Limit also improved our debt maturities laddering by extending the maturity put the revolver by two years to September 2023, and created additional laddering of our term loans with various maturities through September 2024.
Throughout the quarter, we continued our de levering efforts to the sale of 4.2 million shares of common stock under our ATM program generating net proceeds of $89.9 million.
These proceeds allowed us to pay down our revolving credit facility by $75 million and reduce our net debt to adjusted EBITDA ratio, including our unconsolidated joint venture from 5.76 times as of June Thirtyth 2019 to 5.7 times as of September Thirtyth 2019.
We expect to continue this de levering effort through the fourth quarter targeting a net debt to adjusted EBITDA ratio inclusive of our unconsolidated joint venture debt.
At or below 5.5 times.
These activities improved other key credit metrics compared to the second quarter of 2019 interest coverage improved 0.35 times, increasing to 4.97 times fixed charge coverage improved 0.26 times, increasing to 4.72 times.
With that asset value improved 1% decreasing to 38%.
Finally in October 2019, we issued $350 million of 3.9% senior unsecured notes due 2029 and redeemed all 200 million of our outstanding 5.375% senior unsecured notes due 2023.
This refinancing was expected to result in $1.9 million of annual interest savings and on a pro forma basis reduced our cost of permanent debt to 3.81% as of September Thirtyth 2019.
This was our second offerings and the investment grade market in a five months span.
Was again that with tremendous demand and excellent execution.
We've now completed the refinancing of all of our high yield debt instruments and along with the amendment to the credit facility have reduced our debt maturities through the end of 2022 by over $2.4 billion, including the full availability on the revolver.
This completes our balance sheet refinancing activities for the foreseeable future that puts us in an excellent position to take advantage of our investment grade balance sheet as we fund our growth into the future.
Now for a few comments about the financial performance for the quarter.
For the three months ended September Thirtyth 2019, we recorded revenues and a lot of $149.8 million and $130.4 million, respectively, compared to $219.4 million and $198.2 million for the second quarter of 2019.
Decreases are primarily due to the $66.9 million of lease termination income recognized in the second quarter related to the transition of the holiday communities to our senior housing managed portfolio.
FFO for the quarter was in line with our expectations at $85.8 million and on a normalized basis was $90.1 million or 47 cents per share.
FFO was normalized primarily to exclude $1.6 million of unreimbursed Triple net operating expenses.
$25 million a straight line receivable write offs.
$6 million loss on extinguishment of debt, we recognized in connection with the amendment of our credit facility. This compares to normalized FFO of $84.7 million or 46 cents per share in the second quarter of 2019.
Hey, AFFO, which excludes from EFO merger and acquisition costs and certain non cash revenues and expenses was also in line with our expectations at $87.7 million because on a normalized basis was $89.7 million or 47 cents per share.
FFO was normalized primarily to exclude $1.6 million of unreimbursed Triple net operating expenses.
This compares to normalized FFO of $83.9 million or 46 cents per share in the second quarter of 2019.
The quarter, we did record net income attributable to common stockholders of $23.3 million or 12 cents per share.
Our gionee cost for the quarter totaled $8.7 million, including $3.2 million of stock based compensation expense.
Recurring cash DNA costs $5.3 million were 4.4% of our NOI for the quarter and in line with our expectations, we expect ongoing quarterly cash costs to average approximately $5.8 million.
Our interest expense for the quarter totaled $29.3 million compared to $33.6 million in the second quarter of 2019.
This quarter over quarter reduction was driven by a combination of lower total debt of $77.1 million and lower overall borrowing costs from our refinancing activities and the decline in the LIBOR borrowing rate during the quarter.
Borrowings on of the unsecured revolving credit facility bore interest at 3.17%.
September 32019 decreased 48 basis points from the second quarter of 2019.
Interest expense includes $2.5 million to play $8 million of noncash interest for the third second quarter of 2019, respectively.
During the quarter, we recognize the 14 million dollar impairment of real estate related to three vacant skilled nursing facilities and for senior housing communities.
Fair amount associated with the for senior housing communities of $10.6 million being impacted by our decision to sell these assets rather than to fund operations in the future in an effort to achieve a stabilized level of performance.
We did not recognize any revenues from these assets during the quarter.
We were in compliance with all of our debt covenants as of September Thirtyth 2019. In addition to the metrics I mentioned previously unencumbered asset value to unsecured debt increased from 246% to 253% quarter over quarter.
Sure good asset value remains at 2%.
As of September Thirtyth 2019, we had total liquidity of $829.4 million, consisting of unrestricted cash and cash equivalents of $29.4 million.
Variable funds under our revolving credit facility of $800 million.
We reaffirm our previously issued 2019 guidance, which reflects our stated goal of reducing our net debt to adjusted EBITDA ratio to no more than 5.5 times.
With respect to our same store cash NOI growth rate expectations, we expect our alive and joint venture to be in the upper half of the 6% to 12% range and our wholly owned portfolio to be in the lower half of the three 6% range. These expectations are driven in large part by the 5.2% annual.
Rate increase achieved in the two alive at portfolios effective October one 2019.
Finally on October Thirtyth 2019, the company announced that its board of directors declared a quarterly cash dividend of 45 cents per share the dividend. When we paid on November 29, 2019 to common stockholders of record as of November 15th 2019, and with that I will open it up to Q1 day.
Before just before we do this sort of make loan recoveries to a lot of postings about.
Negative shop results.
Facilities that are in secondary markets. We obviously have a lot in secondary markets and we just are experiencing that so I think it's very market specific.
We certainly have a markets here or there that experience a little bit more difficulty with new entrants in the line, but generally speaking.
So the shop portfolio shows that we just don't see that.
Across the board in our portfolio review those markets as extremely stable.
Labor costs are lighter and.
Got smaller buildings, obviously, so impact of occupancy up or down by a couple of patients as a little bit more significant but we tend to see more stability. There so with that I'll turn it over today.
Thank you as a reminder to ask a question you will need to press star wanting your telecom.
Draw your question press the pound key please stand by compiles acuity roster.
Our first question comes from trio with Scotiabank. Your line is open.
Hi, good morning.
Just looking at your top operator list for skilled nursing EBITDAR coverage declined across that group since to trailing 12 month metric. It implies that the most recent period saw more material decline, but at the segment level you reported stable coverage. So the implication of the balance of the portfolio and your smaller operators may have improved materially.
So can you maybe bridge that gap or explain that difference.
Yes, I'll kick it off and that could add to it but keep in mind that.
Amir Genesis, which are part of the top 10 those are not included in those coverage ratios because they have a material corporate guarantee so.
The portion of the portfolio that would have declined that portion of decline is not reflected in the stabilized in the stable.
Occupant our season coverage that we show the overall portfolio. So there maybe some of that but those two are excluded.
And on the terms the trailing 12.
A number of those talk to both of them.
Came down pretty incrementally so we're not concerned about that I would say that.
Headwinds persist they had strong performances in the earlier quarters and as those drop off that's affected a little bit nothing going on with any of those offerings that we have concerns about.
The market basket increase in October Onest and PDP.
For that to see improvement.
And then those operators.
And I guess sticking with PD PM, Rick I know you mentioned you had some some comments in your prepared remarks.
No. It's still early days, but can you maybe talk a little bit more about how it's been receive how your operators have adjusted to the new model. If there is maybe anything left from a learning curve perspective, any additional color would be appreciated.
Yes, so I think.
As I said there was no disruption at all that they had much really to prepare for which was really helpful.
More of that one of the things that made the transition a little bit easier. Thanks for the good operators is that there are prior to PDP.
Every skilled nursing facility there was some percentage of patients that had.
Some serious nursing issues.
The old system, just wouldn't allow you to fill for so.
Hey, good and bill for because I never get reimbursed for but that that allowed the operators to have a population that already existed in those facilities start focusing on trading, particularly relative to coding and setting up new clinical protocols and the coding is really what are the biggest issues because coating has shifted from therapists.
Doing coding to nurses doing coding and thats not something historically done that much but it's much simpler system, obviously than rose to 56 categories and so in terms of going forward I think.
But I think a couple of things will happen to sort of fuel improvement as we go forward I think people will get better at Koning sure. In fact, I know that our day, one even though there were no disruptions have felt like everybody was hitting on all cylinders on day. One so it's going to take some time for that to get better in terms of concurrent group therapy.
Offers have been pretty cautious about not just moving as much in there as quickly as possible.
Hey, the regulators would look at as workflow. So think of cost on that so I think growth concurrently therapy will happen slowly over a period of time.
We continue to improve there.
There as well.
And.
Well of course.
The.
One of the issues Thats very hard to quantify impossible to quantify it can you quantify cost savings, but to the extent.
Operators to stayed away from certain kinds of patients because there were going to get reimbursed.
Stores now open which will help certainly the hospitals quite a bit because.
The whole host to people sitting there thats skilled nursing facilities wouldn't take simply because I want to get reimbursed and.
And so that may that's going to shift the population as well, but you're also has some impact on length of stay because those those patients will have a longer length of stays in the short term rehab patients and that's that's really the.
The single biggest thing I think that changes here is that we've gone from a reimbursement system. That's solely envelop incentivized operates to go after short term, we have patients which balance stock created industry headwinds because thats all you're doing your tenants and continuing shortening the length of stay which is going to lower your off.
C and exacerbated a little bit issues. So.
The other system actually created some of the headwinds and actually significant percentage I think of the headwinds that have impacted the industry. These last few years. So.
Hopefully that gives you at least on their condition.
That's that's very good color. Thank you just one more if you don't mind.
Rick you mentioned more skilled nursing opportunities in your acquisition pipeline, but I think you also previously mentioned you're not really interested in particularly large skilled nursing portfolio because that might push the perception of sabra to be classified as a sniff right.
But if the earnings yields are more attractive in that space and your peers seem to be active in acquiring and you're currently trading in a discount multiple to those peers, what's the negative stigma in your opinion of being viewed by some of the snare free if it means you're investing for earnings accretion.
Well one.
Augmenting skilled deal and we will do portfolio good deals remain that through multibillion dollar portfolio deals, but we'll do portfolio deals.
With our with our senior housing exposure increases at our skilled exposures, where it is we can afford to do we took a sizable over deals without becoming a skilled ligand being going back to 75 plus percent.
Skilled exposure show.
The negative to us really.
It looks as we love the asset class is.
You are completely dependent upon sentiment based on what that asset class by the market and with all due respect to the market sentiment.
And when it's negative that usually to negative with positive. This year is a two positive and so the had health assessment based on more of the what asset class.
As we invest in the long term and senior housing start a really bright future ahead of it we think it's a little bit more advantageous to have some diversity in asset class, but no. One should take that is moving that we are focused on doing skilled nursing and more than just wonderful too that's kind of what we're seeing now but.
To do portfolios that are several hundred million dollars, we absolutely would entertain entertain doing that and we still think we'll be able to keep belts in the portfolio by doing that earnings accretion is something that we're going to be.
Laser focused on for next year. This year, we've really prepared the company positioned the company to take advantage of those kinds of opportunities and clearly the one question that everybody has is how much growth is going to have going forward and it's the right question. So we're not going to.
What about it.
Forego opportunities that we think are good and at that pushes our skilled exposure up maybe a little bit more than we'd like.
The interim we have complete confidence that as we do other deals and our cost of capital continues to improve as you note with the existing discount.
We'll always be in a position to be able to balance the portfolio more later on so.
We expect us to take advantage of the opportunities that are out there in the school side.
Appreciate that thank you very much.
Yes.
Our next question comes from Nick Joseph with Citi. Your line is open.
Thanks.
So the first part of the question listen to take additional equity interest.
That's a good execution out into the leverage target really as it is there additional equity that you're contemplating or is it or story for us sitting there, though is primarily driven by continuing to issue equity under the ATM program.
And so you'll see us continue to do that will August and they've got an elsewhere in the fourth quarter, but thats. The main driver and we've been consistently said that from the day, we issued guidance and built into guidance of is nothing there's nothing new or unusual there and there's no nor is there any sort of spiked and now that we're going to have to do so the number the amount.
Of equity that we're going to be raising money ATM through the end of year at this point isn't that material any longer.
Thanks, Thats helpful. Not just on core FFO guidance.
Reaffirmed guidance and previously you've indicated that you are trending towards the low end to the range.
So does that comment still stand or are things trending differently now.
No I think on the on the.
FFO, we're still turning towards the high end on FFO, we're still trending towards the low end and again the reason for that turning towards the low end was because we removed.
Four cents straight line rents when we move tenants to a cash basis from an accrual basis.
But we do we didnt update that specific comment I think we've got some opportunity for that to be.
Higher than that.
Obviously the issue for us as far as nailing down. The number is we have the cash basis tenets and certainly timing of collecting cash could have an impact on earnings more so than it would have fuel, but you still on a straight line basis and then the managed portfolio. Obviously has some upside from where we forecasted it as well so we still feel comfortable total.
Thanks, but I would expect that is still true we've had to pull out forces of FFO and so we have to overcome that to hit the high end with the range.
Thanks.
Sure.
Our next question comes from Jonathan Hughes with Raymond James Your line is open.
Hey, good morning out there on the West coast.
I appreciate.
I appreciate the earlier commentary on the EBITDAR coverage decline at AVN Amir.
Concern there, but are you able to give us facility level EBITDAR coverage coverage for their portfolio.
And then remind us when those leases mature.
Yes facility level coverage is actually pretty similar to the fixed charge coverage.
That's a pretty close over at this point.
The difference that got losses with those Astoria companies from the one to 2001 word one so in terms of lease expirations on Avenue, we sort of quantify yet on that it's not per cent for many years, yes, probably five years out something like that could be on that doesn't lauria matures before 2027.
2027, and one other things out there waiting to hear on average here because it's it's really the issue that affects them. The most is what's going to happen with Washington State Medicaid rates, Washington was talking about doing.
Increase.
Next year, hopefully, we'll have news on that sometime in the first quarter, but as everybody knows they haven't been doing that up to this point, but now they're up to 19 facilities.
Being closed within the state that 10% of the facilities and say that have closed for financial reasons.
The probably at least another 5% humming, that's a pretty huge number.
In one state so they're going to start to have access problem.
Certain markets so.
Once we see what happens with the Medicaid rate in Washington State.
We'll know whether we want to do anything differently or somewhat I say, we that that we just really the capital part of the Avenue, where one of the things that is appealing to then is.
They're starting to see more opportunities for facilities being sold at extremely to stress levels.
And if you can pick them up at the right price even in that environment that might be a good way for them to go so they're considering that.
But I think when one of us for the season do anything and they don't really want to do anything until really two things occur one we see the impact of Pdps facilities, and secondly, we know one way or another whether it'll be a rate increase.
And with state of Washington, So.
So stay tuned for that but thats really the single biggest.
Kind of issue the Adflow issue with the IP conversion that will pass, but it's really Washington state.
Okay Thats helpful and then switching over to the diminish portfolio.
I can see has declined a little bit there, yes growth has been really strong driven by the rate increases in expense savings.
I'm just trying to understand.
And with rate increases when you need to provide more services and in turn higher expenses I'm, just trying to better understand what what is going on within those portfolios.
Sure This italia.
The when we talk about the rate increases were talking about room and board rate increases so.
That doesn't correlate to a change in service.
Delivery AD and care so the care rate.
Hello.
Continue to be delivered as needed car party individual but the but the basic room and board rate has been what we focused on in terms of the increase.
Our operators don't have exceedingly high acuity levels I think if there will continue to creep up over time.
And we'll be more opportunity on the level of service.
Rates on top of the room for going forward.
But that's probably so thats off the driver the driver at this point thanks.
You noted our than live it they've taken a much more sort of scalable like approach to things that have stratify the portfolio and the lower stratifications are really starting to show some nice occupancy increases and that should have more of a disproportionate impact because of how low they are to begin with.
Okay.
That's helpful. And then maybe just one last one for for Rick.
You talked about seeing more sniff deals in the pipeline and I know, it's too early to tell and the impact of ppm, but has that altered your underwriting process for sniffs, meaning as you look a bit further out on the horizon and are you underwriting sniffs using overly conservative assumptions in case CMS say seven.
Three years down the road might cut reimbursement reimbursement rates like they did in 2011, if overall margins begin to significantly improve and they look to kind of recoup some costs I'm just I'd love to hear your thoughts there.
Yes so.
Our underwriting approach is 1.5 coverage skills.
And the cap rate, putting on the quality of the facility in the marketing the operator at all that could be a they have to like plus.
So I don't think with that changes I think that give some breathing room, but.
A couple of things that I think a different now versus what happened with the claw back in 2011.
Juan.
The really poorly designed system and.
Our of additional money beyond.
CMS projection or additional expect Medicare expenditures to facilities from the government the odd CMS projection was relatively regis.
And I don't think if theres any way with PDP.
You're going to see that same level again.
Secondly.
Via the timing issue that was really horrible back and it certainly could happen again is.
The call back was during the great recession and.
And.
You may not recall, but at the time within about 48 hours of the final rule coming down the Clawback was supposed to be half of what it wasnt industry thought just from a pure math perspective.
That the actual pullback was about twice as much as it should have been but it was a recession in the white house is looking for money.
There was just sort of nothing we can do about it.
Operators I think operators have all the memory that investors do with all due respect so they remember what happened that I think to my comment earlier, that's why you're not going to see from the good operators and I would.
All of our.
That does conclude how the conversations you're not going to see the good operators go from zero percent.
Colonel grew therapy to 25%, which is the Max.
You may see some guys do that out there and I think we'll get in trouble if they do that.
Most of the operators that we talk to our smarter than that and they're going to be much more judicious.
Because they don't want a scenario where they're looking at.
A clawback a few years down the line and if there is some adjustment you know it's more of its more more more of a marginal adjustment that its weaknesses system that would happen in 2011. So I. Just think people are really life love. It I do think this is a much better designed system and the fact that we I think we all would have liked to have seen so.
Lets out there that CMS didn't want to do that but the fact that the industry was engaged at every step of the way and putting the system together with CMS and giving them input and feedback.
Creates a much different environments for that that was with rugs four.
Got it okay I appreciate all the color.
Yes.
Our next question comes from John Kim of BMO capital markets. Your line is open.
Thank you.
Just a follow up on the senior housing managed.
Facility performance.
Can you just elaborate on how you're able to push.
Room and board rates in the face of new supply and then what we're hearing from.
Some of your peers is that new community that they're being aggressive on.
On incentives, it's really hard to push rate.
Same time.
Not too much occupancy.
So.
My color.
Sure This italia.
The first of all the bulk of our managed portfolio frankly system. The in the joint venture because that's 170 properties, we have 49% economic exposure.
Those those properties as well as many others in our portfolio are not in markets, where there has been significant overbuilding and additional new supply so the competitive.
Forces have aren't.
Our.
Not uniformly spread across all markets.
And so.
The news that we hear about new supply oversupply et cetera are specific to certain markets.
And there within that.
Probably more narrowly within certain sub markets.
And we have found that in the secondary and needs and some of the tertiary locations in which.
We have communities in the managed portfolio, we have not had anywhere near the kind pressures that some others are experiencing in call. It the primary market.
There are some markets, where we have seen some pressure on the Dallas Metro area, we have seen some pressure on pricing.
Significant addition at new supply.
Crop.
Across the spectrum of cost as we get has impacted some of our.
Latin and assets, but generally that's not in case. The other thing I'll add is a focus on middle market is.
Becomes really interesting in this part of the cycle because.
Because you really see how a product that target.
Certain price point.
Probably is not economic to build to today, if you started construction.
That product has a large market target target market that needs that product and can't afford.
A a product that need $10000 Brent.
In order to to breakeven.
A couple of other comments all of polysilicon. That's also apply to our triple net senior housing portfolio as well.
And look I think the market can fill likes to look at things and with everything lot Olympic So the secondary markets or this the high urban markets or this and it's just not the way. It is you've got to look at the specific portfolios and where they're located and who the operators. The operating makes a difference I think the I think the quality of services.
Provided by our operators has a lot to do with why they've been able to push rate the way they have.
They are resistant to discounting.
In the longer I think we're really pay off and look you've got a 50% of the middle class elderly will not be over for senior housing.
And our country and we happen to have a lot of.
Product a lot of assets in our portfolio where to Taleo point, it is going to be affordable.
So look we underwrite these things you know for 10 to 15 years.
And that we're holding up pretty well right now in a tough environment and so the recovery becomes realized over the next couple of years, we'll be in will be in that much better shape, but such as isn't monolithic.
Sure.
What was the catalyst start to get the double digit rate increase this quarter, though.
Really the revenue management system or just pushing rate.
Being willing to give up some occupancy just wondering with the exact catalyst one.
Well on on.
Our enliven wholly owned portfolio for thoughts 11 property types.
It's a small sat there and we're talking about the they gave up they really pushed occupancy at the expense.
And as they look that they really pushed occupancy.
And they really push rate expansive occupancy and they did combined tax so they were at like 95.6% occupancy a year ago and they're willing to go below that.
And and really drive drives the rate.
And they looked at.
The expense controls a better one of the ways to think about a lot of I'd say in terms of my experiences and operate or having done turnarounds and be kase and stuff is those first few years, there's a lot of low hanging fruit and so you're sort of improving your results are leaps and bounds then you start getting to the point, where it's a lot more flights.
Good morning, and Thats, where we see analyze it to a really nice job of looking at everything on a market specific basis stratifying their efforts. So they can allocate resources differently.
And then getting better expense controls.
Overtime as well as they start putting new systems in place and they're not close to Doug, particularly on the new systems part.
And we've already convey to then that a lot of VIP initiative that they are looking at embarking on in 2020.
Bars, we were like that we will be a partner with them.
In doing that so.
There's an awful lot that can still get done through a fine tuning perspective, but I appreciate the fact that actually or other operators to it's not just a.
Really focus more on the long term when it comes to rate versus.
Gross was just occupancy and giving discounts.
Given the strong performance.
I'm sure you feel more comfortable with the joint venture assets and your balance sheet and cost of capital improving in the same time do you still need to proceed with joint venture partner for the buyout.
Just a partner why not just go back mining.
I think look at Phil.
Going to be less dilutive to bring a partner in regard to that percentages at the end to write a check for the full 51%, so and still retain our ability to exercise.
Whatever the remainder is episodes of ownership of the portfolio. So.
We're still in the middle in negotiation, so what kind of see how it goes.
Our.
Focus right now and it may not be a new joint venture partner that may be a new arrangement with TPG.
Is your attention.
The majority stake.
Oh, that's always that our stated intention.
Where we said that on the second quarter call in August So is that our intention to go for 49% to some majority.
Great. Thank you.
Yes.
Our next question comes from Rich Anderson with SMBC. Your line is open. Thanks. Good morning, just just finishing up on enliven.
So.
Quite are they in low hanging fruit phase still or are they in fine tuning or are they transitioning to fine tuning from low hanging.
So I would say that now they've stratify the portfolio in terms of marketing and allocation of resources. So there are portions of the portfolio.
About.
Close to a couple of doesn't buildings that there's still a lot of low hanging fruit.
Sort of a middle tier where it's kind of.
They're not quite low hanging immediately the latter, but you're not quite just fine tuning and then you've got.
A big chunk of the portfolio, where it really is fine tuning, so thats really where they've shifted where days.
Taking a more holistic historically more and more holistic effort towards improving the portfolio because there were so many issues with it when they got it now getting it to the point, where they can look at it and say, okay, we're pretty good shape.
I'm going to take our either walkable, obviously, but there's a different level of resource management, that's needed with this percentage versus this percentage because these guys are already over 85% occupancy. This groups over 75%. This groups under 70% right, Okay, and the ITC initiatives, what was that John Se revenue management.
Is that what that was.
It's electronic medical records is a bit is really probably the biggest was.
Because everything still paper, so that'll improve efficiencies and expenses.
Quite a bit okay.
And that should help on the it's an intangible about how that kind of step helps occupancy but to access systems in place that better allow you to.
Show, which are outcomes are.
To your referral sources the health of occupancy.
So just this might be yes, or no question, but is there anything pre determined about the cap rate when youre addressing the process of taking out TPG are partially or.
Fully or is this all market driven and that could be yes, or no question.
Yes.
As stated before current arrangement with TPG has a floor on the option price. So thats part of the discussion. So I think that would be the right way to think about depending on performance. There is a cap rate in place under our current option.
So we're still kind of working with and talking with them and tell them in that context of what's already in place.
Okay.
Rick maybe one of them main message that you've been talking with last few quarters is sort of turned down the.
The fire hose in terms of external growth and make it a story much easier to understand but today do you find yourself kind of striking a balance between that message and also starting to use your currency bit more.
Incrementally beyond just using the ATM to de lever.
Yes, so what am I missing some important port.
People tend to think because you're so busy with thing.
You know focus and other things. So we're finishing the restructuring we're focused on the balance sheet. So we're not focused on doing acquisitions, we've always been completely focused on.
Getting some acquisitions done this year, we've had an active pipeline we have a full investment team is focused on that and not distracted by anything else. We just havent found opportunities that have been interesting or.
Equally affordable, particularly on the senior housing side and because most to see there has been that many opportunities outside of a couple of portfolios.
And some of the stuff that we've been selling on the skilled nursing side. So.
I think the main message for us with whatever we happen to get done from an investment perspective this year.
Would it be complicated just slip into the other than full in terms of that so whatever it is we get done people just look at it and failure that makes sense and and even though you like to ramp up our growth going into 2020, we need to do that.
It's with that mindset.
No we don't want to be we've had a lot of noise.
It doesn't matter that it's for the right reasons that got us to good place, we had a lot of noise.
For quite awhile, and we don't want that going forward. It's it's made it really difficult for people to understand the storage takes too much work.
So this has been a nice period of time I think for people to see who we are post all the activity that we had.
Look at how the balance sheets change to our diversity of tend to change all that stuff.
And we can get back to growing at a more routine ways and maybe another way to put it is we don't want to be in a position, where we're going to point out the deal that so called clutch, we're going after the conference call to talk about and try to explain you guys. Why this we're doing it okay.
Last question for me.
The whole Avalere thing with the tech rollout.
Off the ball that sort of stuff seems to me.
The amount of operators can be easily distracted if the environment around them is perfectly sterile.
I'm wondering how can you play a role and invoicing this in the future another words.
These are these your partners and if something is coming down. The Pike said is potentially disruptive can you sort of get ahead of it somehow as their landlord and say keep your eye in the ball and be a partner in that regard is that something that you think you can do as from the re perspective or year to sort of beholden to.
These types of dynamics that have been filed by the time.
It's somewhat challenging when these linger got triple nets, what I would say this when it came the PDP end.
I think we were active a partner as a recent possibly be a lot of dialogues, making referrals to resources that could be helpful.
So I think we're really active from that perspective, there operate as conference with helpful as well be too.
Provided a form to talk about all those things for our operators to share best practices with each other.
So I think in terms of that we've done that and look all the credit goes to our operators for having a period of time with PD PM, where they haven't seen a disruption.
But I think certainly at least on the margin we've been helpful. There when it comes to dual things like I key Rollouts and stuff.
The narrative frustrating as Hell rich people just.
It takes a lot and people who take their eye off of all I've seen it of the billion times and you have to have some level of trust. We were operators I think were compounded the issue at have Amir was the gentleman, who was the founder and chairman and CEO of Adam here.
Had really taking it back seat and had other management running running the company and he is fully engaged now has made a number of senior management changes.
He's running at on a day to day basis skin, which we by the way things are really good thing.
So I think it probably doesn't help that at the same time they were going through a transition with their software systems for that's where we companies. They were both the senior management changes same time, which is compounded it got you. Okay. Thanks very much.
Yep.
Our next question comes from Stephens eloquent with Barclays. Your line is open.
Thanks, Good morning, everyone. Thanks for taking the question.
So your overall comment so far around the PDP. After SNF operators have certainly been helpful. So I guess I'm, just curious to hear more specifically, whether or not the therapy utilization per average patient was already coming down within the industry.
Then Rick it sounds like from your comments at the May already be an initial read that some higher acuity patients are already being followed into Smith.
Now the reimbursement is more appropriate kind of as you talked about so I guess I'm curious what those higher acuity patients.
Be taken from a pool of patients that would normally go to elteks and or erfs or would they be coming from somewhere else. Thanks.
Yes so.
And I know, we're sort of neutral, but others will recall me, saying this I think any changes that reimbursement system.
That make it.
Create more quality from reimbursement perspective helps minutes and hurts L. taxing IRS there'd been a number of studies done by Medpac that show IRS.
Permanent Medicare rates that they get have no better outcomes and skilled has had at the rates that they've had.
And we've got a number of operators that two things that happened in L. Cox, our regular basis, only because they happen to be in states, where there are specialized rates that do it.
Do that on the normal sort of Medicare Medicaid rates.
So yes, I do think so I think they get these patients.
Hospitals that were helpful haven't had a place to discharge and too because.
All tax aren't that many markets. They are in five states or something like that and even though if you look at the map on the IRS. There are there and a lot more states you're actually concentrated in a relatively small numbers data there were a lot of markets out there where the hospital we've had no choice with the sit with these patients because they didn't even have an l. Tucker.
Hi wrapped ascended to in those markets, where we have high acuity skilled nursing facilities that compete with L. tax an IRS I definitely believe that they can impact the occupancy in those other asset classes.
Okay.
And then the very beginning when you talked about just they'll get no disruption than that at the very beginning of your prepared comments. Then there is a little more color around that but again should we should we take out the main though that there is just hey, there is no problems, but maybe theres no change in.
Therapy trend, yet, but I guess I'm just curious.
You are you're not seeing already.
Therapy is coming down maybe per average patient or you're not seeing that yet.
We're not really seeing that yet and that goes to my earlier comments, specifically, where I think our operators being really careful.
There's no reason.
The day before PDP Avenue of billing 600 minutes for patients and the next day.
400, and you have Lin group therapy for things of that patient. So I think our operators in all of their discussions with of.
Our being really careful about that so I think that the.
And a decrease in the level of therapy utilization is going to be over a period of time and it's going to be rational.
As they start ramping up their services to other kinds of patients there will be able to manage that as that balance we believe in a way that'll be that'll be net positive so.
Stay tuned, but I think we'll see more over the next year so that.
Consistent I think in saying that even though we've been really positive PDP.
We believed all along was going to take a good six months to really see.
Super tangible impact across a number of operators on PD.
And so by the time, we issue first quarter earnings of 2020, we may be in a position to provide some snapshots of coverage.
For operators because on a trailing 12 basis, you're not going to see it totally hear from now right. So.
If we're seeing improvement or are they able to show that so we'll keep an eye on that as to the extent that we want to make some additional disclosures.
That would be helpful that everybody in the supplemental.
Then we'll do that.
One other comment I want to make.
In terms of opportunity.
I'd say no disruption I think there.
There are number of operators, where there has been disruption, particularly with small to the model top operators were just a less sophisticated operators and they're going to start feels and paying pretty quickly. So specifically.
If you haven't really if you were prepared for PDP.
And your nurses.
You're going to enhance your MBS function and your nurses, where trade appropriately and all that and from October 1st your billing rate.
At a lower.
With the level of care requires for those patients that were they currently that let me start coming in and 30 to 45 days, that's going to make for a really tough Thanksgiving. So I think there's some percentage of operators out there because they're going to be feeling some pressure sooner than later.
Now.
In terms of whether they have to do something about that because on the operator and how much cash they've gotten the bank and how much time they come by themselves.
Lots of stuff.
Goes to why a lot of US go up that there would be more skilled opportunities prior to PDP because at some level of awareness or the part of certain operators that they've just done they're ready to hit out but it wasn't the case.
Peers that are a lot of offers that we don't think all prepared that thought Oh Gee everybody says this is great. So if we hang around October 1st which is going to be making more money civil work that way.
Okay, all right Thats perfect I appreciate the extra color. Thanks.
Our next question comes from Joshua Dennerlein with Bank of America Merrill Lynch. Your line is open.
Hey, guys just form question for me.
You mentioned that dynamic pricing systems under senior housing managed portfolio.
How how should we think.
That plays out as far as rate and occupancy going forward the full occupancy.
Dipping as they keep pushing rate or do you think that kind of trend has trended out at this point, it's more more balanced mix going forward.
I think that the opportunity is going to differ depending on how you trash the portfolio.
I got to Rick's point earlier, when you explain how that how enlivened guys conscious portfolio by by occupancy and and other metrics. So I think the dynamic pricing model is passed in probably will should continue to be particularly effective and don't lowest strategy.
Of occupancy.
Right and it's the greatest opportunity to add occupancy and.
That has a disproportionate economic benefit at that point.
In terms of covering fixed cost et cetera.
I think it will be additive to the other conscious of occupancy on on units that might have been typically harder lease.
Or sach, we've talked about spot occupancy before Dan it's really been spot.
Since they really fully engage us new initiative.
We're looking at five to six weeks now we've actually seen some real improvement so it just.
Feels better.
We'll see we've got.
A lot of people are really concerned about the flu season is going to be this year based on what we've seen happened in Australia. So we'll see how that goes but if they can continue this current trends going into that there will be in a lot better positioned than they would have been otherwise to get through it.
Interesting thanks, guys. That's it for me.
Our next question comes from Daniel Bernstein with capital line. Your line is open.
Great.
Correct is good and good morning for you so to me.
My question goes back to the in living portfolio.
The JV portfolio.
Pushing rate of 81% occupancy in search.
Is there an indication that that map portfolios kind of stable at that occupancy you typically you don't push rate until.
In your house until you get close to 90%. So I'm just trying to understand the dynamics on rate growth within that portfolio, maybe there's some.
Assets that are high that that are pushing rate.
Even above what you're showing such trying to understand the nuances.
I think it's more a function of as their reputation has improved in those communities. They can continue to push rate and try to push occupancy at the same time. So I don't think they're mutually exclusive I think it's just it's a little bit different with a portfolio that had been in turnaround mode for quite awhile.
I would be my only comment is it sort of.
Your question is best answered with granular detail.
And we're talking about a portfolio of a 170 properties and occupancy is not the same costs and the not average rate right and that's that's where the complexity the dynamic comms comes forward.
So there are properties that are well occupied and there's room to push rate and that's the focus and our properties Theres, a contra properties, where occupancy is a big opportunity and thats. The one I reference when I talked about.
What we've seen.
Basically on terms and the leap and spot occupancy on that on the lowest contra market pad assets and there the focus is getting people in and.
And raising occupancy as opposed to driving rate specifically.
Okay.
Is there a general strategy.
And maybe your other operators, where it is to resource.
Some of the wholly owned assets.
To drive great over occupancy.
Importantly, a month I think thats a good strategies.
But is that it's going to general scratchy folks are urged using within your portfolio.
Obviously at some other portfolios and some of the reached its clear that we're driving occupancy over rate.
So just I think.
We don't have any opportunity set today.
Can drive rate they want to do that they don't want to compromise that under any circumstances, I think thats, a long term impact of compromising on that.
It is more negative than staying with a little bit lower occupancy for a period of time.
Okay, Let me.
Sorry.
Let me add one nuance and I want to make I think Rick said, this but I want to make sure understood. The dynamic pricing model is not a discount model and is not about discounting or free rent in your fourth fifth mistakes Mark it's not that it's actually evaluating.
I think units Newbuildings and understanding what what would be that range of pricing that would be possible.
And assist.
The team in making decisions and getting those units occupied.
Okay.
Just my last question would be.
And I'm, just a little bit or the early recall assortment with some of your comments on hampered us supernus discernible.
I guess feedback from operators of.
Yes.
I guess, maybe little bit using labor pressure now that you can free up some merger your nurses to actually do.
Nursing instead of paper work under Pdps trying to understand.
Some of the I guess expense savings and labor pressures there has been there.
Are you actually seen some of that discernible.
Benefits under ppm.
I think that's going to be more in the therapy side because to the extent that you're going to have some percentage of people, including concur therapies, you're going to need less therapists, which there's a big therapy shorter. So thats really helpful. On number of different levels, which is why you hear the therapy Association screaming about pdps.
On the nursing side.
Got it and coating now so you got some other stuff to do.
There has been there have been some regulatory burdens that have been lifted having to do assessments is often so maybe there is a little bit more care time, there, but it's kind of more on the margin Dan.
Huh.
No.
Thats all I had.
Okay. Thank you.
Yes.
Our next question comes from Tayo Okusanya with Mizuho. Your line is open.
Hi, a welcome back.
Tycho.
So your line is open please check your mute button.
Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is open.
Thanks.
How much of the big shout out to tie our marketing and sales [laughter].
Yes.
Stephen Yang and I'm sure we'll come back.
Thanks, just a quick one can you provide facility level sniff coverage, including all your tenants. So so four wall coverage with the near and the others.
No we haven't historically disclose that I think our approach to coverage has been that we give we give the coverage.
For those that don't have guarantees and then when we provide the top 10, the intent there to give investors and everybody a really clear picture of our primary and significant tenets of where their coverage there, but we've never ever published.
Has talked about them.
Yes, thats the together into the two critical to us and I look.
The reality is no actually with a time way back in the early days were showing vote and all that is was created confusion and people always I'd like to look at the lower number.
So it's.
The fixed charge coverage is the number that we get paid on so that's what we're going to show for those few than we are very many are two of them too we only have two of them anyway.
Because that would give therefore.
Great. Thank you.
Yes.
Thank you and I'm currently showing no further questions at this time I turn the call back over to matrix for closing remarks.
Well thanks, everybody for your time today for those that have kids I Hope you guys AFFO trick or treating today, we're all around and available for follow up questions.
Have a great. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
And then.
David.
Hi.
Now I'd like to see.
Good.
Okay.