Sabra Health Care REIT Inc (SBRA) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Fourth Quarter 2017 Earnings Conference Call. This call is being recorded.

I would now like to turn the call over to Michael Costa, EVP, Finance. Please go ahead, Mr. Costa.

Thank you.

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

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2017, that was filed with the SEC yesterday as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-K and earnings release can also be accessed in the Investors section of our website.

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

Thanks, Mike, and thanks, everybody, for joining us today. I'll go through my comments and then I'll turn the call over to Harold Andrews, our CFO. And after that, we'll go to Q&A. So again, thanks for joining us.

We had an extremely productive quarter. We've executed on all initiatives following the CCP, Enlivant and North American transactions, as we said we would. We completed the integration of the merger well ahead of schedule. We've now finalized our portfolio restructuring analysis, lowering our worst-case annual rent reduction from $33.5 million to $31.2 million, with a new best case of $28.2 million. Our pro forma Skilled Nursing EBITDAR rent coverage will be between 1.38x and 1.40x, consistent with what we've been articulating.

We completed the sale of 22 Genesis facilities and have executed LOIs on 76% of the remaining Genesis assets we intend to divest, and I would remind everybody that we just started marketing this at the very end of the year. So we've gotten really fantastic response for the prices that we anticipated, and Harold will get into that with more detail. With these and other asset sales in process, our Skilled Nursing exposure will be reduced to 63% pro forma from 74%.

And I want to take a minute here to reiterate some of our long-term goals.

And look, when we did the CCP merger, we knew we'd get some pushback on the increase in skilled exposure. We heard comments out there that we sort of did this about-face, but we never did an about-face. Our long-stated goals had been, from the day we did the spin, to get to investment grade, to diversify our tenant base and to increase our asset diversification, so we had more balance between Skilled Nursing and Senior Housing and potentially other asset classes.

With the CCP merger and the subsequent acquisitions of Enlivant and North American, we received our investment-grade rating, we diversified our tenant base pretty dramatically and we were confident that the increase in Skilled Nursing exposure going from 57% to 74% would be temporary, and here we are a month later and it's 63%, only 6% higher than it was prior to the CCP merger.

And so I would reiterate that we do everything that we said we were going to do. We're on record with those goals, and we feel really good about where we are. And I'd ask everybody to think about where we would be if we had stood pat with one operator having 33% of our revenue exposure. With all the requests and compromises that we've had to make with that operator, we'd be in a pretty tough spot right now. So we're pleased to be in a spot where we're actually stronger as a credit than we've ever been since the inception of the company.

We closed the Enlivant JV transaction. But additional -- additionally to closing the JV transaction, we acquired 100% of 11 of the facilities at a discount to the option price that had been agreed to. And that, from our perspective, is a reflection of the growing partnership and the strength of that partnership that we have with both Enlivant and TPG, and we look forward to growing with both of those organizations on a go-forward basis.

We also closed the last 2 facilities that were part of the North American transaction. We executed purchase options on 2 facilities in our proprietary pipeline at a 9.5% cash yield and a 7.5% cash yield. So we've got more of that coming in over the course of this year, and Harold will comment on that as well.

I want to comment now on Signature. I know that's foremost in everybody's mind.

So we have an agreement with the other primary landlords on Signature. The one remaining item is the negotiations with the MedNow guys. Those negotiations have actually been progressing really nicely. So I'm still a little bit cautious, but right now we are more optimistic than we had been at any point in time that if the negotiations with the MedNow guys continue the way they are progressing currently, that there's a really good opportunity to get Signature restructured outside of a [d-cade] so we can put this behind us sooner than later. Again, it's dependent upon how those negotiations continue to go, but based on where we are now, we're hoping that we can bring that to a conclusion.

We move on to our acquisition pipeline.

Our acquisition pipeline currently sits at approximately $850 million, almost exclusively Senior Housing assets. Competition is what it's been on the Senior Housing side. Private equity is still throwing a lot of money at deals. We are continuing to see some [busted] deals and some recycled deals that hasn't yet translated into any expansion of cap rates.

So it remains a very competitive environment as it pertains to the PEs on Senior Housing. And that competition is really very specific to when someone's selling a business. If someone's selling their business, then it's going to go to the highest bidder, and they are always the highest bidder, regardless of how competitive any of us want to be. And look, they have an IRR model. They're willing to lever up. And then we've got the added issue of what's happening -- what's happened to equity on our end as well.

So that said, if it's a triple net or even a RIDEA situation, where the operator wants to stay in, they tend to never want to do a deal with a PE and they'll take a more reasonable price from our perspective in order to have someone like Sabra as a capital partner as opposed to a private equity fund. So we'll see. We're pursuing a lot of things. We'll see what happens on that.

In terms of Skilled Nursing, we see very few opportunities now in terms of acquisition opportunities. We don't see -- we see very little private equity in the skilled market and actually really only one private equity entity, and that happens to be one of the buyers of our Genesis Skilled Nursing assets.

Despite the fact that we don't see very many acquisition opportunities on the Skilled Nursing side, the appetite for buyers to acquire Skilled Nursing assets remains unabated, and we get unsolicited offers on a very competitive basis on Skilled Nursing assets in our portfolio on almost a weekly basis. So we'll continue to assess the direction that we want to go in. That's another opportunity for us to more quickly get our Skilled Nursing exposure back to where it was prior to the CCP merger.

Let me move now to our operational results.

Our same-store Skilled/Transitional Care (sic) [Skilled Nursing/Transitional Care] EBITDAR rent coverage was slightly down sequentially from 1.51x to 1.46x. And as noted on prior calls, we're not going to go higher than 1.5 coverage in this particular environment that we're in, so we would expect those coverages to fluctuate around where they are.

So we don't see any particular trends there. It's just going to fluctuate around the margins, we think, through the remainder of this year, and hopefully start to see some turn upside at some point in 2019 as the initial entry of the new sort of demographic starts hitting the skilled nursing facilities.

Our same-store occupancy was down at 88.5% from 87.4% with the skilled mix at 39.8%. That was down from 41.9% sequentially. At 30% -- at just about 40%, that's very, very strong skilled mix. We feel good about that. And skilled mix at that level creates tremendous front door activity. So continuing sort of the challenge to keep your admissions up so you can maintain that skilled mix somewhere around that level. And for the operators in our portfolio, they've been able to do that, so we feel obviously really good about that.

Our same-store Senior Housing EBITDAR rent coverage at 1.23x was down from 1.32 sequentially. Occupancy is at 88.3% from 88.5% sequentially, so relatively flat. And only one of our top 10 tenants has weak coverage, and it's -- and I'm not referring to Holiday. And I feel like I always need to remind everybody on Holiday that this is an IL investment, independent living investment. The coverage for Holiday is exactly where we underwrote it at. The margins of the business continue to be strong at 40% EBITDAR margins, so it's a tenant we really feel good about.

So we have really just one SNF tenant that's got weak coverage, so we feel really great about our top 10. And that particular tenant, we're content right now to be patient with them because they've got a lot of low-hanging fruit. We've done a pretty deep dive on their business initiatives. They brought some new executives in. So we're content to sort of wait that one out a while and see how they do.

So with that, I'll turn it over to Harold. And then when Harold's done, we'll go to Q&A

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

I'll walk through the financial highlights from the quarter, and then spend a couple of minutes providing an update on the CCP portfolio repositioning, the Genesis asset sales, our 2018 outlook and then make a couple of quick comments on the recent Genesis press release.

For the 3 months ended December 31, 2017, we recorded revenues and NOI of $166.5 million and $160.5 million, respectively, compared to $61.8 million and $60.3 million for the fourth quarter 2016. These increases are due predominately to revenues and NOI generated from the properties acquired in the CCP merger.

On a same-store basis, cash NOI increased from $46 million to $47.7 million, an increase of 3.7%.

FFO for the quarter was $106.8 million, and on a normalized basis, after the exclusion of $1.6 million of CCP merger and transition-related costs and $9.3 million charged against provision for doubtful accounts and loan losses was $117.9 million or $0.66 per share. This normalized FFO compares to $40.6 million or $0.62 per share of normalized FFO for the fourth quarter of 2016, a per-share increase of 6.5%.

AFFO, which excludes from FFO expense, merger and acquisition costs and certain noncash revenues and expenses was $106.6 million, and on a normalized basis, after the exclusion of $0.7 million of CCP-related transition costs and $0.4 million attributed to the recovery of previously reserved cash income, was $107.1 million or $0.60 per share. This compares to normalized AFFO of $35.7 million or $0.54 per share in the fourth quarter of 2016, a per-share increase of 11.1%.

For the quarter, we recorded net income attributable to common stockholders of $101.4 million compared to $20.6 million for the fourth quarter of 2016.

Our G&A costs for the quarter totaled $8.2 million and include the following: $0.7 million of CCP-related transition costs; $1.3 million of operating costs for HealthTrust, the valuation firm acquired in the CCP merger; and $2.5 million of legal, audit and tax fees.

Recurring cash G&A, excluding CCP transition costs, were 4.7% of NOI for the quarter, in line with the prior quarter. We expect our quarterly recurring cash G&A run rate to be approximately $5.3 million to $5.6 million per quarter.

During the quarter, we incurred charges totaling $9.7 million to provision for doubtful accounts and loan losses primarily related to the write-off of straight-line rent balances associated with transitioning certain assets under new leases. We incurred no specific reserves related to rents or loan payments during the quarter.

Our interest expense for the quarter totaled $32.2 million compared to $15.7 million in the fourth quarter of 2016. Included in interest expense is $2.5 million of amortization of deferred financing costs compared to $1.5 million in the fourth quarter of 2016.

As of December 31, 2017, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility and including our share of the Enlivant Joint Venture debt, was 4.04%. Borrowings under the unsecured revolving credit facility bear interest at 2.81% at December 31, 2017, an increase of 34 basis points over the third quarter of 2017.

We recognized a $47.4 million net gain on sale of real estate during the fourth quarter associated with the sale of 28 facilities, 22 of which were operated by Genesis. These sales provided total gross proceeds of $140.9 million.

During the quarter, we made $26.6 million of incremental investments in 2 assets transitioned from loan and preferred equity investments as part of our proprietary pipeline to our stabilized real estate portfolio, one asset being a Senior Housing facility with an initial cash lease yield of 7.5% and one being a Skilled Nursing/Transitional Care facility with an initial cash lease yield of 9.5%.

Subsequent to year-end, we invested an additional $533.8 million to close on the Enlivant and 2 remaining North American Healthcare assets. These investments were funded with cash held as of December 31, 2017, and borrowings under our revolving credit facility.

As of December 31, 2017, we had total liquidity of $877.4 million comprised of currently available funds under our revolving credit facility of $359 million and available cash and cash equivalents of $518.4 million. Pro forma liquidity, after taking into consideration investments made subsequent to year-end, totaled $343.6 million.

We were in compliance with all of our debt covenants as of December 31, 2017, and continue to maintain a strong balance sheet with the following pro forma credit metrics, which incorporate, among other items, aggregate CCP and Genesis rent reductions of $47.2 million and investment activity concluded after year-end: net debt-to-adjusted EBITDA at 5.49x; net debt-to-adjusted EBITDA, including unconsolidated joint venture debt, 5.94x; interest coverage, 4.2x; fixed charge coverage ratio, 3.8x; total debt-to-asset value, 50%; secured debt-to-asset value, 8%; and unencumbered asset value-to-unsecured debt, 220%.

On February 5, 2018, our Board of Directors declared a quarterly cash dividend of $0.45 per share of common stock. The dividend will be paid on February 28, 2018, to common stockholders of record as of the close of business on February 15, 2018. This dividend is well covered at just 75% of our fourth quarter 2017 normalized AFFO per share.

On February 5, 2018, our Board of Directors also declared a quarterly cash dividend of approximately $0.445 per share of Series A preferred stock. The dividend will be paid on February 28, 2018, to preferred stockholders of record as of the close of business on February 15, 2018.

Switching gears to talk about the CCP portfolio repositioning, I'd like to start off by saying we have completed our evaluation, and as opposed to the initial estimated $33.5 million long-term impact on rents, we now anticipate a total range between $28.2 million and $31.2 million, with only a handful of tenants warranting a rent reduction. Already captured in the reduced estimate of $28.2 million is the annualized impact of a $5.6 million rent reduction reflected in our earnings reported in the fourth quarter of 2017.

We will make a determination regarding utilize some portion or all of the remaining $3 million of rent relief as we continue to monitor the performance of certain tenants throughout 2018. In addition, we have identified for sale in 2018 10 properties operated by 5 different tenants estimated to generate approximately $58.8 million of gross proceeds, which we expect will largely offset the $5.5 million of current annual cash rents from these properties once redeployed.

However, we cannot accurately predict at this time the time frame between receiving proceeds and their subsequent redeployment to replace the lost rents. This temporary reduction of rents from asset sales is consistent with our previous expectations and noted in our prior discussions.

Moving on to the Genesis asset sales.

We've made great progress toward reducing our exposure to Genesis. This discussion and the disclosures in our press release no longer make any distinction between the multiple agreements we have with Genesis to sell various properties under various terms. Rather, we will now refer to the Genesis portfolio in its entirety to aggregate and simplify the presentation.

We currently have 54 facilities leased to Genesis, contributing annual cash rents of $51.2 million, net of the $19 million rent reduction we provided to Genesis effective January 1, 2018. Of these 54 facilities, we have identified 8 contributing $10.4 million of annual cash rents that we will retain through continued lease arrangements with Genesis. Discontinuing Genesis rent represents less than 2% of our pro forma annualized cash NOI.

Of the 46 facilities being marketed for sale, we have executed purchase and sale agreements for 6 and letters of intent for 29. These 35 properties under contract generate $30.8 million of annual cash rents and are expected to generate total sales proceeds of $297 million. 25 of these 35 facilities are aggregated into 3 portfolios and are being sold at a 9% lease yield set at a 1.4x EBITDA coverage. These portfolio sales are expected to trigger residual rents to us of $5.2 million per year for the following 4.28 years, as provided for in our agreement with Genesis.

The remaining 11 facilities not currently under contract worth $10 million of annual cash rents are expected to be sold in 2018, generating sales proceeds of approximately $70.7 million. We have previously estimated a valuation range of $425 million to $475 million for that final group of 43 assets we announced last fall to be marketed for sale, which excluded the 11 facilities we had previously announced we were selling.

Now we intend to keep 8 of the facilities in that final group, along with receiving residual rents in excess of our earlier estimates. These facilities and excess residual rents are valued at approximately $118 million. As such, the current expected value of those 43 facilities we originally intended to sell is between $440 million and $450 million, approximating the midpoint of our prior estimates.

We expect all these sales will occur over the remainder of 2018, with those currently under contract to be completed by the third quarter. Ultimately, we expect to have total continuing cash rents from Genesis, including residual rents generated from sold assets, of approximately $19.5 million or 3.4% of our pro forma cash NOI.

A few comments related to our 2018 updated outlook.

First, it includes the following. All completed acquisitions to date, plus approximately $202 million of additional investments related to our proprietary pipeline and an incremental investment in the Signature Behavioral hospital portfolio and other committed investments, with such additional investments having an estimated weighted average initial cash yield of 8.2%.

The CCP portfolio repositioning and Genesis asset sales previously described are also included in guidance.

And finally, capital markets activity consisting of retiring our preferred equity in the first half of 2018 and refinancing our $500 million, 5.5% senior unsecured notes due 2021 and our $200 million, 5.375% senior unsecured notes due 2023 are expected to be sold -- or are expected to be refinanced during the second half of 2018.

We will also be opportunistic in reinstating an ATM Program for match-funding acquisitions. We have no set timetable for doing so, and it's not something we currently need to pursue given the significant asset sale proceeds we expect to receive over the course of 2018 that we can reinvest in acquisition opportunities that will arise. We currently don't expect to pursue reinstating a program until we see a significant recovery in our cost of equity as compared to many of our health care REIT peers.

Our normalized FFO per share outlook remains essentially unchanged with a range of $2.48 to $2.56 per share, while our normalized AFFO per share outlook at the midpoint declined $0.04 or 1.7% to $2.28 to $2.36.

As I noted in the assumptions for the 2018 outlook, we have a lot of moving pieces, including expected asset sales of $532 million and total expected investments of $202 million, for which timing is hard to predict. As such, we have increased our outlook range from $0.06 to $0.08 per share.

Furthermore, we have made some changes to our assumptions which lowered our range, including increasing the amount of non-Genesis asset sales by approximately $40 million, delaying time and slightly reducing the expected interest savings from our bond offering in 2018 and increasing our recurring cash G&A cost run rate assumptions by about $3 million for the year to account for higher estimated professional fees, labor costs and taxes.

Offsetting these reductions in normalized FFO were certain changes to the final purchase accounting for CCP that are excluded from normalized AFFO.

And finally, just a quick comment on the recent Genesis press release.

The announcement highlighting the $70 million of additional liquidity from new and expanded loan commitments and the $54 million of annual lease reductions, which included the $19 million from Sabra, is a very positive step for Genesis' stressed capital structure.

You will note in our pro forma coverage disclosures a fixed charge coverage for Genesis of 1.25x. This coverage includes the pro forma effect of the new financing commitments and restructuring plans discussed in that press release. These positive developments provide us with a strong rationale for our decision to retain 8 high-quality assets leased to Genesis.

It has been, as Rick said, our long-stated goal to reduce our exposure to Genesis to a prudent level. And with the sale of currently under contract and excluding the sale of the remaining 11 assets not under contract, we will have accomplished that goal with Genesis at approximately 4.5% of our total pro forma NOI.

And with that, we'll open it up to Q&A.

(Operator Instructions) Our first question comes from the line of Smedes Rose of Citi.

Lots of moving pieces in your outlook and lots of detail there. But I just wanted to ask a couple of kind of overview questions. On Page 15 of your supplement, where you provide the EBITDAR coverage by segment pro forma, just want to ask, what percent of your portfolio or, I guess, company-wide EBITDAR is covered by those coverage metrics? I know some of them you don't include a physical guarantee attached.

Yes, so if you -- if -- the way I like to think about it -- and this will answer your question. We can get you the exact number. But if you look at our top 10 portfolio, that's covering about -- over 60%, about 62% of our NOI in the top 10, with a handful of those in the top 10 that are also included in those coverage numbers. So we'll get you the specific number of what's included, but it's probably 70-or-so percent.

And the other thing I would point out, this is a question that I get a lot, how much of our NOI is non-stabilized? And our non-stabilized is only about 8% of our NOI. And coverage -- and again, we could find stabilized assets that are actually being transitioned to new operators or new acquisitions that we have. So we'll get you that, Smedes, here in a second, the specific number, but we do disclose about 65% on a specific, asset-by-asset basis.

Okay. And then, Rick, I think you said you guys are looking at about -- a pipeline of around $850 million on the Senior Housing side. So is that primarily in the triple-net side of the business? Or are you looking at RIDEA -- more RIDEA assets? Or will Enlivant be kind of your only venture there?

So it's primarily triple-net. Our view on RIDEA is, as everybody, I think, knows, it's never been a strategy of ours to pursue RIDEA, having been an operator.

But the key there really is, if you're looking at -- if we're looking at an asset to acquire on a RIDEA basis, it's got to be in sort of its early stage, where there's a lot of runway ahead of it.

So if you think about when most of the larger RIDEA deals were done, they were done sort of in the 2012, 2013 time period when Senior Housing occupancy was really ramping up. And even though shop growth has slowed for some of our peers, if you look at the returns from inception, it's actually been quite good.

So in the case of Enlivant, because they aren't close to peak performance yet, there was an opportunity to ride it up. So another way to put it is, we would not look at acquiring a stable portfolio on a RIDEA basis. It's got to have some runway.

Our next question comes from the line of Juan Sanabria of Bank of America.

Just a question. I guess I apologize, Harold, if you went through this in your very detailed commentary. But of the $28 million to $31 million in rent cuts that you now feel comfortable with, what, if anything, was flowing through the fourth quarter? And what's the timing of when that gets effectuated as with regards to your 2018 guidance?

Yes, so we did have some flow in the fourth quarter for a couple of tenants. On an annualized basis, that would be up a little over $22 million. And so the rest, the remaining difference between $28 million and $22 million, about $6 million, is going to be flowing through effectively January 1. So the full $28.2 million will be fully baked in, but $22.2 million was baked in the fourth quarter already.

Okay. And then with regards to the Genesis sales that happened in the fourth quarter on the 22 assets, what was the NOI that flowed through in the fourth quarter or however you want to describe it to get kind of a clean run rate as to think about the numbers from the -- for the first quarter for those, just those 22 assets?

I'll think of it as -- I'm not exactly sure off the top of my head, Juan, but we'll get that to you shortly. The way I think about going into 2018 was we've got the 54 assets that are representing the $52 million of revenue. So that's your best starting point for where we started in January. And then those assets will start to be sold with the $10.4 million plus the $5.3 million of residual rents continuing for the full year.

Okay. And then I noticed you guys published an NAV, kind of the building blocks there. How are you guys feeling about kind of where you're trading relative to how you see private market values? And any thought about looking at a buyback instead of pursuing the Seniors Housing acquisitions, which I would assume will kind of be 6%-ish type cap rates? Or any thoughts there?

Yes, so we -- one, I'd say, that we've got so much coming in, in proceeds we don't have to worry about where our stock is right now. But look, it's -- in no rational universe should we be trading at close to distressed levels, which is where we are, it just makes no sense.

So hopefully, as the story continues to unfold and despite all the questions or concerns about the ability to integrate and execute, I think we're aptly demonstrating that we have no issues there. We have tremendous capacity here to do that.

So in terms of a buyback specifically, we have looked at that, we've done a full analysis, we've discussed it with our board, and the amount of pop you get by doing a buyback is pretty negligible and would just serve to increase our leverage. And we're really mindful of being investment grade now and staying there and everything that we've done over the past 6 months or so as we've transformed the company has always had previewed with the agencies so that we were comfortable that we weren't doing anything to put that good rating in jeopardy.

And I think everybody saw with Fitch and S&P that they put out notes at the end of 2017 and early 2018 affirming their outlooks and the rating that they gave us.

So obviously, no one knows where this market's going to go in terms of the equity side, but we should perform better, at least on a relative basis given the current discount that we're trading. And certainly, some of the guys that cover us have been pointing that out, and we appreciate that. We appreciate everybody pointing that out, but we appreciate the support that we're getting.

Our next question comes from the line of Michael Knott of Green Street Advisors.

This is Andrew Suh for -- filling in for Michael Knott. Looking at the Senior Housing operating, it seems like '18 is going to be a tough year as some of your peers are guiding to negative growth. But with Enlivant being in slightly different markets, can you talk a little bit about what you're forecasting for this year and your assumptions on the changes of -- for the occupancy?

Well, for Enlivant, as I noted, they're in a different spot. I think others may be forecasting light growth or negative growth because they really maxed out some time ago and maybe were in the low- to mid-90 percentile, and that's not the case with Enlivant.

So we haven't put out a specific forecast for Enlivant nor will we. But suffice it to say that we don't expect any negative growth. We continue to see that -- we continue to expect that portfolio to ramp up.

Okay. And for the bond issuance, that has been pushed out from '17 to '18. Can you talk about what has changed and what your target pricing is?

Well, I think what changed is a couple of things. One, we have a peer in our group that is a strong comp for us, and they were trading wider, which affected us. And so we have -- there's no rush for us. We don't have to do this now. We don't even have to do it this year.

So rather than go out and do -- and take out the old notes with new notes, where there was more risk involved, we believe that we're better off standing pat and waiting for the spreads to tighten up a little bit. And it also give us the opportunity -- as we continue to execute and continue to decrease our exposure to Skilled Nursing, that comp will no longer be as effective as it is now, which will accrue to our benefit.

Your next question comes from Rich Anderson of Mizuho Securities.

Are there any more changes? I know you changed the sort of the worst-case scenario rent reduction in CCP. But are there any changes about how you get there? Is there going to be more asset sales or anything like that? Or is it basically all rent relief?

There's no changes in the assumptions now that we've had some of those operators under our umbrella for a longer period of time. We've done really deep dives. Bill Mathies has joined us to do some work on the portfolios. So we've done pretty intricate operational assessments.

And as you know, Rich, given our operational backgrounds, certainly mine and some of our asset managers' and certainly Bill's, it's beneficial to us. So it really just is a function of understanding where they're at, looking at their business plans, watching their trends, watching how they're starting to execute, their responses to us in terms of the feedback that we've given them, which they have been really open-minded about. So it's really just those kinds of things that led to the reduction in the assumption.

Yes, Rick, just to add to that, I just want to remind you and everybody that we did anticipate some asset sales as part of that process. In my commentary, you heard me say there's about 10 assets that we are selling, and that basically stayed flat from where we originally expected. And we will see some rent go away from that, that will be replaced, but all consistent with what we had previously...

Okay, yes. That $58.8 million, I didn't connect the dots. That was CCP stuff, excuse me.

Okay.

All right. Rick, HCN has become a little more dovish on their process with Genesis. You guys are continuing on basically selling almost everything.

Not to speak for their strategy, but why if -- why wouldn't you maybe still own more than 8 assets given the lifeline that they're getting and all the rest and the potential that ultimately, this could all work out for them longer term? Have you given any thought to doing that a little bit more than...

Yes. So without commenting on anybody else's strategy because it's not [something I'm prepared] to do so, I would say this, it's great that they've gotten the relief that they've gotten.

All that's done is put them in a better position to hopefully completely restructure the company. The company has to be restructured. The current business model does not work. You can't run a company with 500 buildings or 450 buildings in this environment. In fact, you could never run a company that size in the skilled nursing space ever, even in a much simpler time.

So from our perspective, they simply can't compete with the kinds of operators that we have in our portfolio. And so maybe 6 months from now -- and look, I know they're addressing sort of the next step. It's possible -- as Harold mentioned, we have 11 assets that aren't under contract yet, and if they come out several months from now and announce some additional restructuring steps that we think will make them a more effective operator and fit the profile of the operators that we want to align ourselves with, then maybe we'll think about keeping some of those that currently aren't under contract. But that would only increase our exposure from 2% to 4.5%.

So we still prefer smaller operators, regional operators that are much more nimble on the ground than they are. And I want to stress that we think they're good operators, we think they're good guys. We just think they did too much, and that's really tough when you're an operator.

And the other point I would make, and I think this is important, obviously Brookdale made their announcement, so they're going to be around for a while. I pray that they're out of the public spotlight. Manor Care probably won't be visible at some point. And we'll see what happens with Genesis.

But I think that in terms of -- when you all look at the space, more and more it's going to be the REITs that really represent the space. When you look at the number of tenants that we all have, we represent the space. And so I think it's incumbent upon us, I think we have a responsibility to make sure that we are aligned with the best operators so that you've got a much better and broader perspective, and it isn't going to be headlines of a few operators or maybe some larger operators that really don't represent the business any longer that sort of drives sentiment about the industry.

And we take that -- I don't want to sound all sort of high flying here and all that, but we actually take that responsibility really seriously. And when you look at our top 10 and you look at our percent of unstabilized assets, that's a pretty good place to be that we've gotten to relatively quickly since the close of the CCP deal.

Okay. I think -- did you give any thought to, as long as you're going through the process with CCP and running around the country, reviewing and evaluating, to do the same with Senior Care, to just address that in the quick fashion that you often do? Or why wait it out a little bit with them?

It's a good question, and as I pointed out in my initial remarks they're obviously the one operator that stands out that doesn't have a strong coverage. Our analysis of that portfolio is that unlike some other operators that are doing a pretty good job and they just have certain headwinds in their markets, whether it's on length of day or wages or whatever.

In the case of Senior Care, because they've had so much turnover in management there, there's a ton of low-hanging fruit there that should be relatively easy fixes. They brought a new COO in, who we know. We brought him into the office and went through everything in detail with him. I had Bill Mathies then went out to their corporate office in Texas and ran through everything that they were doing.

And so at this point, we think that we can wait a little while. We're not going to wait 2 years or probably even a year. But we're going to wait a little while to see if they progress the way we think that they can progress. And if they can, great. And if not, there are other solutions out there that we are prepared to take.

Okay. Last question. Do you think you -- in the next year or 2, you could fly past or below the 57% Skilled Nursing exposure you had prior to CCP? Or where is your happy resting ground on that breakout? Is it 50-50?

Yes, I don't think -- we want to get close to 50-50. But in terms of getting back to -- we're only 6% above it right now. So we've gone from 17% to 6% in months. So I don't think it's -- it's not going to take us 2 years. And so I would expect that we're going to be pretty close by year-end this year.

Our next question comes from the line of Chad Vanacore of Stifel.

So I might have missed this 1, too. You -- now on your rent cut that you previously outlined, it looks like you're better than expected by $3 million to $5 million. So what factors were in that improved expectations? And then you said something in the prepared remarks about having $3 million left to allocate.

Yes, so that's -- so we gave ourselves some cush there in case we want to use a little bit more. But basically, it's really what I just said with Rich's and the previous questions.

And that is, we've had those operators in our portfolio for a longer period of time now. We've done really deep dives operationally. We brought additional expertise into the management team to spend time with those operators.

And so as we spent more time and got to know them better and saw how they were executing on certain components of their business plan and watched some of the trends, we felt really comfortable that we didn't need to do quite as much as we did before. And we don't want anyone to ever be concerned about another shoe dropping, and that's why we're giving ourselves some cush with the other 3.

And just to add to that really quick, Chad, if you'll remember, going back when we came up with the $33.5 million, it was a pretty high-level analysis before we did the deep dive that Rick's talking about. And it was really based on getting the tenants who were below 1x coverage up to 1.1 plus getting Signature up to 1.3.

And so as Rick says, as we've done a deeper dive, some of those tenants are below that 1.1 threshold, but we're comfortable with where they're at. And there's a couple that we're going to wait and see what happens with them.

So -- and there's also a tenant that's a shorter-term tenant that's got the lease expires here at the end of the year. So there's no reason to give a rent cut for a tenant that's expiring. We'll deal with that when that time comes.

Okay. And Harold, are we seeing all those rent cuts in the first quarter? Or do you some roll in through the year?

Well, so, again, about $22.2 million were on an annualized basis, were already reflected in our fourth quarter numbers. And then the full $28.2 million, you can expect to be in the numbers effective January 1. And then any additional amounts, so that $3 million Rick talked about, we haven't made any decision if at all we'll even use that.

Yes. And remember in the last quarter, we started booking certain tenants on a cash basis, right, like Signature.

All right. Then just one more for me on your development pipeline. Looks like you're looking to invest $120 million in 2018. How should we expect those cash flows or investments to come in through 2018 and 2019?

Yes, the amount that's going to be -- so the investment that we're talking about is primarily assets that are currently in our preferred equity portfolio or loan portfolio, stabilizing and thereby triggering the purchase option to come into our real estate portfolio. And it's spread pretty evenly throughout the year. It's not a big chunk, but I'd say it's probably slightly back-end loaded for 2018.

Your next question comes from the line of Daniel Bernstein of Capital One Securities.

I guess -- normally, I don't say great job, but I think you guys had good execution on here. On the flip side, I'm going to play a little bit of devil's advocate. And I agree with the demographics that everybody talks about, but how do I reconcile potential occupancy increase versus some of the wage growth we see out there in SNFs and maybe seniors' housing and also the kind of limit on the market basket we've seen in progress.

When you talk to your SNF operators and you think about the outlook for the SNF industry the next couple years, how are you thinking about that occupancy versus expense growth?

Well, I think there are a couple of things. And one, our skilled operators are actually pretty comfortable as they look out over the next couple years. I think on the demographic piece -- and one of our peers on their earnings call talked about it in detail because they actually have infrastructure in place to run this modeling. I think that they are -- the basis for their modeling is really good.

We don't have an infrastructure. We access information from the trade association, which has good data points, and some other third-party vendors that do really good job on projections. And so we agree that we'll start to see it for the 75-plus crowd, some increase in occupancy starting at some point in 2019. And there's no big wave coming in, as we all know. It's just going to start trickling in.

But here is part of the way to think about it. If the industry is at 81% or 82% occupancy and you've got, on average, 100-bed buildings, getting 1 or 2 more patients in, your costs are fixed. So that goes straight to the bottom line. It provides pretty strong relief relatively quickly.

So when you think about the wage issue, the thing about the wage issues is they haven't really changed very much. There have been wage issues for the entire time I've been in the business because there's been a nursing shortage and a therapy shortage for the last 35 years. And the issue really is that with length of stays coming down, and therefore, occupancy coming down, the impact of that wage pressure becomes disproportionate.

So the way we think about it is if you wind up adding a couple of percentage points to your occupancy, knowing that there are no costs associated to that, you've got some really good leverage there to impact or to mitigate the impact of those wages.

And I would also point out that the wage increases are really very market specific. We have very specific markets that we're seeing more wage pressure than others. We have a pretty significant component of our portfolio that's in secondary and tertiary markets, where you don't see the same wage pressures. But that's kind of how I view it.

I think there are 2 other dynamics to think about relative to the skilled nursing industry. You're going to continue to see a decline of supply. And that comes from both modernizing facilities. When we look at our existing operators that do renovations or when they do acquisitions, and this is very much so when they acquire mom-and-pops, who are shutting some of their doors, so you'll have some decrease there as well. They take beds out of service. They want to have more private and semiprivate rooms to accommodate today's customer.

They build bigger dining rooms. They build bigger gyms. They have more common space. All that reduces the number of beds, and so you've got about 1.5 million beds, and that's going to come down, I think, pretty dramatically over the past few years. So it's going to be a good dynamic, I think, of some slight increase in occupancy, combined with a decrease in supply.

And then the other piece of it that I think is really critical is if CMS gets the design right, and obviously, we're all hoping they will, on the RCS-1 system, where there is a greater incentive for operators to go after complex nursing patients, those complex nursing patients have a much longer length of stay than the short-term rehab patients that the industry historically has been focused on.

CMS tried to do this with RUG IV and in Dial a Bed, we all know how that turned out. But this time, they've worked with the industry on the modeling to try to get it right. And we have operators in states currently that have really strong Medicaid systems to get patients out of hospitals and higher end settings or even LTACs once those patients come off Medicare and they pay an equivalent rate through Medicaid.

And so those operators in our portfolio do a lot of complex nursing. I'm talking vents, different kinds of pulmonary patients, dialysis patients. And they have no length of stay issues because the length of stay is so much longer in those patients that it mitigates the shorter length of stay on rehab patients.

So occupancy increases are not just going to be a function of the demographic improvement, it's going to be a function of decrease in supply. And then when the RCS-1 system gets rolled out, which I don't see it happening this October, I know that's still something that CMS talks about, I think probably October '19 is a more realistic time frame to that.

So -- and the other thing I'd point out about the RCS-1 system that seems to go unnoticed is rehab is not going to be billed by minutes any longer. And if you look at every DOJ investigation, it's all based on an assumption that people are somehow upcoding or gaming the system, or the minutes, and billing everything to ultrahigh, very high, and all that is going away.

So even though the DOJ investigations haven't hit a lot of providers, the headlines and the impact on the industry obviously have been pretty negative. So that's going to really help in that regard, too. That may be more than you were looking for, sorry.

No, no, I mean, you know the industry really well, so whenever I open up Pandora's box, it gives you the floor. Actually, just one real quick question too, just related to that.

I mean, you don't have that much construction in your portfolio and relative to the size of your portfolio, and it seems like there's -- if the industry is going to move more towards complex care, there needs to be a lot of CapEx put into some of the buildings or even new construction coming to the SNF space.

Do you see any opportunities? Or are you working on any opportunities to put some more CapEx into your operators and maybe do some more development?

I don't see much in the way of skilled nursing development. In Texas, there is quite a bit because you can do whatever you want in Texas for less money and without regulations, but -- that's not that much of an exaggeration, actually.

But outside of Texas, it's so regulated. It's so expensive. I had a conversation with someone yesterday, who's actually opening up a new skilled nursing facility in California, which is almost unheard of. It took them 4 years to get through the regulatory process. So we -- it's just too expensive. It just doesn't work. And I think that's going to accrue to the benefit of the operators that sort of get it right.

So in terms of CapEx investments on our existing portfolio, if operators want to modernize, they know that we will do that as soon as they feel like they want to make the call. And we have ongoing dialogues with them about that with our asset management team. So if they haven't brought it up to us, we may actually may bring it up to them and say, don't you think it's time that you start thinking about maybe doing a little bit more modernization than you've done, whatever that entails.

So it's possible that we'll have more opportunity there, but it's going to be on modernization of existing assets and not on development of new skilled nursing assets.

Our next question comes from the line of Omotayo Okusanya of Jefferies.

Questions from my end. The first one is Signature, so you have dealt with the rent concession there, but they're still going through a bigger restructuring at this point. Just curious what's kind of going on with the broader restructuring and whether they can get all the parties together, the same way Genesis is trying to, to give them a sort of -- a kind of making it through the tough times.

Sure. So except for the MedNow guys, because those negotiations are ongoing, we already have an agreement in place. So look, it's us, it's Omega, it's a group called ARBA, which provided the equity sponsor for Signature, and they have about, I think, 6 facilities that they hold leases on. So it's primarily us and Omega, and then the lender on the line is Cap One, who's been very cooperative working with us as well also. We already have an agreement that's essentially in place. We're just waiting to see if the MedNow guys are going to continue to be reasonable in the negotiations. And if they are, then I don't think we're that far from getting this done, and we won't have to go through a BK. So there's no issues with us and major constituents. So it actually came together pretty easily, Tayo.

Okay. But what if they're not willing to negotiate and you do have to go through the BK process, does that change anything about how we should be thinking about the overall impact of the Signature restructuring or Signature bankruptcy?

So it won't change anything except that -- look, the bankruptcy will add a cost, but those guys will get crushed. But it won't change anything in terms of what we have been recording or what we anticipate going forward. And I feel comfortable saying that, again, even though I don't want to make any comments about any of our other peers, I think our peer in this case would feel comfortable in saying the same thing.

Okay. That's helpful. And then the second thing, the rent residuals, the $5.2 million for the next 4.28 years, could you just remind us again how that works again?

Sure, no problem, Tayo. So the deal we struck with Genesis is we gave them a $19 million rent cut that set all those properties in a 1.3 cover and a 4% management fee. We knew in our premarketing analysis that, that was probably a tighter coverage than most buyers were going to be willing to accept. So when we agreed to give Genesis a $19 million rent cut, in addition to just getting their cooperation to sell assets, we also put into the agreement that we will give them a rent reduction from those asset sales based on whatever the other -- they are going to have to pay the new landlord. So in this case, rents were cut, set at 1.4 coverage, so these new landlords are demanding less rent on these leases with Genesis, and that delta between the rent that they're paying us and what they're going to be paying the new landlord, that's what they have to pay us for the next 4.28 years. As I said, the ones that are under contract, it's about $5.2 million, and there's an additional $3 million or $4 million we expect upon selling the rest of the portfolio.

Got you. Okay. That's helpful. And then, Rick, back to a comment you made earlier on, you talked about pushing the bond deal because, again, one of the comps you had out there was a SNF that was trading very wide from a credit perspective. And you thought your world would change this year with a lot of the senior housing assets you kind of had in the acquisition pipeline. Over the past 2, 3 years, you've kind of gone back and forth in becoming skilled nursing heavy and then not skilled nursing heavy, and it kind of seems to go back and forth, and I think it creates some confusion sometimes about exactly what Sabra wants to look like or be on a long-term basis. So I guess the question I have is, are you -- do you still consider yourself mainly a skilled nursing business? Do you want to become more of the half and half like the LTCs and NHIs of the world? What's the vision of what really Sabra wants to look like over the next 3 to 5 years?

Yes, it is more balanced. And I would say this, prior to the CCP deal, we really didn't go back and forth. We were on a steady-state reduction in skilled nursing and increasing senior housing. We will really do the occasional skilled nursing deal if it was a good deal, but it really wasn't very much. If you look at the trajectory from 2012, when first started getting into senior housing through the spring of last year. And so in the case of CCP, it was very -- it was a very specific opportunity that gave us some different strategic benefits, as you know, which included getting to investment-grade and not having one tenant that completely drove the narrative off of our entire company. And for us, achieving those 2 things, which had also been long-stated goals, was worth the increase in skilled nursing exposure because we were confident that we were going to be able to get that down relatively quickly, which we certainly have been doing. We also felt that the new size of the company, the improved credit of the company, improved credit facility of the company would allow us to be more competitive on senior housing than we had been. And as we noted, without doing that deal, we would never have gotten the deal done with TPG and Enlivant; it would not have happened. So for us, there's only been one instance in time where we sort of veered a little bit off our trajectory and having a more balanced portfolio, and that was because of the strategic benefits that we got during that merger. And I would tell you that if we had any doubt that we would be able to continue to diversify our asset class, that would have given us second thoughts about the merger. But we were that confident that we would be able to continue on that path. I mean, that's -- those are the kind of decisions you have to make, right? And again, look, we've proven it.

Our next question comes from the line of Eric Fleming of SunTrust.

I can follow up with you off-line, it's not that important.

The next question comes from the line of Todd Stender of Wells Fargo.

Just a quick one for me. The lease coverage on Signature, I don't know if I missed this early in the call, it was sub-1x last quarter, now it's over 1.2x. Any color there? And does this upward move get in the way of your restructuring at all?

It's actually -- Todd, it's actually a result of the restructuring. Those are -- that's the pro forma coverage, which represents the rent adjustment that we're giving them. So they are still performing very strongly like they had been previously. There's been no deterioration in their performance. It's been price steady-state, so they're paying their rent based on the adjusted rents that we're providing to them. And so that just shows you what's that's done, they're going to be covering -- on a historical basis, historical performance basis, it's 1.26x. When you look forward to projections for 2018, it's -- we would expect it to tick up closer to the 1.3x area.

(Operator Instructions) Our next question comes from the line of Jonathan Hughes of Raymond James.

Just 2 for me. Rick, you mentioned the private equity is kind of out of the SNF acquisition market, except for the one fund you're working with on the Genesis sales. Are there strategic buyers out there? Are any of the REITs looking to fund expansions for their operators? I'm just trying to understand how deep the buyer pool is for the remaining [indiscernible] you're looking to sell.

Yes. So the buyer pool really is deep, and there was never -- it was never a huge influx of private equity interest on the skilled side. I mean, if you consider formation, a private equity fund, they've always been in it, but outside formation, it just hasn't been. And our experience has been, with the foreign buyers that you can have really substantive conversations and you think you can get close, but it doesn't necessarily happen. So the buyer pool is really -- there are operators on the ground. There are strategic buyers. There are finance sources that have been in and around the business that understand it, that see sort of the upside that I outlined earlier, and they are really willing to make commitments. What's been interesting and a little bit different than we've seen before, and we've seen this with the Genesis assets. We're seeing buyers out there who normally would like to operate than are willing to buy the real estate only. And if that particular asset they're buying, if the operator who's running it happens to fail, then they're totally fine with that because they basically get [off go] for free or close to it. So that's been sort of interesting to watch. But I mean, if you think about -- we just started marketing this, I mean, literally a little bit over a month ago, and we have 76% of the assets under LOI. So it's pretty robust out there. And the other way to think about it is, you can't think about sort of all of us having all these assets out there on the market because when you look at it on a market-specific basis over 50 states, there's really not that much on the market in any given market. So -- and in terms of the result, I think every one of our peers is willing to invest in their skilled operators and put CapEx in and do kind of whatever is necessary to grow with them. And I know that all of the operators that are aligned with all of us out there know that to be a fact, and it's one of the advantages that we have in trying to get deals that as they know, that we are sort of tried and true capital partners that they can always count on.

Okay. That's helpful. And then just one more. I know it's still early in the legislative and rate-setting process, but we've heard that New York and California may try to claw back some of the tax reform benefit on the Medicaid managed care side. Do you see that as a longer-term risk for your SNFs or the outlook for investments in those states?

Yes, we'll see how it plays out. But one, our operators don't do much any Medicaid managed care. It's just not happening in the skilled setting. I don't mean to think it's -- we may not have any revenue from Medicaid managed care in our SNF operators. If it is, it's not even rounding. And we see no trends there within the SNF population. So I'm not really concerned about it in those 2 states if it were to happen. But I also think that anytime they try to do something legislatively, the trade associations usually have really strong lobbying effort and really strong graphics to go along with that lobbying effort that tends to keep people in check. People, politicians [can] pay to see ads in their districts with grandma being pushed over a cliff, and those ads will get pulled out all over again.

Thank you. At this time, I'd like to turn the call back over to Rick for any closing remarks.

Thanks very much. Thanks all for your time today. I know the call went a bit long, but as everybody knows that we have a lot of things going on, but I hope you all at least have a comfort level that in what may look to you like a lot of moving pieces and a lot to execute, for us, it's just another day. So anyway, Harold and I are always available and look forward to talking to you on a go-forward basis. It's conference season, so we'll be seeing a lot of you at the conferences coming up. Thanks very much. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.