Sabra Health Care REIT Inc (SBRA) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT's second-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 tenant relationships, 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 is 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 those 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 perspectively to the Form 8-K we furnished to the SEC yesterday. These materials can be accessed in the investor relations section of our website at www.sabrahealth.com.

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

Thanks, Talya. Thanks for joining us today everybody.

We reported another strong quarter last night. We had solid operational results and lower leverage. We've updated our guidance which Harold will provide specifics on. We also announced a planned disposition of a significant number of Genesis facilities. These dispositions will reduce our exposure to our largest tenant and it will leave us with 43 Genesis facilities which is half the number we started with at the time of the split and leaving us with stronger access that will see increased rent coverage over time as Genesis we'll be able to focus on their best performing assets rather than have a disproportionate amount of management time spent on more challenging assets which is a trap that operators always get caught in.

Our lease expirations will now occur ratably rather than be front loaded, however we apply the specifics as well. I'd also note that this is just one piece of a number of larger strategic initiatives that I'm sure Genesis will be talking about on their call going forward. I think those initiatives will give the market great comfort relative to what Genesis is doing on a go forward basis and will strengthen them from a balance sheet perspective and operational perspective and an income statement perspective.

In terms of investments, our investment activity has slowly been picking up. We have invested just under $95 million to date and have agreed to terms on another $22 million in a senior housing campus.

I want to point out also that our investment activity and the timing of the fact that it is picking up has nothing to do with anything else that we have been addressing in the Company, whether it was the Forest Park stuff or this Genesis deal. It's really just simply a matter of the acquisition market and that after having a seller's market last year things are just starting to pick up a little bit more.

Our pipeline currently stands at $300 million. Almost exclusively assisted living and memory care. On complete sales of the business we continue to see competition from PEs paying exorbitant prices on future earnings.

It is really sale leasebacks that we have the opportunity to compete wherever we have a situation where an operator intends to stay in. They prefer to have a long-term relationship with the capital partner like Sabra rather than to do a deal with a PE and deal with a very different kind of paradigm as well as an earlier exit and then having to start over again.

We are hopeful given the current level of activity in the pipeline that we will see more leaseback opportunities for much of the first part of the year. The opportunities we saw were complete sales of businesses and again we're not seeing any where near as much activity on the skilled nursing side in terms of assets of sales as we are on the senior housing side.

We have been prudently selling off a small number of skilled nursing facilities as we pruned our portfolio to be focused on those operators that we feel really understand how the paradigm is shifting and what's going to happen going forward. What's become clear for us and we think we feel confident actually that we will see this with the proposed Genesis sales that there's a huge disconnect between the public market and the private market in terms of the value of skilled nursing. Every time we have put an asset on the market the competition for that asset is pretty intense and so we expect to see the same thing with the Genesis assets as well.

No turnover to operational results. Our skilled nursing transitional care portfolio of EBITDAR coverage held steady at 1.43 and was up year-over-year from 1.18. Our senior housing EBITDAR coverage was 1.17, down from 1.26 year-over-year.

As noted on our first-quarter call, I mention this again because I see it missing from a number of the notes. The reason that we are down is because of the number of IL beds that have come into the portfolio. As you know we all underwrite independent living coverage at a lower level than assisted living or memory care. In our case it would be acquisition of the Canadian independent living facilities getting fully baked into the numbers that bring it down.

If you look at our same-store senior housing stats which don't include the independent living beds we are actually up year-over-year. So there has been no deterioration actually in our assisted living memory care portfolio from a coverage perspective, actually quite the opposite.

Our skilled transitional care occupancy was down 90 basis points year-over-year. Our skilled mix is up pretty dramatically 280 points year-over-year. As noted on our last call also that's the key step that we look for. Skilled mix increases indicates to us and is the best measure from a metric perspective that our operators are moving their business where it needs to go by increasing their ability to take higher acuity patients and a broader spectrum of clinical patience.

There's a natural dynamic that occurs whenever skilled mix goes up, your revolving a lot more quickly and so you are going to have a natural decline in occupancy when your skill mix goes up. But remember that when your skill mix goes up and when you are admitting primarily only skilled mix patients that means that you are replacing Medicaid patients which are reimbursed at a much lower level with much higher reimbursed rates whether it is managed care or Medicare fee-for-service. And because 90% of the cost in a skilled nursing facility are essentially fixed, the pull through to the margin are those higher reimbursed patients. It is pretty dramatic, so that's why you see rent coverage being pretty strong despite the fact that occupancy is down. It's all about the skilled mix.

Finally, on senior housing occupancy we were a solid 90.1% there. We are not experiencing any competition from new entrants in the markets that we currently exist in.

And with that I'll turn the call over to Harold and when Harold is done we will go to Q&A.

Thanks, Rick, and thanks everybody for joining the call today.

Today I will provide an overview of the results of operations for the second quarter of 2016 and our financial position as of the end of the quarter as well as provide some additional color on the final resolution of the Forest Park investments and the agreement we recently entered into with Genesis as well as our updated guidance for 2016.

I will start with the recent Genesis agreement. First, I will remind everyone that we already have in place two other agreements with Genesis to divest eight facilities of which two have been completed. My comments will incorporate the impact from all three of the agreements that are now in place which includes the new agreement to jointly divest a total of 37 skilled nursing facilities across 10 states. Once all of the divestitures are completed, the number of facilities leased to Genesis will decrease from 78 today to 43.

First I would like to reiterate the key benefits from these agreements. Number one, it's acceleration over objective to diversify our portfolio and reduce our concentration in revenues from Genesis through this joint divestiture of assets. Number two, improve our portfolio quality through the elimination of less desirable assets, rent reallocations to better align rent with facility performance and improvement in total portfolio coverage over time to additional rent adjustments which will occur at the end of 2020 and 2021.

Number three, improved flexibility for future portfolio management through enhancements to the corporate guarantees of all leases with Genesis, such that those guarantees will survive and attach to any future asset divestitures Sabra may pursue that are subject to leases with Genesis. Finally, number four, significantly improve the laddering of lease maturities through extensions of certain lease maturities and other rent reallocations.

The latest agreement paves the way for the joint divestiture of 29 assets leased to Genesis. These assets will be marketed effectively immediately and will be sold in any number of possible groupings including one on an individual asset basis.

We expect these sales to occur over some period of time which cannot be estimated with any specificity today, however, we do expect the sales to largely be completed by the end of Q2 2017. Each sub sale will trigger a rent reduction from Genesis not based on current rent allocated to that asset today but rather based on a 7.5% of the net proceeds received by Sabra from the sale. This effectively eliminates any long-term dilution from the asset sales as we would expect to redeploy that capital at an initial lease yield that would approximate that 7.5% rent reduction.

While this will slow our growth in FFO and AFFO on an absolute dollar basis during this capital redeployment period, we believe the ultimate impact to our long-term FFO and AFFO growth on a per share basis will be immaterial compared to the growth we would have realized during this time had we fronted that growth with a mix of permanent debt and equity capital in line with maintaining our goal of having leverage of no more than 5.5 times.

This negligible impact on per share FFO and AFFO growth being a function of our high cost of equity capital today. So said another way our FFO and AFFO growth per share would be muted if our acquisition plans required the issuance of equity capital at our current stock price to maintain our leverage goals, such that recycling capital through these asset sales and using that capital as a source to fund our acquisition plans results in similar FFO and AFFO per share growth once all that recycled capital is deployed.

All of these factors allow us to continue to invest in high quality assets, maintain leverage and reduce our concentrations in Genesis and skilled nursing assets without sacrificing the FFO and AFFO per share growth we had previously expected. We expect this will have the added benefit of improving our credit rating and ultimately our equity value and thereby reduce our overall cost of capital in the future.

We expect these agreements with Genesis will generate a total of up to $200 million to $250 million of net proceeds from sales and reduce our cash rents from Genesis from $77.1 million today to $58 million to $62 million within that range of $58 million to $62 million. On a pro forma basis today that would reduce our Genesis concentration to approximately 27% before redeploying that capital and approximately 25% after redeploying that capital, assuming it is reinvested at the initial cash yield of approximately 7.5%.

The agreement also provides for a dramatic improvement of the laddering of the maturities of leases with Genesis. Under the original terms of the leases, approximately 77% of the Genesis portfolio revenues were leases that matured by the end of 2021. With the modifications that drops to 30% and includes certain rent adjustments that will improve the portfolio coverage and thereby enhance the likelihood of those lease extensions beyond the maturity date.

Finally, corporate guarantees are being modified such that if we sell any of the assets or put our interest in those assets into a different ownership structure the guarantees will remain intact and follow the assets to the benefit of the new owner or partner. This along with the relocation of rents to better match facility performance are incredibly important enhancements to the relationship as it gives us maximum flexibility going forward to manage the portfolio.

Next, I will switch gears and close the book on the Forest Park investment by first reiterating that we have said all along that Frisco was the only loss we expected to take on this investment. Despite predictions of massive losses on our loan investments we have completely repaid on these loans and realized a combined 10.8% annual return over the life of these two investments. We promised that we would swiftly to exit these investments and expected to be out by the middle of 2016. We have accomplished this goal.

The Frisco lease guarantees are now the only remaining piece of the story yet to be told and we have offered a generous discount to incentivize quick collections and avoid having to pursue litigation. However we will pursue litigation if the discounted payment offers are not accepted.

If we are able to collect the aggregate discounted guarantees which we have offered of approximately $14 million, the final recoupment for the three Forest Park investments would result in an IRR of approximately 5%. An outcome that far exceeds most expectations and one that we believe demonstrates our capabilities to mitigate risk in our investments and ultimately deal with difficult situations that don't turn out as we had originally hoped.

And now for the financial results for the quarter. For the three months ended June 30, 2016 we recorded revenues of $74.2 million compared to $56.6 million for the same period in 2015, an increase of 31.2%. FFO for the quarter was $51.4 million and on a normalized basis was $39.8 million or $0.61 per diluted common share. Normalized to exclude $8.9 million of out-of-period default interest income on the Forest Park Dallas loan and $2.1 million lease termination fee associated with the agreement to sell five assets with Genesis and $0.7 million of other one-time or out-of-period items.

This normalized FFO compares to $27 million or $0.54 per share for the second quarter of 2015, a 13% increase on a per share basis. AFFO, which excludes from FFO acquisition pursue costs and certain non-cash revenues expenses, was $49.3 million and on a normalized basis was $38.3 million or $0.58 per diluted common share compared to $30.8 million or $0.52 for the second quarter of 2015. This is an 11.5% increase on a per share basis.

The 2016 AFFO normalized consistent with normalized FFO. For the second quarter of 2016 we reported net income attributable to common stockholders of $34.9 million or $0.53 per diluted common share compared to $14.3 million or $0.24 per diluted common share in 2015.

G&A costs for the quarter totaled $4.6 million and included stock-based compensation expense of $1.8 million and acquisition pursuit costs of $0.1 million. Our ongoing corporate level cash G&A costs were $2.7 million compared to $2.5 million in the second quarter of 2015, representing 3.7% of revenues for the quarter compared to 4.4% of revenues for the same period of 2015.

Interest expense for the quarter totaled $16.4 million compared to $14.1 million for the same period in 2015 and included the amortization of deferred financing costs of $1.3 million in each period. Based on debt outstanding as of June 30, 2016, our weighted average interest rate excluding borrowings under our unsecured revolving credit facility was 4.47% compared to 4.68% at the end of 2015, a 21 bp improvement.

We generated $69.8 million of cash flow from operating activities during the quarter compared to $26.6 million in 2015. A significant portion of the increase driven by the collection of the Forest Park interest income. The repayment of those loans provided funds to fully pay down our revolver and resulted in cash of $103.9 million as of June 30, 2016.

We paid quarterly preferred and common dividends totaling $30 million during the second quarter of 2016 and on August 1st declared a $0.42 cash dividend to be paid to common stockholders on August 31, 2016. This common dividend represents 56% of AFFO and 72% of normalized AFFO for the quarter.

As of June 30, 2016 we had total liquidity of $603.8 million consisting of currently available funds under our revolving credit facility of $500 million in available cash and cash equivalents of $103.8 million. After funding the three investments subsequent to quarter end totaling $87.6 million our pro forma liquidity stands at $516.2 million.

We continue to be in compliance with all of our debt covenants under our senior notes indentures, our unsecured revolving line of credit and our term notes as of June 30, 2016. We have seen our leverage improve significantly as we have previously indicated we would since we finalized the exit from the Forest Park investments. Specifically leverage declined from 5.85 times at the end of 2015 to 5.09 times at June 30, 2016. This is well within the range of leverage we would like to maintain over the long-term and provides us additional room to continue to invest without needing to raise equity in the short term.

Our credit status as of June 30, 2016 were: Consolidated fixed charge coverage ratio of 3.19 times, minimum interest coverage ratio 4.14 times, total debt to asset value 44%, secured debt to asset value 6%, and ratio of unencumbered asset value to unsecured debt 239%.

Finally, a couple of comments related to our updated guidance for 2016. We have revised our outlook for full-year 2016 as follows. Debt income per share reduced from $1.00 to $0.90. FFO and normalized FFO per share increased from $2.13 up to $2.47 and $2.14 up to $2.33 respectively. AFFO and normalized AFFO per share increased from $2.02 up to $2.42 and $2.02 up to $2.24 respectively.

This guidance includes all investments completed to date totaling $94.9 million plus an additional acquisition of $22 million is expected to close in the third quarter. Our original outlook excluded any impact from the Forest Park investments for the year. Included in the updated guidance is the impact of the resolution excluding any proceeds we may recover from the Cisco guarantees.

The impact on FFO and AFFO from Forest Park in 2016 was $0.28 and $0.26 per share respectively. The impact on normalized FFO and AFFO was $0.19 per share for each. And then finally the guidance does not include any future impact from the recent Genesis agreement.

And with that I guess we will open it up to questions.

(Operator Instructions)

Juan Sanabria from Bank of America.

Hi. Good morning out there on the West Coast.

Good morning.

Just hoping you could talk to a couple things on Genesis. Firstly, what was your guys rationale or I'm not sure what the arrangement was but for not participating in the term loan?

If you look at the total dollars, it wasn't a huge amount of money and they already got covered with HCN and Omega so there was no need for us to participate and for us we are completely focused on reducing our exposure at this point. Bigger issue for us obviously than it is for the other guys.

Understood. And then just a question on the extension of the lease duration. Was that on your whole pool of assets or just the assets up for sale?

On the lease extensions the way it works, Juan, is obviously it's master leases. There are several master leases, but they are individual leases and so there were staggered maturities and when originally at the time of the split with Sun, those maturities were pretty front-end loaded and so what we did is we just looked at the overall portfolio and said we want these maturities to once we exit these assets that are being sold we want it to be more ratable over a period of time rather than front-end loaded and so that along with creating an opportunity to reduce some of the rent at that time and keep the maturities more stable over time rather than front-end loaded those are the two things that drove the decision to do that.

What was your rent adjustment you have referenced? I didn't see that stipulated in the release.

Yes. So what's going to happen is if you look at the rents that we have with Genesis by leases, we've agreed to give them in the asset they were selling anyways additional rent reductions again across the portfolio in 2020/2021 and what that does by adjusting the rent maturities at the same time it really has no negative effect on us and ultimately takes from 77% of the maturities happening early on reduces that to 30% so that's a combination of spreading rent and providing a rent reduction at that time.

I want to be clear there is no rent decreases here. There's no rent cuts that are going to be happening or are being contemplated. There's nothing like that.

Yes. All it is, Juan, is at the end of those leases we allow those rents to go down as they would have gone down.

You're just kind of marketing to market based on coverage?

No, it's based on the rents that were allocated to those assets previously. So the leases that we are allowing them to exit, the excess rents we expect will be there once we give the credit. Those are going to go away when they basically would have gone away anyhow.

Okay.

No immediate rent cuts.

Okay. And just a quick question on the last question on the rent coverage of the assets you're selling versus the remaining pool. Could you just give us a sense if any on the difference in the rent coverage on a facility level?

Net-net, there's not much of a difference on day one. There are facilities that are in the package that actually performed really well but Genesis I think smartly is choosing to get out of the entire markets in states which will allow them to reduce infrastructure more materially and leave them in markets that are more aligned with their operational strategy. So it's not that every facility in the package is an underperforming facility, there are actually some good performing facilities as well and that's going to help to enhance the sale process as well.

Thank you.

Yes.

Chad Vanacore of Stifel.

Hey. Good morning. Just trying to unpack the increased guidance. What would you say the pro-rata split between the collection of Forest Park proceeds and the impact from new investments offset by any Genesis dispositions?

The Genesis dispositions as we said are not reflected in the guidance other than the original agreement we had where they paid us a $20 million fee and we would reduce rents but a lot of that doesn't occur until 2017 so that's very immaterial. If you look at the impact of Forest Park for the year and in our guidance as we talked about it's pretty significant and with the acquisitions we're completing happening toward the second half of the year, the vast majority of the guidance is the Forest Park stuff as far as the increase that we are showing but there is still a few pennies related to the acquisitions as well. But the Forest Park is clearly a big chunk of it.

Okay. And then just thinking about in light of the challenges for Genesis. How is the NMS portfolio performing and then is that the real driver for improved skilled mix in that portfolio?

Yes. It's the big driver for improved skilled mix and prior to that it was the acquisition of Vision that was originally pushing our skilled mix up because Vision has no Medicaid business at all, so it's 100% skilled mix but NMS performance is holding up. They are doing great. They're great operators. It is holding up really well and I'll make a couple of comments about Genesis and I say this completely from an operator's point of view. I'm not speaking for them this is just my perspective on the whole thing.

Obviously they've got a really large company and when you look at our smaller sophisticated operators, they can kind of move on a dime so if things unfold they can get involved in what they want to get involved in. It's easier for them to put new clinical products in place. It's easier to bring in IT investments. Because they are small. Genesis is a battleship and I think that the conscious decision that they've made to aggressively get involved in the BPCI programs and a number of the other initiatives they've got is really the right thing for them to do and despite any short-term pressures from doing that from an operating perspective by the time all this rolls out over the next several years they're going to be ready and if they were to wait and be less aggressive and therefore maybe have less short-term pressures they would be in a much worse position several years out.

So I think what they are doing operationally from a strategic perspective and then you all these other initiatives that we talked about and they will be talking a lot more about because it goes beyond the Sabra portfolio, I think it well positions them very well. And I admire the fact that they are doing it the way they are doing it.

All right. Thanks for all the extra color.

Yes.

Smedes Rose of Citi.

Hi. Thank you. I wanted to ask you, you mentioned a large disconnect between public markets and private markets when it comes to these skilled nursing facilities and I was just wondering what you think of some of the largest differences in perception of how the market is changing or why is the private market seeing so much more value on a relative basis in your opinion?

Yes. I think the private markets, these are guys have always been involved with the skilled nursing industry. I think they understand the underlying business and with due respect generally that the general market does and certainly real estate investors do for the obvious reasons. And if they have facilities in the right market their point of view is the same really as our point of view and that is in an environment where you're going to have bundling for the first time in the history of the skilled sector or the post acute sector I should say, not the skilled sector, the entire post acute sector there is going to be a level playing field. So no longer are facilities going to be disadvantaged on higher acuity patients because IRS or L Tax get paid more money.

It's one of the reasons that the reimbursement hasn't been there for [smiths] to take [in]-patients for the most part. It's not a clinical issue it's a reimbursement issue and these private buyers many of whom are strategic not always they're financial buyers as well understand how well-positioned facilities are because of the lowest-cost providers so if they can find facilities that have been underperforming and are in good markets and they can bring the right operator in, there is a huge upside for them in those facilities and so that's why I think there's a disconnect now and this isn't new for the private market.

The private market has been remarkably consistent in how it's approached smiths assets over the many years that I was on the operating side of the business. The public markets two years ago really frankly for no discernible reason were sort of the darlings and that went extreme in that regards and I think the negative reaction now is extremely well so I think the public markets react to headlines and complexity and uncertainty and the private market reacts to the facts on the ground that are different than what the public markets sees.

Okay that's helpful. I wanted to ask you since you mentioned, so as you point out in your senior housing on the same-store basis sequential coverage ticks up a little bit but when does the independent living acquisitions, when do those start getting layered into your same-store numbers and then would we then expect the coverage then to start ratcheting down?

I think those start coming into next quarter into our same-store numbers because a lot of that was as Rick said those are investments that we made last year.

And so that will start pulling down your same-store coverage?

Correct.

Right.

Okay. Thank you.

We are underwriting AL and memory care minimally at 1, 2 if not a little bit higher. We are underwriting IL at 1, 1 which is consistent with how everybody underwrites obviously on these assets. That's the issue.

Okay. Thank you.

(Operator Instructions)

Todd Stender of Wells Fargo.

Hey, thanks. Within the memorandum with Genesis, how is the 7.5% rate arrived at and what if you do better than that rate on the asset sale, does that impact Genesis' rents going forward?

Just to be clear, the 7.5% was arrived at first of all because as we looked at it we said we don't want to take long-term dilution on this transaction so what we want to think about as we reinvest those dollars in the future we want to make sure we can replace that revenue stream. We will tend to be investing in lower cap rates, private paid senior housing.

So that's how we arrived at 7.5%. If you look at the acquisitions we just completed they are in kind of that range of 7%, 7.5%. We wanted to make sure we could fully replace the revenues so we didn't take long-term dilution and the question your are asking, I don't really think applies in this situation because it's just a function of proceeds we get so if we get $200 million of proceeds we will give them a rent credit of $15 million. It has no impact. The rents that are allocated to those buildings today are irrelevant. We have evaluated this on an overall rent basis not looking at each individual asset and trying to figure out can we replace that rent. We are looking at just replacing the rent at 7.5% on an overall basis. So, I don't know if that answers the first party question but --

Yes. Sure does. Thank you, Harold.

And then, post sale do you know what the rent coverage looks like I guess on the remaining assets. I forget the number you gave. It's in the 40-asset range want to say. What does the rent coverage look like I guess on a facility level basis.

So the rent, per my earlier comment, the rent I think this is the best way to put it, each facility is going to sell over some period of time because even though if someone wants to buy all whole thing they can. It's unlikely that is going to happen but say for example if it all sold on Monday, on that day the rent coverage really wouldn't change.

And the whole idea here is that it will improve over time simply because they are going to be shedding so many underperforming assets that it's taking a disproportionate amount of their time and they are going to be able to focus on the markets and the assets that are better suited to their strategy and have a lot more upside. And that happens to all operators over time. You don't want to spend a disproportionate amount of time of the lowest performing assets so if everything were to sell in one day there would be no change in coverage but we would expect coverage to improve over time as they have a more nimble company if you will.

Got it. Thank you, Rick, and just lastly here. Can we hear a little bit more color on the skilled nursing facility acquired in Silver Spring Maryland? Just seems like a big price tag for only 93 beds. Just want to hear more about that.

Yes. So, that's another NMS facility. That's a facility that we looked at when we bought the four last year. They had just acquired that and it was an under (technical difficulties) performing facility that they acquired. Within nine months they had it at 30% margins and so the way to think about it is really to look at it in the context of the four facilities that we acquired last year.

It is a high -- I mean I don't really ever pay much attention particularly per bed on skilled nursing because it's so market specific and individual facility specific but it is a high number on a per bed basis but these are facilities that really reflect where the whole sector will be somewhere down the line. When you look at the business that NMS is in they have two operating models in their facilities. They are basically operating in IRS and LPAC under a skilled nursing license. They can do that because in the state of Maryland, Maryland is one of the states that provides the specialized Medicaid rate for vent patients that is the equivalent of Medicare.

So, for most skilled nursing providers where there isn't a backup reimbursement rate to Medicare if you admit a vent patient who isn't amenable after 100 days you are stuck with that patient at call it a $200 Medicaid rate instead of a $700 Medicare rate and you are getting killed and that goes to my earlier comments with bundling where people follow the money. It's not a clinical issue. It's not an inability on the part of skilled nursing to take care of certain sort of patients but until the reimbursement is there and allows them to do it they are not going to invest in the infrastructure that's required.

So in the case of NMS if you look at their revenue, it isn't just skilled mix because for NMS because of their Medicaid ventilator rates their Medicaid revenue is as potent as their Medicare revenue. And the reason states are incentivized to do this, and a number of states do this. Maryland isn't the only state. We have two skilled nursing facilities in Pennsylvania that do the exact same thing (technical difficulties) and they do everything that LPAC does under a smith license. It is because LPACs are only in a handful of states so in most states these are patients that are staying in hospitals for a long period of time and cost an awful lot of money obviously and so the state creates incentives for them to be discharged to say that they can be better take care and in this case that's a smith. I don't know if that's too in the weeds.

No, I'll take it. Great. Thank you.

Sure.

Juan Sanabria of Bank of America.

Hey, guys. I just wanted to follow up on the rent adjustment. I wasn't quite clear if for Genesis if basically you are not cutting rents today but agreeing to cut them in the future. I just wasn't quite clear on the explanation. Apologies for not understanding.

Sure. I will try to make it as clear as I can. As you said there's no rent cuts today but the assets that are being sold have rent associated with those that would've gone away in 2020, 2021 so when we get out to those dates we are basically providing them with a rent adjustment or rent reduction at that time. They would equal whatever it would've been had they walked away from those particular leases which presumably they would have done since they are exiting them today however we've also extended leases and changed maturities such that it really has no impact on our rent, it's actually an improvement on our rent going forward because we are pushing maturity dates of other leases further out.

So net-net it's a positive but it's part of the big picture around restructuring and maturities and I think the benefit that I think we do get out of it as well is it will get even better rent coverage at that time, where previously they would've likely just walked away from those assets and our rent coverage would've been improved now it will improve at that date.

Said maybe a little differently. So for those facilities that we anticipate keeping there's no rent cuts to those facilities. Either now or then. Zero.

But those remaining facilities will get a rent cut equivalent to what the rent is for the ones you are selling?

The overall portfolio will, let's put it this way, rents will mature associated with those old leases as if they would have just gone away at that date.

If you have ten facilities and you are going to keep seven facilities and you know three years from now the other three facilities the leases are up and your operator is going to walk away, that rent would go away, right, for those three facilities.

Yes.

The seven facilities that are being retained there's no rent cut their.

And what is the rent associated with the facilities you are selling then, so we know what it will go down in 2020 and 2021.

A lot of it depends on exactly how much credit we get so we don't know right at this time. Suffice it to say I think the right way to look at it is before we had 77% of our rents tied to 2020 and 2021 going away and now it's only 30%. All the things that go, and in addition to that our rate coverage will go up at that time so those are the two benefits that we get out of it and there really is no cost to us in having that occur and today there are no rent reductions at all.

Okay. I mean isn't the rent that these assets are paying today that is going away in 2020 I understand that it is being offset by an increase term in the rest of the portfolio that you're keeping. Isn't that rent number known today? How is that dependent on the proceeds. I thought that was two different pieces?

I'm not sure I follow the question. Say it one more time.

You said the rent reduction or however you want to phrase it that is going to happen in 2020 and 2021 is based on a credit? I wasn't clear on what that meant.

I'm not exactly sure but let me say it this way.

Do have a dollar amount that the rent is going to go down in 2020 and 2021?

The rent credit that we're giving them today, the rent credit that they are going to get when we sell the assets we don't know what that rent credit is today. It could be --

But that is based on the proceeds but this is a different piece, right. This is another rent reduction?

It's not a different piece because we know how much rent is associated with those buildings today. We don't know how much it is going to go down from the sale of assets therefore we don't know how much it might go down in 2021 when we give them the additional relief they would've gotten anyways.

Does that make sense?

No.

It's all linked.

Okay so you are getting a reduction of rents or Genesis is getting a reduction of rents based on the proceeds based on the 7.5% which is an agreed to but is there another rent reduction in 2020 on top of that and are they tied together?

Okay so the rent reduction in 2020 is tied to the rent reduction that they get immediately. So, I'll give you an example. If there was $100 of rent being paid today and they are going to get a credit of $50 based on the 7.5% beginning 2020 or 2021 they will get the other $50 but they only get $25 it will be $75 but ultimately when you throw that in the mix with all the other rent adjustments we have our rent is only going to go down 30% in 2020 instead of 77% in 2020.

Keep in mind something I didn't spend a lot of time talking about but part of this the reason it is a little confusing is first of all we view these leases kind of on an aggregate basis. We have reallocated rents across the portfolio. Rents in almost every building are changing as part of this agreement. I alluded to that, that we're reallocating rents to better reflect the performance of the assets and so looking at rents of this building or that building is kind of hard for us to even think about. We look at it on an aggregate basis but the rents as of yesterday are completely different from what they will be tomorrow once we get all of these rents reallocated over the next few weeks. It's a little bit --

Is there a range you can get for that reduction in 2020 of what the dollar amount --?

I will say it this way, our rents are going to go down if they walk away from leases in 2020 and 2021 by 30%. That's what will happen.

I will follow up off-line. Thanks guys.

Okay thanks.

Michael Carroll of RBC Capital Markets.

Yes. Thanks. Hey, Rick or Harold, can you guys talk a little bit about the differences between the assets that Sabra and Genesis are keeping versus the ones that you are selling and I believe you touched on this earlier in the call but is it more based on the location of those assets or the age of the assets or the size and I believe you said location but can you expand on that a little bit?

Mike, it's all market oriented. There are certain markets that they don't think fits with where they want to be strategically and typically what most operators do they will sell assets here or there and they wind up keeping underperforming assets because even the underperforming assets can cover your overhead costs for a particular region.

So now that they've done as many acquisitions as they have done they are taking a look at their whole map and saying which of the markets are the most conducive for us to be in and there are some states that they just don't want to be in because for example they may be high liability states. And so that was taken into consideration as well. It's all markets and environment and strategic decisions relative to what they're trying to do with the company.

It's got nothing to do with the age of the asset. As we said earlier some of them actually performed pretty well but then when they get out in the home market and because they are going to be exiting the entire markets and/or states they're going to be able to have a much bigger impact on infrastructure reduction as well.

Okay. Great and then on the 29 assets that you kind of highlighted, are all those assets currently on the market for sale right now or you are starting to put them on the market for sale?

They will be going up for sale shortly. They've not been marketed yet.

And who's going --?

They are actually going to be marketed by Genesis. We obviously will be a part of that but they are going to market those assets for sale.

Okay. And then congrats on the Forest Park dispositions. Can you guys talk a little bit about, I know you touched on this of the personal guarantees. I mean have you put out a proposal or a settlement offer and they just have to accept or try to renegotiate that and you just don't know what the timing of that is. Is that how we should think about that piece?

You should think about it this way, we have put out an offer very, very recently. We have given them some period of time to think it through and then we will hear back from them and either they will accept or they won't and if they don't accept it then we will pursue our remedies. We think it's a very fair offer we spent a lot of time working through looking at the benefits that were provided by the docs as we went through the bankruptcy. All those things were factored in, in giving them some discounts.

Okay. Great. Thank you.

Rich Anderson of Mizuho Securities.

Can you conference me in on that call of Juan because I need to understand that too and I am not going to spend more time on it but I don't understand it. I think that's kind of par for the course right now.

I will give you a call.

Yes. Okay. I appreciate that. Harold I think you said lease termination fee in the second quarter of $5 million related to Genesis. Did you say that or did you say the full year. I wasn't clear what that number was.

The lease termination fee we recorded for the year was, excuse me during the quarter was about $2.1 million.

Right. Yes. I see that.

It doesn't match up to payments. They have made about $10 million worth of payments to date out of the $20 million but GAAP requires us to record that over a period of time so it's only $2.1 million recorded during the quarter even though we've gotten $10 million in cash so far.

All right. So there will be more then rest of the year then?

Right. Through probably the first quarter of next year we will record the full $20 million.

Okay. 1Q 2017. All right. So when I think about this fixed what I'll call lease yield the 7.5% it reminds me of what HCP did when they were selling HCR Manor care assets last year and so for there not to be a reduction in rent coverage you have to sell these assets, you and Genesis have to sell these assets at a cap rate, so a property level cap rate below that 7.5%. Right. Isn't that correct. If you sell it above that then your coverage would actually mathematically go down. Am I thinking about that correctly? Sorry I didn't mean to stump you. (laughter) (multiple speakers)

I think I'm right so let me just put it this way. EBITDAR divided by rent is your rent coverage, right? Let's say EBITDAR -- and so you want the numerator to go down less than the denominator for coverage to go up. Right? So that means EBITDAR has to be a 5% reduction just to use a number and rent is going to go down 7.5% thereby getting an increased rent coverage. So to me to say that there won't be any impact on coverage requires that the assets be sold at a property level quote unquote cap rate below the 7.5% lease rate. Does that make sense? Maybe another thing off-line but I just --

Let's chat about it off-line. We can explore it some more. I think the way I think about it is there's a mixed bag of coverages that those assets that we are selling have. Some coverages are strong, some coverages aren't strong. If we are selling assets that have negative EBITDAR and we are getting rid of a negative EBITDAR number that's going to improve the coverage.

Absolutely. (multiple speakers) 100% agree with that.

We're getting rid of a high performing asset and we only get 7.5% then we might have a lower coverage and so it's a mix of all that and ultimately when you look at it all and it's pretty flat as Rick said. (multiple speakers)

So it may average to 7.5% but you are going to have some that are good and some that are bad. It's going to depend on what the market is willing to pay for that EBITDA, right? I mean that's what it comes down to.

Just so you know, Rich, we look at every one of the facilities in that bucket and we assume the traditional and existing cap rate that is currently be paid for skilled nursing facility. So we're not making any sort of aggressive assumptions on that at all. We are looking at what is happening in the market currently. We are looking at the skilled nursing facilities that we've been selling over the past couple of years and the cap rates we're getting for those so we are taking sort of an average kind of cap rate. It's really the number of facilities in the portfolio that unperformed that caused the entire portfolio to come out basically to break even.

Okay. I also wanted to explore the question of why do you have any Forest Park interest income in any guidance number if it's done with?

Because what we are providing is guidance for the full year of 2016 not just the balance of the future. It's the full year so what our full year going to look like.

I know but it just seems like it's one time and back-outable but that's semantics I guess.

And then the last question, you get to 24% Genesis after this is all said and done, is that, Rick to you, is that the right number or do you see that meaningfully lower the next few years whether it's selling more Genesis or buying other assets?

We see it as meaningfully lower. I mean, what this does for us, we want to get them as low as we can get them period which isn't a reflection on Genesis but you see how the market reacts to our stock [on all this] stuff. It's an uncontrollable for us and it doesn't matter whether I think the market particularly when it comes to real estate investors understands this or not, it still is affecting us, so we have got to get that number as low as possible because this is a lighter year for us from an acquisition perspective, this basically accelerates what we were going to be anyway and the 24% only assumes investments of those proceeds we get from the sales.

We're going to continue to grow this Company as we have been growing it and so over the course of that of the time it takes to sell these assets in all likelihood the number may be lower than 24% because we are going to reinvest the $200 million we're getting from these assets plus we're going to be buying whatever else we're buying. So there isn't any sort of level where okay when we get down to 20% that's good enough. And we'll do other things with Genesis and we will just sort of keep it that level. We don't like being in a position where subject in our shareholders get affected by things that are out of our control for whatever the reasons may be, perception lies in the market or whatever it happens to be.

And then the final question from me. It could be a one-word answer. Is cardiac bundling worse or less worse than CJR to the skilled nursing business?

I will give you more than a one-word answer because --

Darn.

(Inaudible) discussion on it and I disagree with the premise.

First of all IRS aren't really an issue there's 1,200 or so IRS's. 15,000 smiths. Many of the states that IRS exists in there's only one IRS in a state. In most markets IRS are actually not an alternative to smiths for post surge cardio patients.

Okay.

Secondly, if you look at where IRS are they tend to be clustered as you would expect in urban markets where the smith providers are most expert at doing high acuity because those markets are much different than rural secondary tertiary kind of markets. And remember that much of the smith business is still kind of mom-and-pop. It's not the more sophisticated providers and in those markets that are more rural it's going to take longer for all these changes to impact them anyway.

I also look to the MedPac reports that I talk about how great the outcomes are on smiths and how comparable they are to IRS. So I just don't think you can do that in broad strokes. It's very market specific. I think it's informative to look at a map of the US and look where all the smiths are and look where all the IRS are and that will help. I think you start drawing different conclusions. The other point I make is that as bundling expands and these bundling programs expand, I will make the same comment as I did earlier. Operators always follow the money, always have always well.

As the reimbursement becomes acceptable to them they will invest in the clinical infrastructure that's required for them to do it and if you look at where the sector is today versus 10 years ago it's already dramatically different. I mean so much of the sector has moved away from traditional long-term care to post acute post surgical acute-care patients that are high acuity and long-term complex medical patients. I disagree with the thesis.

Okay. Well that's fair enough. Harold I will look forward to hearing from you. Like I said you can conference me in with Juan. Okay. Great. Thanks.

Tayo Okusanya of Jefferies.

Most of my questions have been answered but just a couple of quick ones. First of all I just wanted to make sure that the rent coverage under Genesis coverage statistics we're looking at this quarter our apples-to-apples versus last quarter none of the 29 assets are being sold are being excluded from that number or anything on that sort?

Apples-to-apples.

Apples-to-apples. Perfect.

Then the second question is a broader one for you, Rick. To date we had a lot of conversations around bundling, around Medicare Advantage, a whole bunch of different things going on, how Genesis is trying to react to these things, how you are trying to help support the initiatives but when you do think on a longer-term basis of all these changes happening over the next whether it's three years, five years or what have you. How exactly do you think that ultimately ends up impacting skilled nursing real estate and how does Sabra end up preparing for that. I mean is the idea that you pivot more towards senior housing? What is it ultimately when you think about what do you need to do just kind of given all the uncertainty around skilled nursing over the next few years?

Couple of things. One, we are always going to be focused on increasing our senior housing and as the company gets larger and cost of capital improves we may consider other asset classes as well. But in terms of smiths we like the smith-asset class. It's really a function of are you aligned with operators that understand what they have to do strategically to shift their business model to be in line with the changes.

As a general principle the sector is very well-positioned and that's not to say that there won't be some losers and I think losers in this case are going to be your traditional mom-and-pops who have always run Medicaid businesses and various cost focus, they do traditional long-term care, some of them may survive for a much longer period of time if they are in secondary or tertiary markets but certainly in the urban markets they're just not going to make it and there will be acquisition opportunities on that as a result and we pruned off our non-Genesis portfolio some to shun ourselves of those assets that we don't think can get there and we focused our acquisition strategy as it pertains to skilled nursing on those providers that completely get it and I think you see the results in our smith stats as a result of rent coverage or you look at skilled mix.

As the operating bench that we have here I think we are very well-positioned to differentiate between those operators that get it and those that don't get it. Overall I think the smith sector is going to be fine so we will continue to accentuate other asset classes as we've been doing but we're not afraid to do certain smith acquisitions that makes sense.

I will also point out a couple of things. There's a lot of focus on how much home health benefits and how much that takes away from skilled nursing. I completely agree that home health is going to benefit and (inaudible) health companies as well. It gets exaggerated because a good smith provider shouldn't be accepting patients that can be taken care of at home.

Home care by definition is intermittent. Sure there is some percentage of patients that can overlap and maybe they can get by at home or get by in skilled nursing facilities but the hospitals have to be really careful about where they are discharging people to because if they wind up with re-hospitalizations that should not be happening, then they have a problem on their hands as well.

You've also got a dwindling supply base on the skilled nursing side. You've got one third of the skilled nursing supply base has gone away over the last 15 years. That's going to continue to drop while the Medicare beneficiary number that you've all seen live is pretty dramatically even over the next number of years. And if you look at it, I would encourage everyone to read reports by Avalere. They probably do the best job in the business on assessing all these changes and what things look like going forward but those volumes increases are going to help dramatically to offset some of the losses to home health.

I'm not concerned about them competing with other providers like LPACs or IRS. I've seen too many providers do just as a good a job and again once the reimbursement is there for them they will be there clinically.

That's actually very helpful color. I mean, just kind of give me your viewpoint, should we be expecting a world where you may do things you are doing with Genesis where we start seeing you do it with some of your other operators as well?

No, because our other operators are all pretty small right. They have got two buildings or five buildings and we haven't had them for that long so it's just been too small for anybody to notice but we sold facilities here and there over the past couple of years. We have sold smiths in Texas. We're looking at Oklahoma. We have sold smiths in Connecticut and so we have sold some smiths here or there where we just don't think there's the right combination of factors in there to serve us well going forward and with the private market being so good for selling smith assets we're just being proactive in taking advantage of that. So if you look at who our smith operators are now we've got really great providers and they are doing really interesting things and extremely high acuity.

We've got the guys in Pennsylvania that do everything that LPAC does. We have talked about NMS, we've got Vision in Oklahoma that there's no Medicaid business. It is 100% skilled mix. It is all short stay high acuity. We've got Cadia which is the first big deal we did back in 2011. They have the largest vent unit in the state of Delaware. We feel really good about the guys that we currently have as our partners on the smith side and that too we are looking to partner with going forward.

Now that said there aren't a whole lot of those guys out there. As reimbursement continues to evolve and people do start following the money, there will be more of those operators a year from now than there are today and certainly three or four years from now there will be a lot more of those operators that have developed that expertise but you have to be pretty particular right now.

All right. That's helpful. Thank you very much.

Yes.

We will go next to Paul Morgan of Canaccord.

Hi. Good morning. Just to wade back into the Genesis a little bit more, you said $200 million to $250 million. Was that gross proceeds or net proceeds?

That would be estimated net proceeds but there's not a lot of difference between net and gross. I mean closing costs and those kinds of things.

Yes. Okay. So pretty much the same. Just to see if I might understand this. Is the reduction in 2020 due to the difference between your 7.5% and what they will actually sell it for and it's like a catch-up for that number? If they were to sell it at say a 9.5% then there would be like a 200 basis point additional cut to reflect that?

The catch-up is this, the difference between the 7.5% and what those leases had as of today. So if the rent credit is less than they are paying in rent on those facilities today that difference goes away when it would've gone away anyways in 2020/2021. That's the difference.

Okay so there's no type of then additional catch-up for the period between 2016 and 2020 that you are sort of deferring until 2020?

No.

Is there a straight-line impact of all of that?

I think the accounting will be we just re-jigger straight line. There's no write off of straight-line rents. It is just straight-line rents going forward based on all the changes that we are making.

Okay.

Part of the way to think about this, Paul, is Genesis wants to streamline their company so a lot of this is about why wait until these leases just start naturally expiring. Let's get ahead of that and start streamlining the company now instead of waiting until (inaudible) waiting until 2020 and so what we were able to do cooperatively with them is to do certain things that would benefit us including once we had agreement on those assets that we all wanted to stay in together that they would expire much more ratably than they were originally or we were going to lose three-quarters of the portfolio in the first year.

Yes. Again it's all potentially losing. They may have extended those leases, they may not have. Now we have certainty that they will go on for a longer period of time with those assets we want to keep.

Yes. Okay. I'm sorry if I missed this earlier but what's the $2.4 million in the other income line? What is that?

That's primarily that $2.1 million fee that we recognize relative to the older agreement with Genesis to sell the eight assets. The $10 million payment they made. That's the vast majority of it. $2.1 million.

Okay. All right. Great. That's it for me. Thanks.

Yes.

Smedes Rose of Citibank.

Hey, it is Michael Bilerman. Just two quick follow-ups. This whole element of it going away in 2020/2021. Is it just simply that Genesis would've walked away from these leases at that point and you would have had to have remarketed them to other operators?

That's exactly what it is. Rick, I think well said was that they were going to leave these leases anyhow. We would let them accelerate that but we did not let them out of the full rent until the end of those leases anyhow.

Right. And in exchange for that you made other adjustments in other places but the effect of you had the majority of these leases maturing or sitting there with 77% of the leases maturing in 2020/2021, five facing that and staggering that a little bit that was sort of the give back that they had to you for the flexibility in doing it?

That's correct.

The other comment I would make Michael is that when we looked at these assets we asked ourselves do we want to release these to other operators now, same question we would've asked ourselves in 2020 but we asked ourselves that question now and we didn't see good enough reason for us to do that and look you never know whether you would have felt differently in 2020 so you do what you do but we did make that conscious decision now in the context of this agreement that we prefer just to exit everything with Genesis as opposed to staying in some of these assets with other operators.

And then do have a sense of how much of the 50 basis point move one way or the other if the assets were being (inaudible) cap versus second cap versus the 7.5% credit, how much that differential means to result in coverage of the remaining pool of assets that you will have?

It's not that significant. We've done a sensitivity analysis around it and you can go up or down one or 2% from our estimates and it is just not that significant.

Okay.

It's not that big a number of buildings in the context of everything.

Right. Rick, you made a comment in terms of operators spending a disproportionate amount of time on their most difficult assets and I'm curious as you think introspectively to your own Company the amount of time that you have had to spend on Forest Park and Genesis. I guess where have you lost time, what have you not been able to deal with when you have had so much time to deal with these issues and how is that going to change I think going forward about maybe the types of investment strategy and the diversity and things like that in terms of what you are willing to do. I know sometimes you don't know there's going to become a problem until after the fact but I'm just curious how this whole episode has gone and in terms of your own time.

I may have touched on this on past calls, Michael, but there is just a real disconnect here. We have not been distracted by any of these things to the point where it's affected us in any way. Last year which was when most of the time was spent on resolving Forest Park we did $550 million in investments on a deal basis that wasn't as big of the year before because of the holiday deal but it was more deals than we had ever done at the same time we were dealing with Forest Park.

We hired really good attorneys to deal with this for us. You have a call with them once a week. I have a Board member who runs the restructuring practice for patton. I've got pretty deep experience on restructurings myself. It just wasn't that much of a distraction and neither is Genesis. We had a series of discussions with Genesis to come to a deal, a broker is going to be hired and they are going to market the assets. We have a lot of capacity here.

The deal activity this year is a function of the acquisition market and our discipline relative to what we will pay from a pricing perspective has got nothing to do with anything else. And in terms of Forest Park has Harold said in his comments we set our past goals, even though obviously no one bought it we were always completely comfortable and we are on the record for the past year on this. We were really completely comfortable that the two debt investments were really well collaterlized, well underwritten, we had a problem with an operator, every region had problems with operators. Don't mean to make light of it, but it's a fact.

We had the one asset that was really an issue. The other two assets were never an issue for us and for months I was also on the record saying that we were going to come out whole or better than whole on this recombined. Well before the Dallas and Fort Worth sales. I am on the record for that. It's been a diversion for everybody else.

Last year all we ever talked about on every earnings call was Forest Park when on every one of our earnings releases we showed improved skilled mix on the smith portfolio. We showed improved coverage. We had good quarters every year but that was a diversion really for everybody else and everybody else focused on it and fortunately or unfortunately we think the Genesis deal is great but that's all we are going to talk about for awhile. So I get that. I get all of it.

It's been more of a diversion for everybody else. I see notes where there is this sort of cause-and-effect. Okay. Now that Forest Park is done and now that the Genesis deal is announced we see acquisitions buying and picking up so now they can refocus on doing acquisitions.

Right.

It's just not the case. We have a lot of capacity with ourselves here. It just was what it was. It is fine.

All right. Thanks for the color.

At this time we will turn the conference back to Mr. Rick Matros for any additional or closing remarks.

Thank you. Thanks for joining us today and for anybody that is still wants some more time to get their arms wrapped around the Genesis deal, Harold is happy to spend time with you on that and happy to spend time on the models as well because I think when you start actually modeling this everything will become a little bit clearer. I know Harold and Michael would be happy to spend time on that as well. And I'm available. I look forward to seeing you guys while we are out on the road and talking to you. Thanks very much. Have a great day.

That does concludes today's conference. Thank you for your participation. You may now disconnect.