Q2 2019 Earnings Call

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And then.

Ladies and gentlemen, please stand by your conference call will begin momentarily once again, thank you for your patience and please standby.

Good day, ladies and gentlemen, and welcome to the Sabra Health care REIT second quarter 2019 earnings Conference call.

This call is being recorded I would now like to turn the call over to Michael cost. He VP of finance. Please go ahead Mr. Costa.

Thank you.

Before we begin I want to remind you that we will be making forward looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition disposition and investment plans, our expectations regarding our financing plans and our expectations regarding our future financial position and results of operations.

These forward looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially.

Including the risks listed in our Form 10-K for the year ended December 31, 2018, and in our Form 10-Q for the quarter ended March 30, Onest 2019.

And June Thirtyth 2019, as well as in our earnings press release 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.

In 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 a reconciliation of these measures to the comparable GAAP results included in the financials page of the investors section of our website at Www Dot Sabra health Dot Com, our Form 10-Q earnings release and supplement can also be accessed in the investors section of our website and with that let me turn the call over to Rick Matros, Chairman and CEO of Sabra health care REIT. Thanks, much appreciated thanks, everybody for joining US today, we had a productive first quarter, particularly.

In the context of creating long term value for our shareholders through the execution of a number of things that improve our balance sheet, including our first high grade issuance. We also have a fully committed our new credit facility, which will lower our cost of debt as well.

We've made significant progress on Delevering, our balance sheet and Weve kicked off the process to assume getting a new joint venture partner for why that joint venture.

We hope to conclude that process by year end that will mitigate the need for any material equity raise our part I know everybody that expecting us to pull down a 100% of the JV, which we required.

And if I can check so.

That won't be the case and Harold and Talya, when we get to their affections will provide more detail on all of the aforementioned items, we are reaffirming guidance.

Our acquisition pipeline currently stands at about 500.

Primarily senior housing, but we are starting to see some skilled deals now.

We mentioned I think on the last call and certainly the last couple of conferences that weve been exploring opportunities to atrophy addiction chemical dependency space similar to the behavioral space, we really like it a lot of it's got Tailwinds, Scott strongly imbursement from a policy perspective.

It's viewed is important and getting a lot of support.

So we've been pursuing potential opportunities there. So we're we'll be closing off for a small deal there it's not that material, but it will allow us to get into the space and start developing a reputation as a capital partner. They are working on some other deals as well.

In addition to that with our operating tenants were looking at repurchasing.

A handful of facilities that can be converted to things like addiction behavioral services and the like and we've got a couple of operators that have been very active in that regard. So we look forward to doing more of that as well. It's there aren't very many other uses.

For skilled nursing facilities, some others for senior housing because some limitation there as well.

And this is a perfect avenue to pursue in those markets that lend itself to having those kinds of services rather than the existing services that currently exist.

We expect to see from our proprietary development pipeline about 70 million.

Coming in this year from options that were going to exercise those properties will be in at about 7.5% cap rate.

Several of the half cap rate on brand New senior housing product is quite a bit better than we can get.

Buying 25 year old older assets at this point. So we have about 130 million left in that pipeline.

That will be coming in there for this after the end of this year as well so we felt a little bit ways to go on that in terms of operations. Our triple net senior housing same store EBITDARM was flat sequentially at 1.33, our same store senior housing occupancy was up 120 basis points to 86.1% our skilled portfolio was stable with EBITDARM sequentially sequential coverage at 176 versus 177.

Our occupancy and skilled mix were down 20 basis points, and 30 basis points to 83% and 39% 33.4% on skilled mix.

Respectively, we have no tenants remaining that require restructuring and no additional disposition plans beyond what weve already announced.

I do want to comment on a couple of our top 10.

Top 10 tenants that had some reduction in coverage.

Avalere and health Mark Mcgwire, all came down but that was primarily due to an exceptionally strong first quarter 2018 that fell off the trailing 12. So it just wasn't that good comps there their current performance and steady.

We see no erosion with those operators and expect no changes there.

Amir.

It's going to benefit from the significant rate increase in July from the state of Oregon, and also really nice benefit from a new pharma contract that's got materially.

Improved their ally and Washington State, which has really been the problem with that portfolio is now saying that they have been.

Material Medicaid rate increase.

Potentially in first quarter of next year, but its Washington State. So we will believe it when we see it.

It does appear to be some positive momentum there the other.

The other tenants that I want to mention is north American, which drifted slightly down from 109 to 107, but on it current trailing three basis ending may 2019, they're up over 1.2 and continue to show improvement so.

Thats trending the way we anticipated it would trend.

So again that really covers the tenants are probably caught everybody's attention.

Again, no need from our perspective to contemplate doing anything different.

Brands or.

And finally on CMS confirmed the 2.4 market basket.

Over first.

This year in conjunction with that we'll see the implementation fondly of PDP and we recently had our offers conference last month 35 to 40.

Across all asset classes spent a lot of time sharing best practices talking about not just PDP and other opportunities that are coming into play from a reimbursement perspective, both for skilled nursing enter senior housing and it was very productive and every one of our operators are reporting really good progress in terms of preparing for PDP.

We don't expect any sort of downturn from the transition going through ppm.

Although we think it will take a little bit of time to get the full benefits of it particularly on the revenue side. Most people don't focus on cost savings.

Come along with PDP and and those are a lot easier to model and calculate that there will be revenue changes.

As we see some corresponding behavioral changes within the reimbursement system, so feel good about that as well and.

Look forward to having a good solid base now with a much stronger balance sheet and look for a good growth as we go into 2020 and with that I'll turn the call over to Harold Ami technology, rather and after telling unheralded then we'll go to Gionee Italia.

Thank you Rick I'll provide an update on our managed portfolio in the second quarter of 2019, approximately 16.4% Cibers cash net operating income was generated by our managed senior housing portfolio approximately 56% to that relates to communities that are managed by enliven and 33% relates to our holiday managed community. The balance includes our Canadian portfolio increase now community in the U.S.

On a same store year over year basis, the managed portfolio, which excludes the holiday assets had had solid results in the second quarter compared with the second quarter 28 key revenues increased by 3.1% cash net operating income increased by 3.6% and revenue per occupied unit. Excluding the non stabilized assets was up 4.7% I remind you that last quarter. This storage was very similar when we reported same store results with a 3.9% increase in revenue, 2.4% increase in cash net operating income and a 4.6% increase in revenue per occupied unit.

Our operators are successfully balancing occupancy versus rate improving profitability in spite of the industry headwinds that we are all here about.

Now for some details.

Enlivened joint venture patent portfolio, which that 170 properties as two communities were sold in the second quarter of which Sabra owns 49% showed steady improvement.

Average occupancy for the quarter was 81.8%, which is 0.9% higher on a on a same store year over year basis.

Revenue per occupied unit with $4272.

5.2% higher on a same store year over year basis. This is the highest revenue for achieved there during our hold period.

Importantly, cash NOI margin with 24.9% up from 24% on a same store year over year basis.

For the first half of 2019, Dan lives in joint Ventures cash net operating income was 6% higher than in the first half of 2018.

Cibers initial minority investment in the enlivened joint venture was always viewed as the first step towards making a long term investment in the portfolio with this in mind Sabra negotiated an option to buy out TPG. Its partner in the joint venture Exercisable through January 2021, this allows us to own or control the joint venture long term, while providing liquidity for our our partner by either buying out TPG or taking a controlling interest in the JV by bringing in a minority partner.

We have now started the process to identify and investor preferably with a long term investment horizon and an appreciation of the strength of the enlighten platform, who would be interested in co investing with sabra in the joint venture. This would allow sabra to take a controlling interest in the joint venture with minimal additional capital and retain optionality for sabra to own 100% of the portfolio at some point in the future.

Both TPG and enlivened are supportive and actively involved as partners in our process.

Now to the results of the wholly owned managed portfolio Cyrus wholly owned in life and portfolio of 11 communities gave back some of the outsized gains that were made in 2018 occupancy was nearly flat to the prior quarter at 90.7%, but declined on a year over year basis by 3.4% reflective of lower move in volumes.

Revenue per occupied unit rose to $5431, a 1.3% increase over the prior quarter and 6.7%.

Over the prior year cash and away was down 5.6% on a year over year basis, driven by certain one time expenses such as insurance claims, but for the first half of 2019, the cash net operating income was 4.6% higher than in the first half of 2018.

We transitioned our holiday portfolio from our net lease to manage portfolio at the start of the second quarter. So this is the first time that we are reporting community level statistics.

Portfolio occupancy was 89.1% in the quarter slightly higher than 89 flat in the prior quarter nearly one point higher than in the second quarter of 2018, Revpar was $2459, which is even year over year.

The holiday team has maintained its focus on operations. Despite the distraction of negotiating with each of its landlords over the past year.

Since the transition has was completed we have worked with holiday to explore acquisitions of independent living communities catering to the middle market a product type, where we believe the company excels.

Sienna senior living manages eight retirement homes for us in Ontario, and British Columbia in the second quarter of 2019. The properties managed by Sienna showed steady operating and financial results with 89.6% occupancy slightly down relative to the prior quarter Revpar was $2191, which was even with the prior quarter and 3.2% higher on a year over year basis and cash net operating income was up 4.2% on a year over year basis and flat sequentially. We continue to reinvest in our Canadian portfolio and work with our partners closely to ensure that the communities are competitive and profitable in their markets.

And with that I will now turn over the call to Harold Andrews Cibers, Chief Financial Officer. Thank you Tanya.

This quarter was marked by significant progress towards improving our balance sheet.

Closing, our stated goal of lowering levers to below five and a half times by year end. Our efforts resulted in an improved cost of debt and significant improvements in other key credit metrics.

First we completed the issuance of $300 million, 4.8% senior notes due 2024, our first issuance since the completion of our merger with care capital properties, allowing us to take advantage of the investment grade bond rating that merger provided.

The net proceeds from the offering together with borrowings on our revolver were used to redeem all $500 million of our outstanding 5.5% Senior notes that were due 2021, improving both our debt maturities schedule and our cost of debt.

We also sold 11.1 million shares of common stock under our ATM program during the quarter generating net proceeds of $214 million.

These proceeds together with the proceeds from real estate sales were used to reduce total consolidated debt by $545 million from $3.2 billion as of March 31st 2000, $19 billion to $2.7 billion as of June Thirtyth 2019.

These transactions combined to lower our cost of permanent debt by 19 basis points to 4.09% as of June Thirtyth 2019, and to reduce our net debt to adjusted EBITDA ratio, including our unconsolidated joint venture from 6.08 times as of March 31, 2019 to 5.76 times as of June Thirtyth 2019.

This 32 basis point reduction is all in leverage takes us more than half way to our year end goal of leverage before below 5.5 times.

In addition, these activities improved credit metrics compared to the first quarter of 2019, our interest coverage improved 4.43 times, increasing to 4.62 times, our fixed charge coverage improved 0.4 times, increasing to 4.46 times and our total debt to asset value improved 9% decreasing to 39%.

Finally, we recently kicked off a process of amending and extending our $2.2 billion credit facility and as of today have received commitments from our key lending relationships for the full amount of human facility.

Closing on this amendment is expected to occur in the coming few weeks and we expect strong participation from our important banking relationships.

This amendment will improve our interest rate spreads on the term loans than revolver by 20, and 15 basis points, respectively based on our current credit rating saving over $2.8 million of annual interest expense using our current revolver balance. Furthermore, it will improve our debt maturities laddering by extending the maturity of the revolver by two years to August 22003, and creating additional laddering of our term loans with various maturities through August 2024.

Along with this amendment, we took advantage of the recent interest rate environment and extended our interest rate protection.

For the vast majority of our variable rate term loan borrowings to their new maturity dates using a mix of forward interest rate swaps and collars.

These steps have posted excellent position going forward to fund future growth opportunities, while eliminating a significant amount of interest rate in refinancing risks.

Now a few comments about the financial performance for the quarter for the three months ended June Thirtyth 2019, we recorded revenues in in July $219.4 million in $198.2 million, respectively, compared to $136.8 million and $129.3 million for the first quarter of 2019.

These increases are primarily due to $66.9 million of lease termination income recognized in the current quarter related to the transition of the holiday communities to our senior housing managed portfolio.

Of which $57.2 million was a cash payment received $9.7 million was related to net assets obtained in the transition.

In addition, resident fees and services revenues increased $19 million in senior housing managed portfolio operating expense increased $12.2 million, primarily due to the holiday transitioned from a triple net lease structure to our managed portfolio.

Our same store triple net skilled nursing portfolio cash NOI increased $3.8 million or 5.3% over the first quarter.

This increase is primarily due to the adoption of the new lease accounting standard in the first quarter, which we discussed last quarter and detailed in our filings.

Specifically under the new standard we began recognizing revenues for certain leases on a cash basis in the first quarter. We saw a reduction in earn cash rents of $2.2 million due to timing of collections.

This quarter cash rent spreads were higher for those tenants than last quarter, resulting in this same store NOI increase there were no changes during the second quarter to the group of tenants accounted for on a cash basis and we expect some continued variability in cash collections produced cash basis tenants at least through the rest of 2019 as they are generally operations in some phase of transition most notably the NMS portfolio transition to one of our strongest operating partners.

FFO for the quarter was in line with our expectations at $139.4 million and on a normalized basis was $84.7 million or 46 cents per share FFO was normalized to exclude the $66.9 million of lease termination income.

$10.1 million loss on extinguishment of debt due to the 500 million senior note redemption, and a $1.3 billion of unreimbursed Triple net operating expenses.

Hey, AFFO, which excludes from Myfico merger and acquisition costs and certain non cash revenues and expenses was also in line with our expectations at $132.4 million and on a normalized basis was $83.9 million or 46 cents per share.

Hey, AFFO was normalized to exclude $57.2 million of cash lease termination income $6.9 million of cash loss on extinguishment of debt.

And $1.3 million of Unreimbursed Triple net operating expenses.

This compares to normalized FFO of $84.3 million or 47 cents per share in the first quarter of 2019.

For the quarter, we recorded net income attributable to common stockholders of $83.7 million or 46 cents per share.

Genie cost for the quarter totaled $8.1 million, including $2.8 million of stock based compensation expense bickering test unit cost of $5.4 million were 4.1% of NOI for the quarter, excluding the holiday lease termination income and inline with our prior quarters, we expect quarterly cash unit cost to average approximately $5.8 million going forward.

Our interest expense for the quarter totaled $33.6 million compared to $36.3 million in the first quarter of 2019.

Interest expense includes $2.8 million and $2.6 million of noncash interest for the second and first quarters respectively.

Borrowings under the unsecured revolving credit facility bore interest at 3.65% at June Thirtyth 2019, a decrease of nine basis points.

In the first quarter of 2019.

We sold 28 skilled nursing facilities and seven senior housing communities. During the second quarter of 2019 generating net proceeds of 320 $322.7 million and recognized a $2.8 million net gain on sale.

In addition, we sold two senior housing communities. We are part of our unconsolidated joint venture and recognized a net loss of $1.7 million, which is included in the loss from unconsolidated joint venture line item on the income statement.

We were in compliance with all of our debt covenants as of June 32019. In addition to the metrics I mentioned previously we saw secured debt to asset value declined from 7% to 2%.

An unencumbered asset value to unsecured debt increase from 233% to 246% quarter over quarter.

As of June Thirtyth 2019, we had total liquidity of $772.4 million, consisting of unrestricted cash and cash equivalents $47.4 million available funds under our credit facility of $725 million.

As Rick said, we reaffirm our previously issued 2019 guidance and I would like to highlight a couple of a couple of items.

Net income and FFO were positively impact impacted by the $9.7 million noncash lease termination income as such we expect for 2019 to be near the high end of our guidance range for these measures.

FFO was positively impacted by the classification of certain cost of disposing and transitioning facilities previously operated by senior care centers as an impairment charge.

These costs were classified as cash expenses, the original guidance and have the effect of decreasing FFO.

As such we expect 2019 FFO to be even near the high end of our guidance range.

Normalized FFO and normalized FFO.

Ranges remain unchanged. However, we expect normalized FFO to be the near the low end of the range due to the reduction of straight line rental revenues associated with certain leases converted to cash basis under the new accounting standard adopted in 2019 that we discussed in the first quarter and that I mentioned above.

Straight line rents were $2 million per quarter prior to the accounting change as such this change reduced to straight line rental revenues expected for 2019 by approximately four cents per share for the year, but again does not impact our expected cash rent collections.

Our guidance in a currently does not impact our normalized FFO guidance.

Earning guidance continues to be based on our expectations are reducing our debt to adjusted EBITDA to below five and a half times by December 31 2019.

Finally on August seven 2019, the company announced that its board of directors declared a quarterly cash dividend of 45 cents per share the dividend will be paid on August thirtyth 2019 to common stockholders of record on August Twentyth 2019.

In terms of cash flows and related funding of the dividend. We expect full year 2019 cash flows from operations to fully cover our 2019 dividend payments and notably the cash payment from holiday represents available funds generated from the portfolio for dividend payments in the future totaling 31 cents per share.

And with that I will turn it back over to the operator to open up the Q and a.

Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

If your question has been answered or you wish to remove yourself on the queue. Please press the pound key again, that's star then one to ask a question.

To prevent any background noise and ask that you. Please place your line on mute.

What's your question has been stated.

Our first question comes from Trent to Halo with Scotia Bank. Your line is now open.

Hi, good morning out there.

So Rick and tell you I appreciate that you've spoken about some of your year over year comps and the benefits you should see in the back half of the year.

Regarding same store NOI guidance.

Given.

Negative I think it's 2.7% growth on your wholly owned seniors housing managed portfolio. According to the supplemental.

How comfortable are you with the 3% to 6% range.

The results have been better for your unconsolidated portfolio, but in both cases guidance assumes about 11% growth in the second half of the year. So to the results suggest you are trending toward the low end.

And.

Yes.

If you look at 2018 numbers.

The ability to.

The flu last year created basically a relatively low bar for.

For the year.

Comp so we expect to have.

And ability to beat.

28 in the second half and in a in a material way and we also in our smaller operators and that is and what I'm talking about.

They had some downward trend towards the end the second half of 2018 and.

And that has turned around and so they are trending positive, which will also have a material impact on can we are talking after all about fairly small numbers here.

Now, we'll be I'll add to that is the oded as Harold is the rate increase that we expect.

On the on the on the wholly owned utilizing portfolios will have a nice a nice impact in the fourth quarter.

Okay I appreciate it.

Yes current trends trends are better as well so even forgetting about 2018.

In 2019 current trends are better.

Okay, Okay that makes sense, but just to I guess follow up on that maybe a little bit more I think on the last call you mentioned like for the enlivened JV, specifically you had easy comps in the second and third quarter.

And there was a lot of discussion about situation, where theoretically if the first quarter NOI was the run rate for the year than you could hit your guidance, but in the second quarter.

That NOI, despite being strong at 7.3.

It was not flat quarter over quarter, so and the margin decline, so even with a favorable comp and.

Third quarter, how much more can that accelerate.

Well certainly slowed dramatically in the fourth quarter, because it looks like a little again.

Upwards of 5% rate increases in the fourth quarter.

And what of what was in 2018, right and the trends are better now anyway. So we expect third quarter to be stronger.

Second quarter.

As apparently was and.

As you just noted.

Over 70% growth pretty strong and.

The question really is how much sort of outsized growth can we have in the managed portfolio to completely offset.

Change neutralize rule that we have no control over.

So we're not going to mitigate that completely.

But again, if current trends in the rate increase that Harold just referred to.

Well, we will get us where we need to be for the year.

Okay. Okay. Thank you for that.

I guess turning to another different topic, how are you viewing dispositions with respect to both portfolio management and as a source of capital.

Beginning of year, you had 600 million in guidance and that's been to reduce reduced to effectively about 400 million. So from a funding perspective seems like that could be offset from the equity you've been issuing but how are you looking at your portfolio quality pruning whatever is non core and does that additional 200 million get pushed into 2020 or is that now being retained.

So I'll answer the question about what's being pushed in what's being retained theres a handful of property sales that were being pushed to next year and then there's a handful of properties that are not been sold and particularly what percent of ripple portfolio that we wanted to hang on to.

We were able to negotiate with the buyer who had the right to purchase that portfolio from us this year.

Hence why was that our disposition expectations, we're going to be able to hang on to that as it relates to funding you're exactly right.

It's a bit of.

We're going to see.

Less de levering, if we're hanging on to some of these portfolios.

As we saw the disposition levels drop it results in.

Slightly slight increase in leverage therefore, requiring us to raise a little bit more equity. So thats why while you see maybe a little higher it away in July that were being able to hang ultimately how close was those were to issue a little more equity to hit our leverage targets. So it kind of all kind of offset each other when you look in the same place if you will and that's all baked that's all baked into the numbers obviously in terms of pruning the portfolio more.

Other than what's been announced we're pretty much where we want to be.

That doesn't mean that there won't be a building here or there.

That we're going to want to dispose, but for all intents and purposes.

We're pretty much done as I mentioned earlier in the call we have a few facilities.

Primarily with one operator that they really see some upside to repurchasing four different kinds of services other than skilled nursing services like behavioral services.

But thats because they won't be dispositions and that should provide upside to those existing those existing assets.

Okay, Great maybe one more for me.

So the guidance for Capex increased but I think you kind of message that this would be the case since you'd be responsible for it following the holiday transition and other moving pieces.

But as you evaluate those properties how are you thinking about recurring or maintenance capex on a run rate basis was there much deferred maintenance that might inflate the near term capex spend or and then normalize how should we think about that.

And I see as the portfolio has been in our hands since 2014, I did and we did an extensive review at the time of the acquisition I don't I don't expect that there isn't really any deferred capex.

Whether we choose to undertake projects that are more defensive and offensive to maintain and gain market share that that'll be part of our asset management teams rig annual review associated with the budget.

Okay. Thank you.

Thank you and our next question comes from Nick Joseph with Citi Research. Your line is now open.

Thanks, maybe just sticking to the equity I think it to be in that of the year you had talked about five to eight cents of dilution from equity issuance, obviously, you've done some of that and maintain your leverage target, but I'm wondering if that's still the amount of equity you're expecting to raise this year in 2019.

Yes, Harold I think the key.

Impact on or.

Dilution from leaving equity is still within that range.

Okay. Thanks, and then maybe just on live event.

Wonder what.

Maybe a little more color there what percent of ownership would you ideally like to have with the new JV partner and then how do you think about overall valuation now versus when you initially did the JV.

So in terms of percentage ownership, we'd like to have a controlling stake so that would suggest we wanted to be at 51%.

That's not a fix number whether I think it will be really a function of the discussions we have with investors. Our preference is to put in a small amount of additional equity and have a controlling interest.

And and replaced the balance with star with another long term partner.

And.

We'll see what the Latin Investor say, it bears interest at 8%, becoming a 30% we may or may not be interested in that well, we'll have to gauge that.

The additional commentary I'd give you is.

Nothing's changed for us in terms of how we do that portfolio and our desire to own 100% of the portfolio at some point in time, but there is no rush for us to do that and.

Yeah.

You get in a bit of a box right now because in addition to the equity raises the ATM, which we're getting to the end of obviously, but it's a big checks right to take that whole thing. So its created a significant overhang on the stock and if there's an overhang on the stock prevented stock from getting to the point, where you can do something thats accretive on pulling the whole thing down right. So I think pursuing the JV.

Can bring us a long term partner gives us controlling interest.

It should it should alleviate the overhang we have because we're just not going to have to raise a material amount of equity and it will limit our downside risk and given the portfolio a little bit more time to to mature. So I think all that in.

I was going to be beneficial to our shareholders and Thats why were pursuing it.

In that light and Power's and we'll see how the negotiations go relative to the percent.

But it's not going to be a big change in all likelihood from where we are now and it's actually a pretty large universe of potential partners.

Potential partners out there and I think as Tom mentioned in her prepared comments.

The fact that TPG.

Explored a lot of these partnerships in the past and is an active partner with us on helping to make this happen, we really want to express our appreciation to them as well as the enlighten team for that.

Thanks.

Thank you.

And our next question comes from Chad Vanacore with Stifel Nicolas and company. Your line is now open.

Thanks, and I apologize if I missed this but in your press release, you mentioned four cents impact from moving receipts to recognize those on a cash basis can you give us some more details about what's going on there.

Sure Chad so going back to last quarter, when we when we transition certain leases that under the new accounting rules requires a very very high level of confidence that you're going to collect.

Hi, virtually all of the rents over the life of a 15 year lease that required us to take a look at record all the reais to take a look at those leases and determine which ones are hitting that threshold and put them on a cash basis. So we did that in the second quarter and we did we identified properties that had straight line rents associated with them of about $2 million a quarter and so what you are seeing in the core sales basically an $8 million of annualized straight line rents. There was in our original guidance number did now is out of our guidance number that's why we updated our expectations within the range for our FFO number to account for that four cents decline that we saw.

Alright here or how many properties how many opportunities are we talking about there.

So there's a couple of.

The old NMS portfolio is one and then there's a handful of others, its probably 10 or 12.

Total.

Operators two operated for about half of the rest are pretty negligible.

And.

Through our focus to operators by the way because you'll recall the Acadia team is take took over the NMS portfolio.

Both.

Both those two operators are operators that we consider to be really strong operators.

Okay, and then I was just thinking about you were talking about transitioning some properties to behavioral health and Caesars skilled nursing property. The main what kind of capital improvements are those going to need to do that and.

Are you going to need to expand your partnership somewhere else.

It doesn't really it doesn't really require much capital.

Much capital improvement at all so the physical plant within a skilled nursing facility can pretty much accommodate.

For example, any kinds of behavioral services and historically for me my old operator, Dave.

I ran behavioral programs under skilled licenses with facilities that if you walk through them you wouldn't notice any difference.

Other than to the clients are.

Right.

So there's not going to be material.

Amount of capital there to the extent that there is some capital that's required than what would be a partner for those operators and.

Typically happens in those things was rejected some additional capital we get our return through increased revenue.

And we don't really we don't necessarily anticipate needing to create new partnerships to do that because we have operators that understand that business and can segway into it and it's not going to be a huge move into context their entire portfolio, but as we said before we do want to expand our presence.

In the space.

The CIS. The you know the opportunities are few and far between its still a very fragmented space fill space et cetera was limited number of operators, that's going to have a tried and true tried and true history. So.

It's a little bit tough to find things, but we're working on it and.

And for the addiction space.

Make similar comments, except to say that achieving younger by a long shot in the behavioral space. So.

So it's taken quite a bit quite a bit of time at our part to find operating teams that we actually really.

Arms around it.

Making.

Immaterial investment in our first foray into the addiction space is a good way for us to go.

All right that's it for me thanks.

Yep.

Thank you.

And our next question comes from Rich Anderson with SMBC could your line is now open. Thank you good morning.

Back to you.

Good morning back to enliven situation.

Could this be structured as almost like a fund to funds, where you get into a joint venture with.

An investor in that joint venture makes it an investment into the existing joint ventures, I was going to work or will that be more of a direct investor into what is already existing with you and TPG and 11.

Okay. So I mean explain it the way I think about it maybe.

Maybe that I'll clarify for you.

Okay imagine sabra replaces TPG.

As one investor and some new investor comes in and replace the Sabra.

So to address the new fit I say for Silenor somebody else's, Dan TBD is then youve.

49% owner you like I think you have to take TPG. So the whole thing happened with a simultaneous they right.

Right.

Okay, that's great.

Okay got you and so.

From the standpoint of the January 2021, Exercisable date sort of go poof. Once this happens and so then you have no specific timeline to to buy out the entirety of it I guess it would right because TPG would be gone better.

Right that will go by the wayside and there will be a new agreement. However, long that agreement is and it will be windows within that time period, as well, but that all remains to be negotiated and okay. Yes in the in the context of a new investor Yes, but also we also have.

If we don't exercise our purchase option by that date just to make sure I cover the question completely we still have a a right of first offer in case TPG wants to do something thanks.

We're not we're not stock if we don't we don't get it done by January 2021.

Okay very very helpful. Thanks for that.

Ill tell you also mentioned, 16.4% is your shop portfolio exposure today, including holiday.

A question from anybody I mean, what's the appetite to ramp that up to maybe do some other transitions to write data or to have more increasing more of your port your acquisition activity be.

Structured that way is there a magic number is it bigger than 16.4% I'm. Just curious where you are what are you land on that issue.

Yes, there's not really a magic number part of the increase is going to be dependent upon how the JV structured in terms of some of our ownership. It was going to if we pull if we pulled out a 100% I think it was going to pop up from 16.5% to 30% of it thats not going to be the case now.

But really outside of outside of holiday enliven and Sienna all the rest of our senior housing operators are miniscule. So.

Any additional growth outside of what happens with the JV on on shop is going to depend on the acquisition opportunities that we find and if you want to stay in the senior housing space.

Then you're going to do you're going to be shop deals.

You're not going to do triple net deals the only deals that we've seen that are triple net deals just haven't been attractive to us. For example, there was a facility that we took a look at and it was almost 40% Medicaid and.

Thats it.

And so that was a great cap rate, but it's really great cap rate, if you love Medicaid waiver.

And we go and we certainly don't love it at that level. So.

So we chose to.

Pass on.

Bidding on that kind of assets so.

So if you could if you sort of carve out those kinds of things are turnarounds.

Pricing has improved much yet okay last question.

Rick you said.

On a big rush on enlivened I agree that it's a good.

Good.

Stepping stone to perhaps not right the big check today.

But.

But in terms of not being in a rush to the joint venture portfolio is obviously significantly under occupied relative to what the you know the potential there is.

What do you think the timeframe is to get from 82 to 89 ish.

Within live and I imagine you what you would like to have a lot of that happening on your watch as much as possible.

I think it's going to take several years still for that to happen. There. Okay. There is still some oversupply. There there is absorption that needs to happen. So I think we've got a pretty volatile window, there for that to happen and we've been talking about.

So its speculative obviously, how long it takes them live and if you get the industry average by the time, we get the industry average industry average should be moving up theoretically right, because you'll you'll be hitting absorption.

And even if development starts ticking up again, and 21 or 22, you you've got sort of a three year window, given construction and lease up and all that kind of stuff. So.

I think you have a pretty good window, where absorption will start paying off.

And before new development, even if they don't learn the lessons that that should be learning and is over development again that probably gets you to like 2025.

The other advantage that you have we have with your margin portfolio and enliven has with with with the inland portfolio is it it's a middle market product.

So.

In today's cost structure for construction and development, it's impossible to build a middle market product.

Yeah. The point I'd make is because most of our properties largest senior housing that most of our properties are in secondary markets and none of the top them I say, we actually are seeing some of the same pressures from Ics expense growth and labor growth.

That.

You see the top and the top end I say so.

So they may not be a properties, although if you live in that community. It's in a property for that community right.

Yeah, I think it provides a little bit more stable environment.

For sure Okay, great. Thanks very much.

Yes.

Thank you and our next question comes from Lukas Hartwich with Green Street Advisors. Your line is now open.

Thanks can you talk a bit about the similarities and differences of addiction treatment business versus skilled nursing and senior housing.

Yes, so yeah. So it's a good question.

I'll try to do it.

Briefly.

Related to that we've done it.

Look.

First of all it's completely a service business. It's a lot more of the focus is on on the social aspect can programming that is on medical care.

Where the social component of programming and care within senior housing and skilled nursing and certainly in senior housing now that it's become a medical model over the long term model is really supplemental to the basic care that needs to be provided for those individual.

And here is a much stronger emphasis on.

Okay programming, and social things and psychological pieces, and and all that sort of stuff. Obviously this medication management that's involved with it but the medication management is never successful without appropriate programming on the social psychological side of things.

Got it and then I just have a follow up kind of a housekeeping question.

On page nine of the supplement Mackenzie enliven portfolio Revpar was up about 5% in occupancy was up about 1%.

But revenues were only up 4%, so I'm trying to figure out maybe I'm missing something there, but how do I bridge that gap.

Thanks.

[noise].

Let's just get back to you offline on that.

Sure.

That's it for me thanks.

Thank you as a reminder, ladies and gentlemen, that's star then one to ask a question. Our next question comes from Todd Stender with Wells Fargo Securities.

Your line is now open hi, Thanks, Ed just to kind of go back to the ATM issuance in the quarter just on a relative basis. It was kinda big for you guys, but how much was that driven by investor demand. How much of that was just you guys. Maybe wanted to de lever quicker, maybe just that push and pull if you can kind of describe how it played out.

Sure I will tell you that there was a very strong investor demand.

Quite a bit of a reverse inquiries coming in the desk of those running you your program and when we were able to kind of settle on a price that made sense for us that the market has been made since then we were able to do some larger blocks, but it is a mix. It was a mix of just some of that and for those of US just being taking advantage of days when we felt like the price was holding up well and it was a strong demand. So nothing that I would say without really too far outside the norm for any ATM program. We were just we were just you know appropriately aggressive to raise as much as we get we taper down a lot more we could have done a lot more easily but we obviously we try to manage it so on a percentage of shares outstanding there's no restrictions on a quarterly basis right. It's just if you have availability you can tap it.

That is correct.

Like there's sort of a daily rule of thumb, 10% to 15% so that it doesn't really impact your stock price. It's not it's not really that noticeable so that's kind of the daily with and then when they blend and little bit above that on a good day or you go a little bit below it but but it's it's evaluated every single day. So the bank. So don't like for the run with things for a week decisions are made on a daily basis.

And with blackout periods baked in there theyre the windows can be quite short right. So maybe that's why the the volume you take it when you can.

That's correct Yeah, you during a period of no material non public information you have to shut it down so our window typically closes a week or two after each quarter end and then the window would open back up typically after an earnings call. So it is a that's somewhere between seven seven and a half month.

Out of the year, but you could actually be active on an ATM. Okay. Thank you.

Oh and then Rick you described your investment pipeline predominantly senior housing, but though you are looking at skilled.

When we see that Omega for example has a $735 million portfolio under contract.

Is that something that's too big whether it's literally two big fear your size that's too much sniff at once how you kind of evaluating looking at large sniff portfolios.

Particularly the yield so high.

Yeah and on that portfolio with a nice portfolio were.

We know that portfolio intimately we had no interest in it because that is a very big deal for us and I think as you know I made a commitment that you know we are not going to do anything that's complicated or requirement nation.

You know, we've we've had a lot of noise in the stock price in the last couple of months for about a year and a half and doing a deal of that size.

It really puts us on the road, beating that Hillary and it becomes harder and harder to come back from that and again as I said before I mean, everybody knows we love the asset class, It's got nothing to do with that.

But we think will benefit in the long run from being a more diversified read and prior to the announcement the CCP merger, we saw that reflected in the stuff.

Got price in multiple so I guess when I have more of a balance there because you know then you get even more dependent upon whatever investor sentiment is however, right or wrong that that's something that is so.

Yeah, we just prefer not to make that big a move.

Got it and then just finally anything you can share.

Hosted the Super Operator conference I imagine it was post name right.

Anything to share from how the operators are looking at the world, particularly either revenues or labor cost new supply and then anything maybe P. D. P. M is adding some optimism to the sniff folks.

Yeah, I think generally speaking a lot of the focus where.

Was on or the reimbursement opportunities there was a focus on labor force as well and we had some presentations there and some interruption in some some pretty cool products for instance, as a company out there that has sort of taken the lift you Goober network model will apply to staffing. So you go in their app and they've got tens of thousands of people signed up to their App and you go in the App and you can access temporary employees that way which is.

The brand new concept for the space and because it's basically a virtual network as opposed to a traditional staffing company, even though it may cost you more than having your own staff. It doesn't cost you the same amount as I'm going through traditional agency, which is typically about 35% higher than your in house cost. So.

So some so there were a lot of discussion about things like that and some opportunities that are out there with different companies, but a lot of the focus was on reimbursement on the senior housing side, you know the new opportunity.

To partner up with Medicare advantage on sort of the ancillary services in senior housing. We think is a fantastic opportunity and that was really embraced and we had some amazing sort of speakers.

On that on the skilled.

Everybody focused on P.D.P.M. as they should be but there are other opportunities as well with particularly with the I. Smith, the special needs program, which essentially allows the provider to become its own unsure and and.

And that is just.

Starting to gain momentum and it's a real game changer for the industry, particularly when you look at how much the managed Medicare advantage and sure takes off the table profitability wise that comes off the back of the skilled nursing facility. This allows them to control that products and control the profitability.

We know a private operator, that's been fully up and running with that for quite some time and it's doing exceptionally well.

Our newest board member then Kathleen is involved in that effort as well with a company called <unk> ally line, because a lot of the operators out there are large enough to take the initial risk to get that going in the time. It takes and so they'll be able to partner with any number of providers to do that so there was a lot of conversation about that as well as value based payments.

So it was really really wrote I thought it was best conference or that we've had we've done a few of these and as always our operators get to know each other they fall off after the conference. They do best practices real have very many operators that would view each other was competitors so they're pretty open and free with each other about sharing with with they all do better. So you know it was really productive we had a great turnout and you know will continue obviously to do these things and we also.

It was also a focus on data and and the things that we're trying to do at point right to provide constant opportunities at our cost for our operators take advantage.

Some predictive modeling that point right does on the regulatory side. So those are some of the main areas that we've covered.

Great Thanks for sharing that Rick.

Yep.

Thank you I'm not showing any further questions at this time.

I would now like to turn the call back over to Vic mattress for any closing remarks.

Thanks, everybody for joining us as always we're available for 'em as my follow up is I want to do thanks again for your support and how to break that Pakistan.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect.

Everyone have a wonderful day.

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