Q4 2019 Earnings Call

It's been a long day without you my friend and I'll tell you about it when we've come a long way from where we began. I'll tell you, ma'am know how to planes we flew good things. We've been through this is standing right here talking to you about another choice. I know we love being in the road and lab but something told me that it wouldn't last had to switch up. Look at things different see the bigger picture. Those were the days hard work forever paid off.

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Good day, ladies and gentlemen and welcome to the Cyber Healthcare read fourth quarter 2019 earnings conference call. This call is being recorded. I would like to call over to your host Mister Michael Kosta TV off, please go ahead and Mister Costner. Thank you. Before we begin. I want to remind you that we will be making forward-looking statements in response to your questions concerning our expectations regarding our acquisition disposition and investment plans are tenants financial performance our expectations regarding our financing plans and our expectations regarding our future financial position 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 risk listed on our form 10-K for the year ended December 31st, 2019 that was filed with the SEC this morning.

As well as in our earnings press.

Release included as exhibit 99.1 to the form 8-k we furnished to the SEC this morning. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid in addition references will be made during this call to non-gaap financial results investors are encouraged to review these non-gaap Financial measures as well as the explanation and Reconciliation of these measures to the comparable gaap result included on the financials page of the investors section of our website at ww.w. Our form 10-K 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 name is Chairman and CEO of Sabra Healthcare everybody for joining us this morning this afternoon this morning song and see what else

happy Laker game order and Kobe and Gianna and the other families that were lost in the helicopter crash and now

The celebration of life for all those families is happening Staple Center and made a memory be a blessing now onto Sabra 2019. What was the year that we finished our repositioning of the portfolio and um did all the things that we did to improve the balance sheet, which going into 2020 is a pretty in pretty pristine condition and how may talk more about that our story and our Focus for 20/20 is really simple and that's getting back to growth and based on a very strong platform that we have in place on the desk that when she took River had activity is starting to pick up we completed just in the 38 million in the fourth quarter of Investments and a little bit over $82 million so far off through the first quarter rather of 2020 the average yield of the deals were 7.4% We're also getting close to closing 150 million bath.

Investment in senior housing investment and that that deal will initially be earnings neutral will be accretive later in the year. Our focus on investments going forward is going to be on Hiatus testing specifically skilled nursing behavioral and addiction.

incorporated in

This year's guidance Is our commitment to maintaining the dividend would expected coverage improvements beginning in the latter part of the Year moving on to the deal environment. Essentially. It's the same as it's been in terms of competition Thursday. We're seeing some senior housing opportunities a better cap rates. We're starting to see skilled nursing volume pick up and that's sticking up a historically stable levels are current acquisition pipeline is just a billion still primarily senior housing, but we're seeing more skill deals and we're also starting to see some behavioral and addiction is Dustin opportunities as well. And we now have relationships with to our operators in the addiction space. So we don't expect the growth to be rapid there but it's getting off to a nice start for us moving on to a live at we're not pursuing a new JV Thursday. We determine that it's best to work with tpg to have a simpler solution the JV solutions that we were looking at had some real complications to our story and I think as you all know we've been talking about it for a while we're off.

Keep our stories uncomplicated as possible. We have enough Millions with everything that we went through with the repositioning. Our option to exercise doesn't end until the until December 31st of this year wage. We believe we're in a good stock to give it more time as the driving performance continues to strengthen.

Would anticipate exercising the option when we see occupancy gains that provide a clear path to accretion from any incremental investment until that occurs. We're happy with our current level of investment in the portfolio. I don't feel compelled to make any changes possible outcome may be a partial take out with an extended town the option for the remainder minimizing the equity Equity required again working with tpg song maintain the current Partnerships now moving onto TV p.m. I know everybody is curious about the results for PD p.m. We're not at a point where we consider publish a snapshot but I would say through the 4th through the 4th quarter of 2019. We're seeing great growth net of the Market Basket at Mid single-digit pretty much across-the-board little bit more a little bit less with some but coming in around mid single-digit. Um, once we have some more data points, we will be able to provide a snapshot of how that impacts coverage. Hopefully, we'll be able to do that on or off.

Quarter call Early in day one of the things that our operators are still working through that hat will have a big impact on the improved coverage is the cost reduction therapy. So as we as as they make more progress on stabilizing those cost reductions will have a much better sense of have a combination of the rate increase and cost reductions go to improve coverage, but we're really pleased with the improvements that we've been seeing relative to TV p.m. And there's really been no disruption with any of our operators as they transition to the new system moving out of operations are triple triple net same-store skilled business occupancy skill mix and even Dom coverage or stable for senior housing occupancy and even encouraging table as well on top 10 is generally strong the three the three operators should we always kept a close the Scion we've been avamere signature help and North American avamere wage.

I was down sequentially but they bottomed out in the third quarter. They showed nice Improvement in the fourth quarter. That's continuing.

To the first quarter cuz they're actually trending up a little bit more quickly and sooner than we anticipated North American Health Care continues to improve improve sequentially is also improving a quarter Signature Healthcare ended up in the fourth quarter as well as the early in in the early first-quarter. So we feel really good about with our operators are from a coverage perspective and all else for that matter our same-store shop Italian would provide all the specific details, but we showed Improvement across the board and occupancy margin and read for the unconsolidated JV wage live in and tpg short occupancy and red floor up with a solid margin and with that. I'll turn it over to Harold. I see the tie first I'm sorry. I didn't update on our management.

And the fourth quarter of 2019 approximately 17.3% of sauber's annualized cash and a while. I was generated by senior housing portfolio approximately 57% of that relates to communities that are managed by environment and 35% relates to our holiday managed communities the balance includes our Canadian portfolio and for assisted living Memory Care community of making less money on a same-store year-over-year basis to manage portfolio, which excludes the holiday assets showed favorable results in the fourth quarter compared with the fourth quarter of 2018 revenues increased by two and half percent Cash Net operating income increased by 2.9% and revenue preoccupied room for excluding the non-stabilized assets Club at 4.4% The year-over-year results aren't as dramatic as they were last quarter when we were comparing third quarter 2019 results to a quarter of 2018 that was recovering from the impact.

flew the impact of the

Kon flu season was already filed in December resolving a higher move out the context. This context makes are managed portfolio results in even more solid continuing the trend of improving rate revenues and cash net operating income across Australia. Although the Senior Housing Industry continues to feel the pressure of increased Supply and higher labor costs our portfolio communities that largely town in the Middle Market in secondary cities in the US and Canada is not as dramatically impacted by these factors because of location ongoing capital projects maintain the same for both residents and employees and the importance of our communities as an important employer in their markets before we get into the details of this quarter's results in a state the obvious 1/4 doesn't make a trend as in every operating business there is volatility. So we focus on the direction of results over time while understanding the sources of volatility wage.

to seasonality flu

Changes have been competitive landscape etcetera and I encourage you to look at the sequential quarterly results that we include in our supplemental information where you can begin to track Trends in our managed portfolio phone number time now back to the details the enliven joint-venture portfolio 170 properties of which fiber owns 49% showed steady improvements average wage for the corner with 82.2% point eight higher point eight per cent higher than previous quarter and 1% higher on a stabilized Bank store year-over-year basis for was $4,418 2.6% higher on a quarter-over-quarter basis and 4.1% higher on a stabilized same-store took over a year basis. This is the highest RAV4 that we have seen since we made the investment.

Same-store Cash Net operating income for the quarter Rose 1.4% year-over-year and with flat sequentially cash and margin was 25.7% off in lines of the prior Year's results in 2019 the alive and joint ventures cash and a wide was 7% higher than in 2018 driven by top-line growth and spam control.

continuing

The results of a wholly-owned manage portfolio Fabrice wholly-owned and live in earlier of eleven communities continued to drive rates. However, the early start of the flu season impacted occupancy and therefore margins occupancy at two of our eleven communities with particularly hard hit by move out related to flu beginning in late November and into virgin. Both communities are in strong markets and occupancy is already bouncing back but in a portfolio of 11 properties events at two communities affects the results of the group fourth-quarter occupancy with 89.5% and 7% higher than the prior quarter and lower on a year-over-year basis by 3.1% as a result of a spike in depth and move-outs to higher Acuity settings while January occupancy came in at 86.9% because of the flu and live in is seeing a strong wage.

Ruben's and is optimistic about

Momentum on occupancy game sport in the fourth quarter Rose to $5,810 85.1% increase over the prior quarter and 6.8% over the prior-year order cash and Alive. Was that 10.4% on a sequential basis because of rate increases I need to effect on October. First name is up 2.9% in calendar year 2019 compared to 2018. This outcome is a direct result of pasta to us as being offset by raised in Chrome.

Holiday, we transitioned our holiday communities from us at least to manage portfolio at the start of the second quarter of 2019. So we do not yet have your of your same results to report in addition. We transitioned our independent living community Frankenmuth, Michigan to Holiday in the fourth quarter this year. So I will focus on same-store quarter-over-quarter excluding the Frankenmuth asset portfolio occupancy was 87.8% in a quarter 8% lower than in the prior quarter off with $2,486 in line with the prior quarter Cash Net operating income fell 6.3% sequentially because the third quarter included a favorable adjustment associated with a deferral of referral fees, excluding this adjustment cash and a y increased 2.9% sequentially.

Sienna

Senior Living managers eight retirement homes in Ontario and British Columbia for Sabra in the fourth quarter of 2019. The a properties managed by Sienna delivered 88.3% occupation, which is slightly down from 89.8% in the prior quarter red car was $2,268, which was flat to the prior quarter and 3.3% higher same-store year-over-year basis. Fourth-quarter Cash Net operating income was down 2.7% on a year-over-year same-store basis, but increased by 2.5% in calendar year 2019 compared to calendar year 2018 on the same-store basis with margins remaining virtue of the same in full year 2019 compared with 2018 Sienna continues to maintain occupancy in a narrow band and tight extent controls resulting consistent operating results for stabilized portfolio that I will now turn the call log.

over to Harold Andrews

Fabric Chief Financial Officer. Thanks to all your thanks everybody for joining the call today this quarter. We achieved our objective of lowering. Our leverage levels of comfortably below are stated Target 5.5 times this effort throughout 2019 resulted in many credit metric improvements compared to December 31st, 2018 as follows. Our debt-to-ebitda just a TV box is down from 6.12 times to 5.38 times and excluding the JV debt. We're now at 4.89 times interest coverage up from 4.18 * 25.2 * fixed charge coverage up from 4.05 times to 5.08 times and debt to asset value down from 43% to 36% We also lowered our cost of permanent debt which excludes the revolver from 4.28% at the end of 2018 to 3.79% off.

Need the 2019.

A 49 basis-point Improvement generating annual interest Savings of approximately twelve million dollars during the fourth quarter. We issued 11.5 million shares of common stock under 80,000 program generating net proceeds of two hundred forty eight point four million dollars. These proceeds were primarily used to repay all outstanding balances under our credit facility and a hundred five million dollars of our term loans maturing and twenty twenty-two in addition to the Improvement of our credit metrics the full paid out of our revolving credit facility along with our unrestricted Cash Cash equivalents provides us with over 1 billion dollars of available liquidity getting us well positioned to take advantage of investment opportunities supplementing that liquidity is a 340 million dollars we have available on our 80 in stock offering program. The ATM will among other potential uses allow us to match fund Acquisitions and ensure that we maintain our leverage below the Dead.

45 * long-term

Target as we grow and now for a few comments about the financial performance for the quarter for the 3 months ended December 31st, 2019. We recorded revenues and Noy of $158 155.8 million dollars in 134.8 million dollars respectively compared to a hundred forty nine point eight million dollars in 134 million dollars off the third quarter of 2019 increases a 4% and 3.4% respectively. These increases are driven in part by the Acquisitions during the third and fourth quarters thousand nine million dollars of non-cash lease termination income related to the transition of one senior housing community to our senior housing manage portfolio during the fourth quarter and took over the quarter was in line with our expectations at $91 and on a normalized basis with ninety five point six million dollars or forty eight cents per share. SFO was normalized. Yep.

Going to exclude A 5.6 million.

Dollar lost on extended from the debt recognizing connection with the Redemption of our 5.375% senior unsecured notes that we're doing $20.23. This Compares normalized ffo of 90.1 million dollars or forty seven cents per share for the third quarter of 2019 a f f o which excludes from FL merger-and-acquisition in certain non-cash revenues and expenses was also in line with our expectations at eighty nine point six million dollars in on a normalized basis with ninety three point two billion dollars or forty cents per share a f f o was normalized primarily to exclude a 3.6 million dollar cash portion of loss on extinguished for the debt recognized in connection with the senior note Redemption. This compares to normalized ffo of eighty-nine point seven million dollars or $47 per share in the third quarter of 2019 for the quarter. We recorded, New Jersey.

income attributable to Comstock

The thirty nine point seven million dollars or Twenty cents per share GNA cost for the quarter totaled 5.7 million dollars including 1 million dollars of stock-based compensation wage, cuz our recurring cache ta cost a 4.7 million dollars or 3.5% of it alive for the quarter and in line with our expectations. We expect them poorly Kashi any cost to average approximately 6.5 million dollars our interest expense of the quarter totaled twenty seven point four million dollars compared to twenty nine point three million dollars the third quarter 2019. This quarter-over-quarter reduction is driven by a combination of lower total debt of 193.1 million dollars and a lower overall Bowery costs resulting from our refinancing activities interest expense included two point two million dollars and two point five million dollars of non-cash interest for the 4th and 3rd quarter wage.

a 2019 respect

Like during the quarter. We recognize a 2.7 billion dollar impairment of real estate primarily related to one Skilled Nursing Facility expected to be sold in 2028. We did not recognize any revenues from this asset during the fourth quarter other income of 1.7 million dollars for the quarter relates to a settlement from a prior operator. This amount is excluded from normalized ffo and normalized ffo during this and subsequent the fourth quarter of 2019. We completed real estate Acquisitions of 118.1 thousand dollars with a weighted average cash yield at 7.4% those Acquisitions consisted of five senior housing communities, including three from our development Pipeline and 114.3 million dollars one addiction treatment center for three point eight million dollars. We have committed to invest in additional eighteen point five million dollars to complete the construction project for the addiction true.

consider which is expected to be

Is it in early 2021 during the fourth quarter of 2019 we completed the sale of eight skilled nursing Transitional Care Facilities, but aggregate sales proceeds off point three million dollars details for anticipated in our portfolio repositioning plans and further strengthen the portfolio during the fourth quarter. We recorded revenues from these Soulja sold facilities, totally less than a hundred thousand dollars. We were in compliance with all of our debt covenants as of December 31st, 2019 in addition to the metrics. I mentioned previously are unencumbered asset values to unsecured debt increased from 218% to 275% year-over-year and secured debt to asset valuation remains at 2% Finally getting to our our guidance reach you at our first year earnings guidance range from twenty twenty as follows. Net income $0.81 per month.

FFF

A buck sixty nine to a dollar 79 normalized ffo a dollar seventy $1 to a dollar eighty one a f f o and normalized ffo home to a dollar eighty. We expect our twenty-twenty senior housing manage portfolios same store in Hawaii to grow as follows Coleone 4% unconsolidated joint venture 3% with a portfolio repositioning and delivery of the balance sheet and accomplished in 2019 were very excited about the prospects of returning to growth. We have a good food in our guidance expected investments in 2019-20 hundred and fifty nine million dollars and a weighted average initial cash yield of 7.4% 52 nine of this is already been completed. We did not include any status of investment activities in our guidance furthermore maintaining debt to adjusted ebitda at or below 500 off.

five times is built into our

Performance expectations and will be a critical consideration in our investing activities going forward our guidance includes expected dispositions and Loan repayments of $111 which consists primarily the three remaining Genesis assets requiring HUD approval and a few remaining asset sales identified in 2019 that are yet to close we expect both used to close by the end of the second quarter at a yield of approximately 6.6% with the refinancing activities would be accomplished in 2019 and the absence of any meaningful debt maturities over the next several years. We do not expect any significant financing activities except as may be related to funding acquisitions.

Related to the assumed Acquisitions included in our guidance and our commitment to maintain our leverage below five and half times. We do include the issues of 120 to $140 a month on the ATM during the year. It should also be noted that we have a few leases maturing in 2020 having total annualized revenues aggregating to twelve point nine million dollars a month many of these are expected to be renewed and no reduction of rent and several mature in the fourth quarter of 2020 limiting the impact on 2022 less than a penny per share the impact. These maturities has been included in our guidance one final comment on our 2020 guidance. We expect first quarter 2020 normalized ffo normalized ffo to be in the ranges of forty-three to forty-five cents and $42.44 respectively. This decline from Q4 2019 is driven off.

merely by an increase in the later

Average shares outstanding quarter-over-quarter along with higher G&A costs and timing of collections from our cash basis tenants finally on February 4th, 2020 the company you know that it's blue directors declared a quarterly cash dividend to $0.45 per share. The dividend will be paid on February 28th, two, stockholders of record as of February 14th, and that's all tried that correctly truth open Q&A now, thank you ladies and gentleman ask a question, please press star one on your touch-tone telephone.

I guess that's the question, please press * 1 our first question comes from Nick you hello.

Thanks. Good morning. First of all, I just I just wanted to clarify Rick when you were talking about PDT p.m. Same as a little bit early but to give a snapshot but I think you said the the rate growth net of the Market Basket was mid single-digit. So does that mean that's inclusive of the benefit of the Market Basket increase excludes The Market Basket wage? Okay. Okay. All right. So I guess I mean at this point, you know granted still a little bit early, but you know any any kind of fuel for how you think CMS maybe, you know, viewing the benefit from PD p.m. And whether you know, it's some points going to have to address that in terms of sort of Club, you know, any sense that that that would happen in the April notice that goes out so a couple of a couple of comments one. We all knew that it wasn't any Revenue age.

Control, but it's not egregious.

The way rugs for was rugs for was double-digit and we're not we're not seeing that I don't think we will see that you may season awkward here that it's certainly not the basis of life. I actually don't expect a clawback. I think CMS despite comment expected some some positive growth and change. My my guess is what they'll do is at some point in time do an adjustment go forward going forward. So for example, October twenty one, maybe getting a Market Basket we get so my guess is it's it's it's moral go forward thing which would be fine than anything else. I'll be surprised if anything happens this year simply because they've already been in the process of writing the the initial Rule and there just hasn't been enough data out there. So I just think oh

basically, technically

It's going to be tough to do anything. That would be effective October twenty twenty or Twenty-One, you know, but you never know but that but that's my my best guess as long as it's not going to be a call back cuz growth isn't going to be unreasonable. But the want to make some adjustment on a go-forward basis which obviously, you know a lot more palatable. The other thing I would note home look for it wasn't just that the the revenue growth was so extremely high but it also took place during the Great Recession. So that's sort of compounded kind of the issues at the time. So

Okay, that's helpful. Thanks. Just a second question is on in live in and yeah, I know you said you're not pursuing a new JV. I think you said there's a partial takeout possible. Um, I you know, I think that it was just in January that the the option open for tpg to do something with selling their interest mean you just tell us kind of where you're at on the discussions. And if you'd think at some point this year it will get resolved as to whether you're going to own more of in live in or not. Yeah. So, um, so the only discussions that took care of that both parties. I mean you're interested in working together tpg has been a great partner and he's shown some flexibility real life here too considering just a partial takeout. So we don't have to write that much of a check and extending the towel on the option. So really all we're really doing right now is as you still on the numbers off

We saw some nice occupancy limit going in the fourth quarter and they've done a good job.

To managing through through the flu. So Banning that isn't going to take a significant effort. So for us we want to see a pack increase in here and at this point tpg seems to be rolling with us on that and we'll just send a take it from there. So, you know, as I said, the opening comments were pretty comfortable where we are. Now. We are really pleased with the additional traction. We're seeing with Enlightenment and I would expect something to happen. We're just not you know, when a rush

And key just a follow-up Keys remind us how it works in terms of you know, if you are going to increase your stake in the joint venture how how the valuation of that would work. Is it just a total new valuation that happens or is it somehow dependent on you know, the price that was originally paid that was originally paid said nothing's changed there. There was a month. It's a floor plus 5%

okay.

Thanks, very helpful.

Thank you. Our next question comes from Nick Joseph City. Your line is open. Thanks buddy. Just following up on that in terms of obviously put out your expectations for this year and understand wanting to acquire it took so based off your current expectations. When does that inflection point occur either from occupancy and analyzed standpoint where you think you could actually do it creatively dead can't pick a time if the latter part of the Year probably closer to some time in the fourth quarter.

Thanks, that's helpful. And then with your opening comments, just getting back to growth obviously just gave twenty twenty guidance. So the impact of the share issue to be leveraged into seeing about right now. Is that more of a 2020 one comment? Would you currently expect earnings per share growth next year? Yeah, I think yeah, it is worth anything everything that we get done this year particularly the time it takes to close deals are going to have a much bigger impact on 21 than they will have on twenty. So I would expect that the impact on twenty-twenty wage incremental but will that will help us clearly move into growth mode for 21 and that's why I commented Also earlier that we expect dividend coverage to improve a part of the year when the impact of some of the investments will start taking home.

makes sense

Yep. Yep. Thank you. Our next question comes from Chad Van is open.

Hey, good morning. So I was just thinking about the the the owned Assets in shop, you know holiday occupancy drop pretty significantly from first half of the second half, you know, you've got a couple of hundred basis points. So how should we expect that Trend in 2020?

This usually held fairly steady on me that that so there are some volatility but I think to the main they these are stable with the portfolio stabilized assets. The only asset that's not stabilized. The one that we transitioned to them that was being run by a different operator. And that's the acid I mentioned in Michigan. Okay, and I'm sorry Talia. How's that affect the overall?

The the the Frankenmuth Bassett I don't think it's included in our numbers cuz it's not stabilized. Okay, then just thinking about em, and you know, you've got to talk about this positions that are in there. What about the hundred fifty Acquisitions? Does that skilled nursing that you alluded to and then we'll kind of kapre should we expect that to senior housing that's a senior housing investment and we're in the midst of finalizing negotiations on the PSA. So we're not prepared to talk about any specifics relative to the deal.

Okay, so

As I said, it'll be initially it'll be earnings neutral but expected to be a lot of Harvey here. Okay, and then you had mentioned about the shifting more toward the to the skilled nursing side of things. How should we be thinking about that? Well, I think you know, there's been an assumption that we we haven't been interested in skilled nursing which isn't the case as I just want to emphasize that we are actually looking at high-yield Investments that we've done. You know, we think a really nice job since the CCP marriage or rebalancing the portfolio and have plenty of room to grow in a skilled nursing Arena without becoming sort of the skilled nursing read and still having balance in the port in between skilled nursing senior housing and the behavioral hospitals and other specialty hospitals.

All right, and then just one more just the equity issuance part. You said, you know you we should expect a hundred twenty $240 million. Wouldn't that be Thursday at this point? And then what would what should we expect in terms of if you end up closing that enliven JV second half of the year.

Yeah, it's not.

It's not additional delivering. It's just it's just using the ATM to match fun. So that will use some combination of debt and Equity as we do Investments this year so that we maintain our leverage at or below our Target and and similarly with a live and if we were to exercise that option in part or otherwise, they'll be some combination of debt and Equity used so that we maintain our Target leverage. Everything is about maintaining the target market. So there's no need for us to issue Equity just to deal over the balance sheet any further just maintain a where it is.

And and you using the ATM not just to match phone instead of routine Investments, which is pretty standard for all of them. We would expect to use the same name is could you edit for anything that we might do on the enliven portfolio this year?

All right. Thanks. I'll leave it there. Our next question comes from Rich Anderson is open. Hey, thanks. Good morning up there. So I'm back to the JV. Is there something you saw the observed with the portfolio that caused you to sort of Hit the pause a little bit here on making a new incremental investment in TV was it you know like some sort of fundamental thing or is it simply you know, thinking about staying simple put it that way and and you know not complicating things more wage. Just curious. What do you do? If you don't get that occupancy gain that you feel like you need to move ahead and and do something incremental or you willing to just sit at 49% for you know forever.

They're comfortable with.

That we are obviously tpg may feel differently about it. So they they may want to take additional actions, you know, once the option is up if they can find a buyer that can you know, oh, okay that handsome a price so but hitting hitting so that's kind of where that's at. But we're comfortable with where we are in terms of hitting the pause button wasn't really so much hitting the pause button. If you think about you've got Sabra and live in you've got tpg owning the operating platform. Now, you're going to bring a new JV partner in um, you know, you've got issues with a line that says you got a much more complicated structure and and we really, you know mean what we were talking about all last year. We want to have a more simplified story. It's easier for everybody to Jeff. We have a really good partner in Fiji. And so their willingness to work with us is greatly appreciated on our part and then the other sort of specific thing to the timing for Thursday.

Did was we saw and make some changes relative to their marketing strategy which results in stronger occupancy.

In the fourth quarter, but we also knew that we were going into what everybody was calling, you know, the worst flu season that we were had even worse than two years ago. Although it looks like it's more short-lived that it was two years ago. So, you know to pull the trigger knowing that you're going to have an occupancy decline just didn't make any sense of we just want to get the net. So there's no reason for us not to just wait longer until they've got through the flu season. And as I said in my opening comments, they did a really nice job managing through that as our other operators off. Yeah, that's it. Okay, that's fine. And then so thanks for that moving the PDP. I have a maybe abstract type of question or something. But you know, everyone has recalls rugs for and what happened when we maybe we got everyone got a little fat dumb and happy not not expecting the reaction that they got from CMS. I'm Curious George.

Do you think perhaps the the the industry will behave more rationally and maybe not try to milk every single dollar.

And and and allow this to have some legs as opposed to you know, maybe going too far too fast and opening up the conversation for you know, you know a club scenario or something like that. Is it possible we can actually have you know good behavior this time. So that doesn't become part of the story. Yeah, so a couple of comments which one month for was just not well designed. This is a much better designed system and the operator is approach things pretty simply they follow the money and it was such an easy thing to do the wage was designed. So this number one is has a much better designed to put your other point. Yeah. I think there's definitely behavioral changes this time operators. Remember every slide that's ever happened in the history of Life careers and every cut that's happened in every state in the history of the careers. And so they're really mindful of that sort of give you a specific example under under pdpm you're allowed to roam.

Up to 25% of revenues in the concurrent and group therapy and 26% by the way.

Before they took away from current group therapy was industry average. So the cap is very basically where industry average always was but the industry and how to talk about our operators, but we're here or elsewhere as well a very mindful of the fact that CMS is going to look direct flags and one red flag would be going from 0 concurrent Therapy & group therapy on September 30th to 25% kind of overnight, you know, when you've been billing everything under rug for adult rahai and very high. So we're not seeing that with our operators with our operators are telling us in fact, even when they were talking about transitioning or working on a training programs and coming into doing presentations to us. They all made a point of saying we're not going to go there. We're just not going to grab that much, you know wage and even and look do you think about that level of business and to me it's even more admirable given the headwinds the industry has had that they're not going to do that so dead.

You know, we're seeing a much slower and smaller gravitation and percentage of concurrent a group therapy than might have been anticipated wage opportunity to go to 25% And I expect that we're going to see that pretty much across-the-board. You're always going to have operators here and there and if they're doing something that's egregious then let those specific operators page, but I think yeah, I think there have been some lessons learned and you know people say investors have short memories operators have really really long memories So Okay, so we've been really pleased with the approaching tickets. Okay, how old on the on The Leverage side? I know you're inclined to sort of stay in this range, you know in the mid fives wage, but wasn't there a call for a long-term number below five or my or my forgetting something know? You're actually not for getting rich below 5 it was always dead.

characterized as

So, uh a long-term goal. We would like to achieve we obviously recognize that being under 5 and 1/2 x put this first of all in a good spot off of our other investment-grade peers and secondarily puts us into good standing with the rating agencies. So that's kind of job. One job to really is to manage, you know earnings growth over time. So I would I would say, you know, as we see our cost of capital improve in the future then that'll give us a more of a an ability to further deliver the balance sheet as we see fit and it would be really nice to get it down to, you know closer to five or below five times. But obviously we're also very mindful of our need to grow earnings in New Jersey. So we're very comfortable at that 5 and 1/2 or slightly below that for the near-term and then we'll be opportunistic in the future to give it down further. Okay last one for me you guys report dead.

Coverage what it would be on how what's the difference between that and ebitda R coverage? And why don't you report it on?

Our basis just out of curiosity. So we always have so three three three issues and foremost is that some of us who reported andar using a computer game management fee While others use for and weaken despite the fact that everybody should be aware that we were continually being including by the rating agencies for having lower coverage without taking into consideration the differences in management series and frankly, which is kind of over it. Secondly, you know, we always got negative feedback about the fixed today in the fixture of coverage and by having everybody on the uneven John basis now, it's all Apples to Apples whether or not there's a corporate guarantee. So that should make it a lot more digestible and simple for everybody else to to understand and then thirdly we're not the only ones so we're not setting a precedent the difference like one or ten basis points or something like that twenty basis points wage.

I I think for super senior housing it's about 20 basis points for skilled nursing. It's probably a little bit more like thirty-five.

I basically

Okay, so I got thanks. Yep. Thank you. And next question comes from John Campbell is open.

Thanks. Good morning, Rick in your opening remarks. You mentioned that avamere the the coverage decline sequentially, but at the same time you saw an improvement in the fourth quarter. Can you just tie them together? Yeah. Sure. So you might recall going back to previous earnings going through a complete change it systems specific to their ancillary businesses and some of that was really critical to them because they've got a home health business and home health has has a new reimbursement system as well called a GM which is similar to to PDP and although for the home health industry. It's widely viewed as a negative because there's a reduction in revenues. So that just creates real disruption. So most of most of the downturn in their coverage of the function of their ancillary businesses and half of that so we saw them get through that and improve

All systems and that plus the combination of improvement from PD p.m. Is what contributes there.

Okay, and coverage in the upward trends that we saw in the fourth quarter fact on Friday. We had a full detailed operational call him on the fourth quarter and there early first-quarter results. So we're seeing that Trend improving improving the first quarter as well the other comment I'll make of that avamere because everybody's aware of the issue really with avamere on an ongoing basis in Washington state, which is just which has horrible Medicaid rates three more facilities closed recently. So out of about 120 facilities, I think there were totally off the total in the state of Washington state. They're not been twenty-two closures. So it looks a lot more positive that there will be a Medicaid rate increase this year both of rebasing of existing in a rate increase for Washington State. So in addition to any Improvement that have a mirror seeing from 2 p.m. They'll get a great Improvement. Yep.

And again whether or not it's what everybody wants remains to be seen but still be better than it is now. We should continue to see improvement with would have a year.

Okay. So do you anticipate selling any assets out of the portfolio or restructuring the leases at all or just think it's going to improve naturally as you mentioned without restriction reason, I think if if if there were no rate increase in Washington state then we'd sit down with the avamere team and see if there was anything else he wanted to do they what it was telling the facility. They might want to buy back the real estate office. We didn't see a need to rush into that there are strong company and and hopefully not between PDP and and some level of rate increase for Medicaid and Washington state will be good. But there's never been any discussion about about whatever least.

And on the alignment transaction, is there anything that you are asked to give up on your end to get the option window increase from tpg long? Can you talk about overall on Triple net lease transactions or Acquisitions in senior housing how difficult it is to stretch leases in a trouble no basis today. And what are your underwriting as far as coverage and any wife leaders? Hi It's Italia if anything I would tell you would be entirely theoretical because we hardly ever see an operator that wants to enter into a lease these days. I wouldn't be surprised if sometime in the not-too-distant future to the switch will flip and it'll be greater interest in Lisa's, but for now, there's there's almost I'd say there's somewhere around zero interest dead.

Entering leases which is why I can tell you what?

Would underwrite than that, but it's kind of not reality.

Yeah, that's fine. Last one for me is do you have guidance as far as what you think recurring capex will be in 2020? Yeah, it's actually off on the on the press release and I want to look it up here.

Not yielding cap is $21 and that's both between our own managed portfolio and a little for the triple-net portfolio of a $21. Great. Thank you.

Thank you. Our next question comes from Steve and Alex at Berkeley. Jalan is open.

Oh great. Hello everybody. Thanks for taking the question. So you touched on this topic a little bit, but just giving your comments around PD p.m. And timing of any CMS adjustments which were definitely helpful or just big picture how much does pdpm impact your overall mindset and strategy for the next twelve to twenty-four months as to whether you want to be more of a net buyer or net seller of sniff assets create a sense of urgency for you one way or the other or do you still just look at every sniff property case-by-case and regardless of any sort of a bigger picture strategy tied to PDP em next so a couple of things off in terms of disposition the dispositions were all in the context of the position in the company. So that's basically done other than what's been announced. I mean, there may be one here one there. But if it's the box is done. So for for skills, we just think skills in for a really nice running. It isn't just tdtm. It's a combination of several factors dead.

DPN it's the improvements in demographics, which we're starting to see in in the skilled space ahead of where we're seeing it in senior.

Senior housing yet. And then you can continue to have a decline Supply and that's a client Supply comes from both. Um, but it closes as we're seeing and Washington in Massachusetts and Maine and Wisconsin and and its people that current operators birth additional facilities because most of the facilities in the country are quite old they modernize them and when they modernized then they take Dad's out of service. So you made by a forty-five-year-old hundred buildings just got some free bedwars three bed Wards just don't work with the customer. So you're going to take that data service. You can add more common space and maybe a $75 building and then Thursday, you've got a really high percentage of the space is still mom and pop they're they're struggling already with the transition to PDP em, so they're going to be some buying opportunity wage.

But some of them also need just existing markets that don't make sense. So you may see some closure there as well. So you've had you've had over the last fifteen plus years pretty significant decline in the number of skilled beds in the country. It kind of leveled out a little bit over the past few years, but to start seeing that decline again and you're actually going to have access problems. So the combination with the federal reimbursement system improved demographics and declining Supply sort of all converged. I'd almost the same time. We think to set up the skill space or really nice run off going forward their projections out there that show the school space almost full by Twenty forty five. So so our interest is one. We've always like the skilled space. We wanted to get some bounce back up slowly out after the CCT merger, and now we see the skills today. It's really poised for a nice run.

Okay, that's definitely helpful color. Thanks. Thank you. Our next question comes from all Mateo.

Kessiah of is open. Good afternoon everyone. Hey, how are you doing? A hundred and fifty million senior housing investment that you decide you were talking about earlier on is there any reason like one you didn't include that in guidance and then too although it's going to be neutral to earnings when done you do expect it to be accretive further on you talk about kind of what some of those drivers of accretion will be and is it a is it a triple net or or shop portfolio? So a couple of things it's not in guidance office is not done and nothing's done till it's done and if we put it in guidance and probably fall apart just you know, just to change yourself. So that's kind of that one. It's a shot portfolio Thursday. We expect we're seeing some some Revenue growth there from the opposite perspective, but there's inherent rate growth that that's dead.

A portfolio that we should see towards the end of the year as well.

Gotcha. Okay, that's helpful and then second of all just from a regulatory perspective. I know we've had a lot of conversation about PD p.m. But any thoughts around and kind of wage latest with that and what you think May ultimately happen with that with CMS. Yeah. So let's talk about it into pieces provider tax and then the U PPL suck. So from a provider tax perspective and this may get a little bit more to the week than you guys like but it should answer all your questions the whole issue of a provider taxes is wage language and seeing that feeling like there were some games played to provide waivers for certain operating classes within the provider tax environment. There were twenty States prior to 2002 that I bought a tax and plays those waivers are all clean meeting. There's no way the language is about 27 States Post two thousand two that had different waiver language in it of those 20 wage.

Penn State's ten States will have to make

Some significant changes to clean up the language. None of which any of us think are insurmountable and and a lot of the waiver the most problematic waiver language has to do with see if she's being carved out of paint file your taxes. So so we think providing taxes are going to be fine and both with provider taxes and depending on the circumstances. There are two or three years to come into compliance. So we think there's plenty of time they're so from so for example from an underwriting perspective when it comes to provider tax, we're not going to look at under them any differently than we do today. We think well that's going to be fine. It's a little bit of a different story with u t l and i GT and they're from a legal perspective the the trade Association the lobbyists think that the industry is in good shape to defend itself on T. And you PL from a political perspective the skilled industry isn't standing just on its own.

Will be the biggest driver.

except the hospital industry CLC joint efforts between the skilled trade Association and the American Hospital Association all that said

You never know what's going to happen in court. There are three states in particular that had the most vulnerability relative to that. It's Utah, Texas and an Indiana and Georgia now in Indiana ninety percent of the industry is on IGT. So it would be pretty heavy hit to do something there, which is another reason to think many don't expect it to happen. But I think when it comes to those three states from an underwriting perspective, we would seriously take that into consideration if we were looking at any skilled assets in those three states, we have no exposure in Texas and in Utah we have we're in good shape in Texas. We got our exposure down to 5.7% on the skilled side. It's bigger when you look at our whole exposure of the senior housing, um our operators, they're in really good shape. We have one operating with five facilities that may struggle with that a little bit but it's only five facilities and then birth

And Indiana, we have seven facilities skilled facility in Indiana, but that's with our operator Magnolia. We've got a corporate guarantee. They are most of their real estate net worth. So we have no concerns about them sort of weathering the storm in Indiana. So From asaba perspective. We're in good shape with our current portfolio, but we would definitely look at those three states wage, you know, very very conservatively from an underwriting perspective. Thank you. Also got to send to the 3-year package under the with IGT and you PLS you do provider tax directive. Okay. Thank you again. Ladies and gentleman for like, that's the question, please press * then 1 on your touchtone telephone. Our next question comes from Daniel Bernstein of Capital One Yolanda's open.

Hi, how are you going to take over the pipeline a little bit you see any change in?

The sellers or buyers post p d p.m. Uh-huh. And would you say most of the pipeline you're looking at is you that Mom and Pops or owner operator or is it more institutional AVS or somebody else trying to to sell larger portfolios? So let's see. So I have we haven't really seen any change in speed bump into effect as it relates to an impact on our sniff pipeline of and transactions most of the transactions that we have seen that have been of scale in the sniffs a faith has been institutional sellers, um that either put together portfolio to sell or are disposing of them their bottom quintile if you will their problem children, so those are the two baskets of portfolios. We are seeing occasional one-off transactions birth.

Did they are and and they're they are not institutional.

Nature in terms of the seller and and often the process and they are still quite competitive with most of the ones we've seen have been in California. Um, there hasn't been significant deal flow. We we expected to trigger fairly within a fairly small window sort of increased activity and I will say we have not yet seen it. I still believe that we will see it a lot of a lot of the smaller transactions and non-institutional transactions are really generational turn over there are the typically family-owned companies or businesses and the children aren't interested and either there's a specific event such as a death or an illness or they're simply retirement and there's best because there's nothing else to do. So those are the thing off

It really sounds like the same environment is a quarter.

Two ago, I think I think it's it's we're seeing more of those but we're we haven't seen a flood off and on. I don't know if I miss it in in commentary or other questions, but did you break down the the shop growth or guidance for 2020 based on faith and live in versus holiday and other operators in the portfolio. Just trying to understand how the different portfolios within shop May perform this month vs. Last year. We broke it down low broken down dam was just between our wholly-owned and then our JV so you can think about it. The the wholly-owned is primarily driven by um,

Alignment and and I still think that even in our number Holiday Inn that because holiday is not part of our same-store. So it's really driven a holiday. And then our Canadian portfolio is the best way to work of the lease. Am I right to read it that effectively than a slow down and Shop growth versus nineteen. And and if so is that is that from the you know from your comments on the flu season? Just just trying to understand how he's about 20 vs. 19 a little bit better.

Yeah.

Think I would say this comparing 2219. We had some some 7% growth on the JV side Works were forecasting cited below that probably more in line with just what you would consider a normal nice growth rate. I think in twenty in 2019. We had a very good cop compared to 2018 relative to the fluid in a 2018 and that's a big part of why it was outside in 2019 / 2018. So I think you're going to see it kind of normalized but I think the point being you know, when other one other operators are expecting the club and and and declining I typically we feel really good about the fact that the occupancy a stable and we should see some nice rate growth and hopefully some box with you growth per year as well.

Okay. Okay. Do you want to imply that it's it's poor numbers just it just felt like slow down and one last question here. What is the dividend part in terms of where would you be comfortable? I don't know if you use f o or f a d payout ratio, but we're what's the Comfort level, you know a point where you would consider raising the dividend getting it back into the ATS wage?

All right.

That's all I have. Thank you for taking the questions. Thank you. Thank you. Our next question comes from connoisseur of berenberg Yolanda's open.

Hi everyone. Thanks for taking my question. One quick one on Medicare Advantage. Are you seeing any continued pressures on length of stay pertaining to Skilled Nursing or how do you see that developing in the future? Yeah. No, we're not. We actually took the Medicare Advantage penetration into skilled nursing is a pretty small number of relative to Medicare Advantage and the over sixty-five plus population because all the marketing has been to the healthy elderly off. So it's from its senses perspective. It's sort of mid to high single-digit and it's been pretty flat for quite a while and it's projected to be pretty flash going forward. It's really the next generation of seniors that will enter skilled nursing where you going to see a much bigger percentage of Medicare Advantage because they have the ones that the younger elderly that signing up for it. So now in terms of length of stay there's always going to be pressure there. However, under PD p.m. We expect length of stay to be a lot more stable and potentially improved.

Cuz you're moving from A system that on the rug for the system totally incentivize operators to go after short-term rehab patients. So by definition.

The system created headwinds for the industry because you're admitting only patience that make it easier for insurers and case managers generous to put pressure on length of stay under pdpm while you're still going to be providing services to short-term rehab patients. The shift is really providing a lot more services to more complex medically needed needy patients and by definition they have a long length of stay. It's a lot harder to put pressure on someone who's got complex medical conditions with homework page that is for pressure on someone who's come in after knee surgery or hip surgery. Thanks. That's very helpful and then a little bit more on the dividend. I think you mentioned in the prepared remarks that you're going to see some improvement towards the second half of the Year. Could you provide a little more color on what makes up that calculus and maybe what factors are going to contribute to improve coverage?

We have primarily it's going to be from the investment activity that we have this year. Which as I noted earlier is going to have a much bigger.

Impact on Twenty-One, but we'll start to impact that from a lot of parts here. If we start getting deals closed over the next number of months, so that that's really the driver everything. Everything for us is about dead. Everybody knows everything about us is as getting back to grow. I think you'll also see contribution from our our managed portfolio in the lab in the fourth quarter of extra cuz as as you recall, we see a nice rate increase on the 11th portfolio the see those rate increases every October 1st. And so that's going to also help improve improve the dividend coverage towards the latter part of the year. I got you. Thanks and then one final one for me somewhat sensationalist articles seem to come across last week saying that the sale-leaseback system is becoming less attractive for sniff operators. I mean, can you provide any color choice to why that may or may not be the case?

Yeah, we we haven't seen anything like that and do anything other than triple net skilled nursing home. That's something that we would be interested in not a think anyone would be interested. So whether there were skilled nursing sellers out there that are interested in not going to find very many takers. The only the only situation will assume anybody do a JV with a skilled nursing operator is the one that I traded private REITs and I think we all that time if any of us that were publicly announced that same deal we wanted. So look there's

Take on that risk and and more than that.

Really a liability with because you know, we're landlords to us. That's a clear delineation between real estate ownership and the operations worth getting into javies on the skilled nursing side and open up the whole liability piece. And I don't think any of us are really up for doing that unlike faiths housing where you can more comfortable do these kinds of things. The level of liability is much greater on the skilled nursing side, simply because of the federal database home and and the plaintiffs the plaintiffs attorneys just roll that database all the time. That's all they do is they just rolled Saturdays and file and everything feel like filing so that may present exists in in the other spaces.

All right, that's all for me. Thanks very much. Thank you. Our next question comes from Lucas of Green Street advisors is open. Thanks just a couple of quick ones, but I think you said this earlier, but I just wanted to clarify the the tenant level coverage on page think it's seven of your supplemental that that excludes corporate guarantees now.

No.

The things that we made for for clarification in the past when we when we published our coverage for the portfolio, there were certain tenets that were excluded from that coverage and those were tenants Thursday. And now under the new reporting reporting even coverage. There is no note tennis that are excluded from those coverage numbers published. Everything is included wage, you know portfolio other than are stabilized assets in the in the numbers in coverage going forward. So we've simplified dramatically you made it, you know, all-encompassing. Okay. And so the the the tenant disclosure on page seven still includes the corporate level cash flow.

Kind of coverage is not it is it is the property level coverage got it. Okay, and then just a quick follow-up on the three Legacy Senior Care Centers assets that you were going to sell last year. I'm just curious if those closed yet and I'm curious with the proceeds were ultimately there.

Some of those I think one of those is closed this year and the other two are closed facilities. And so the proceeds are going to be a very minimal a few million bucks. But one of the three hatchback close I believe to 3 or you have to be closed with, you know, call it less than five million around five million places. You know, we're just going to Real Estate at this they were the ones that they were the ones that God destroys with the hurricane. That's it for me. Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Rick Matrix for any closing remarks everybody for their time today, and I'm sure we'll be seeing a lot of you've got more options coming up through the week next week. So we're heading out tomorrow from the East Coast, so as always were available to everybody follow up and look forward to seeing your conversation may very much and have a great day. Thank you. Ladies and gentleman this desk today's conference. You may all disconnect. Have a great day.