Sabra Health Care REIT Inc (SBRA) 2012 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Sabra Health Care REIT's first quarter 2012 earnings call. This call is being recorded. I would now like to turn the call over to Michael Costa, Controller. 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 business strategies and expectations for growth opportunities, expectations regarding our acquisition pipeline, and expectations regarding our future results of operations. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-Q to be filed with the SEC later today, as well as in our earnings press release included as exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid.

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

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

Thanks, Mike. Thanks for joining us, everybody, this morning. I'll start out by talking about recent highlights and then talk strategically about where we are and where we're going, and then I'll spend a bunch of time drilling down on coverage numbers, which I know are first and foremost in everybody's mind. Then I'll kick it over to Harold Andrews, our CFO, who will talk about the numbers for the quarter, both income statement and balance sheet.

So to start, our recent highlights included $40 million of deployed capital that include the acquisition of two subacute facilities and a mezzanine that's secured by three skilled nursing facilities and one assisted living facility that we anticipate purchasing in 2013. In terms of the mezzanine, this also represents our new relationship that we have that should continue and lead to other opportunity is as well. We're currently looking at a number of other projects with this group. In terms of the former, the two subacute facilities, these are very unique facilities and go along with the kinds of things that we're looking for. These are licensed skilled nursing facilities but they are subacute facilities, providing primarily ventilator care and the same level of ventilator care that you find at higher end settings. There are physicians around the clock. Our operators [do] in those facilities and one of the centers of population is primarily young teenagers to middle-age. The other facility has a population that's split, middle-aged and elderly as well. They take care of some other pretty tough chronic diseases, progressive diseases as well but ventilator care is their primary focus.

We were also pleased to receive the ratings upgrade to B1 from Moody's this past quarter as well. Our pipeline currently stands at approximately $350 million with about 40% of it being AL and/or memory care. That's a higher number than we've seen before. I think in part because we're focusing a lot more or trying to increase our opportunities in senior housing arena. But in part also because we're still seeing very light activity on a relative basis in the skilled nursing arena with operators really focused still on mitigation and making sure they've got their numbers where they want them. And I would expect the latter half of the year, we'll start seeing more skilled nursing activity. [I think our] anticipation based on the operators in our portfolio is that numbers will continue to improve over the second quarter and third quarter, and by around the third quarter and certainly by year-end, people will be where they would have expected to be for mitigation, I think the bulk of it by sometime in third quarter.

In terms of what we're focused on, we're very mindful of what's been occurring with changes with the healthcare systems. There are about 70 ACOs now, CMS policy, generally and with the healthcare systems [doing] from market perspective to be competitive. I think some of the trends from our perspective are becoming predictable relative to where the systems are going, in terms of integrated care and bundle delivery systems, that bundling is virtual or more pure bundling, in the form of acute hospital and controlling all those dollars. So that's really driving what our focus is relative to the kind of asset classes that we're interested in. And it also drives our focus in terms of the kind of operator that we want to align with, that are forward thinking, that have the assets and provide the clinical services that will fit within the environment, as that environment changes over the next 10 years.

So consequently, last year or early last year, we first formed the REIT, we're open to really broad range of asset classes. At this point, our focus is going to be very specifically on assisted living and memory care and skilled nursing. We really see those asset classes as being winners over the next 10 to 15 years as things continue to evolve. And obviously, as a REIT, we have to think about everything from an underwriting perspective in the amount of time that we're underwriting assets. We will look at independent living opportunities but it will depend on price and market. Right now, most anything that we would see in the independent living sector is too expensive for us but at some point, that will change as we continue to lower our cost of capital. In terms of hospitals, we'll continue to be opportunistic. We have continued to see some hospitals. We're obviously very pleased to see hospitals that we acquired last year but to date, we haven't seen anything else that was a unique enough opportunity for us to take advantage of. But we will continue to look. We'll also be open to doing [Rideau] structures within senior housing, obviously not skilled nursing. And again, I think we've stated in the past, at some point in time we'll see an opportunity that makes sense for us both from a size perspective and an asset class perspective to do Rideau so we are open to doing that structure as well.

And with that, let me move to operating statistics. Our skilled mix for our portfolio was down 140 basis points quarter-over-quarter to 38.4%. That 140 basis point drop is primarily due to the Medicare rate cuts from the CMS final rule. And occupancy for both skilled nursing and the portfolio generally was down 80 basis points to 87.7% and 87.3%, respectively. Our largest tenant, Sun saw sequential improvements in occupancy and mix of 10 basis points and 90 basis points, respectively. And although their numbers on the top line were soft on a year-over-year basis, which we saw really all over the place and not in any small part due to the fact that we had a really mild winter, Sun's trends were up in April so we do get affected by the seasonality.

In terms of rent coverage, just a reminder to everybody that we report a month in arrears, and that's an important consideration, particularly in the current quarter because the fourth quarter contains September, October, November. September was pre the CMS cuts and the current quarter is December, January, and February. January and February are always very light months for a couple reasons. January, you've got three sets of payroll taxes and benefits that impact the expense side of the month and February, obviously, is just a short month. By having December in our quarter as opposed to March, we've got the two months, December and January, where we have holidays so benefits tend to jump quite dramatically. And March is one of three strongest months of the year typically in skilled nursing sector.

So that said, for the three months ending March 31, 2012, facility EBITDARM, EBITDAR, and Tenant EBITDAR was 1.58, 1.12, and 1.35, respectively. For the 12 months ending March 31, 2012, Facility EBITDARM, EBITDAR, and Tenant EBITDAR coverage was 1.84, 1.37 (sic - see press release), and 1.6 respectively. To put things in a little bit more perspective in terms what the difference March makes from the seasonality of having December, January, and February one quarter, March Facility's EBITDARM, EBITDAR, and Tenant EBITDAR was 1.71, 1.26, and 1.57, respectively. Pretty significant improvement. And for our largest tenant, Sun, the Tenant EBITDAR for March 31 is 1.61, as compared to the quarter that we're reporting, which is 1.32. So really a dramatic change.

So this is seasonal timing and we expect to have a strong second quarter, relative to coverage. The other thing I'll point out relative to coverage is we develop our internal expectations based on the budget that we review of our operators and their actual results were on target relative to their budgets. So there's nothing even over the course of the quarter that concerned us in terms of where the numbers were coming in, and you may recall on our year-end earnings call, I did note that we expected to see a drop in coverage for this current quarter.

In terms of mitigation, we have been in contact with all of our operators and mitigation is continuing as expected. I think that Sun noted on their call, the fourth quarter had a lot of the impact of therapy mitigation. The first quarter, you're starting to see the impact of cost because of what the operators have done, both on wages and benefits. And because employees get wage increases on anniversary basis, that wage impact will play out over the course of the entire year.

And with that, I'll turn it over to Harold Andrews.

Thanks, Rick. For the three months ended March 31, 2012, we recorded revenues of $23.7 million, compared to $17.6 million for the first quarter of 2011, an increase of 34.8%. 76.1% of our revenue was derived from our leases to subsidiaries of Sun Healthcare Group during the quarter, down from 100% in the first quarter of 2011. On an annualized pro forma basis, taking into account all of our closed transactions, the Sun portfolio represents 73.4% of our total revenues.

FFO for the three months ended March 31, 2012, was $11.7 million or $0.32 per diluted common share, compared to $7.3 million or $0.29 per diluted common share for the first quarter of 2011. AFFO, which excludes from FFO acquisition pursuit costs and non-cash revenue and expenses was $14 million, or $0.38 per diluted common share, compared to normalized AFFO of $9.4 million, or $0.36 per diluted common share for the first quarter of 2011. Net income was $4.4 million, or $0.12 per diluted common share for the quarter, compared to $1.2 million or $0.05 per diluted common share for the first quarter of 2011.

G&A costs for the three months ended March 31, 2012, totaled $4.3 million, and includes stock-based compensation expense of $2.2 million and acquisition pursuit cost of $0.5 million. Excluding these non-cash and transaction related costs, G&A costs were 6.9% of total revenues for the three months ended March 31, 2012. Stock-based compensation expense included a $320,000 charge related to Sabra stock price increases during the quarter, which impacted management's 2011 bonus payouts during the quarter, bonus payments, which management elected to have paid in stock in early 2011. I would point out at this time that management again elected to take their bonuses for 2012 in stock rather than in cash. In addition, recurring cash G&A costs were up $0.5 million compared to the first quarter 2011, to $1.6 million, the increase related primarily to state income taxes.

Interest expense for the three months ended March 31, 2012, totaled $7.7 million, compared to $7.6 million in the first quarter of 2011, and included amortization and deferred financing costs of $0.6 million in 2012 and $0.5 million in 2011. This represents a 7.25% weighted average interest rate on our total outstanding debt, which has been consistent each quarter since the first quarter of 2011.

Looking at the balance sheet and statement of cash flows, our real estate investments totaled $796.8 million before accumulated depreciation at March 31, 2012, an increase of $29.5 million since December 31, 2011, resulting from the Pennsylvania subacute portfolio acquisition on March 30, 2012. In addition, the $10 million investment in the Meridian mezzanine loan on March 15, 2012, is captured in other assets. These transactions were funded with available cash.

Cash flows from operations totaled $16.5 million for the three months ended March 31, 2012. Cash and cash equivalents decreased by $39.6 million to $2.7 million as of March 31, 2012. In addition to the investments mentioned above, cash was primarily used during the quarter for scheduled principal payments on mortgage debt of $0.8 million, payments of deferred financing costs associated with the revolving line of credit amendment of $2.5 million, and payment of the quarterly dividend totaling $12.2 million. We incurred no new borrowings in the first quarter 2012 including no borrowings under our amended revolving line of credit. This amended untapped revolver, along with cash and cash equivalents as of March 31, 2012, provides us with approximately $202.7 million of liquidity. This liquidity along with cash flows from operations subsequent to March 31, 2012, is available to fund our $0.33 per share dividend to be paid on May 31, 2012, ongoing operations, and future acquisitions.

We were in compliance with all of our debt covenants under our senior notes indenture and our secured revolving line of credit as of March 31, 2012. Furthermore, on April 19, 2012, as Rick mentioned, Moody's investors services upgraded our senior unsecured rating and our corporate family rating from B2 to B1, with a stable outlook. The upgrade referenced our growth, improved tenant diversification, and maintenance of sound credit metrics as drivers of the upgrade. Those key metrics have continued to improve over time and include the following, based on defined terms in our credit agreements, consolidated leverage ratio of 4.04 times, consolidated fixed charge coverage of 3.01 times, and minimum interest coverage of 3.34 times. Our total debt-to-total asset value is 39%, and secured debt-to-asset value is 16%. Again, reminded that real estate asset values for the Sun portfolio are based on the 9.75% cap rate on the initial rents from Sun. Our unencumbered asset value-to-unsecured debt was 175%, also the same 9.75% calculation on the Sun portfolio.

As we've stated before, we do not believe that any of the covenants in our indenture or amended credit agreement will limit in any significant manner our ability to deploy our available liquidity to support our acquisition strategy. Rather, our liquidity and sound credit strategy provides us the flexibility to continue our growth plans throughout 2012.

With that I'll turn it back to Rick.

Thanks, Harold. Before we go to Q&A, I wanted to follow up on one specific item from Sun's earnings call and then provide some reconciliation for you all, in terms of our fourth-quarter coverage to our first-quarter [rent] coverage. Sun talked about disc ops. They now have nine facilities in disc ops, two of which they moved into disc ops after they provided 2012 guidance. Of those nine facilities, seven of them are Sabra facilities. Of the two facilities they just put into disc ops, one of those facilities we are working with Sun on divesting. The other facility is an asset that we really like and it does really well. It just doesn't make sense for Sun to be left with just one asset in the market. So that's just practical perspective for them.

In terms of the other five assets that were in their disc ops, that are Sabra facilities, one of those we're also working with Sun on divesting and we do have an offer in hand for that. The other four, we would actually like to retain the portfolio with another operator. The fact of the matter is, when you're running a large company, in Sun's case, 200 facilities, and when I was at Sun, we divested facilities every year and typically divested them to smaller operators that could focus more on those assets. And [then] pretty much every case, they performed better with those guys and while you'd like to think you can run everything at peak efficiency, sometimes you have to pick and choose, in terms of where you are devoting your resources and infrastructure, from an ROI perspective. So four of those five other assets are assets that if we find the right operator -- and there is currently an operator that we're very engaged with right now in cooperation with Sun -- there's a possibility there that we'll retain four of those assets with another operator. And if not, then we may have to look at divesting those assets because we're only going retain with an operator, obviously, that we feel good about.

Going back to the coverage and taking into consideration disc ops, so if you think about the EBITDAR coverage that we reported in the first quarter, to the fourth quarter, let's talk specifically about Sun because that's really the biggest driver. The Sabra EBITDAR coverage for Sun properties in the fourth quarter of 2011 was 1.24 and the current quarter, it's 1.03. The difference in timing of the reporting quarter, so the fact that we had September in the last quarter and didn't have March in this quarter, creates a 0.06 swing. So that 0.21 difference, 0.06 is simply timing because we report different time periods. So we would have been better by 0.06 if we reported the same time periods and then the biggest difference, obviously, our disc ops. Sun had all those facilities in their numbers in the fourth quarter. They excluded them in the first quarter. We don't exclude disc ops. If we were to exclude those disc ops from both the fourth quarter and the first quarter numbers, our coverage would actually have been up sequentially in the Sun portfolio. So it's really those two items, the timing and then to a larger extent, the disc ops being excluded from Sun's numbers in the first quarter but not excluded in our numbers, that creates the coverage differences. And again, once we resolve the status of those disc ops, that'll address obviously the coverage issues as well.

And with that let me turn it over to Q&A.

Thank you. (Operator Instructions) We'll pause just a moment to allow everyone an opportunity to signal for questions. We will go first to Daniel Bernstein with Stifel Nicolaus.

Good afternoon.

Hi, Dan.

Hi. I just wanted to a little bit more over the pipeline and in terms of not maybe what you want, but what you're seeing out here. Are you seeing maybe a tilt towards senior housing versus [SNFs] given that uncertainty out there in reimbursement (technical difficulty) the operators still concentrating on mitigation? Or based on your tilt, looking at more maybe senior housing? Trying to understand what sellers are actually out there versus what you want to buy.

Sure. So on the flip side, everybody knows what we'd like to do. So that's purely a function of things just being lighter. I think I saw [guys] get through mitigation. That's just not just an assumption, there were guys that we had been talking to that said we just want to take a few more months to get through this. So that's specifically a function of that.

In terms of what we're seeing on assisted living and Memory Care, I think a couple things. One, I think in part just because we're so young and because we're a lot more focused now on talking to assisted living operators and developers, we're just seeing more of that now. So I'm not sure that there's more of that in the market than there was six months ago or eight months ago. One of the things I would note that I think has been a change at least in the AL memory care market is that we saw this quite a bit at the last NIT conference is there's a lot more discussion on development. That's something that we now have a much higher level interest in than we did before.

When I say development, I'm not talking about the big operators. They may be doing it as well but we don't really know that [because they are real] big guys. So these are small, niche market kinds of operators and developers that are focused on this. You'll recall last year, when we talked about growth in the portfolio, we really wanted to stay away from development because it was obviously so critical for us to get stabilized assets, start diversifying away from Sun.

That doesn't change. Our focus is still we're totally zoned in on diversifying away from Sun and we have a goal of getting Sun down to 50% of the portfolio in 2013. But we have the capacity now to both pursue stabilized assets and continue that diversification from Sun but also look at development opportunities. We've been fortunate with a number of the assets we acquired over the last year to get new or relatively new vintage assets. So the thought of being able to bring on senior housing that's brand-new is really appealing to us. So hopefully that answers your question.

It does. As a follow-up to that, the senior housing development. One, the level of interest and development, is that concerning in any way to you? Obviously, memory care is probably going to probably be a good place to be as the population ages [but is] the amount of chatter on development concerning? Then the other question, maybe not directly related to that, would be, how would you structure the development? Would you want that to be in some kind of master lease with an existing operator? Or part of an acquisition, where you get both stabilized assets and some development capabilities?

I think it's a mix match. In terms of any concern about it, I don't think that there's that much chatter. It goes back to when people really got crazy with it, and there was too much capacity being brought into the market. But it really comes down to the market that you're looking at and how competitive those individual markets are. So I'm not looking at it or thinking about it on a national basis in terms of an uptick in development. But the guys that we're specifically talking to, we're the markets that they're focused on developing new properties and how competitive are those markets. And if we feel good after doing that analysis, then it's not an issue.

In terms of how it's structured, everything will go into a master lease, so that will happen under any circumstances. It may be depending on who it is we're working with, there may or may not be stabilized assets that come along with an initial deal. If there are, then the stabilized asset will go into a master lease and development projects are stabilized and come online, then they'll go into the master lease as well. If they are purely development projects, then when they're stabilized and become part of our portfolio, then they will come into a new master.

Okay. The last question I had, on the cash G&A, it looks like it went from maybe $1.2 million in Q3, Q4 to $1.36 million when I back out the stock-based comp. Was that increase based mainly on the taxes you talked about during the comments? And is that $1.6 million cash number a good number to use going forward?

Yes. That's correct. That's the difference of -- the state taxes is about half of that, call it a $400,000 delta, or $500,000 delta. The rest of it is just miscellaneous stuff, everything from bringing on a new staff person that we planned on at the initial starting of the Company that didn't happen until later in the first quarter, to just normal cost fluctuations. So about half of it was state taxes. I think that's the right number to think about on a cash recurring basis going forward.

Okay. Thank you.

We'll hear next from Frank Morgan with RBC Capital Markets.

Good afternoon. A couple questions. Rick, when you evaluate opportunities, investment opportunities out there, when you're looking at non-Sun or when you're looking at unaffiliated non-Sun properties. How do you evaluate those properties? Or how do you assess how well they've adjusted to all the changes that have occurred between the rate cuts and the rule changes, related to therapy on the relative basis, say, to how Sun has done? Would you characterize them doing about the same? Are they doing better, or worse? How would you characterize that?

I'd say they're doing actually about the same. I think part of it is because who we've aligned ourselves with. Part of what's been actually a little bit revelatory to me over this last 1.5 years is having run big chains my whole career, you tend to think of the big chains and the larger regional players and everybody else is a mom-and-pop. But the reality is, there are a lot of small operators out there who may be classified as mom-and-pop because of the number of assets they have but they've actually come from the big guys and they're smart, forward thinking, operators who are the A team on the ground as opposed to operating through four or five different levels of management.

So as a result, we're seeing very effective mitigation even with our smaller operators, similar to Sun, even though you'd think of the smaller guys wouldn't have as many levers to pull. Certainly they don't have the overhead reduction capability that Sun has but they're so effective on the ground that they are making up there.

I got you. Then another question, in terms of helping Sun look to find buyers or replacement operators to step into those facilities that they're choosing to exit. How big a market is there for the backup operators? Do you characterize this as a very difficult thing to do? Is it usually based on just the current operational state? Or is it more a function of, here's the [rin] I would have to step into? How does that conversation go when you look to try to help them secure an operator?

It's not real difficult. As you probably recall, because I know you covered Sun for so long, we divested probably three to six facilities that were underperforming for Sun pretty much every year. You typically don't get proceeds in those situations because they are underperforming. But we never really had a problem finding operators in those markets, or operators that want the focus on those markets, that wanted to take over those facilities.

So in the case of the four that we're looking to transition to another operator, the market is a little bit difficult. But we've had a number of operators that have come to the table that are interested in taking over and obviously from our perspective, we need to work out an arrangement where we remain whole, on that critical [stuff] our end. Out of the group of operators that came to us, we have one operator that we really think fits the bill. If for some reason, as we continue our negotiations and Sun works on it as well, if that doesn't come to fruition, then I think in that case that we've already vetted probably the only available operators in that particular market. Then we'd have to look at potentially divesting those.

I got you. Then, I think Sun may have also mentioned some development that they were looking into. I'm taking you would be the funding source for those developments?

No.

Okay.

On the CapEx piece, there's a bit that we've been talking with Sun for redevelopment of existing assets, so putting money into our assets. But I'm assuming that's what you are talking about first --

Yes. That's actually right.

Okay. They mentioned $30 million number, selling what their REIT's worth -- small portion of that. To the extent they were looking at any other ground-up development, we're not involved in that.

I got you. Then the color on the coverage ratios and the timing difference and discontinued ops, it's all very certainly helpful there. But as you think about, as we roll forward here, Sun talked about starting to see an uptick in volume, starting to enjoy the full benefit of all the cost mitigation. Sounds like things should get better in subsequent quarters, but how do you think -- what do you think, based on what you see today, how the coverage ratios when we roll over to the next reporting period. How do you see how much movement do you see either way in those coverage? Thanks.

I think it's still pretty much in line with how we talked about it late last year. That is that, it's a little bit lumpy over the course of the year. By the end of the year, we'll continue to see coverage improve so we thought that fourth quarter was a little bit better than we expected. We expect it to be light in the first quarter. I would expect a pretty good coverage quarter in the second quarter, as indicated by both the 1.61 for Tenant coverage and Sun had a margin [Bill comment about] April, on the call. Third quarter is always a seasonal quarter for the SNF business. So it may lighten up a little bit but it won't drop off, obviously, to the extent that it dropped off in this quarter, in part because there will be more mitigation done.

By fourth quarter, I think it'll be stabilized. In terms of Sun, I think we talked about somewhere north of about 1.44, something like that on a stabilized basis. So that's how we see it. Sun's not going to talk about it on the call but I will because even though they were soft on a year-over-year basis, on occupancy and volume, compared to two of their other large peers that reported earnings earlier, their drop-off in occupancy [in skilled] is actually materially less than those two so it picked up a little bit there.

Okay. Thanks.

(Operator Instructions) We'll go next to Tayo Okusanya with Jefferies.

Yes, good afternoon. Just a couple of questions. Rick, going back to the discontinued ops situation, given again, Sun's getting out of those assets. When you look at discontinued ops, Sun reported it's a negative number. It just seems like those assets are generally underperforming in their portfolio and I was just wondering again your ability to take those assets and get new tenants, and even if you did, what kind of rent do you intend to get out of them relative to what your getting from Sun right now?

Sure. So, two of the seven assets that we have, that are materially underperforming, those are the two that are being divested.

Okay.

So that's a big driver in those numbers. The other five facilities, one is already performing real well, as I mentioned. It would just leave Sun with one asset in the market. So, it doesn't makes sense to them. The other four aren't performing -- they're underperforming but not to the point where we don't think that they can't perform better. So it's just that the numbers are really driven by the two facilities that both Sun and Sabra want to divest because they're just killing us.

Okay. So at the end of it all, when again these seven assets get resolved in one way or the other, are you expecting any meaningful hit to your current NOI that's being generated from these assets -- relative to where you will be once all the stuff is resolved?

No. Without getting into details about how we're negotiating either with operator or Sun, because I don't want to go there. I will refer to my prior comment that I would expect that we would come out whole on any assets that we move to another operator.

Okay. Then on credit ratings upgrade, we've had Moody's make their move. Can you give us any sense of maybe some of the other credit rating agencies and what they may be thinking?

Well, we got the upgrade from S&P late last year.

Last year, yes.

So since then, I think one thing that Moody's and both of them have looked at is we've obviously executed a strategy as we described it to them up front before we did the split and actually beyond what they expected. So the upgrade was certainly due and in fact I would argue that we're still probably a notch or two below where we should be. But their focus, really the overriding focus at both agencies have, is diversification and growth. So as we think about the next upgrade, probably we're looking at something in that, needed to be in that, 50% range of Sun concentration, plus or minus.

Then, obviously what comes out of that diversification is growth as well. So maintaining our credit stats, and look, they've indicated that we can lever up a little bit and that's not going to give them concern. If we keep it -- at Moody's particularly, if we keep it below 6 times in their write up, they feel like we're in good shape. So we've got room to grow using debt, which is obviously very helpful for us. Looking at getting Sun concentration down and just growing the size of the Company are the two things that we'll focus on to get that ratings bump to the next level.

To put just a little more perspective on it, maybe from a timing perspective is, if you were to assume that we did around $200 million in acquisitions by the end of this year, so that's how we move into 2013. Then you take a look at the effect of moving these disc ops facilities either out of Sabra through divestiture or to another operator, our exposure to Sun drops from the current 73.5% to close to 60%. So 50%, then, in 2013 is clearly within our visibility. So that's just to give you some metrics attached to where we think we could wind up at the end of this year.

Got it. That's helpful. I guess one last question moving closer and closer towards getting CMS's initial proposal for SNFs and also states setting their Medicaid rates, just curious what you're thinking and what you're hearing about how those two things could shake out?

On CMS, they're not putting a rule-out. So that's always good news. So we would expect based on our conversations with folks in the industry and then looking at what CMS specifically put out that they'll just be announcing a [mark] capacity with a productivity adjustment. The numbers that we're seeing and hearing range from a net 1.8% increase to 2.2% increase. So it would be somewhere in that range.

On the Medicaid side, when we look at all of our states, we'll be up and down in a couple of states. But for the most part, we continue to expect a flat rate environment, consistent with the last three years.

Great. That's helpful. Thank you.

Yes, thanks.

And with no further questions in the queue, I'd now like to turn the call over to Rick Matros for any additional or closing remarks.

Thanks for your time, everybody. We appreciate it. Appreciate the support, and Harold and I are both available, and Talya as well. So shoot us an email or give us a call and we'll be happy to spend some more time one-on-one with you for follow-ups. Thanks very much and have a great day. Talk to you soon.

Again, that does conclude today's call and we thank you for your participation.