Sabra Health Care REIT Inc (SBRA) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT 3Q 2016 earnings conference call. Today's conference is being recorded. I would now like to turn the conference over to Michael Costa, please go ahead.

Thank you. Before we begin I want to remind you that 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 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 finish 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. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Mike, appreciate it, thanks for joining us, everybody. Hope you're having a good day.

Let me start by reaffirming our guidance. Mentioned that we reported quarter in arrears on our current statistics give us the complete confidence that we need to reaffirm guidance. I'll move on now to Genesis. Yesterday Genesis announced a deal that we view as very favorable to them. They are selling -- real estate is being sold by Welltower 92 facilities, Genesis will remain the operator. They'll be getting a rent cut, and we think that bodes well for them in terms of going forward, and will have an immediate impact on them as well as they'll have better coverage. It will affect our fixed charge coverage ratio as we look into the future.

As far as the Genesis sales process for our facilities are concerned, bids are coming in. We have LOIs on five facilities, and that relates to the facilities that we had previously announced we were going to sell last year. And at the current group we're getting bids in on most of the facilities and bids are coming in meeting our expectations. We still anticipate that all of those sales will not be completed until about the end of second-quarter 2017, but the bids are coming in a little bit more quickly than expected and again, we're meeting our expectations.

In terms of investment activity, during the third quarter we closed $113.5 million of investments with a weighted average cash yield of 7.9%. For the year we are at $121 million at an average cash yield of 8.06%. $71 million of that total is senior housing, we anticipate closing on an additional $44 million in senior housing investments by year end. Our pipeline, which excludes our development investments, and we will talk a little bit more about that later on, continues to increase. Our pipeline currently stands at approximately $500 million of which 90% of that is senior housing.

In terms of the competitive environment, it's pretty much what we've been talking about the last couple of quarters. On the senior housing side is where we see the most competition, and that's particularly because the PE firms are bidding extraordinarily high prices for facilities and we're just not going to compete with that. That said, where it hurts us from a competitive perspective is when the entire business is being sold, because it's obviously going to go to the highest bidder and the PE is always going to outbid pretty much any REIT.

That said, when it comes to sale leasebacks we can compete, because the operator typically does not want to enter into an agreement with a PE, would prefer to have a long-term arrangement with a capital partner it can count on. And so when it comes to sale leasebacks, that's where we see that we are able to compete and compete effectively. And when I talk about the pipeline increasing to $500 million, we are seeing more sale leaseback opportunities.

We have more LOIs out and CAs signed over the past few months than we had the first six months of the year in total. Things seem to be picking up there and hopefully that will allow us to get up to a decent start in 2017.

In terms of our operating statistics, our skilled transitional care portfolio performance was extremely strong. Our EBITDAR coverage improved to 1.49 from 1.28, and that's the result of a couple of things. We've been repositioning our skilled portfolio, and this includes the Genesis assets.

We've been selling some Medicaid shops over the past couple of years, and our acquisition strategy is focused on those operators that are preparing for the shift in reimbursement as we get -- as we start moving towards bundling over the next number of years. And these were providers who very, very high acuity, have exceptionally high skill mix, are much less dependent upon Medicaid, tend to be in more urban markets and they just basically get it.

So if you look at our portfolio overall as opposed to same-store, that's a function of both selling off some Medicaid shops and again, bringing in the providers that we really think understand the paradigm shift and are moving in that direction. And from an operating perspective, and as you well know, I was an operator my whole career, that's exactly the direction I was taking Sun prior to the split and exactly what I would be doing as an operator. So I would encourage you all, while I think it's important to look at same-store on skilled facilities, that you look at the other statistics as well, including focusing on skilled mix which hit a new high of 43.7%.

And I want to be a little bit more specific there, skilled mix is Medicare and Medicare Advantage. When people talk about quality mix, quality mix is not a statistic that makes sense anymore I stopped using it almost 15 years ago. Quality mix includes all non-Medicaid revenues, including private pay. The issue is private pay is not an important metric any longer in the skilled sector as it pertains to specifically skilled facilities, certainly on senior housing.

And as people understood, with the help of attorneys, how to transfer assets, more and more people qualified for Medicaid. And if you look at Medicaid rates over the 50 states, you'll see that there's not much but difference any longer between Medicaid rates in private pay rates. In some states there's more of a difference, in some states there's less of a difference. So quality mix is not a metric that is an important indicator of where the business is going, it's skilled mix.

Our occupancy also ticked up to 87.3% in our skilled transitional care portfolio. Genesis coverage was steady coming in a [1.24] as we expected. As we noted it the last quarter, probably the last two quarters, we expect to be in the mid [1-2s] for the next several quarters with Genesis.

And then we expect to see an upturn after that, and we expect to see an upturn really for a couple of reasons. One, as a result of all the things they're doing to rationalize the portfolio, they're getting out of a number of states, as you are aware of. With the new deal they cut with Welltower, they're going to have reduced rents and better rent coverage. And most importantly, from my perspective and again, I talk about this from an operating perspective, they've spent the last number of years just doing acquisition after acquisition after acquisition.

And while there was good reasons for doing that, and I am not critical of that at all, it always creates a diversion and your operations always tend to suffer somewhat while you're focused on integrating all these acquisitions. So now there is a point time in their development cycle where they are rationalizing a company, they're focused on their organic business, they're realigning themselves to be in the markets they want to be in.

I think everybody should expect to see an upturn in their operational performance as a result. So we feel really good about that and also thought it was terrific that in that deal they announced yesterday that Omega increased their exposure to Genesis, because Omega understands the business very well, and so we saw that as a real positive.

In terms of senior housing coverage, we were at 1.13, that was down from 1.28. And as we've talked about in the last couple of quarters, that is specifically due to the fact that our current statistics include independent living beds that we've acquired that weren't included on a year-over-year basis. So independent living is underwritten at a lower level, in assisted living and memory care.

If you look at our same-store senior housing, we were up at 1.36, which is very strong. Our same-store senior housing stats only have one independent living facility in there, so it's primarily all assisted living and memory care. Holiday coverage was flat at 1.17, as expected.

Occupancy in the senior housing portfolio was down at 89.5% from 90.7%. That was specifically due to two portfolio loss that we acquired in the middle of 2015 that weren't in last year's statistics. So if you exclude those, our occupancy would've been essentially flat at 90.6%.

Now we're going to move on to something that's been an important focus of ours, and we're now getting to the point where we want to make sure that everybody is paying the appropriate amount of attention to it, and that is our proprietary development pipeline. We started focusing on developing proprietary development pipeline at the end of 2012 and for a couple of reasons.

One, we believe that there's an obsolescence factor to some percentage of senior housing assets that were built and in the 1990s and early 2000s. Particularly those facilities that were built by multi family guys. The model has changed dramatically.

When you look at AL and you look at memory care, it's now what nursing homes used to be. You've got individuals who are about 10 years older than they historically have been, they have cognitive issues, they have comorbidities, they have physical issues that 10 years ago weren't apparent in assisted living facilities.

So you now have a medical model in place, you have nursing around-the-clock, you have rehab services, you have hospice services. And as such, a different physical plan is required to provide appropriate care to the residents that currently live in assisted living.

So we really like the idea of building purposeful build facilities that are resident centric. And in terms of being resident centric, it isn't just to benefit to residents so that they can navigate the facility much more easily than in some of the older facilities, but because you now have a lot more staffing than you historically have, the line of sight that staff has with residents is critical. So having a physical plan that lends itself to easy execution on the medical model and easy access from staff to residents is important. So that was one of the primary reasons that we wanted to engage in having a proprietary development pipeline.

Secondly, we wanted that so we would be less dependent upon the external acquisition market and could depend on new products coming in that would -- that we can count on for year-over-year growth, and I'll throw down on some of those numbers in a second.

So those are the two primary reasons, we also had as a goal to have a high percentage of total assets in our portfolio being new assets. So let me restate that. Our intention is to have a high percentage of new assets in our portfolio overall to include the quality of assets in our portfolio.

In terms of the development pipeline, we've acquired six projects to date, five senior housing facilities, one skilled transitional facility for $82.5 million. We currently have an additional 33 projects in the development pipeline for an anticipated real estate value of $584 million.

In 2017 we'll see more of these projects stabilizing and coming online. We currently expect to purchase six to nine of these facilities with a value of $95 million to $143 million, depending on timing of stabilization in 2017.

The bulk of the rest of the projects that we've currently [relighted] we expect to see come on board in 2018 and 2019. The six to nine that we expect to acquire next year include one skilled nursing facility and the rest are a combination of assisted living and memory care facilities.

And with that, I will turn it over to Harold, and then we will go to Q&A.

Thanks Rick, and thank everybody for joining this morning. Our earnings for the quarter were in line with our expectations. For the three months ended September 30, 2016 we recorded revenues of $61.9 million compared to $59.9 million for the same period in 2015, an increase of 3.3%.

FFO for the quarter was $38.4 million or $0.59 per diluted common share compared to $35.6 million in 2015, or $0.55 per diluted common share. A 7.3% increase on a per share basis. FFO in the third quarter of 2016 and 2015 included certain income and expense items we don't believe are indicative of our own ongoing operations and are therefore eliminated from normalized FFO.

In the third quarter of 2016 we recorded one-time or unusual items that increased FFO by $3 million compared to 2015 where such items reduced FFO by $2.4 million. As such, normalized FFO for the third quarter of 2016 was $35.4 million or $0.54 per share compared to $38 million or $0.58 per share for the third quarter of 2015. This $2.6 million decrease in normalized FFO is primarily the result of higher non-cash stock compensation expense of $1.8 million and higher interest expense of $0.6 million.

As noted above, revenue growth was somewhat muted due to our loss revenues because of the complete exit from the Forest Park investments prior to this quarter. Specifically, no Forest Park revenues were reported in the third quarter 2016 compared to $3.3 million recorded in the same period of 2015.

AFFO, which excludes from FFO acquisition pursued costs and certain non-cash revenues and expenses, was $38.4 million or $0.58 per share compared to $34.5 million in 2015 or $0.53 per share, a 9.4% increase on a per share basis. AFFO for the third quarter of 2016 included $3.5 million of one-time run usual items and increased earnings while no such items were recorded in 2015.

Accordingly, normalized AFFO was $35 million or $0.53 per share for the third quarter of both 2016 and 2015. Flat on a comparative basis most notably due to the revenue growth through acquisitions being muted by the loss of Forest Park investment revenues discussed previously.

For the third quarter of 2016 we reported net income attributable to common stockholders of $22.7 million or $0.35 per share compared to $15.5 million or $0.24 per share in 2015. G&A costs for the quarter totaled $6.2 million and included stock-based compensation expense of $2.5 million and acquisition pursue costs of $1.1 million. Our ongoing corporate level G&A costs were $2.6 million, representing 4.3% of revenues for the quarter.

Interest expense for the quarter totaled $15.8 million compared to $15.2 million for the same period in 2015 and included amortization of deferred financing costs of $1.3 million in each period. Based on debt outstanding as of September 30, 2016 our weighted average interest rate, excluding borrowings under our unsecured revolving credit facility was 4.54% compared to 4.74% at the end of 2015, a 20 bip improvement. This improvement is in part due to the payoff during the quarter of a $10.7 million mortgage loan having an interest rate of 5.6%, as well as lower interest cost on our term loans.

During the quarter we took steps to further reduce our exposure to interest rate fluctuations through two new interest rate swaps and the termination of our existing interest rate cap contract. The end results being no variable rate debt exposure as of September 30, 2016.

During the third quarter of 2016 we recorded other income of $2.9 million. $2.6 million of this is in the amount earned during the quarter related to payments from Genesis under the first of the three memorandums of understanding with Genesis. This agreement relates to our releasing Genesis from lease obligations for five assets which will result in an aggregate $2.1 million reduction in rents from Genesis in exchange for a $20 million lease termination fee.

As of September 30, 2016 we have received $10 million as scheduled and rents have been reduced by $0.3 million per year. The remaining $10 million payment is not scheduled to be paid until after 2016, at which time the full rent reduction will occur. We have sold two of these properties to date and expect to sell the remaining three in the near future.

Just quickly, I want to provide some clarification, because there seems to be some confusion around the number of Genesis assets that are in the MOUs for the sale and the status of those sales. Currently and consistent with last quarter there are 35 Genesis assets in our portfolio to be sold, 29 are from the latest MOU announced last quarter. The number we are selling has not changed and we did not sell any of these assets in the third quarter.

32 of those 35 assets are currently in the market, as Rick has said, and we continue to be very optimistic about the estimated value we ascribe to these assets and our expectations at completing the sales by the end of the second quarter 2017. Five of these assets are under LOI and some of those could close before year end or shortly thereafter.

Moving on, we sold one skilled nursing asset during the quarter for $10 million, resulting in a $1.5 million gain on sale. This asset was not part of the Genesis portfolio. Our investment activity for the quarter of $113.5 million included the acquisition of three senior housing assets and one skilled nursing transitional care asset, along with incremental investments in our proprietary development pipeline. This activity was funded with available cash.

Following up on Rick's comments about our development pipeline, you will note in our third-quarter supplemental new disclosures for our proprietary development pipeline and new assets we own in our real estate portfolio, six of which were acquired as part of the proprietary development pipeline.

Here are a few highlights from these new disclosures. First and very importantly is the way in which our development activities are typically structured through smaller investment in each project as even a loan investment, preferred equity investment or forward purchase commitment, in which case no investment is made prior to acquiring the completed project.

These small investments and forward purchase commitments allow us to tie up a large number of assets for future acquisition without tying up significant dollars during development. Through these structures we now have 23 active projects out of the 33 total projects in the pipeline that Rick referred to earlier, with an estimated value at completion of $487 million or 83% of the $584 million total pipeline value that Rick referenced.

Our invested dollars to date in preferred equity and loans totals $93.2 million or just over $4 million per asset. All such loans and preferred equity investments come with an option to purchase the asset upon stabilization at a prenegotiated lease yield on actual operating performance at stabilization. This proprietary development pipeline of 23 assets today is 87% private pay senior housing and 13% skilled nursing transitional care and will provide us with a weighted average initial cash yield of 7.7% when the assets are required.

We do not expect to make significant additional investments to complete these developments as the developers have secured other financing sources, including construction financing. Because these investments are typically structured to eliminate stabilization risk by selling the acquisition date at stabilization, it is difficult to predict with accuracy of timing of the acquisitions. As Rick stated, though we do expect to see up to nine assets coming on board in 2017.

Finally, the new supplemental disclosure summarizes 11 new assets already in our real estate portfolio. These 11 new assets have a total gross book value of $154 million. New assets being defined as assets built since the inception of Sabra in 2010. These metrics of new assets in the portfolio will continue to increase over time as we complete the acquisition of the assets in our proprietary development pipeline.

Now switching to our cash flows and balance sheets, we generated $39.3 million of cash flows from operating activities during the quarter compared to $27.8 million in 2015 and paid quarterly preferred and common dividends totaling $30 million in the third quarter of 2016.

On November 2 our Board declared a $0.42 cash dividend to be paid to common stockholders on November 30, 2016. This common dividend representing 72% of AFFO and 79% of normalized AFFO for the quarter. We had no capital market activities during the quarter and continue to expect to fund near-term acquisitions with cash generated from asset sales and borrowings on our line of credit.

As of September 30, 2016 we had total liquidity of $519.6 million consisting of currently available funds under our revolving credit facility of $500 million and available cash and cash equivalents of $19.6 million, which excludes cash held in our RIDEA-compliant joint venture.

Finally, we continue to be in compliance with all the debt covenants under our senior note indentures, our unsecured revolving line of credit agreement and our term notes as of September 30, 2016. Our leverage continues to be within our desired range of 4.5 times to 5.5 times, sitting at 5.29 times.

Other credit stats were as follows, consolidated fixed charge coverage ratio 3.17 times, minimum interest coverage ratio of 3.99 times. Total debt to asset value of 44% and secured debt to asset value of 6%, ratio of unencumbered assets to unsecured debt 246%. And with that, I'll turn it back to Rick to open it up to questions.

Thank you.

(Operator Instructions)

Juan Sanabria with Bank of America.

Good morning, guys. I was just hoping you could talk to your views of your cost to capital. Obviously your balance sheet's now a much stronger position post, the Fortress proceeds. We had retrading in the 8%-plus implied cap rate.

Any thoughts about selling some assets outside of the Genesis assets up for sale to buy back some stock? Or just curious on your thoughts around that.

Yes, actually that question's come up several times, particularly when our stock is down. It's not something that we're entertaining at this point. I think where we sit today with the sales of assets from Genesis and with the availability on our revolving line of credit, we can't be very patient in raising equity.

At the same time we do not want to be buying back -- it would be a very short term pop of benefit for us from our perspective. We think it's really important for it to continue to get more liquidity in our stock, to expand our shareholder base over time, so it's working contrary to that. But to be sure, we don't have to raise equity at this time to fund acquisitions, and so you won't see us doing that as well.

To buy enough stock back to make it --have any sort of impact would be pretty substantative and would cause our leverage to go up. And we worked pretty hard getting our leverage down to a much more manageable level and we think that trade-off would be real negative for us. Certainly the rating agencies would look at it very negatively, but we would as well.

And then Brookdale had pretty strong comments about the surprise impact of new supply in seniors housing in secondary markets, could you just give us a sense of what you guys are seeing, what gives you comfort on the Holiday rent coverage numbers or the fixed charge being sustainable, and how should we think about the risk to the $500 million plus pipeline of new supply? Thanks.

Okay, so a couple of things, the Holiday and Brookdale are apples and oranges because Holiday's all independent living and you're not seeing very much new supply on independent living at all. You may see some CCRC development where there may be some cottages or some IL units, but most of the development is AL and memory care. So I wouldn't draw that comparison.

Secondly, the $500 million pipeline, it's all stabilized assets, that's new stuff that's coming online. That's not new product.

In terms of what we are seeing in our markets and senior housing, even though a lot of our -- most of our senior housing assets are in secondary and tertiary markets, we're not seeing that pressure at all, and I think our same-store statistics bear that out. Our occupancy was stable, our rent coverage is actually better than it was [earlier].

Didn't the occupancy go down, I think 60 basis points quarter-over-quarter, any color on what drove that?

What I said earlier in my opening comments, and that is we acquired two new portfolios in the middle of 2015 that had lower occupancy when we acquired them and the rest of that portfolio. And last year's numbers, because it was a new acquisition, they weren't in the numbers, now they're in the numbers That's why I pointed out.

If you look at the same-store numbers as opposed to the all-in numbers, you'd see that differential. It's specifically due to those two portfolios. If you exclude those two portfolios, our occupancy was at 90.6%, so essentially flat.

Thank you.

Does that make sense?

Yes.

Okay.

Smedes Rose with Citi.

Thanks, I wanted to ask you just on your development pipeline, when you look at the new supply that is under development in senior housing, it seems like you're implying a lot of it is not being built to the new specifications that you talked about, that the stuff in your pipeline is being built to, or is that a fair characterization?

My point is, let me say it a little bit differently. In the skilled nursing sector, if you have a 40-year-old facility in the right market and you have the capital to put into it to modernize that facility, you are good to go, because you have got the relationships in place, you already have the medical model in place.

On senior housing, if you have a brand-new facility go into a market that's got a lot of old product, particularly if that product was built more apartment-like, which is the case in a lot of markets, the new product automatically has an advantage.

In terms of our pipeline, our pipeline projects are in smaller markets where we are not seeing the big guys go in and develop. We're in markets where there are 30,000 people, where land is cheaper and building is less expensive and you can build a 60 unit facility and have it do real well, you don't need 170 units to make the economics work.

And we are building with guys that are in those markets, they live in those markets, they have those relationships and you'll typically only see a couple of other senior housing facilities. We only have one facility in our entire portfolio that's been impacted by new entrants. Does that answer your question?

Yes, it does. So you are working with these developers from the ground up instigating the development in these smaller markets that's to these higher standards?

Let me talk a little bit about the process. We do not do construction financing, we have once or twice, but we generally do not do construction financing. We align ourselves with a group that sometimes is an integrated operator and developer. If they are not an integrated operator and developer, they are an operator or developer that have an ongoing relationship with each other. So we will never do anything with just a developer because we think too often they just don't get it.

And when we get involved in the project, it starts at where the actual site is going to be. So we sign off on where the actual facility is going to be built. So it's absolute set up from day one.

And we provide, I think a number of you know, a preferred equity strip that has a 10% to 15% return. They get construction financing from typically a regional bank, that takes them to 65% or so of the cap stack, our preferred equity strip takes them up to about 90% of the cap stack. The operator then kicks in equity of their own to finish out the cap stack. So everybody's interests are aligned.

It's not a structure --I believe we were the first ones in the space to start putting that structure in place back about 40 years ago. So the beauty of it for us is you've got interests aligned, there's an event of stabilization that is defined, typically sometime after CO, so the facility had time to stabilize and that has a predetermined exercise price and coverage.

We're not only building all this new product, but we are building at a cap rate to that range on the senior housing side from 7.5% to 8%, which is actually more favorable than a lot of the stuff that's being sold today that's a lot older. And because of the preferred equity structure we have very little exposure in any one facility. $3 million or so, and that's allowed us to do a lot of projects. As you can see by the total number of projects that we've green lighted, because we don't have much exposure in any one project.

And if we aren't happy with the operator, then we just bring in another operator, because the point for us is we've got a brand-new facility in a market that we think is viable, and that's our goal. So hopefully that additional color helps.

It does. I was just wondering, when you are working with these folks, do you have any kind of sense of how regional banks are feeling in general about lending to this asset class? We've just heard from others that there's been a little bit of a pullback, and I'm wondering if you are seeing that as well.

There's been a little bit of a pullback, it hasn't been material, but there's been some pullback. But there's always had pretty tight credit limits, so they were, even when you had more of them coming in, they were still being a little bit cautious by having pretty tight credit limits. But yes, there's been some pullback.

For us, as it slows down, the number of new projects we can bring in, we've got so many projects in the hopper right now we're in pretty good shape. I think we're doing -- we've got more projects than I think anybody else in the state, at least for senior housing. So we'll see how it goes with the banks, but yes, there's been some pullback.

Great, thank you.

Josh Raskin with Barclays.

Thanks, good morning there, I guess guys, still. First question, you mentioned the $44 million of senior housing investments in the fourth quarter, what were the yields on that and then any color on the assets as well?

Yes, the yield was, I think we averaged around (inaudible) I'll get you the specific number. In terms of color on the assets, they tend to be under 100 units. They tend to be assets that were built in the early 2000s and primarily assisted living with a little bit of memory care.

Yes, they were kind of in the mid-7%s, with one of them being in the 6% (inaudible).

So about 7.5% all in.

Okay that's perfect, and then just SNF valuation discussion, public valuations are different, or it seems like there's a bigger disconnect than usual versus the private. One, would you concur with that? And then forget about what you're doing about it, but why do you think that is? What do you think is causing that differential between the valuations?

One, the huge disconnect between the public and the private market, there's always a disconnect. The disconnect is currently much bigger than usual. I think the only time I never saw a disconnect was a couple of years ago when for some reason that was inexplicable to me, SNFs all of a sudden became a darling to the public markets. And it's exaggerated as that was at a positive way, it's exaggerated now in a negative way.

But the reason for the difference is pretty simple, and that is the buyers to these assets on the private side are guys that are already in the business. They are strategic buyers, they're operators, they're finance sources that have been in the business for a long time, so they have a much better understanding of the business than the public side does because they've lived it for a long time. When you talk about strategic buyers and operators they see a lot of upside with all these paradigm shifts, specifically because the one thing that skilled nursing sector has always wanted and never had is a level playing field.

And then the other piece of it is that CMS is actually going to -- is taking a number of years for operators acclimate to this. With the BPCI pilots and CJR you've got time to work on these things. It's going to take a number of years to actually to rollout, it's not going to happen tomorrow, it's not going to happen in a year and a half. And typically CMS puts the final rule out and operators have 90 days to acclimate.

So they've got time to strategically address their business and figure out what they want to do. They'll have a level playing field, which puts them in a much better position as it pertains to competing for patients with IRS and LPACs. And then when you add to that the Medicare beneficiary number going up 10% between now and 2020, you'll have some additional volume coming in as well.

So the private side sees all that and likes it and understands that if they're aligned with the right operators, they're going to be winners. Certainly there are going to be losers here, I don't want to make light of that, but the losers are going to be the traditional mom and pops that have run Medicaid shops and it's worked for them for years, and is not going to work for them going forward.

So we believe that the kind of operators we align with will have buying opportunities when those guys start to -- get to the point where they decide they just don't want to be in the business any longer. And I think I mentioned on the last call, we have been selling some skilled facilities outside of Genesis over last few years. Every time we put a facility on the market we have 10 bidders. It's very robust.

So Rick, on that question, you've got more assets in the market now with Genesis, your pipeline I think you said was 90% seniors housing. So why is this not a good time? Is it just your current exposure and your want of diversification, or is it you're struggling to find better transitional care assets at reasonable prices?

A couple of things. One, there's actually no price differential between the higher end operators and the more traditional operators. It's more a function of diversification for us, and there aren't as many operators as you would like to see that really understand how the paradigm shift is going to affect them.

As time goes on there will be more of those, and because so much of the sector is in secondary and tertiary markets, some of those guys aren't going to be affected for years. And in fact, half of our portfolio is outside of the top 100 NSAs.

So even though our non-Genesis portfolio is focused on these higher end operators, most of our portfolio -- it really reflects the industry, it reflects our fellow REIT peers in that a lot of facilities are secondary and tertiary. And even CMS thinks that only 50% of its facilities are going to be really impacted by bundling.

So you'll have a lot of facilities out there that can keep on going the way they've been going for quite some time, and I think the public market doesn't really understand that. So for us it's primarily diversification.

And the other point I would make is really a defense of the public side, the problem really is, you guys don't have data points anymore. You've got what you hear about Medicare through HCP, and that's been a problem asset for six years. You had the Genesis misstep of guidance earlier this year, you had a really good company in Ensign, you've had a little bit of softness. Those are the only data points that you guys have, (inaudible) there were over two dozen publicly held companies so if one or two of them were having problems, everybody kind of blew it off because you had a better perspective than the whole sector. The only perspective that you all really get from the REITs because we have a much broader base that much better reflects the industry as a whole than just looking at Genesis or Ensign or HCR Medicare.

Just going to get put you guys in a really tough position, and I think that's why when we have these calls and you hear from Omega, LTC of the other guys, our portfolios are a much better representation of the whole sector because much of the sector really is in secondary and tertiary markets that don't get affected the same way.

If you look at our stats, our stats have been great on the (inaudible) side. Our rent coverage has been going up every quarter on a year-over-year basis if you look at our all in, because that's how we are reshaping the portfolio for 2 1/2 years now. And our skilled mix continues to go up as well, and it's at an all-time high now, and that means you are less dependent on Medicaid and those markets that really are reflecting the shift in the paradigm.

Yes it's tough though, to your point, Rick, when it's three for three in the public market its tough to blow it off, but I agree with your commentary. Thanks.

Chad Vanacore with Stifel.

Good morning.

Good morning.

Thinking about the development pipeline, only because you went through a quick I want to make sure I understand it. What was your actual capital commitment and what types of yields do you get on the development?

On the developments themselves, when you look at our preferred equity in you look at our investments, we get about on average almost a 13% return on the preferred equity as it's invested, and then on the loans it's an average of about 9%. And then our total dollars that we've invested to date is about 90 -- I think I said $93 million, $94 million.

We don't have any significant future commitments, again, as the way Rick described it. Most of these guys have financing outside of our financing, we're just a part of the capital stack. So you won't see significant dollars growing into these particular investments, they'll just kind of sit steady until they reach stabilization, at which time we will exercise our purchase option and bring them into the portfolio.

The other [source] we have in this, Chad, is if you recall a few quarters ago we mentioned a new development here with the Silver companies, that's a forward purchase agreement. So in that case we were able to strike a deal where we had no capital commitments that we're going to have to make, we will simply have the opportunity to buy the facility once it's stabilized. And we're looking at about a [half a dozen] projects there.

All right, and then what qualifies as a stabilization level for you?

Stabilization level typically for senior housing is 90% occupancy and 1.2 EBITDAR coverage.

Okay.

And that's based on trailing earnings at the time, and so the facility is then obviously completely capable of supporting that rent obligation.

And then just Joe, I understand that when you take these out then the rent will be around 7.5% yields for you?

I think on average it will be about 7.7% because we've go a bunch of 7.5%. So I think the average based on everything we've great-lighted it's at this point is 7.7%.

All right.

That's with branded product, obviously.

I just want to go back to the senior housing portfolio that you do currently have, which it looks like that occupancy is waning and went down sequentially. What do you see is going on there with your operators? And then are there any particular operators that are outperforming others in any trend by geography that you could point to?

No, I think you need to look at two things, Chad. If you look at our same-store senior housing portfolio, occupancy was stable. If you look at the all-in portfolio, it was down, but it was down, as I said, because we acquired two portfolios in the middle of 2015 that had lower occupancies in the existing portfolio in Sabra.

Those numbers weren't included in the 2015 numbers because we had just acquired them. They are in the numbers now. So if you just take those two portfolios out, and we bought them based on where they were operating. If you take those two portfolios out, our occupancy is at 90.6% all-in versus 90.7%.

Back to geography question, anything that you can look at as far as trends on geography?

No. None. We're pretty stable across the board.

All right, and does it look like Holiday is faring well even though there may or may not be new supply coming in the secondary markets that are their bread and butter?

What I said about Holiday is they have been very stable. We expect them to be better than stable, and with the management changes at Holiday, and we spend quite a bit of time with the new CEO and some the new strategic things they are doing, we actually would expect Holiday performance to improve over time, but it's been stable.

All right thanks, I'll hop back in queue.

Yes.

Tayo Okusanya with Jefferies.

Hello, Tayo

Hello, good morning to you guys. The Genesis MOU, again, thanks for the call about when you kind of expect that to be completed. Could you talk a little bit about what kind of interest you're seeing in those assets, whether you expect it to be more one-off type transactions? Or is it possible to pull off a portfolio type deal?

Yes, we are seeing -- I don't expect there to be a portfolio deal. The only possible portfolio deal may be Kentucky, because there are 19 facilities in Kentucky. So theoretically it's possible that someone wants all of Kentucky, but I would expect these to be a lot of smaller deals.

There is a lot of interest so far, the bids are coming in really quickly. And the way this broker works, this is a that is actually our preferred broker in this space. In each state that the assets exist in, they had targeted buyers. They know who buys in those states, as opposed to some of the large national brokers who basically push [send]. So one million people get these books and you really have to wade through tons and tons of bids that may not be realistic.

So they know who the buyers are, it's a very targeted approach, but I would expect to see a number of different deals here as opposed to one or two deals. And based on how the bids are coming in, that seems to bear out.

Got you, that's helpful. And then again with the Welltower deal that you commented on earlier on, again, the new landowner there did give Genesis a bit of a rent break. I think there's some concern in the market that Genesis may get rent breaks on all its other tenants -- from all its other landlords, is that something you could address?

Yes, so one, and I want to clarify, it's not just the rent break that's helpful to them, they are getting escalator --

Low escalators, yes.

Exceedingly low escalators that grow over time but then peak out 2%. So we think that's even actually more helpful than just the rent breaks, which I think are about 5%. I can't speak to any other tenants, no rent breaks from us.

Okay.

There hasn't even been an ask for a conversation, Tayo. And remember that we were never the ones with the really high escalators. So we -- and we just have a flat number in there, and that's what we agreed to at the time. And one of the things that George Hager requested at the time we consented to the Sun deal was that we don't have a greater of to CPI, and we agreed to that. So we feel like we did our thing with them the right way a few years ago, and it's never even come up in conversation.

That's helpful. Lastly for me again, you feel pretty good about your acquisition pipeline, could you talk a lot about again irrespective of where your stock is trading and the need to fund those assets, timing-wise when you would generally expect is that all stuff you would close quickly, you've got a lot of stuff that's going to take a year the close? I'm just trying to get a sense of how that could impact 2017.

We've only got I think about $44 million we're going to close on for the end of this year. In 2017 we're going to have an awful lot of cash coming in from the Genesis proceeds. So the whole sector's been a little bit funky, and we had a crazy sellout today. And maybe it's to the point that you made a second ago that because of the Welltower Genesis announcement, that people expect us to take a rent cut because the activity pay has been really unusual.

Carving that out, we actually haven't been in that bad a place, but as Harold said, we don't need to tap the equity markets. Based on the LOIs that we have out, we're going to be in pretty good shape for quite some time given our current availability on the line in the proceeds from Genesis coming in.

So as we execute on these dispositions and people continue to see stability in our operations, hopefully some of this noise will go away by the time we actually have to address the capital markets. But the other point I would mention is we still have the ATM turned off, and unless we're going to do a really large deal which would justify going to market, given the size of the deals that we're looking at with these LOIs, they are pretty small. And at some point next year you had to utilize the ATMs just to match funds on a pretty small basis, that's not that big a deal.

Okay, that's helpful, thank you.

(Operator Instructions)

Todd Stender with Wells Fargo.

Hello, thanks. Harold, just to clarify your Genesis comments at the beginning regarding the number of facilities you are selling, in the queue it says that I think you sold two in the third quarter. Just wanted to see if that's a number we'd take that [29 minus] to?

No I'm not sure what you're referencing in the queue, we can talk about it offline, but there were no Genesis assets during the quarter. We sold one skilled nursing asset, but it was not a Genesis asset during the second quarter. So there has been no change in the 35 assets that are being sold that we talked about last quarter.

There were discussions of two properties that had previously been sold that were part of the original MOU so maybe that's what you're thinking about. But that was done several quarters ago, there's been no change this quarter.

Okay, thank you for clarifying. And then it just sounds like Genesis as an operator, it's obviously making the necessary changes as fast as it can. It's also at some point going to have access to the public equity markets, so it sounds like an operator that the REIT would want to partner with at some point.

So my question is, while everyone else is running away from Genesis, when does an opportunity exist, maybe for you guys or for anyone else to partner up with Genesis? I know you're exiting states the Kentucky, but I just want to get a sense of when that opportunity may present itself.

Well, one I think the opportunity has already been taken advantage of in the case of Omega. They are a lot bigger than we are, right? So for us our Genesis exposure is still too high for us to see doing anything more with it. Once we get them down to the teens, maybe that makes sense at that point.

But when you look at the, when we've taken hits in the stock, it's been specifically due to Genesis related announcements, whether it's been negative on the guidance miss or positive on the disposition miss. So we get affected more by Genesis specifically than our skilled nursing exposure generally.

So I just think if we want to ensure that we won't get into recovering the stock, then we should announce that we're going to be doing more deals with Genesis. And I do think they are doing all the right things, as I stated, and I think obviously Omega feels the same way. Welltower is still keeping their foot in there with the JV. But we still need to get our exposure down, but that's a function of our investor base and us just doing what we think is the right thing to do by our investor base and not a reflection on Genesis.

Got it, thank you Rick.

Yes.

Tayo Okusanya with Jefferies.

Yes, just a quick one. Have you given out your expected proceeds from the Genesis MOU once it's all done? How much you can expect to get from that?

Yes, so it's somewhere around $226 million for the entire 35 assets, including, as I referenced in my comments, the $10 million payment (multiple speakers) amount of the lease. But there's about, call it $25 million to $30 million of debt that's got to be paid down, so net proceeds after paying down debt, and this is asset level debt that will be part of the purchase price that will probably go with the assets, it's about $200 million.

Got you. Helpful. Thank you.

With no further questions, I'll turn the call back over to Mr. Costa for any additional or closing remarks.

This is Rick, not Mike. But anyway, thanks for joining us today. Hopefully we provided clarity on a number of things. And again, we did want to bring intention to the development pipeline because we think enough is materializing there that there's some real value that we currently and understandably don't get credited for that we could look forward.

Secondly, hopefully there's been enough clarity on the disposition assets with Genesis and Genesis generally, and again, I want to make the point -- reemphasize the point, we're not going to be having any rent cut with Genesis. And there's never even been a discussion or question about it, so I just want to be clear on that as well.

And as always, Harold and I are available for additional followup questions and I look forward to seeing a lot of you guys at NAREIT. Take care.

Thank you, and that does conclude today's conference, thank you for your anticipation. You may now just cannot.