Sabra Health Care REIT Inc (SBRA) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT first-quarter 2016 earnings conference call.

This call is being recorded.

I would now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead.

Thank you. Good morning.

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 and investment plans, our expectations regarding our financing plans, our expectations regarding our Forest Park investments, and our expectations regarding our future 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, 2015, that is on file with the SEC, as well as in our earnings press release included as Exhibit 99.1 to the form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as Exhibits 99.1 and 99.2 respectively, to the form 8-K we furnished to the SEC yesterday. These materials can also be accessed in the investor relations section of our website at www.Sabrahealth.com.

With that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thank you, Talya and thank you everybody for joining us. The music was in honor of Prince -- his music was a gift to the world.

Now on to the business at hand. We didn't mention anything about guidance, but guidance is reiterated. Nothing has really changed since we initially issued guidance. We did announce the acquisition of the NMS facility at $50 million. So that should close at the end of June, and that will be accretive to guidance, so anybody that is modeling could add that to guidance. We thought we -- given the acquisition activity that we have right now, that we are focused on, we wanted to wait a little bit longer before we updated guidance to see if there is anything else that we will be pursuing.

We raised our quarterly dividends, as announced in the press release. And just want to comment that, that regardless of how high the current yield is, it is business as usual as pertains to the company's dividend policy and will remain that way.

As disclosed in our press releases, we are on track to a complete disposition of Forest Park assets, with the potential resulting in a positive cash return on those investments. As previously stated, proceeds will be used to pay down debt and fund acquisitions, allowing us to move forward without having to tap the equity market. The ATM remains shut down.

Even considering the exclusion of the Forest Park assets, the Company's private pay cuts and treasury stands at 50%. We expect this to improve with our primary focus being acquisition to private paid senior housing and notwithstanding the acquisition of the skilled nursing facility, we would anticipate that it is unlikely we will do more skilled nursing for the remainder of the year, so our focus will be on private paid senior housing.

Field volume has picked up considerably since our last call. Its too early in the bidding process to know if there has been an improvement in pricing yet. We do continue to see PEs bidding on senior housing assets at levels that we can't justify.

A recent deal was loaned by an advisor to a foreign capital fund, and we hadn't seen that before. The pipeline is currently at $400 million - its primarily senior housing assets. Most of the deals we're looking at have also been our normal bread-and-butter kinds of deals, around $50 million.

And that is really the view primarily these past several years. That should continue to be the focus going forward. Our operational results were very strong for the quarter.

Our skilled transitional care portfolio had EBITDAR coverage at 1.45. That is the highest it has been since the 2011 CMS cuts. EBITDARM coverage was at 1.77. Same-store coverage is also at its highest since the CMS cuts.

The recently announced CMS proposed market basket increase of 2.1% was more favorable than it has been over the last several years, providing additional support for coverage going forward. Our senior housing EBITDAR coverage was slightly down at 1.21, but that was specifically due to a greater number of independent living beds in the calculation and independent living, as I think you all know, has a lower coverage than assisted living and memory care. If you look at our same-store senior housing, which doesn't have much in the way of independent living, our coverage is actually up at 1.37.

Our skilled transitional care portfolio occupancy was down 100 basis points to 87.5. However, skilled mix was up 260 basis points, to 41.5%, which is the key indicator that we look at to assess whether the model is going where we believe it should go, and it accounts for the improved coverage. And a couple of other additional comments there: If I take a look at everybody's notes and insert my commentary, there still seems to be something missing as people look at occupancy in the skills portfolio. You have to look at occupancy in conjunction with skill mix.

The higher your skill mix is, because presumably, most of those patients are short stay patients, [folklore] is revolving at a much higher rate, and you should have lower occupancy. However, your operational results are stronger, both from a coverage perspective and a margin perspective, because for the most part, those skilled mix patients are replacing Medicaid patients, which obviously are much lower reimbursement.

And most of that skill mix is Medicare fee-for-services. We noted on the last call and it hasn't changed at all. Since then, Medicare Advantage is growing at a snail's pace.

So the impact of Medicare Advantage is still relatively negligible throughout the portfolio. And again, as mentioned on the last call, it is projected to grow at just about 1% a year. So just a really slow climb there. Our senior housing occupancy improved 70 basis points, to 90.7%.

Things are very stable there as well. And we are not really seeing, in our portfolio, any new entrants that are creating a problem for existing facilities. Both our stabilized assets or the assets we're developing.

And with that, I will turn it over to Harold. When Harold is done, we will go to Q&A.

Thank you, Rick.

This morning I'll provide an overview of the results of operations for the 1st quarter of 2016, and our financial position as of the end of the quarter. For the three months ended March 31, 2016, we recorded revenues of $62.6 million, compared to $55.6 million for the 1st quarter of 2015, an increase of 12.6%.

Genesis revenues declined to 33.9% of our total revenues as of the end of the 1st quarter, after excluding from total revenues $2.7 million of interest recorded on the Forest Park Fort Worth mortgage loan during the quarter. This is down from 41% in Q1 of 2015, when we exclude any Forest Park revenues in that quarter. FFO for the quarter was $33.9 million; in a normalized basis was $36.9 million, or $0.56 per share.

Normalized to exclude $2.4 million provision for doubtful accounts and loan losses, primarily exposed saving with our DIP loan in Frisco, as well as a $0.6 million loss on extinguishment of debt associated with our refinancing of the revolving credit facility and term loans in January of this year. This normalized FFO compares to $31.6 million, or $0.53 per share of normalized FFO for the 1st quarter of 2015, an increase of 5.7%. AFFO, which excludes from FFO acquisition pursue costs and certain non-cash revenues and expenses, was $34.8 million, or $0.53 per share compared to normalized AFFO of $30.9 million, or $0.52 per share in Q1 2015.

For the quarter, we recorded a net loss attributable to common stockholders of $18.3 million, compared to net income attributable to common stockholders of $16.9 million, for the 1st quarter of 2015. Included in this loss for 2016 was an impairment of real estate of $29.8 million, associated with a Forest Park Frisco disposition and a $4.6 million loss on the sale of one Genesis asset having a high carryover book value from the split with Sun Healthcare back in 2010. This sale is part of a larger agreement with Genesis to dispose of certain facilities, and did not result in an immediate reduction of rental revenues.

G&A cost for the quarter totaled $4.7 million, and included the following: first, $1.8 million of stock-based compensation expense, $0.1 million of acquisition pursue costs, and higher than normal legal fees of approximately $0.3 million. Excluding these costs, our recurring G&A cost was 4.2% of total revenues for the quarter. During the quarter, we recorded a $2.5 million provision for doubtful accounts and loan losses, compared to $1.1 million in the 1st quarter of 2015.

This current quarter provision is primarily associated with the DIP loan in Frisco, as previously discussed. Our interest expense for the quarter totaled $16.9 million, compared to $13.9 million in the 1st quarter of 2015, and included amortization of deferred financing costs of $1.2 million in the 1st quarter of 2016 and $1.3 million in the 1st quarter of 2015.

Based on our total outstanding debt as of March 31st, 2016, our weighted average interest rate, excluding borrowings under the revolving credit facility, was 4.58%, compared to 4.64%, as of March 31st, 2015. Borrowings under the unsecured revolving credit facility bear interest at 2.84%, up from 2.28%, as of March 31st, 2015.

Switching to the statement of cash flows on the balance sheet, our cash flows from operations totaled $24.7 million, for the first quarters of 2016 and 2015. We had very limited investment activity during the quarter, resulting in $2 million of cash provided by investing activities, primarily related to repayment of loans receivable. We had no capital market activity during the quarter, and have suspended the ATM program.

We also paid preferred and common dividends totaling $29.3 million during the quarter. As of March 31st, 2016, we had total liquidity of $311 million, consisting of currently available funds under our revolving credit facility of $302 million, and cash and cash equivalents of $9 million. After utilizing net proceeds from the sale of the Frisco Hospital on April 1, 2016, our liquidity was $397 million on a pro forma basis.

We continue to have very strong balance sheet with no near term maturities, and only 13.8% of our total debt subject to risk of rising interest rates. We were in compliance with all of our debt covenants under our senior notes indentures and our secured revolving credit agreement as of March 31st, 2016, and continue to maintain strong credit metrics as follows: net debt to adjusted EBITDA of 5.65 times, after taking into account the sale of the Frisco Hospital; interest coverage of 3.93 times; fixed charge coverage of 3.13 times; total debt to asset value, 47%; secured debt to asset value, 6%; and unencumbered asset value to unsecured debt, 223%.

On May 2, 2016, our Board of Directors declared a quarterly cash dividend of $0.42 per common share and $0.44 per share of Series A preferred stock. Both dividends will be paid on May 31, 2016, to stockholders of record as of the close of business on May 16, 2016. The common dividend represents 79.2% of our Q1 2016 AFFO per share.

Finally, with respect to the Dallas and Fort Worth mortgage loans, there is a hearing set for May 4, related to our motion to lift the stay on foreclosure in Dallas. We have not recorded any interest income on that loan during the quarter, and do not have any additional updates at this time. Fort Worth continues to be on track for a full repayment in the 2nd quarter, as previously stated, and we expect to completely exit the Dallas investment by the end of the 3rd quarter of this year.

With that, I will turn it back over to Rick Matros.

Thank you. We will go to Q&A now.

(Operator Instructions)

Juan Sanabria, Bank of America.

Hi, good morning, there out on the west coast. A question on use of proceeds for Forest Park -- how do you guys think about permanently deleveraging the balance sheet and really not using any of the proceeds to earmark for acquisitions, given some of the premiums from a cost of capital perspective you see with some of your more lowly levered peers?

I think our first priority is to delever the balance sheet some. To the extent that we can find good senior housing deals at the right price, we are still going to want to do those. But we are going to be mindful of our leverage and keep it below the cap that we had previously stated.

So we are not going to let it get as high as it was at year end, for example, but there is plenty of room there for us to get some deals done without tapping the equity markets. We don't see any reason to let good opportunities pass us by at this point in time. We can do that and still have leverage lower than it was for us last year.

And to put some numbers around that -- once we get the three Forest Park assets taken care of, we should see -- first of all, we will just use the proceeds to delever by paying down the revolver. So we don't have current plans to pay off any of our permanent financing at this time. But we will be able to pay the revolver down to $0, and actually most likely put some cash on the balance sheet to fund acquisitions.

So we'll have a period of time where we're making acquisitions without adding leverage. And then we can continue to make acquisitions just using the revolver.

I think we talked about it last quarter -- probably somewhere between $200 million to $250 million worth of investments -- and keep our leverage down below 5.5 times. So the deleveraging will happen quickly and immediately with the proceeds, and then we'll manage the leverage within that range we've always talked about, with a longer-term view of lowering it down closer to 5 times.

And I take your point why we've discussed it internally -- here is kind of the issue that we talk about. There are two things from our perspective that account for its trading at some discount to our peers. The one is the leverage, given our size. The second is the Genesis exposure.

If you look at the discount we are currently at, there is no rationale -- no rationalization for it, it's just ridiculous, even given Forest Park, and certainly with the [cloud] at Forest Park -- there is no justification for it. But that said, it is true that our peers with lower leverage trade at a higher multiple. But we still have to be mindful about getting Genesis exposure down.

And when we think about the path that we need to be on to get to investment grade -- our leverage is not an issue, in terms of our credit stacks with the agencies -- our Genesis exposure is. So that is still a priority for us. So, again, as Harold said, we will be mindful of the leverage -- keep it lower than it was last year.

But if we see good deals, we would like to do them. But we are not going to overpay. So if we have to hold tight and just be patient and just let the leverage fall, then we are content to do that as well.

Thanks. Just a follow-up on -- or a question on Forest Park -- I should say. Could you just clarify two things? How much rental income or interest income was in the first-quarter results? I think you said $2.7 million for Fort Worth?

And then secondly, what are the expectations for proceeds around Dallas, relative to the $110 million mortgage?

We don't want to negotiate publicly, so we would rather not make any comments about the Dallas mortgage.

To answer your first question -- the only income in the quarter was the Forest Park Fort Worth interest income of $2.7 million. So there was no interest income on Dallas. And there was no rent income on Frisco.

Thanks, guys.

Smedes Rose, Citi.

Hi, this is [Arch] for Smedes. I know that you guys talked about Medicare Advantage growing slowly. On a more broader sense, are you seeing -- what are your thoughts around the recent CMS announcements on 2017 policy changes and possible effects of bundling on SNF Medicare reimbursements?

Are you seeing some of the hospitals trying to circumvent the SNFs and go directly to hospitals? Or are you seeing that relationship play a more important factor now?

No -- actually -- first let me go to the CMS announcement -- one, the rate increase was terrific. In terms of the other things they talked about, which were the quality for payment criteria, that has been expected for quite some time, and the industry has been in the process of getting prepared for that. For the providers that get it right, there's going to be some nice upside there.

In terms of bundling, it is still too far down the road. We are not seeing hospitals do anything unusual in their activity right now, in terms of whether they are referring more to home health than they were before. It is pretty much -- they are doing what they have always done.

Over the past number of years, there has been some increase with that. For skilled nursing providers, transitional care providers that understand how the paradigm is changing, they shouldn't be accepting patients that can be taken care of at home anyway.

And I think when you look at our skilled mix improving the way it is, this is not a new phenomenon for us. If you go back -- I pulled numbers going back to the first quarter of 2014. Our skilled mix on a year-over-year basis has been improving every single quarter, on a year-over-year basis. So it has been a trend for our operators.

It has been a trend because our operators -- we believe our operators that really understand that -- we have been really selective in terms of who we have been acquiring. Even if you look at it on a same-store basis, because we have divested some of our small operators over the past couple years that we thought were just too traditional in their thinking -- when you look at our skilled mix growth over the last couple of years on a same-store basis or all in, you see continued improvement on a year-over-year basis. So that tells us that at least the operators that we've chosen as partners understand that. And to the extent hospitals do refer as many people to home health as they can, it is not really affecting our operators.

With that said, it is going to be like any business. There are going to be some winners and losers. I think the losers are going to be the true mom-and-pops, the generational kind of providers who have always done traditional Medicaid long-term care.

They want to take the low acuity patient. Those are the ones that are going to really be hurt by the transition to bundle payments. And that should also provide some opportunity from an acquisition perspective, both for buyers like Sabra and for strategic buyers as well, to pick up those kinds of facilities, and transform them into a model that reflects the current paradigm shift.

Okay. That is really helpful color.

On a separate note, on the senior housing side, we noticed that coverage ticked down a little bit. Is there anything moving in or out from those pieces? Or are they able to sustain rent bumps across -- let's say for the next 5 to 10 years?

The only reason it ticked down is because of the acquisitions we've done. We have more independent living beds in that number than we had before. And coverage is lower in independent living than it is on assisted living and memory care.

If you look at our same-store coverage for senior housing, which doesn't reflect, though, the additional independent living beds, coverage actually ticked up. So we're seeing a pretty stable environment out there. And no pressure on occupancy relative to rate increases.

That is great. Thank you, guys.

Paul Morgan, Canaccord.

Good morning. In terms of how you -- a little bit more on the SNFs coverage side of things. The numbers we get are in arrears, so maybe you can give some color on how you think this year could evolve? You saw good progress in the reported numbers for the first quarter, but in the context of Genesis specifically, and more broadly, what you think the year might look like?

I would expect our skilled mix to continue to be strong. It will tick down in the third quarter, as it normally does. It actually starts ticking down towards the end of the second quarter as you get into that seasonality through the end of the third quarter and then picks up. On a year-over-year basis, it should be favorable.

I would expect there to be some decline in overall occupancy as skilled mix continues to grow. But that is something that we are comfortable with. I think we have about the highest skilled occupancy in the space. So we have got a lot of room there as well, on an occupancy perspective.

Great, thanks. As you look at reinvesting some of the proceeds from Forest Park and senior housing, Rick, you talk about a couple of things. First, Canada -- how are you looking about potentially growing your Business up there? I see you are going to a conference later this week up there.

And then, in the US, if you look at the data, it looked like some of the commentary may be about seeing a peak in new starts. Is there anything going on, in terms of the complexion of where you are looking to do deals? And any markets that are kind of off the table? Or is it much more asset and submarket-by-submarket specific?

It is Talya here. First of all, I think it is very market specific. We're seeing less development opportunities come across our desk. I think the developments that are still looking for capital have been circulating for some time.

We are perceiving a slowdown in construction initiatives. So that is one, and that is a positive.

There is obviously a fair amount of supply coming online in different markets. It becomes a very market-specific analysis.

In terms of where we are looking to buy, I think we're seeing properties come up across the country. There is nothing specific right now in terms of location. And there is nothing we are avoiding; we are really focused on addressing everything on an asset-by-asset basis.

I would also say that -- even though we are seeing less development projects come across our desk, our proprietary development pipeline is pretty robust, as we have talked about in the past. We have around 30 projects that we greenlighted that, over the next several years as they become stabilized and we exercise our purchase option, bring somewhere around -- I'm just using round figures right now -- around $600 million in stabilized assets into the portfolio.

We have a really robust development pipeline. We have been pretty picky on it, historically anyway.

The other point I'd make on the development pipeline is -- also, as we've talked in the past -- we focus our activities in secondary and tertiary markets. We try to stay away from where most of the development has been. We stay away from the top MSAs on the development perspective. I think that is one of the reasons we have not seen much activity there as well.

Great. And anything specific on Canada?

On Canada, we do want to continue to grow in Canada. As we said, we still have an opportunity there for a smaller REIT like ourselves to partner up with what's a very fragmented market up there. But it's going to be slow. There's I don't believe anything in our current pipeline that has any Canadian deals --

Actually, there is one we're looking at.

One -- so we expect it to be slow. It is never going to be a material percentage of our portfolio. It's simply another avenue for growth.

I'm sure when Talya speaks at the conference next year, there will be an amazing amount of deal flow coming in after people hear what you have to say. (Laughter)

As people like from Canada like to remind us that it is 38 million people there, not 380 million people -- and you have got a couple of large US healthcare REITs, which are big in Canada. And so, while there is definitely room for someone of Sabra's scale to provide the service that we provide in the United States -- to provide it in Canada -- it's more diffuse because the land mass is rather large.

Sure. Okay, great, thanks.

Chad Vanacore from Stifel.

Just thinking about -- that pipeline increase is quite a bit. You took it from a few hundred million last quarter to $400 million this quarter. Are you out there looking for more deals? Or are they coming to you? Is this because you previously [cap constrained] and things have loosened up?

No, it's got nothing to do with any of those. It's all coming to us, and I think it's just a function of a couple of things. Last year it was really a seller's market and it just -- there was deal fatigue.

There were a number of deals -- because the brokers were pushing sales so much last year -- there were any number of deals that occurred last year that in a more normalized environment wouldn't have happened until this year anyway. But I think it's just a natural -- it just took a certain amount of time for things to build up again. It's not just the difference in the size of our pipeline, but the $200 million that we talked about in the last call was -- that wasn't very good.

We're actually seeing much better quality stuff now, and we're doing a lot more work on a lot more deals right now. But we're also not optimistic at this point that there's been enough cap rate compression, or any cap rate compression, that would put us in a position to actually get some things done. But things are moving at least in the right direction.

Okay, then just thinking about your NMS acquisitions, why do you think they are good investments in the skilled nursing space right now?

Because NMS is doing something that we have not seen -- we don't see anybody else doing. We see a lot of good operators doing short stay transitional care -- post surgery on hips, knees -- that sort of thing. Certainly, we have got quite a few operators like that in our portfolio.

What NMS is doing that is a little bit different is -- if you look at the business model -- one portion of their facility is focused on short stay transitional rehab. The other portion of the facility is focused on complex long-term medical care -- like ventilator patients.

In other words, if you go into any NMS facility -- they are doing everything under a SNF license that you will see in an LPAC or an [IRR] -- which goes to the point we have been making for as long as you guys have known me, which is, the SNFs are the best positioned asset class in the post acute sector to take advantage of those providers that get it right.

One of the reasons that NMS is able to do that -- besides the fact that it's just really smart guys that see where things are going -- is the Medicaid system in Maryland has specialized rates for ventilator patients that pay for long-term ventilator care at the same rate Medicare would pay on a short-term basis. There aren't many states that do that. A lot of the strategy is very state specific.

There are any number of states that specialized Medicaid rates, because in those states the state recognizes that they need to do something to keep people out of [higher end stays] in acute hospitals and other settings as well. But if you look at Cadia, which was our first large SNF acquisition back in 2011, they have the largest ventilator unit in the state of Delaware. So that is really what we like about NMS.

We underwrote this at a 1.57 coverage. The existing facilities that we did last year are covering at about 1.7. Their margins are 30% or better. They are just really doing a fantastic job.

All right. One last one from me -- can you add some color to how the Holiday portfolio is performing? It looks like fixed charge coverage was 1.18, from 1.15 sequentially -- any color about the competition they are facing in their markets?

It has been very stable. There is nothing remarkable to talk about there -- it has just been stable. It's been business as usual.

I did spend some time with the new CEO, and felt really good about that meeting, as well as with their COO. That was really a question on our minds, and I'm sure everybody else's, with Kai leaving after everything he had done at the company -- what happens next?

So I walked away from the time we spent together feeling good about that, and the way she was approaching the business and the way she answered the questions. There's really nothing remarkable going on there, just business as usual.

Thanks a lot.

Yes.

(Operator Instructions)

Rich Anderson, Mizuho Securities.

Good morning out there. If we could quickly -- on Holiday -- what would a facility level coverage be? And why is it that you don't provide that?

We don't provide facility level coverage with any of the tenants that we have corporate guarantees -- it's just the decision we made. At one point we did, and it actually seemed to cause some confusion.

The corporate guarantee is what is meaningful to us because that is our backstop. The facility level cap coverage is, for the independent living facilities in Holiday, is about 1 times.

1 times, okay. Thanks for that.

When I think about the senior housing coverage -- the same store versus the non-same store -- if you do the math between the good number in same-store and the decline you saw as you explained because of the independent living component, does that mean -- if you back into that, does that mean that the non-same store is currently well under 1? If you go from the 1.3 -- whatever it was for same store -- to 1.21?

No, that is not what that means.

Okay.

This is Harold. If you look at the calculation and the math that you are doing based on the information that is provided, if you are using the revenues and trying to back into coverage, you can't do that because, first of all, revenues from Holiday are included in those revenue numbers. And there is no Holiday coverage in either one of those -- either same store or otherwise.

There is also a handful of assets that are not in the coverage, either because they are not stabilized yet or -- I think there is one instance where there is one that's potentially being sold. So you can't back into the numbers. So no, it is not well below 1 times.

But if Holiday is not in either, what difference does that make?

It is in the revenue number, if that is how you are getting to the calculation. I'm not sure exactly how you're --

Okay. Fair enough.

(Multiple speakers) not in the coverage number.

Okay.

We don't have -- our senior housing portfolio is well above 1 times.

Okay.

Those numbers are accurate numbers.

Okay. Harold, what did you say the Dallas timing was, when there was some type of hearing? I missed that. Is that May 4, 2016? No, that has passed. No, it's tomorrow?

Scheduled for tomorrow, that's correct.

It is tomorrow, okay.

We will have an update, Rich, after that.

And also, just want to make a point -- there were a couple of questions about Fort Worth before we issued the press release. And so I just want to clarify -- we will issue a press release after the Court has approved something. Just because it has been filed, doesn't mean that it is approved.

So there were a couple of notes that came out before our last press release. And it wasn't a delay on our part. It was specifically because the Court hadn't approved it yet. So just so you all are aware, we're not going to put anything out there until the Court has approved it.

Okay. As far as the provision for doubtful accounts that you recorded, this would all basically go away? Or does the DIP stay outstanding for some period of time?

We have recorded a reserve based on how much of the DIP loan was outstanding and how much we collected at closing, plus our expectations for collecting on some of the collateral for the DIP, which is some of the AR was recorded.

Right. And so that part can stick around for a bit; is that fair?

Yes. The collection will happen over time --

Post closing?

The collection will happen over time.

Okay. So there could be some additional charges or non-cash components for the next couple of quarters -- even after you finish everything?

Yes. It could go either way. It is a very small amount -- a couple of million dollars at play here. It is unreserved, and we expect to collect.

But if we don't collect it, there could be a slight charge. If we collect more than we expect, there could be a slight, obviously, reduction.

Okay. One of the more refreshing things about this call is that we haven't talked much about that. So that is good. So I'm going to change the subject again.

And, Rick, you mentioned MA is moving at a snail's pace in terms of its increased component to the story. To what do you attribute that to? Why does it move so slow? Is there any risk that it could accelerate?

It is moving slow for a number of reasons. One of the primary reasons is -- the Medicare Advantage insurers are marketing to the 75 age population, not the age of the population that typically resides in skilled nursing facilities. So that is a big driver.

And the reason they don't do it is because they can't demand the rates that they demand for the 75-year-old and apply that to the 85-year-old. They just don't like the margin on the 85-year-old. And part of what that means is, if they get put under pressure -- which I think they may -- which is a possibility -- to start marketing more to the older patients, they are going to have to be a little bit more liberal in their rates as well. That is the primary thing.

We also have, I know in our portfolio, and I would say the same thing existed when I was an operator -- our occupancy and our skilled mix is good enough that if we don't like the rates we are getting from an MA provider, we just don't do business with them.

Then the third factor is -- the current generation of individuals that are going into skilled and transitional care facilities, grew up having certain expectations relative to their Medicare benefits. They are not assigning their benefits to the Medicare Advantage insurer. The next generation, that has grown up in an environment where managed care has been more prevalent, I think you will see a greater number of those individuals assigning benefits.

So I think post, call it 2020, maybe you will start to see some acceleration. But between now and then, if not a little bit longer, I don't think you are going to see more than a 1% increase a year.

Okay. My last question is -- on Genesis, you mentioned rating agencies wanting to see that concentration come down. From your perspective, they have had this risk statement in their filings for some time now about some preliminary activity with the DOJ. To what degree are you worried about that?

Is it something that you have some reasonable insight on, or are you kind of subject to whatever? I mean, obviously you are. I'm just curious where you are in that, in terms of how much it keeps you up at night -- that kind of thing.

Number one, it doesn't keep me up at night. One of my daughters is about to go into labor; that keeps me up at night, seriously.

In our discussions with Genesis -- that DOJ issue from their perspective is not a material issue at all. And their reserve for that, they think is conservative. Obviously, it is not that big a number. And they are really -- we've known them for a long time -- they are very conservative guys.

So we feel very comfortable with their assessment of it. And maybe it is a function of the fact that I have been around too long. You just sort of take that and deal with that stuff as it comes. Those things happen.

The real large ones are a little bit more unusual. They don't happen that often. But the smaller ones happen.

Okay. Got you. Thank you.

Tayo Okusanya from Jefferies.

Good afternoon. First of all, I love the Prince tribute. But that is a tough song to pull off on an earnings call.

Thank you, I appreciate it. (laughter)

Just a little bit more focus on Genesis in general -- the company did put out fourth-quarter results that a lot of investors reacted negatively to. Here you are with your coverage getting better that now includes those fourth-quarter results. HCN had a very similar circumstance this morning as well.

If you can tell us what is different about your portfolio versus the overall Genesis portfolio that is creating the outperformance in your portfolio relative to the overall operating results? And again, what you are expecting to see going into first quarter?

First of all, it is not our portfolio. The numbers that we presented represent the entire Genesis portfolio.

In terms of the fourth-quarter numbers, that is where there is a disconnect. I didn't think it was that weak a quarter.

They missed guidance, but if you looked at the number that they actually hit for the year, they did not miss it by very much. I just think that -- missing it by anything, in conjunction with all the headlines that were occurring with the BPCI model, and the joint and hip replacement program, and all the negative sentiment that hit -- even though SNFs were the darling of the space a year ago, I really think it got exaggerated.

I didn't think that their quarter was that weak. And they are very focused on strengthening their balance sheet -- they're paying down some debt now. They are looking at ways to rationalize the portfolio a little bit more.

And I think one of the advantages that Genesis has is -- in addition to what we think is a very strong management team, they have really active partners in formation there who have been in the business, have other portfolios outside of Genesis. They are really working hand in hand with Genesis to create a stronger entity. For all of those reasons, we feel comfortable with it, but the increased coverage is reflective of their entire portfolio, not just the Sabra portfolio, which goes to my point that I think there was a real overreaction to their fourth quarter.

So the numbers that we see you reporting is the coverage for the entire portfolio -- not just your portfolio?

That's right -- because of the corporate guarantee. But I would say this -- they are included in the skilled mix and occupancy numbers, just our portfolio.

Got it. That is helpful.

Second question -- acquisitions -- it sounds again you are leaning a little bit more toward senior housing. But you have a world right now where cap rates are still really low in that space.

How do you think about pulling the trigger on additional senior housing transactions? Are you leaning more toward triple net versus RIDEA stuff?

We have always been more focused on triple net than RIDEA. Some of it is just practical.

There are a couple of reasons that we're focused more on triple net. One is practical, and that is because most of our senior housing deals are smaller. Most of the guys we do deals with aren't independent eligible contractors by the definition. So they don't even qualify for RIDEA. That is one reason.

The other reason is, as you know, I have been an operator my whole career. I prefer -- and NOI has its ups and downs. Businesses go through their ups and downs. I would just rather not have to do much with RIDEA.

There is a volatility factor there that at some point is going to hit you. I would just as soon not. We have done a couple, but they're immaterial.

So if it really works -- we will be open to it. But it's never going to be a driver for us.

In terms of your initial question on senior housing deals -- I know we have been really active over the last five years. Last year, we did $550 million worth of deals, and so people look at us as being a growth company, which we are, but we are willing to be patient here.

The NMS deal is a good deal for us. And as I said, it may be the only skilled deal that we do this year, but it's $50 million.

We do think there is going to be cap rate expansion, because even though the PEs are still paying prices that are beyond us, our public peers are being very disciplined about what they are doing. And as deal volume continues to tick up, the PEs aren't going to be able to buy everything.

And when guys want to do sale-leasebacks, they are less liable to want to do a deal with a PE because they're more focused on -- who do I want to have a relationship with over the next 10 years? It's when there's a complete sale of the business that you really can't compete with a PE who's buying something based on forward earnings that we don't believe are ever going to happen. Because the whole business is being sold; it is just the highest price wins. I think if deal volume ticks up, we will see more sale-leaseback opportunities, and then we will be in a better position to compete.

Again, if we have to be patient -- the other side of that coin is, our leverage is going to be even lower. There is really no bad story for us this year. Either we have lower leverage or we have a decent amount of deals done -- or the acquisition market ticks up dramatically, and cap rate expansion happens and we can do even more.

So there is no bad story for us. Part of that is because the proceeds that we are receiving from the Forest Park assets -- well, certainly meeting our expectations -- I know everybody else didn't expect us to get what we are getting. But that is putting us in the position of being able to be patient.

Got it. Helpful. Thank you.

Michael Carroll, RBC Capital Markets.

Rick, can you give us some color on the uptick that you had in your skilled nursing facility coverage ratios? I know the sequential uptick was pretty big. How much of that was driven by stronger operations? And how much was that driven by recent acquisitions?

It is all skilled mix, Mike. As I mentioned earlier, that skilled mix is a trend that has been continuing for us. I just went back over two years and looked at every quarter, on a quarter-over-quarter basis. It has been continual.

That is why I emphasize -- it doesn't matter whether you look at our all-in portfolio or our same-store portfolio. The all-in portfolio does reflect the fact that we're doing acquisitions with operators that are really a little bit ahead of the curve in terms of where the paradigm is. So the NMS deal that we did last year, the vision deal that we did in the fourth quarter of 2014 where, in the case of the vision deal -- their facilities are not Medicaid certified, it's all skilled mix. So that has really helped.

When you look at our same store, you see the same trend there. And the 40% plus in skilled mix on a same-store basis is the highest that we have been.

So that is a reflection of -- we think the operators that we have in place that really understand where the business is going -- coupled with the fact that we have sold some skilled nursing facilities over the last couple of years that were more marginal, from our perspective. Not necessarily marginal in terms of -- that they weren't good operators. But they were just more traditional in their thinking.

And they were in markets that we think are going to be changing. And so pricing was really good at the time. We decided to sell them and get ahead of the curve a little bit. It is really just a function of that.

And when you think of -- and in terms of the actual coverage performance -- and it goes to their margins as well, because -- when you see that skilled mix improvement, those are patients that are replacing Medicaid patients. And in our industry, at least on a consolidated basis -- it might be a little bit different state to state -- in that industry, you lose money on Medicaid patients.

You get to a point in a facility where your occupancy is high enough that [they're covering] -- it is okay to have those additional Medicaid patients -- they fill beds, they cover fixed costs and all that stuff. Generally speaking, it is a really poor reimbursement -- and Medicare has always subsidized the industry. And in fact, there is not much of a difference between Medicaid rates and private pay rates.

That is why we encourage everybody to stop looking at quality mix because as an operator, I stopped looking at quality mix 15 years ago because it is not that meaningful a statistic anymore because private pay is not dramatically different than Medicaid. So it is really skilled mix.

For us, it is primarily fee-for-service Medicare; to a much lesser extent, Medicare Advantage. On the last call, we talked about our non-Genesis portfolio only having about 5.5% of their census being Medicare Advantage, and Genesis was under 8%. If you translate that to revenues, it is probably 11% or 12% for Genesis, and 8% or 9% for our other. Again, it's a small number that's growing slowly.

Does that answer your question, Mike?

That was great. I appreciate that.

On the expense side, was there expense benefits too that drove the pickup? Or are you seeing labor costs -- is that eating away on some of the pickup you saw in the skilled mix?

It has been pretty stable. One of the things to remember about skilled mix and just that business generally is 90% of their costs are fixed. When you think about the majority of their nursing corps and all their dietary, housekeeping, laundry, maintenance and administrative cost -- they are all fixed -- your property costs, all that stuff.

When you're going for a higher skilled mix -- you are offering a higher-acuity clinical product, your cost increases are incremental. So you are going to have more therapists. You are going to have more -- you might have more RNs than you might otherwise have. That all gets captured in those higher RUGs rate that you are getting.

So your margin pull-through is still material. We are not -- on an organic basis, we are not seeing any material uptick in supply costs or wage inflation or anything like that.

Okay, great, thank you, appreciate it.

Thanks, Mike.

Eric Fleming, SunTrust.

Hey, guys. I just want to go back to the pipeline question. You speak great about the CMS proposed rule on skilled nursing. You have the NMS deal you just did.

And then you turn around and say -- we are going to focus on senior housing. Can you give more detail on why there is not more cheap skilled opportunities for you in the pipeline?

Yes. I think -- we could pursue more if we wanted to. But we have kind of seen all along that we are going to be better off in the long run both from a ratings perspective and a multiple perspective. And we saw that multiple expansion happening before the Forest Park default happened.

By expanding our asset base beyond skilled nursing and having more private pay is the right thing to do in terms of how we are building the Company. It has less to do with our view of the skilled nursing sector than it does to how we want to build the Company and how we think we can get to investment grade faster and trade at a better multiple.

And the other point I would make is -- historically, people don't understand skilled nursing that well. They react badly to headlines -- whether they understand those headlines or not. And the headlines are complicated. And most people don't understand the headlines if they're not operators.

For about 1.5 years prior to these last several months, skilled nursing was trading at its highest multiples ever. And people who were completely supportive of us expanding the private pay, would call us and say -- why don't you buy more skilled nursing now? And we said -- wait until the next headline. This isn't flat, this is an anomaly. This is not where skilled nursing normally trades.

Even though I believe there has been a gross overreaction to all these headlines about bundling BPCI and Medicare Advantage and all the stuff we have been talking about on this call and the last call, that is the reality, that is the reality of it. And so I think -- if you look at -- historically -- in [seeing in] the future -- I just think we will be better off if we have an increase in our senior housing.

That doesn't mean we are not going to do more skilled next year or whatever. If we can find more operators -- like the operators we have been acquiring -- then we are more likely to jump on those.

But when we pulled the Forest Park assets out of our portfolio, the senior housing as a percentage of our portfolio ticked up pretty nicely. Our skilled nursing did too, and it got pushed up to close to 60%. We had it down to about 50%. We just want to get it down a little bit more.

Okay. A quick follow-up on NMS -- now you have basically all five of their properties. Is there more opportunity there? Or are they constrained in that they've filled out the Maryland state and there's really no benefit to expanding outside of Maryland, given what you said about the rates?

A couple of things -- they are constrained because they choose to be constrained. We would love to bring them five buildings -- and even if you brought them five buildings that weren't in Maryland -- so much of everything else they do outside of vent care is fantastic.

We would love to have an operator that would do that, like a number of our other guys do -- Fox subacute, and Cadia and Vision that we've talked about. But they are extremely disciplined. They want to get one building, spend time, convert that building to their model, run it for a while, and once it is stabilized and predictable, then they move onto another building.

So it is really their own discipline. It's, frankly, the same thing with Vision and the same thing with the guys at Cadia and Fox subacute in Pennsylvania. They have the same situation there with Medicaid vent rates.

And those operators -- if you walked in there, they do everything that you see happening in an LPAC, but these guys just want to do it right and grow it slowly. That is kind of the way it is. You have to respect it.

Thanks. Appreciate it.

It appears there are no further questions. I will turn the conference back over to you, Rick, for any additional or closing remarks.

Thanks for your time today. I appreciate it. We really have tried, on this call and the last call, to be a little bit more educational with all the changes that are going on, particularly in the skilled transitional care sector.

But as always, Harold and Talya and myself are available for as much time as you want to spend on the phone. And we have -- we will see everybody at NAREIT, and then we've got a non-deal roadshow coming up in a couple weeks on the east coast as well, and we'll see some of you there. Thanks again and have a great day.

This concludes today's presentation. Thank you for your participation.