Sabra Health Care REIT Inc (SBRA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT's fourth-quarter 2011 earnings conference call. This call is being recorded.

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

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 business strategies and expectations for growth opportunities, expectations regarding our acquisition pipeline and expectations regarding our future results of operation. 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 filed today with the SEC as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today. 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 in the supplemental information materials included as Exhibit 99.1 and 99.2, respectively, to the Form 8-K we furnished to the SEC today. These materials can be accessed in the investor relations section of our website at www.sabrahealth.com. And with that, let me introduce Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Talya, welcome, everybody, good morning and thanks for your time today, we appreciate it. I'll start with the fourth quarter and then talk a little bit about the full year. For the fourth quarter, we posted FFO, AFFO and normalized AFFO of $0.39, $0.41 and $0.37, respectively, per diluted share. Our net income per diluted share was $0.19. We received $8.3 million for the repayment of the Hillside Terrace Mortgage Note this past December. It was purchased in March 2011 for $5.3 million. We also amended our secure revolver credit facility to $200 million up from $100 million, and that also has a $150 million accordion feature. Additionally, the interest rate of this facility is approximately 175 to 225 bps better than the original facility.

Our Board of Directors has declared a quarterly cash dividend of $0.33 per share of common stock, which is a 3% increase over the prior dividend. Additionally, we anticipate increase in the dividend beyond this 2012 assuming that we execute within the range of our guidance. As a point of reference, were we to achieve just the low end of our guidance, at $0.33 the dividend would drop below 80% of AFFO which is contrary to our stated intent. And to that end, our pipeline remains healthy. We had a bit of a lull over the holidays, but it's picked up since the first of the year. Our pipeline currently stands at $350 million. The -- of that $350 million, about 25% is senior housing, we're also seeing some hospital properties, as well as the normal amount of SNF activity for us. Our Tenant EBITDAR and Facility EBITDAR coverage for the quarter was 1.62 and 1.39, respectively, both better than anticipated as a result of stronger mitigation of the Medicare cuts.

The cost side of mitigation was as expected. It was the management of therapy services that was better than expected for all of our operators, and Sun addressed that on their call yesterday, but some of the things that Sun addressed we saw across the board for all of our operators. And the other thing I would point out both in terms of Sun as well as our other operators, is we saw a net decrease in Medicare rates of 9%, which is lower than the net 11% -- or better than the net 11% that was a result of the CMS cut, but it's even better than that because the parity adjustment was a net 11%. But in addition to that, you had therapy changes, so the actual real cut to the sector was minimally in the mid teens. So for Sun and our other operators to come in at better than 11% in just the first quarter of mitigation bodes well for the business going forward. Skilled mix for the quarter in Sabra's skilled nursing portfolio was up 50 basis points for the quarter at 39.5%, and up 210 basis points for the year at 41.4%. Skilled nursing occupancy was down 80 basis points for the quarter and 30 basis points for the year at 87.1% and 87.4%, respectively.

I'd like to take a couple of minutes to talk about our first full year as a REIT in 2011. We had a very good year, I think, by any measure, certainly by our own internal measures, which were quite a bit higher in terms of our goal setting than what we saw as targets put out by the analysts. We closed on 211 million -- $211.6 million in acquisitions, reducing our exposure to Sun from 100% to 76.1%. These results validated our initial thesis that small operators are being under served by capital sources. We have not seen and do not see that improving going forward, so we feel good about the niche that we fit into very well within healthcare REIT sector. We completed a successful equity offering in July yielding $163.2 million in net proceeds before expenses. We received a ratings upgrade from S&P in September 2011; that ratings upgrade was after the CMS final rule was announced.

Now on a go-forward basis, we'll continue to take advantage of the opportunities that we see for acquisitions in the skilled nursing market, but we are going to be very focused on diversifying asset classes, and trying to get more deals done in the senior housing market as well. We'll continue to look for opportunities in the acute hospital sector, but our primary priority will be senior housing and skilled nursing. We'll also look for development opportunities and development opportunities will fall into sort of a couple of different categories. One is working with operators that we're building a long-term relationship with who were interested in not just working with us on stabilized assets that will benefit our bottom line right away, but on new projects that they want to build on a go-forward basis. That will ensure a continual relationship with the new operators that we're developing relationships and aligning ourselves with, and we look forward to executing on those opportunities.

Additionally, we'll look at development opportunities that would allow us to put in forward purchase agreements. That's a win-win for both us and for the operators and developers we want to align ourselves with because it makes it easier for them to get the construction capital in place that they need because they have to take out mechanism and it limits the amount of capital that we have to put in upfront, while guarantees future earnings for us on a go-forward basis.

Should the right opportunity present itself for Sabra to contemplate [our idea] structure, we'll be open to that as well, but our primary focus for the foreseeable future is really just to keep things simple. Triple net leases, leveraging our infrastructure, diversifying away from Sun. That'll lead to good things, and good things including lower cost of capital, and improved ratings from the agencies as well, which we'll continue to follow up on, and hopefully we'll see good things happen with that in 2012 as well. And with that, let me turn it over to Harold Andrews, our CFO, and then we'll go to Q&A, then I'll do another wrap after that. Thanks.

Thanks, Rick. For the three months and year ended December 31, 2011, we recorded revenues of $26.3 million and $84.2 million, respectively, of which 88% in Q4 and 95.8% for the year were derived from triple net lease rental income. The remaining revenue of $3.2 million in Q4 and $3.5 million for the year was derived from interest income including $3 million from the repayment of the Hillside Terrace Mortgage Note in Q4. For the three months ended December 31, 2011, 76.4% of our rental income was derived from the leases of 86 properties to subsidiaries of Sun Healthcare Group. On an annualized pro forma basis, taking into account all of our closed acquisitions and excluding the impact of the repayment of the Hillside Terrace Mortgage Note, Sun represented 76.1% of our total revenues.

FFO for the three months and year ended December 31, 2011 was $14.5 million, or $0.39 per diluted common share, and $39.4 million, or $1.31 per diluted common share, respectively. AFFO, which excludes from FFO acquisition pursuit costs and non cash revenues and expenses, was $15.3 million, or $0.41 per diluted common share, and $47.2 million, or $1.55 per diluted common share for the three months and year ended December 31, 2011, respectively. FFO and AFFO in Q4 and for the full year include $0.04 and $0.05 per share respectively of interest income earned in connection with the repayment of the Hillside Terrace Mortgage Note, net of related prepayment expenses. In addition, FFO and AFFO for the full year include one-time startup costs of $0.01 per share. Excluding the net $0.04 pickup in each period, normalized AFFO in Q4 was $0.37 per share and for the full year was $1.51 per share.

Net income was $7.2 million, or $0.19 per diluted common share, and $12.8 million, or $0.43 per diluted common share for the three months and year ended, respectively. G&A costs for the three months ended December 31, 2011 totaled $4.2 million, and includes stock-based compensation expense of $1.4 million, acquisition pursuit cost of $0.3 million and $1.4 million of costs associated with the repayment of the Hillside Terrace Mortgage Note. G&A costs for the full year totaled $14.5 million, and included stock-based compensation of $4.6 million, acquisition pursuit costs of $3.2 million and the $1.4 million Hillside Terrace Mortgage Note repayment related costs. Excluding these non cash and transaction-related costs, G&A costs were 4.6%, and 6.2% of total revenues for the three month and year ended December 31, 2011, respectively. Interest expense for the three months and year ended December 31, 2011 totaled $7.6 million and $30.3 million, respectively, including the amortization of deferred financing costs of $0.5 million and $2 million, respectively. This represents a 7.25% weighted average interest rate on all of our total outstanding debt.

Turning our attention to the balance sheet and statement of cash flows, our real estate investment totaled $767.3 million before accumulated depreciation at December 31, 2011, an increase of $202.6 million for the year, resulting from the acquisition of 11 facilities. These acquisitions were funded with available cash, including net cash proceeds of $163.2 million from the equity offering in August of 2011. Cash flows from operations totaled $44.7 million for the year ended December 31, 2011, and cash and cash equivalents decreased by $32 million to $42.3 million as of year end. The repayment of the $5.3 million Hillside Terrace Mortgage Note on December 5 resulted in $1.6 million of net cash proceeds in excess of the purchase amount of the note, which was included in cash provided by operating activities. In addition, cash was primarily used for scheduled principal payments on mortgage debt of $3 million and to pay dividends totaling $31.6 million.

We incurred no new borrowings in 2011, including no borrowings under our revolving line of credit. As Rick mentioned, the line was amended on February 10, 2012 to number one, increase the borrowing capacity to $200 million with an accordion feature allowing for an additional $150 million subject to certain terms and conditions. And number two, improved pricing by as much as 225 basis points compared to the old line. This amended, untaxed revolver along with cash and cash equivalents at year end provide us with approximately $242.3 million of liquidity. This liquidity along with cash flows from operations subsequent to year end is available to fund our $0.33 per share dividend to be paid on March 30, 2012, and for ongoing operations and future acquisitions.

We were in compliance with all of our debt covenants under our senior notes and our revolving line of credit as of year end. Furthermore, our key credit stats continue to make improvements quarter over quarter. Those key stats include the following based on defined terms in our credit agreements. Consolidated leverage ratio improved from 4.45 times to 4.26 times. Consolidated fixed charge coverage ratio improved from 2.76 times to 2.87 times and minimum interest coverage ratio improved from 3.11 times to 3.17 times. Total debt to total asset value remained at 39%, and secured debt to total asset value remained at 16%. Unencumbered assets value to secured debt also remained at 227% prior to the amendments to the line of credit, and declined to 1.75%, excuse me, 175% after encumbering assets to support the additional $100 million of borrowing capacity. This is comfortably in excess of the 150% minimum requirement.

As we have stated before, we do not believe that any of the covenants in our indenture or credit agreement will limit in any significant manner our ability to deploy our available liquidity to support our acquisition strategy. The $0.33 per share dividend to be paid in March is an increase from our prior three quarter dividends of $0.32 per share and represents approximately 80% of AFFO for the three-month period ended December 31, 2011. We expect to continue to target a dividend rate of approximately 80% of AFFO subject to Board approval.

Finally, a couple of quick comments about our rent coverages. We reported tenant rent coverage amounts using our tenants operations one month in arrears. For Q4, this coverage is for operations from September through November of 2011, which includes two months of operations after the 11.1% Medicare rate cut. On this basis, our tenants have a combined Facility EBITDAR coverage of 1.39 times, a Facility EBITDARM coverage of 1.85 times, and a Tenant EBITDAR coverage, which takes into account the Sun Corporate guaranty of our leases, of 1.62 times. While coverage amounts will fluctuate quarter to quarter based on seasonality of operations, we were very pleased with the level achieved during this period, as it provides strong evidence of our tenants ability to manage through the rate cuts and the safety of our rental stream.

Furthermore, the 2012 guidance provided by Sun earlier this year implies a full-year Tenant EBITDAR coverage for Sun during 2012 of between 1.50 and 1.54 times, or 1.46 to 1.50 times including the expected losses for assets Sun expects to transition to held for sale in 2012. And with that, I'll turn it back to Rick.

Yes, I just wanted to comment on rent coverage before we go to Q&A. One of the reasons that we're so pleased with it is that the -- we had disclosed what our projected rent coverage was going to be once all the mitigation was in effect post the CMS cut. And as of the first quarter, rent coverage is already stronger, just one quarter into mitigation than what we projected post all mitigation. So that's really what drives our optimism at this particular point in time. With that I'll turn it over to Q&A.

Thank you. (Operator Instructions) Daniel Bernstein with Stifel Nicolaus.

On the mitigation, obviously you have a good concentration with Sun. And -- but from the industry -- at the industry level, are you hearing that the mitigation is going well industry wide? Or do you think there's going to be some -- still some challenges at some operators that might present you some opportunities for consolidation and investment opportunities?

I think from what I've heard with most of the big players and the regional players, mitigation's going very well. With all of our operators, even though they're smaller operators, it's going quite well as well, similar to what we saw with Sun to the quarter. That said, a lot of the operators in the business really are traditional mom and pop operators. On the one hand, not as much Medicare business as others, but that's problematic as well because you can't any longer just depend on Medicaid rate increases to make things viable for you on a go-forward basis. So they're just in a difficult spot.

So I think that we will see -- I think consolidation's probably too strong a word because as we've seen over the history of this business, is that no matter how much M&A is going on, always about half the sector is mom and pop, or operators that have less than five buildings. But I do think that there will be opportunities with some of the smaller operators who, while they may not be in trouble or they may not be on the verge of filing bankruptcy, it's just all gotten too much, it's all gotten too complex because the industry has changed pretty dramatically this past decade and it's going to change a lot more going forward. So I do think there'll be some opportunities for us there, particularly given the niche that we're in.

And you mentioned a pretty sizable pipeline, but when we listen to some of the other earnings calls of other healthcare REITs, it seemed like there were some decision delay on the part of SNF operators to perhaps think about selling their assets. Are you seeing SNF operators in a holding pattern, or are you getting a lot of opportunities coming out? Are people still waiting to see how the mitigation goes or you think the opportunities are there?

There may be a little bit of that, but we don't see that much of it. Certainly over the holidays because everybody was so engrossed with mitigation during that quarter, combined with what normally happens over the holidays, we definitely saw a lull. But we've been seeing a pretty nice pick up since then, and I would continue to expect that going forward. So, no we're not really seeing much of a downturn in activity. Maybe just a little bit. Talya, do you see anything different?

No, I think that's right, Rick. I think the other piece of it is what hasn't quite settled in yet and sunk in yet is the change in pricing that's -- that really is necessitated by what's the impact of a rate cut on revenues. So that's probably giving pause to some sellers as they try to -- as they, if they're rational, try to figure out what their assets might now be worth, but also for buyers it's giving everyone pause because 2011 is no longer a -- historical results for 2011 are no longer what you can look at and underwrite.

I do think too, Daniel, that -- and this is maybe a little bit of patting ourselves on the back, but I think there's reality here that we've demonstrated over the last 14 months that -- I mean we understand the business really well. I mean we've been there both on the skilled nursing side, and to a lesser extent, the skill on the senior housing side as well. And so a lot of the folks that we interact with across the country, both in the operating and the development side understand that we get it, and that makes it a lot easier for us to sit down and negotiate things, to look at people's business plans and understand whether they're viable or not. So I think that's helpful for us.

And within that pipeline, you mentioned hospitals. And I just want to understand, are you looking kind of across that acute spectrum from LTACs and IRFs all the way up to general acute or are you focusing on a specific niche within that acute hospital spectrum?

Yes, I think anybody that knows me knows that when I say hospitals I mean acute hospitals. I am not a fan of LTACs in the long term.

I assumed that but I wanted to ask it.

Yes, yes. And well for IRFs, I think that there may be some opportunities that make sense. I think that they have a better future in my opinion than LTACs do, but we'd still be very choosy looking at any of those kind of assets. There may be other blends that makes sense, projects where you've got a facility that's primarily skilled nursing but they may have some LTAC beds in them. That may make some complementary sense. So there might be some unique circumstances, but generally speaking, that's where I stand on that.

And one last question, I think in recent past, you've kind of indicated that you haven't felt the need to tap the equity markets and you obviously have a lot of availability on the credit line in cash. Are you still kind of feeling that way given that that large pipeline that you're not likely to need the equity markets near term? Or maybe just a general comment you have about your balance sheet, how you're viewing your balance sheet?

Yes, I think I don't see us tapping that in the near term. We have enough capacity on the revolver to exceed the high end of our guidance. That said, that doesn't mean that we just stick with that because, given the new revolver and the savings on the costs compared to the old revolver, we really want to be able to be opportunistic when it comes to putting permanent capital in place for some of these acquisitions. So that means depending on the market, we're going to be able to take advantage from a timing perspective as good opportunities come up, whether that's in the high-yield market, whether that's preferred or different source of equity, [ATMs], we want to just keep our palette open. But it is fair to say that in terms of doing just sort of a traditional equity offering, given current stock prices, that isn't something that's attractive to us and --.

All right. Well, I appreciate you taking my questions, and I'll jump off.

Thanks, Daniel.

Rob Mains with Morgan Keegan.

The follow up to that last question, you said you're not going to look at the traditional equity market, how about the traditional unsecured or secured debt market?

Well on the debt side, we're always going to favor unsecured debt. So yes it's -- right now, our bonds have been trading really well, and if there's the right opportunity there and that makes sense in the context of what we're trying to do with our balance sheet, we'll definitely consider that. But remember too, as even though we deleverage quite a bit, we want to be mindful of how much we leverage up because one of our main focuses is to get our -- is to continue to have our ratings upgraded. And so to that end, neither we nor the rating agencies want to see us in excess of 5.5 times. So we still have plenty of room to move up five and slightly over five, so as long as we can maintain that kind of balance. And as we look at our pipeline and our revolver and our own internal projections, we don't have any discomfort with our ability to consider looking at the unsecured market. But we're not particularly interested in the secured market.

Okay. And you mentioned that, or maybe it was Talya, said that the -- your pipeline you've got some senior housing in there. To what extent has some of the recent transactions by your bigger brethren kind of driven up price expectations, sort of like that ManorCare did for the SNF market the end of '07?

Well I guess I would disagree about what happened with ManorCare, because in terms of how that filtered down to the smaller deals, I think it's fair to say that sort of the price wars that the bigs engaged in did impact pricing, call it 50 bps, maybe a little bit more, maybe 75. But it didn't come close to the kind of pricing that those guys were getting. And I think -- and we saw the same thing last year with senior housing, see the same thing now. And that is those of us in the healthcare REIT space that are smaller than the bigs, we're only going to pay so much and these sellers know that. We're just not going to get caught up in that stuff.

And when you think about the CEOs that are running the REITs that we would sort of view in our circle, they're just rational about pricing. And they'd rather not do deals than overpay for them. I think Talya noted on the SNF side, even though there was some compression last year that made pricing a little bit more expensive, again call it 50 to 75 bps, there's been some relief from that and we would expect to see some relief from that because of what happened with the Medicare cuts. And then on the senior housing side, maybe there's still 50 basis points of pressure or something, but not more than that.

Okay. That's all I had, thanks.

Quentin Velleley with Citi.

Hi, thanks for taking my question. Just I guess following on from that, in terms of that pipeline you're looking at, I think you said 25% senior's housing and the rest nursing home or hospital. Can you just give us a sense for what kind of ingoing cash cap rates you're looking at for the senior's housing versus what you'd be getting on the skilled nursing or the hospital? And just comment on how you think about underwriting those on a risk adjusted basis.

Quentin, it's Talya. On senior's housing, depending on whether where we are in the spectrum of acuity, we'd be somewhere -- we think about that as being somewhere between 8% and 9% going in lease rate, which is effectively your initial cash yield. And of course, that varies depending on the quality, the acuity, the location, all those kinds of things. The -- when we look at skilled nursing, we're probably -- for the best and the brightest and shiniest, maybe a 9.5% initial yield. Those assets are few and far between. I'd say that we're probably seeing -- we're probably looking at a double-digit going in yield, typically, so 10%.

Okay.

On the acute care hospitals, it's a little tough to generalize because it's not like there's -- we have a large pipeline of those and we underwrite some one after the other. But I think our acquisition of Texas Regional Medical Center at Sunnyvale was pretty indicative, and that was a 9.25% going in cash yield. And I think that sort of 9.25% to call it, 10%, somewhere in there is about right for acute care. Sunnyvale was a new facility, it was up and running, it was profitable, but we were getting it a year and a half old. So that kind of product still has definitely a premium, particularly in those kinds of locations.

In terms of risk adjusting, so we obviously risk adjust using the going in lease rate that we use. We also use coverage as a way of risk adjusting. So clearly, on acute care hospitals, we use -- we typically look at upwards of a 2.0 times coverage, skilled nursing, 1.5 times would be a starting point. And as we go down the spectrum of acuity just call it down through independent living, we'd be at just over one, like a 1.1-ish coverage number. So we risk adjust the cash flow of volatility, if you will, and then we also risk adjust vis-a-vis valuation of that perpetuity.

Yes, the only other thing I would add to that is we've aligned ourselves with a couple of operators that are very comfortable doing turnarounds, and because of our operational debts, we feel very comfortable in our ability to assess whether some of those deals make sense, and that's going to help the yield rate as well.

And I guess just on that, with Ventas marketing the 64 assets that Kindred had not going to review, are those the kind of opportunities that you could go in with an operator where you might be able to realize some value? Is that something that may or may not interest you?

It might, but not the whole package. I think our attitude there is, one, there are LTACs in that package, so that's out of the question for us. And in terms of the SNFs, there's just a lot of SNFs there. And we're interested in having a more diversified portfolio. Where we are right now in terms of our stage of our development, we really have the ability to control and define who we're going to be and how we want to spread ourselves out amongst asset classes. So to pick up sort of 50 or so SNFs in one fell swoop, kind of defines us as a SNF healthcare REIT, and we have aspirations to be a little bit different than that. That said, if Ventas has an interest in breaking that up into smaller packages, which could happen at the end of the day, we would be interested in looking at some of those packages on the SNF side, and we do have operators out there that we know would be interested in looking at them and we'd be interested in working with them. And so -- and that could include -- I mean geographically, there's no limitations to what we'd look at in that regard either.

Okay. Thank you.

(Operator Instructions) Tayo Okusanya with Jefferies & Co.

So quick question, so it's now March, probably within the next 30 to 60 days you're probably going to start hearing some initial rumblings from states about what Medicaid could look like for the next fiscal year. Just kind of curious if you're starting to hear anything or see any headlines or anything like that?

Yes, our initial indications really reflect would -- I think Sun talked about on the call yesterday, and that is we're probably looking at another flat rate year on a net basis. And when I say net basis, that's net of provider taxes, I think Sun actually was up in their rates on a net basis for the quarter, but flat for the year. So there were definitely some states that are anticipating cuts. Florida is looking at another cut. But remember with some of the states, and Florida is a good example of a state where people get focused on what the cut is, but in the State of Florida, rates and labor are tied together. So when rates get cut, you also have the ability to mitigate by reducing labor. So the net cut in Florida is never what the gross cut looks like it's going to be.

But that said, yes there are some states that are looking at cuts, but there are states like Georgia for example, that are going to be increasing Medicaid rates, they're doing a complete rebase of the Medicaid system in Georgia and that's going to be beneficial for the sector. So I think all in all, given the fact that we're spread all over the place, I think for us it'll probably be close to a wash, if not a wash, obviously it's state specific.

Talk about what -- I know you mentioned Florida, is there any kind of like two or three other states that are kind of on your watch list for decent sized cuts?

There's no one out there that we're hearing really decent size or big cuts from, but Ohio had it really tough. It's been a tough couple of years in Ohio, so we're going to keep an eye on Ohio, we're going to keep an eye on Washington State. I tend to think we'll be okay in California, though we don't have that much exposure there. And I think that's probably about it for the states that we're really going to keep an eye on. Connecticut, you always watch a little bit but the actual Medicaid rates in Connecticut are really good, so you've got a little bit more breathing room there even when they look at trimming things. And I think about may be one other state, New Hampshire traditionally has been a great state for nursing homes, but more recently had to take a hit. So we'll keep an eye on that too. But none of those states I mentioned, maybe with the exception of Ohio, I've got real concerns about, and I think to the extent there are cuts in Ohio, there are other states that will offset it.

Okay, that's helpful. And then just one quick follow-up question, kind of towards the end of the month, you have the Supreme Court starting to look at the Affordable Care Act, and whether certain parts of it are constitutional and all that kind of stuff. Is there any thing in there that you guys are kind of on the watch for, whether it's the Medicaid piece of it in regards to what they call Medicaid expansion or the individual mandate whether that's constitutional or not? Do you kind of have a viewpoint, whichever way that stuff swings, or that could have an impact on how you think about the outlook for the skilled nursing sector?

I think the only thing is to the extent that you increase the number of insureds, it's kind of good and bad to that, right? I mean to the extent that you put more pressure on the Medicaid system, that's not a great thing. To the extent that you've got that many more insureds going to the hospitals and then from the hospitals going downstream to nursing homes, which is going to help occupancy, that's a good thing. So it's just sort of a mix of things. I'll be surprised if it gets -- if the Affordable Care Act gets overturned, but my opinion is no better than anybody else's in that regard.

But generally speaking I think we already see the market driving what's going to happen in healthcare. We're seeing a number of communities where there were sort of faux ACOs that are coming together and hospitals that are establishing networks and pulling physicians in and creating stronger relationships with the post acute businesses that surround those hospitals. And that's -- I think that's sort of to be expected. When push comes to shove, the market kind of figures out what it needs to do in each of the local communities and I think that's going to drive the business anyway. And that's why I'm a strong believer that for the skilled nursing sector, they're just in a sweet spot because of what they're able to do in terms of provision of care at such a low level of cost compared to other settings such as IRFs and LTACs. So I think as long we are aligned with operators that know how to position themselves in their local markets, that we'll be okay.

And the only other thing I'd point out there is that CMS policy cuts notwithstanding, CMS policy is going in that direction as well, and has been going in that direction for the past six or seven years. Their policy isn't changing. It's a tough budget environment, so they're going to get what they can get from whoever they can get it from. But as long as their policy stays consistent and they keep on putting incentives in place to move high acuity patients downstream, then I think in that the SNF sector will be okay. And then to the assisted living folks, there we're seeing more and more success with their focus on residents aging in place, and supplementing what they do by outsourcing for hospice services, therapy services and home health services to maintain their occupancy as well, and so that's good for particularly the AL business and the memory care business.

Thank you very much.

Nicholas Yulico with Macquarie Capital.

Hi, thanks, Just had a question, bit of a technical question I guess, on when you guys were reporting Facility EBITDAR coverage, and particularly, say, for the number you reported for Sun back in your investor presentation in January, what are you actually including in the Facility EBITDAR for Sun, particularly in regards to their rehab therapy business, which I know they sort of treat as a separate segment? How do you guys treat that in that coverage number?

Yes, so facility EBITDAR is focused just on the EBITDAR of the 86 properties in our portfolio. So there is no ancillary business, revenues or expenses in those numbers. So we take their actual EBITDAR number and then we'll apply a 5% management fee to that to reduce EBITDAR by a 5% management fee and then compare that to the rent, and that's how we calculate it. Now on a tenant EBITDAR basis, for Sun particularly, we're looking at their entire portfolio of businesses compared to their total consolidated rent expense. And that again is done that way because of the corporate guarantee that we have. We actually -- the additional coverage they have inures to our benefit because of the corporate guarantee.

Okay. So just to be clear, so the actual EBITDAR number you said there is some piece of that, I guess that is including what's in there, rehab therapy services segment?

Yes, for what we describe as Tenant EBITDAR coverage, but not Facility EBITDAR coverage.

And that's only because we have the corporate guarantee, and I think that's consistent with how others define it as well when there's a corporate guarantee. And let me just give you a couple of other specifics that I mentioned towards the beginning of the call that the coverages we experienced for the quarter were better than what we anticipated in. And referring to the presentation that you just referred to and what we've been publicly disclosing, we anticipated that our Tenant EBITDAR coverage after all mitigation would be 1.56. And we're at 1.62 just in the first quarter of mitigation. And I know everybody always gets focused on Sun, we anticipated Sun after all mitigation would be at 1.47, and they're at 1.53 just in the first quarter. And on a Facility EBITDAR basis, we're at 1.39 on a consolidated basis, which is also quite a bit better than we anticipated. And for Sun, we anticipated after all mitigation they'd be at about 1.2 and that's Facility, not Tenant, in the first quarter alone at 1.24. So just to give you some more specifics relative to what our expectations were and where we are with just the first quarter.

Okay. And you guys don't have the actual number for October to December, rather than September to November as far as coverage goes?

I'm sorry, say that again?

We're a month in arrears --

I think you said the coverage -- all the fourth-quarter coverage numbers are from September through November rather than October through December. You don't have the October to December numbers you could share?

No, we disclosed those. It's always going to be one month in arrears because of the timing to get to the data pulled together.

But I would say that we don't expect it to be much different than that, primarily because by having September through November, September historically in the skilled nursing business is one of the weakest months of the year. So 30 day month and a holiday, in December you've got a 31 day month and a holiday which may not sound like much, but it does make a difference in that business, so it's not going to be materially different anyway.

Okay, thanks. Just one last quick one going back to that again, that presentation you guys put out on January, we're seeing the minimum CapEx is $360 a bed for Sun. Is that a number that doesn't grow every year over the life of the lease? Is it fixed at that or is that just the first year number?

No, it sticks to that number.

But I would say that they're -- and that was part of the negotiation that we did in conjunction with the split and doesn't necessarily reflect how we would view CapEx for anybody on the go-forward basis. That said, Sun spends dramatically more than that on an annual basis even post-CMS, dramatically more than that. But for the past few years, before the split, we were spending close to $2,000 a bed, and spent so much improving the way those facilities looked that we felt comfortable with having a low maintenance number in there. And that's really all that is, is a low maintenance number.

Okay. Thanks, that's helpful.

At this time I'd like to turn the call back over to Mr. Matros for any closing or final remarks.

Want to thank everybody for their time again and just make a couple other comments. One, so we've been in business in REIT a little bit over a year and I just really want to take the time to thank our Management team who I think anybody working with us is surprised to know that we've only been together for a year. And also want to thank our Board of Directors who've been very supportive, and the Management team and the Board works very synergistically together, and it really feels like we're a group that's been together for a lot longer than 14 months and I think the results reflect that. And we're having a blast building this thing, so thank you for your time and we appreciate your support.

I do also want to note that we have a very high percentage of shareholders who have been with us almost since the beginning, and after the CMS cuts hit, obviously, our stock took a big hit from August 1 through most of the rest of the year, and those shareholders have been very supportive and really focused on how we've executed what's in our control and out of our control and they've just been great. So I want to express my appreciation for that as well. And that did have at least something to do with the increase in the dividend for the fourth quarter. So with that, thanks very much. Talya, Harold and I will be available, I think you all have our numbers and our e-mails and we'll be very responsive to you. Thanks again and have a great day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your presentation. You may now disconnect.