Sabra Health Care REIT Inc (SBRA) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Healthcare REIT, Inc., third quarter 2013 earnings conference call. Today's call is being recorded.

At this time, I'd now like to turn the call over to Talya Nevo Hacohen, Chief Investment Officer. Please go ahead, Ms. Nevo.

Thank you very much. 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, our expectations regarding our acquisition and investment plans, and our expectations regarding our future results of operations.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10K for the year ended December 31, 2012, that is on file with the SEC, as well as in our earnings press release included as exhibit 99.1 to the Form 8K 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 the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as exhibits 99.1 and 99.2 respectively to the Form 8K we furnished to the SEC yesterday. These materials can also be accessed in the Investor Relations section of our website at www.sabrahealth.com.

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

Thanks, Talya, and welcome, everybody, to our call this morning. I will jump right into the Forest Park deal. This deal was attractive to us on a number of levels. These are purpose-built, high-end acute hospitals that are state of the art. They are built to conform with the trends that we see on the ground with healthcare reform with a focus really being primarily on outpatient surgery, with their inpatient unit serving as recovery units.

So as a result, we see in the Dallas and Frisco hospitals, 50% and 60% of their revenues coming from outpatient. We see their average length of stay in their inpatient units of 1.8 days, which is less than half the industry average. So we think that bodes really well for the future.

They're physician-owned hospitals, so all private pay. We obviously like that about it. As we see in countries that already have socialized medicine, there are always markets where private pay continues to exist and flourish, as long as those facilities are built in the right markets and these certainly are.

The design of the hospital is hospitality/hotel-oriented. You really feel like you are in a five-star hotel when you're in the rooms of these hospitals. They're destination points. They contain banks and shops. Their cafeterias are chef-run, and in some cases, open to the public.

One of the other things that was very interesting and unusual, we thought, about the deal was how well the interests are aligned by all parties. The principal physicians had material capital in development as obviously the development group. On a go-forward basis, the operating companies, the development company stays in. All the docs participate in the profits of the company and so everybody's interests are aligned with Sabra's.

The pricing of the deal reflects really all the comments that I just made. We realize that an 8.75% cap rate is more expensive than traditional hospital deals, but number one, these are not traditional. Again, they are private pay, built to suit, high-end facilities.

Secondly, I'd point out that there was a larger traditional hospital deal done earlier this year at a 6% cap, but at any rate, there aren't really very many good comps for this kind of deal. So we think that there's plenty of upside here. The escalators are strong and the current trends are strong in both the Frisco facility and in the Dallas hospital that we have the mortgage on.

Additionally, the Forest Park management team is extremely experienced and skilled, and are continuing to build out their platform. We hope to be a party to that growth on a go-forward basis. Additionally, the principal physicians have given us personal guarantees as well on those material guarantees.

In terms of Texas exposure, I'd make a couple of comments. We don't believe that you look at our Texas exposure as one entity. We have three different asset classes in Texas -- the acute hospitals, this, and senior housing. Post this deal, our Medicaid exposure in the State of Texas is 8.8%.

In terms of additional things, in terms of work that went into this deal, we engaged PWC to do a soups-to-nuts analysis of everything about how these facilities operate. They looked at operating systems, accounting practices, revenue recognition, IT systems, managed care rates and got exceedingly positive reports. The PWC report reinforced all of our independent diligence that this is a highly skilled, well run organization for us to be partnered up with.

We also understand that this kind of deal took everybody by surprise. But I would remind everybody that since we did our initial hospital deal, we had said all along -- albeit quietly -- that we continue to look for acute care opportunities. We just haven't seen anything that's really been of interest to us. As recently as last week, we got presented with another development deal for a community-based hospital that was going to be primarily Medicaid and we just simply weren't interested. So we will continue to be on the lookout.

We've also noted, on a continual basis, that as we continue to build Sabra to be in alignment with what we see happening on the ground with healthcare reform, we always included acute hospitals in a number of asset classes that we thought were winners, as opposed to some of the asset classes that you all know that we aren't favorable towards.

In terms of the effect on our profile, the numbers on our balance sheet and income statement, really, the best word I could use is "kaboom" when you take Genesis from 60.6% to 52%. Assuming full funding of the Fort Worth loan, it's 50.4%. Our skilled exposure goes from 82.1% to 70.4%. Assuming full funding out of the Fort Worth loan at 68.2%. Our Medicare and Medicaid exposure drops from 68.4% to 58.3%. Assuming the Fort Worth funding, 56.7%. So we're clearly moving rapidly away from being a SNF REIT, which has been our stated intention all along.

In terms of our strategy going forward, we're going to continue to focus on growing the relationship with Forest Park. Senior housing, in terms of both stabilizing and develop new projects will continue to be a primary focus for us, with New Dawn, Meridian and a third group that we're working with.

We will continue to do select skilled nursing acquisitions and I say select because we don't want to move the numbers the other way. We have a commitment to our existing tenants, our SNF operators, to grow with them, but we want to be committed partners to them. So as a result, we're going to be selective about what we do in terms of new SNF acquisitions. Obviously, we will continue to reduce our Genesis exposure. We will be talking with the rating agencies and expect them to receive this news favorably as well.

In terms of capital markets, our ATM will be activated. At this point in time, we do not have follow-on on our agenda. What we expect to happen is in addition to activating the ATM, while we realize that the ATM is just going to dribble out over several months and may not be sufficient, depending on the amount of deal activity that we have, when we initially announced the ATM earlier in the year, we got a lot of reverse inquiries. We expect that that to be the case once we activate the ATM.

So it may be that we will be able to raise enough equity to be ATM on reversing inquiries and really put off any other thoughts in terms of traditional equity going forward. But as usual, it'll be opportunistic. We will have to see what the market is like, what our deal activity is. We want to manage our leverage, but we have plenty of liquidity on the balance sheet right now, even post this deal, so nothing big pending in terms of equity.

The amount of equity that we'd probably raise with the ATM, at least until the end of this year, will have no material impact on our numbers for the year. As you saw, we've increased guidance for the year, but the real full impact of this deal will be in 2014 where it has a dramatic effect on our FFO growth. [

So we've now done $270 million in investments to date, which (inaudible) our top end on our assumptions was $200 million. We've got a number of things that we're actively working on, so it's possible we will close more before year-end. We'll see. We're actually not in a real rush to do that. We'll do whatever works best for us and our partners.

The pipeline, while it was frustratingly slow through a Labor Day, for whatever reason, since Labor Day, it's picked up dramatically. It currently stands at about $400 million with a lot of high-quality stuff in there, primarily all senior housing, (inaudible) memory care. On some of the larger deals, we're seeing pricing is a little bit aggressive, but on most of the deals, pricing is stable. Institutional capital is obviously still attractive in the senior housing sector.

I'll now move on to our operating stats. Genesis's fixed-charge coverage jumped from 1.19 to 1.29. We fully expect that -- and again, we report a quarter in arrears, but we fully expect that for their third quarter numbers, their fixed-charge coverage will drop for a couple of reasons. One, in the SNF world, the third quarter is the most seasonally light, weakest quarter. So that would be a contributing factor.

Secondly, in terms of their synergies, they are still on track and will hit their $65 million, but they're not finished yet and they're in the second phase of execution on those synergies. The first phase was all back-office overhead-related. The second phase is much more complex because it's operationally-oriented.

So in other words, conforming this on an operating platform and processes to the Genesis platform and processes, which having been an operator for as many years as I was, it's a very disruptive process. So I would expect that from an operating perspective, that there will be a temporary drop in performance for the quarter with a nice rebound the following quarter.

We have great detail about all of Genesis's plans. They do a phenomenal job. We're on board with everything they're doing. We think the end results of this transition, despite any interim blip, is going to be more than worth it. So we're fully supportive and appreciate everything the management team at Genesis is doing.

Our skilled rent coverage is stable at 1.27% and despite the seasonality of this summer, the July and August rent coverage numbers that we've seen are stable as well across all of our tenants. Our one acute hospital was at 2.71% up from 1.5%.

In occupancy, with 88%, down 150 basis points from the comparable period. Our skilled mix was down 90 basis points to 36.4%. So most of that drop was in Medicaid. I would expect for the months of July, August and September, we'll see what we normally see and that is a bigger drop in skilled mix, although the early numbers that we're seeing show overall occupancy actually pretty stabilized, which is helping maintain stable rent coverage through the summer months as well.

And with that, let me turn the call over to Harold and after Harold is done, we'll go to Q&A. Harold?

Thanks, Rick, and thanks, everybody, for joining the call today. I'm going to start today with an overview of our results for the third quarter of 2013 and then spend some time on the financial impact of the Forest Park investments and how we are thinking about our capital sources to fund acquisitions moving forward.

For the three and nine-month periods ended September 30, 2013, we recorded revenues of $32.9 million and $97.4 million respectively, compared to $26 million and $74.9 million for the same periods in 2012, increases of 26.5% and 29.8% respectively.

FFO for the three and nine-month periods ended September 30, 2013, was $17.5 million and $40 million or $0.46 and $1.06 per share respectively. Normalized FFO for the same periods, which excludes non-recurring refinancing costs, was $17.9 million and $50.9 million or $0.47 and $1.35 per share respectively, increases of 35.5% and 31.8% over the same periods in the prior year.

AFFO for the three and nine-month periods ended September 30, 2013, was $16.3 million and $38.5 million or $0.43 and $1.01 per share respectively. AFFO for the quarter increased 9.4% over the same period in 2012. Normalized AFFO for the nine-month period ended September 30, 2013, which excludes non-recurring refinancing costs as well, was $48.5 million or $1.27 per share, an increase of 8.9% over the same period in the prior year.

For the second quarter of 2013, we had net income attributable to common stockholders of $9.2 million or $0.24 per diluted common share compared to $5.2 million for the third quarter of 2012, which was $0.41 (sic - see press release, $0.14) per diluted common share. Our net income attributable to common stockholders was $15.3 million or $0.41 per common share for the nine-month period ended September 30, 2013. This compares to $15.6 million or $0.42 per share for the same period of 2012.

G&A costs for the quarter totaled $3.1 million and included stock-based compensation expense of $1.3 million, and acquisition pursuit costs of $0.3 million. Excluding these non-cash and transaction-related costs, G&A costs were 4.6% of total revenues for the quarter, compared to 5.8% for the same period in 2012.

Interest expense for the three-and nine-month periods ended September 30, 2013, totaled $9.7 million and $29.9 million, respectively, compared to $9.1 million and $24.7 million for the same periods in 2012. These increases are the results of the incremental borrowings in 2012 and 2013, partially offset by lower overall borrowing costs.

Our weighted average effective interest rate for our total borrowings as of September 30, 2013, was 6.04% compared to 6.87% as of September 30, 2012. During the three and nine-month periods ended September 30, 2013, we incurred a loss on extinguishment of debt of $0.4 million and $10.1 million respectively compared to $0.5 million and $0.7 million during the same periods in 2012. The amount in the third quarter of 2013 related to the write-off of deferred financing fees in connection with the modifications to our revolving credit facility.

During the nine months ended September 30, 2013, we recorded adjustments to an asset purchase earnout liability resulting in a cumulative adjustment of $0.6 million recorded in other expenses. An adjustment of $0.3 million was recorded in the third quarter in other income. This resulted in a final liability as of September 30, 2013, of $1.9 million. This liability is expected to be paid out in the fourth quarter and will result in additional rental revenues based on an 8% per year cash yield on the earnout payment.

Cash flows from operations totaled $49.2 million for the nine months ended September 30, 2013, and $58.5 million when you exclude the $9.3 million one-time payment related to the early extinguishment of debt in the second quarter. This compares to $47.9 million in the same period of 2012, a 22.1% increase.

During the third quarter, we had very limited investment activity and no capital-raising activity outside of the completion of our amendment to the revolving line of credit discussed on our last earnings call.

We completed the quarter with available liquidity of $383.1 million.

A quick update on our debt refinancing activity with HUD. In late September, we received HUD approval for all but one of the six properties that we took to HUD for the refinancing of approximately $57 million of mortgage debt due in 2015. Unfortunately, the government shutdown stopped the process before receiving final funding commitments. Those commitments are expected to be received in the next couple of weeks and we should expect to complete the financings at or near year-end.

Rates have backed up in recent months, but we do expect to obtain rates at around the 5% level. We continue to expect the remaining $30 million refinancing through HUD to be completed in 2014, subject to interest rates remaining attractive.

We were in compliance with all of our debt covenants under our senior notes, indentures and our secured revolving line of credit agreement as of September 30, 2013. Those metrics include the following based on defined terms in those credit agreements. Consolidated leverage ratio of 4.43 times, consolidated fixed charge coverage ratio of 2.49 times, a minimum interest coverage ratio of 4.1 times, total debt to asset value of 47%, and secured debt to asset value of 19%, unencumbered asset value to unsecured debt, 188%.

Now I'd like to highlight a few things from the Forest Park acquisition we announced on Tuesday. We included pro forma information in our supplemental package to provide some details on the impact of these transactions on our financial performance. This pro forma data is based on the actual financing sources used for the transaction, which I'll discuss a little further in a moment.

Assuming these transactions were completed at the beginning of the quarter ended September 30, 2013, our pro forma normalized FFO for the quarter would be $22 million or $0.58 per share, a 25.4% increase over actual. Our pro forma AFFO for the quarter would be $20.1 million or $0.53 per share, a 23.8% increase over actual.

While the accretive impact is enhanced by the use of existing cash in our line of credit borrowings to fund the acquisitions, the long-term impact is expected to be strong accretion, given our current cost of capital and the growth in rents we expect from these investments over time.

While these are sizeable investments for us, because of our capital market activities earlier in the year, we are not suddenly compelled to rush to exit the capital markets for funding as Rick alluded to earlier. While we intend to activate the ATM program in the near term and begin to refresh the revolver over time, we're still in a position where we continue to grow in the near term and exit the capital markets opportunistically.

These transactions were funded with available cash and borrowings of $131 million under our line of credit, leaving the company with remaining liquidity of $158.5 million, including $155.5 million currently available under the line of credit. We have additional committed borrowing capacity of $88.5 million under the line as well as the access to the capital markets of $100 million through the ATM program.

Furthermore, we have an accordion feature in the line of credit which provides additional potential capital of $225 million. All told, we have capital access structures in place providing us with access to liquidity of up to $550 million after taking into account these transactions. This gives us significant flexibility in our capital funding options moving forward and it allows us to move forward with acquisitions as we have historically.

Furthermore, the company continues to be acutely focused on maintaining an appropriate level of leverage, with an eye toward continued rating improvements by the rating agencies. Our pro forma credit stats, after [giving effect] to these transactions, also continue to be very strong. Consolidated leverage ratio of 4.65 times, consolidated fixed charge ratio of 2.74 times, minimum interest coverage ratio of 3.72 times, total asset value of 47%, and secured debt to asset value of 19%, and an unencumbered asset value to unsecured debt of 188%.

One thing to note about our leverage calculation, we don't include preferred equity as debt for our covenants, but we do include the dividend in our fixed charge coverage calculations. However, the rating agencies do take into account preferred stock into many of their analysis. So including preferred equity of $143.7 million, our leverage would be 5.63 times.

Those ratios keep us in line with rating agency expectations for future rating increases and we intend to fund future acquisitions, as we have in the past, with an appropriate mix of long-term debt and equity capital. Thus, maintaining credit stats in line with our ratings improvement objectives.

Finally, a quick comment on our guidance update. While the Forest Park transaction occurred in the fourth quarter, because of the size, we do expect our full year 2013 performance to exceed our prior expectations. As such, we've updated those expectations as follows.

Net income to attributable common stockholders ranging from $0.67 to $0.70 per share up from a range of $0.65 to $0.69 per share. FFO ranging from $1.55 to $1.58 per share, up from a range of $1.53 to $1.57 per share. Normalized FFO ranging from $1.84 to $1.87 per share, up from a range of $1.79 to $1.83 per share. AFFO ranging from $1.49 to $1.52 per share, up from a range of $1.42 to $1.46 per share. Normalized AFFO ranging from $1.75 to $1.78 per share, up from a range of $1.66 to $1.70 per share.

And with that, I will turn it back to Rick.

Thanks, Harold. Why don't we go to Q&A now?

(Operator Instructions) We'll hear first from Michael Bilerman from Citi.

Hi, this is Archna for Michael Bilerman from Citi. Could you shed some light on the coverage ratios for the recently acquired Forest Park hospitals and the mortgage one? And also, moreover, looking at future acquisition opportunities with the Neal Richards Group, would they be more concentrated in Texas as well? How would you balance out the geographic concentration going forward?

I'll take the second part of the question and turn the first part of the question over to Harold. In terms of their expansion activities, they have additional projects in Texas, but they also now have identified projects in two other states.

And as it relates to coverages, so Frisco, which is the hospital that we acquired outright, their coverage is on the same basis as we issue coverages for our existing portfolio, which is three months in arrears. It would be around 2.6 times for the trailing 3 and 2.8 times for the trailing 12.

Then in Dallas, because that's a mortgage loan, I think the relevant factor there is to think about what our coverage is, our fixed-charge coverage, if you will, for that entity. That's at about 1.6 times. Keep in mind though that this is a special purpose entity and really, they're collecting rents from their tenant and they're paying our interest on our loan. So we wouldn't expect really any volatility around that coverage.

Okay, great. Thank you.

We'll take our next question from Rob Mains with Stifel.

One question on the Genesis coverage. I appreciate the heads-up on what we're likely to see in the third quarter. What happened in the second quarter? The fixed coverage could have moved up as much as it did, just because I know it was not really a bang-up quarter for the industry.

Their cost controls were really solid. Their therapy management was really kind of peaking, at least through certain parts of the portfolio as it relates to all the changes. Those are really the main drivers, and the seasonality really just started hitting then in the last month of the quarter. So then a bunch of the initial synergies kicking in obviously helped quite a bit as well, but again, those were the synergies that didn't really affect operations although it gets covered in our fixed coverage definition because it was mostly back-office.

That's why I point out that. And I'll get a little bit more specific now because I know you will appreciate it, Rob. In terms of the second phase of execution of synergies, when I talk about the operational impact, the Sun facilities are having to conform to the Genesis clinical protocols, completely different food programs, a brand new labor management system and some differences in therapy management.

Any one of those would have a material impact on an operator. So rolling it all out, I think the decision there was let's get through it; let's take the bump all at once, so that we can recover. The early returns after the first three months is they're already seeing some nice recovery. So I think everything is going as planned. I just wanted to give everybody a heads-up to have more realistic expectations, but not to be concerned over the long run.

Okay, that helps. Then you said the pipeline predominantly is seniors housing. What are you seeing for cap rates because, as you know, [Tamir], larger peers are noting that despite what's happened in the capital cost environment, cap rates, at least on some of the big portfolios, seem to be pretty sticky.

Rob, it's Talya. I think that we concur with that last comment. That observation is exactly what we're seeing on the larger portfolios, where there is sufficient capital interested in the sector and even pension funds and such, institutional capital, that it definitely is a driving force in cap rates to remain pretty sticky on the larger transactions.

On the smaller transactions, it's sort of $100 million and smaller that we're typically focused on. We're not seeing any downward pressure on cap rates. We're basically seeing them sticky, but I'd say on seniors' housing, it's 7.5% lease (inaudible) and lease rate plus-minus is about what we're seeing. We're still looking at deals slightly sub-8% maybe.

Okay. Going back to some of Harold's comments about capital, thinking about capital going forward, that leaves you enough room to have an initial spread? You're pretty comfortable with that?

Yes, absolutely. When you think about our cost of capital moving forward, and thinking about doing acquisitions on a debt to equity balanced basis, 50/50, we still get a lot of accretion. Because when you think about it, one thing that people sometimes don't think about is when you calculate your cost of equity and you factor in a growth rate for your dividend and your growth rate for your AFFO over time. You also have to factor in a growth rate in rents through the escalators. So you can't really compare a cost of capital thinking it might be around 8% to initial cash yield because the cost of capital includes the growth over time, where the initial cash yield is a point in time and we'll see growth.

So you take the Forest Park transaction as an example. Cash yield is 8.75% at Frisco, but the GAAP yield, which includes 3% escalators, is 11%. So when you start comparing 11% yield to an 8% to 9% all-in cost of capital, you still get really nice growth. On an actual accretion basis, it's very significant.

Okay. Just one more and then I'll let somebody else ask questions. To just follow up on the senior housing opportunities, obviously, were it not for this Forest Park transaction, things would be -- you would have gone through a long quiet period. Rick, you said things picked up after Labor Day.

When you say picked up, are you saying that there's more people interested in transactions, or is it that maybe reality is setting in? Because I've heard a lot of -- and your peers complain that a lot of sellers still have visions of sugar plums dancing in their heads in terms of what they can get given where they've seen some other transactions get done.

I think we have a little bit different point of view, but at this point, it's anybody's best guess. I think for the first eight, nine months of the year, taxes went up. I sort of stepped back and said do we really have to monetize now? The year goes by and maybe you just get to the point where, yes, we really do need to monetize now; we need to start thinking about year-end. Do we want to get something done before year-end? Or are we better off from a capital gains perspective, letting it run into the first quarter, which is why we're going to be flexible with our potential new tenants on the deal that we're currently working on.

So I'm not really sure. It just felt like nothing was changing anyway. We might as well still sell but -- and based on Talya's comments also, we're not seeing pricing at the $100 million level. That said, these guys have sugar plum fairies dancing in their heads.

And when I say that deal volume picked up after Labor Day, I'm talking about going through getting a couple of calls over several weeks to getting calls every single day. It was like someone just turned on the spigot. So again, it's anyone's best guess, Rob, but we'll take it.

Okay. Thank you.

(Operator Instructions) We'll hear next from Michael Carroll with RBC Capital Markets.

Can you give us a little color on how the hospital campuses are laid out? In particular, how many medical office buildings surround the two established hospitals? And is there a similar development around the Fort Worth project?

The medical office buildings are part of the campus. There's no other medical office buildings that are closely within the vicinity of any of the projects. The medical office buildings are owned by another publicly held REIT. So they also have an ongoing relationship with the Neal Richards Group. When you walk into these places -- we're going to set up an Investor Day probably sometime in the first quarter where we'll take you guys through maybe one or two of the hospitals, as well as some of our other properties in the Dallas area.

When you walk in, you're going to feel like you're walking into a five-star hotel. So it's very consumer-hospitality oriented, the way that it's laid out with very high ceilings and audible backdrops and all this stuff. But everything is connected within the campus, with the MOB, the hospital, parking garage, which we -- the parking garages come with our deal. Talya, could you add anything else to that?

Sure, I think one of the objectives in the design of these hospitals and the hospital complexes is that they are efficient for consumers -- i.e., patients -- and they're efficient for physicians. So the travel distance for docs to go from parking to their staging room and break rooms, their (technical difficulty) the ORs is all very short.

Similarly, for the consumer who comes to have a procedure, they have parking that's very close to the [entrance], easy access, direct access, into the facility itself, a very simple, very short travel time to their pre-op and on and on, and also, for visitors coming to see patients.

So there's the facility itself, when you'll hopefully join us in an investor tour, you'll see that it appears as one complex, as opposed to a scatter -- several buildings adjacent to each other. It's very integrated and the feeling is seamless.

And as beautiful as the Dallas facility is, they took another step forward with the Frisco facility. The Southlake facility, which recently opened takes another forward. So they keep on improving the model. I think one of the things I neglected to mention earlier is that these are all lead certified. It's a very high standard. It does an awful lot to contribute to having lower operating costs and because this is physician-owned hospitals, that reduction in operating costs is really put back into patient care.

Okay. Then the Fort Worth project, is the medical office buildings currently under construction or are they already complete? Is the hospital ahead of the other development around the area?

The hospital, the structured parking and the MOB are all being developed at the same time.

Okay. Then can you talk about the other three hospitals that this operator owns? Why weren't they included in the transaction? Is that something you'd want to acquire in the future?

There's only one other hospital that's open besides Dallas and Frisco and that's Southlake and that was recently opened. So as that hospital stabilizes, we're certainly in dialogue with Forest Park on that one as well. The others are all going to be constructed.

Okay. Would you do a construction loan on the other two also maybe in the future?

We're willing to talk to the Neal Richards Group about anything.

Okay. Then I guess last question, can you talk about or explain the call and put option on the Dallas hospital? Do you expect to exercise those? If so, when do you expect that to occur?

Sure. So the call and put option are in place. The call option that we have is in place based on basically a 2.5 times coverage, once the hospital reaches and stabilizes it 2.5 times. The put option allows them to put it to us also at a 2.5 times coverage, but if it's less than 2.5 times coverage, I think if it's more than 2 times, they can still put it to us. But there would be a reduction in the purchase price as well as right-sizing the rents associated with the hospital.

So the idea being that fully stabilized, the expectation is building -- the real estate will have $168 million valuation. In the event that it takes longer to get to that, or they don't achieve that, we'll still have some opportunity to buy it at a reduced price. If that's the case, reset the rents on the existing lease that we'll step into so obviously, the tenant provides us the appropriate level of coverages.

Really, the primary reason this is in place is to allow them to have time to stabilize. It was the first hospital, it's the largest of the three that are open, the first one that transitioned from out of network to in network. So if you look at their 12-month numbers, as you would expect when you go from out of network to in network, there's a lot of fluctuation.

The current trends are very good, but we just wanted to give them and give ourselves more time [until that's] stabilized. The mortgage was, frankly, pretty easy because the real estate value easily supports that. So it really provided a great hedge for us.

Then similarly, with the Frisco facility, as well as it's performing, we think that there's more upside there. Harold talked about the coverages. We see those starting to improve as they complete their transition going from out of network to in network. But the [holdback] provided a hedge as well. So we felt like we conservatively structured the financing of these to give both ourselves and our new partners some additional time with really no downside (inaudible).

So this asset just stabilized sometime in 2014?

Yes, that's our expectation.

(Multiple speakers) --

(Multiple speakers) --

(Operator Instructions) We'll hear next from David Shamis with Jefferies.

I just want to turn back to Genesis real quick. Just wondering once all the synergies are achieved, what's the coverage expected to settle out at? How long is that expected to take approximately?

The fixed-charge coverage, it's probably going to be, the way we calculate it, somewhere around 1.3 times would be my estimate. It may be a little bit north of that. They've gotten a lot of the synergies already reflected in the numbers and there's still some more to come. But exactly how much has been reflected and how much is still to come, I'd say I don't have a real good complete handle on that. But where they're at right now, they're probably end up probably a little bit north of where they are today.

Yes, so (inaudible), you're going to have a dip in the next quarter. You'll have a rebound after that and as Harold says, it probably settles in a little bit north of where it is.

Okay, great. Then just turning to your investment pipeline, and I know you mentioned it's $400 million, just wondering if you can elaborate. How much of that is debt investments versus sale leasebacks? And as interest rates eventually do rise, do you expect to do more debt investments versus asset acquisitions?

Most of them are sale leasebacks. We are actively working on about 25% of what's in that pipeline right now and still doing some diligence on the rest of it. In terms of whether we do more or less debt instruments, we've been completely opportunistic about that. That's how we're going to be going forward. So it's just going to depend on what the situation requires. We've gotten to the point where we pride ourselves on how flexible and creative we've been with these guys. So we'll just continue to do that. But it's difficult to project whether it's going to go up and if so, by how much.

Okay.

Let me just add, whenever you see us do a debt investment, it's really just a first step in the deal to actually get to ownership of the asset. So it's a means to an end and the objective is always to own the property and either lease it or have it (inaudible) structure or something. But real estate ownership is the objective and a loan is just a means to an end.

Yes, we're not going to be a bank.

That makes sense. Then just on capital, would you guys go back to the preferred equity markets?

I don't see us doing that right now. I think we have plenty of other opportunity, as I said earlier, with -- once the ATM is activated and the volume that we think we're going to see in reverse inquiries and the existing liquidity that we still have. Even post this deal, I don't think we need to go there.

And (inaudible) we like the preferred equity market. We definitely wanted to tap into it last year because one of the things we wanted to do is demonstrate that we have multiple sources of capital that we can access. But given how the rating agencies view preferred, that puts a little bit of a damper on using preferred to some extent. But we do like the fact that we have that there and we've demonstrated we can access it in the future. But to Rick's point, it's something that's on the radar screen right now.

That's helpful. Then just last one -- Harold, I think you mentioned for the HUD refinancing that you're looking at rates at around 5%. Last quarter, I think you mentioned 4%. Given it's a 10-year, it was about the same as it was last quarter. I just want to make sure I'm understanding that properly.

So there's a couple of things that have happened and treasuries have actually obviously improved here the last couple of weeks. But one of the things that's happened in that market with HUD are the investors in HUD are now re-evaluating how long this debt is going to be outstanding and re-evaluating their models for refinancing. It seems funny to me but their model still assumed these loans would be refinanced in six to eight years, when people were doing HUD debt at 2.5%. I can tell you we're not going to refinance our 2.5% HUD debt in eight years. It's going to be out there for 30 years.

So I think part of what's happening is they're re-evaluating their models on refinancing assumptions, which is driving up the spreads to 10-year treasures a bit. But we have seen, even as recent as this week, rates seem to be improving. So we're hopeful we'll get inside 5%. But I feel pretty good about that kind of being the high end of where we might end up.

The current rate on that debt is 5.5%, is that right?

I believe it's 5% floating. But again, I think the benefit that's obviously here for us, even if it ends up being 5%, is we're taking something that's maturing in 2015 and amortizing it over 30 years.

And not floating.

Right, at fixed.

Great, thanks for taking my questions.

This will conclude the question-and-answer session. I'd like to turn the call over to Rick Matros for closing comments.

I appreciate everybody's time and attention this morning. Just our plan going forward, obviously, we're all around as well for additional calls with any of you guys. We're very responsive.

We'll be at NAREIT and then the week before Thanksgiving, we'll be doing a non-deal road show. Then the first week of December, we'll be doing a non-deal road show again. So we'll be, between now and the end of the year, we'll be out there, very accessible and very visible and also working on hopefully getting some more deals closed this year.

So with that, have a great day and again, appreciate your time and your investment in Sabra.

This does conclude today's conference. We thank you for your participation. You may now disconnect.