Sabra Health Care REIT Inc (SBRA) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Inc fourth-quarter 2013 earnings conference call. This call is being recorded. I would now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead, Ms. Nevo.

Thank you very much. Good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition and investment plans, our expectations regarding our financing plans, and our expectations regarding our future results of operations.

These forward-looking statements are based on Management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2013 to be filed with the SEC in the next couple of days. 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 Exhibits 99.1 and 99.2, respectively, to the Form 8-K we furnished to the SEC yesterday. These materials can also be accessed in the Investor Relations section of our website at www.sabrahealth.com and with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Talya. Good morning, everybody, or good afternoon for those of you not in California. Welcome to the call. We appreciate your time today. Let me start out with a recap of where we've been. We had very strong fourth quarter. As you know, we didn't have a whole lot of activity the first half of the year, but a very strong fourth quarter, driven by the Forest Park acquisitions and the additional investments we did on the development side with our senior housing operator development partners.

We've gotten to a very good start in the first quarter. We had robust capital markets activity with the high-yield offering. We got that done at 5.5%, as you all know, it replaced 8 1/8% money, with 5.5% money, so our cost of capital today, which Harold will talk about in more details, is much more competitive than it's ever been. We feel great about that. Our ATM is active. Harold will give you an update on that as well.

We also announced last week the acquisition of the Nye Portfolio in Nebraska. That's a combination of senior housing and skilled nursing. Very, very nice properties. Nebraska is a new state for us. We love the team. They have expansion plans in place for most of the six assets and would like to grow beyond that. So we'll look forward to having another new operator in the portfolio that we can grow forward with.

In terms of our strategy going forward, it really remains the same. Senior housing is a priority both in terms of stabilized assets and, again, it will be primarily AL/Memory Care, but also on the development side. Development will continue it to be a key focus for us. We've got, as you know, several development pipelines in place. We are continually working on trying to develop more. Our goal, really, is to have the highest percentage of new assets in our portfolio than any of the healthcare REITs. We think we are well on the way to getting there.

We will also still do skilled nursing facilities. That is a secondary priority for us and we will continue to look at opportunities to do acute hospital deals. We don't expect a whole lot there, but we would like to think that we will grow with the Forest Park platform. We do have a couple of things that we are looking forward to again this year, including the full funding of the Fort Worth project and the exercise of the purchase option on the Dallas facility. They are also breaking ground in two other areas in Texas and have now identified a couple of other states for expansions, as well.

Diversity and growth is really what we are about, obviously, continuing to reduce Genesis exposure, which on a pro-forma basis is now down to 48.5%. Our ultimate goal, obviously, is to get to investment-grade rating. Along with the growth factors that I talked about, one of the things that we are now taking a hard look at is our leverage.

Harold will give you specifics on our leverage, but as you know, we've been very comfortable and the rating agencies have been comfortable with us maintaining leverage in the 4.5 to 5.5 range. But we see a very high correlation from a multiple perspective between those REITs with lower leverage and those REITs with higher leverage. So our focus on a go-forward basis will be to try to get down to the 4-ish range.

In terms of our pipeline, we currently stand at about $400 million, so pretty stable compared to the last quarter. Different assets in the portfolio -- it the pipeline now that we had then about 65% senior housing. We're very pleased with the quality of assets in the portfolio. We don't see any pressure from a cap rate perspective, nor do we see any relief from a cap rate perspective. In terms of competition in the market, it's pretty much what it's always been for us. That is, we get our share of off-market deals and those deals that are competitive, we tend to compete with two or three others. So, that really hasn't changed, as well.

In terms of the impact, if any, of the recently announced merger with Emeritus and Brookdale, we really don't see it -- obviously, is a huge company at this point. At the deal size that we focus on, and even as we start to focus on larger deals as they come available. We believe -- and based on all the things that we're looking at in our pipeline today, that cap rates will pretty much be in the ranges that are reasonable from our perspective. So on the AL/Memory Care side, 7.5% to 8%; closer to 7% for IL, and for skilled nursing, 9% to 10%. We still see those numbers as numbers that we can count on, on a go-forward basis.

We also are reaffirming guidance and I want to make a couple of comments just to clarify what that guidance is. When we announced guidance early in January, that guidance did not assume any investments. It still doesn't. So, the Nye acquisition that we made and announced last week, that is not included in the guidance. We don't want to raise guidance every quarter. Obviously, we have a lot of deal activity going on.

In our guidance, we've stated that we expected to do $350 million to $400 million in investments this year. We still feel good about that. At some point this year, we may raise guidance once we have better clarity on the flow of those deals. But in our original guidance, we did try to give you all some better direction relative to timing of the investments that we see for the quarter so it makes it easier for you all to do some modeling.

Again, the Nye acquisition is not included in the guidance. Everything that we do, obviously, will be accretive to the guidance, even to the extent we have capital markets activity at some point later this year and to the extent that, that might be a little bit dilutive at the end of the day. The acquisitions that we do will be net accretive to the guidance that we put out. In terms of Genesis, I want to talk to Genesis a little bit, specifically. Genesis' fixed-charge coverage, as we gave everybody a head's up on in the last call, dropped 1.12. And dropped 1.12 really for a couple of reasons.

The third quarter is a seasonally light quarter for all of our skilled nursing operators. In the case of Genesis, they were also impacted by the fact that they are towards the tail end of their synergies and the phase-in of synergies in there with the Sun portfolio. That they wrote it in the Sun portfolio the third quarter was moving all of the Sun platforms to Genesis platforms.

That's policies and procedures, menus, IT platforms -- it's extremely disruptive for the operators. They've started seeing some bounce back in the fourth quarter and continued to see bounce back in January. All that should lead to really better results for Genesis, because it's difficult, obviously, when you do a big acquisition and the company you're acquiring is on completely different systems, has a different budget.

As of 2014, everybody's in the same platform, everybody's got Genesis budgets, so it is going to make it a lot easier for Genesis to manage on a go-forward basis and Genesis is no longer diverted by the integration of Sun into Genesis. We expect the fixed charge coverage for the fourth quarter to rebound from 1.12 to 1.21 and then to improve continually from there. As you know, it was at 1.29, so nice rebound in the fourth quarter. We expect it to get better after that.

They also renegotiated their covenants with their banks and got an additional 25% cushion on their EBITDA off their 2014 projections, so they've got plenty of room there. To the extent that there is a permanent doc fix, which looks less and less likely, and to the extent that there is a pay-forth by all the various sectors, that push gives Genesis that much more breathing room, so we have no concerns about where they're going.

In terms of operating stats, generally our EBITDARM coverage for our entire portfolio was 1.8 for the 12 months ending 2013, pretty much flat with 1.79 to 2012. Three months ending 2013 were at 1.73 versus 1.90. Our EBITDAR portfolio coverage was 1.40 for 2013, slightly up from 1.37 for 2012. For the three months ending 2013, it was 1.33 versus 1.49. Again, that's really all due to the seasonality and then very much driven by Genesis and the integration issues.

For the skilled portfolio, specifically, on an EBITDARM basis, almost flat to 2013 versus 2012, at 1.72 versus 1.75. For the three months ending, 1.66 versus 1.77, and on an EBITDAR basis for the year, relatively was flat at 1.25 versus 1.27 and we saw the drop, as we've been talking about, in the third quarter to 1.20 from 1.29. We don't expect much change in the fourth quarter. October got off to a very good start for our operators.

December was pretty harsh over the holidays. But all of our operators are reporting a very strong rebound in January and some speculation -- it looks like it's maybe the best rebound we've had in a couple of years, when we normally expected a big rebound in January. But because of the use of observation days over the past couple years, coupled with the CMS cuts, skilled mix really was never strong in January as we historically saw.

Whether there is some reduction in use of observation days, it's speculative at this point, it's a little bit too hard to tell. CMS has taken some action along those lines, some of which has been delayed. It's a little bit hard to tell why the rebound occurred as strong as it did in January. We will need a few more months to determine exactly what that is, but we will take it. It's good news for us.

Again, for the fourth quarter, relatively flat rent coverage through the third quarter, but a nice pop in this fixed charge coverage for Genesis. For occupancy stats -- I'm sorry, let me go back to our senior housing portfolio. Our senior housing portfolio, both on an EBITDARM and an EBITDAR basis, was essentially flat for the quarter and for the year on comparable period reporting.

Turning to occupancy stats, our skilled mix declined to 36.6% for 2013, down from 38.1% for 2012, again, due to the 2011 Medicare cuts and the observation day issue. The third quarter came in at 34.9%. As noted January 2014, we'll see an increase in skilled mix, matching the fourth quarter, we will see an increase in skilled mix as well.

For the fourth quarter, portfolio occupancy was 88.1% versus 88.9% for the fourth quarter of 2012. Our skilled portfolio was at 88.1% for the quarter versus 89.1% for the fourth quarter 2012. Our senior housing portfolio came in at 87.9% versus 87.4% for the fourth quarter 2012.

One other comment that I want to give everybody a heads-up on -- we will get something formal out -- but we are going to have an Analyst Day on -- we'll have a dinner on May 19 and tours on May 20, that will be in Dallas. We will be touring everybody through the Forest Park assets and we have got skilled nursing assets in that community, as well, so we will give at least one skilled nursing facility, in addition to that. Just wanted to give you all a heads-up. We will send a save-the-date out to everybody. With that, I will turn it over to Harold.

Thanks, Rick. I will begin this morning with a quick overview of the results of the fourth quarter and then discuss the pro-forma impact of certain activities subsequent to year-end. Finally, I will discuss our liquidity position, how we are thinking about the funding of our expected investment activity in 2014. For details of the 2013 annual results, I would point you to our Q4 earnings press release and our Q4 supplemental.

For the three months ended December 31, 2013, we recorded revenues of $37.6 million compared to $28.3 million for the fourth quarter of 2012, an increase of 32.8%. As at December 31, 2013, 51% of our revenues were derived from our leases to subsidiaries of Genesis and 69.5% were derived from skilled nursing related assets. These are down from 64.5% and 83.1%, respectively, as of the end of 2012.

FFO for the three months ended December 31, 2013 was $19 million, or $0.49 per diluted common share, compared to a normalized $16.3 million or $0.43 per diluted common share for the fourth quarter of 2012, an increase of 14% on a per-share basis. AFFO, which excludes from FFO acquisitions pursuit costs and certain non-cash revenues and expenses, was $19.5 million, or $0.50 per diluted common share. Compared to a normalized $15.6 million or $0.41 per diluted common share for the fourth quarter of 2012, a 22% increase on a per-share basis.

Net income attributable to common stockholders was $10.4 million, or $0.27 per diluted common share for the quarter, compared to $4 million or $0.11 per diluted common share for the fourth quarter of 2012. G&A costs for the quarter totaled $5.2 million, and included stock-based compensation expense of $2.6 million and acquisition pursuit costs of $0.7 million. Excluding these non-cash and transaction-related costs, G&A costs were 5% of total revenues for the quarter, down from 5.6% for the fourth quarter of 2012.

Interest expense for the quarter totaled $10.6 million, compared to $9.7 million for the fourth quarter of 2012 and include the amortization of deferred financing costs of $0.9 million in the fourth quarter of 2013 and $0.8 million in the fourth quarter of 2012. Based on debt outstanding as of December 31, 2013, our weighted-average interest rate was 5.41%. This compares to 6.28% as of December 31, 2012. This reduction is the result of our continued efforts to take advantage of the low interest rate environment and our improving credit rating.

Year-over-year, our effective interest rate on unsecured senior notes declined from 7.75% to 6.6%; our mortgage debt effective interest rate declined from 4.65% to 4.08%. Our revolver effective interest rate declined from 3.71% to 3.17%. During the quarter ended December 31, 2013, we also recorded amortization of a discount associated with an asset purchase earn-out liability; this resulted in non-cash other expenses of $0.2 million.

Looking at the statement of cash flows and balance sheet, our cash flows from operations totaled $12.9 million for the fourth quarter of 2013 compared to $8.4 million for fourth quarter of 2012, an increase of 54.3%. Our investment activity during the quarter consisted of the Forest Park Frisco real estate investment of $119.8 million and four mortgage loan investments totaling $126.5 million. These transactions were funded with available cash and borrowings under our revolving credit agreement of $135.5 million.

During the fourth quarter of 2013, we sold 1.4 million shares of our common stock at an average price of $27.01 per share through our ATM program, raising net proceeds of approximately $37.6 million. As of year-end, we had $61.7 million available for future issuance under the program. Once fully utilized, we expect to put up a new similar ATM program to allow us to continue to match fund our acquisition activity.

Cash and cash equivalents decreased by $92.3 million during the quarter, to $4.3 million as of December 31, 2013. This decrease was primarily due to the investment activity during the quarter, offset by cash flows from operations and proceeds from the equity issued under the ATM program. In addition, we paid quarterly preferred and common dividends totaling $15.5 million during the fourth quarter. As of December 31, 2013, we had total liquidity of $139.4 million, consisting of currently available funds under our revolving credit agreement of $135.1 million, and cash and cash equivalents of $4.3 million.

We were in compliance with all of our debt covenants under our senior notes indenture and our secured revolving line of credit agreement as of December 31, 2013. The key covenant metrics are as follows, based on defined terms in our credit agreements: consolidated leverage ratio, 4.6 times; consolidated fixed charge coverage ratio, 2.76 times; and minimum interest coverage, 3.85 times. Total debt-to-asset value, 52%; and secured debt-to-asset value 17%; unencumbered asset value-to-unsecured debt, 163%.

Subsequent to year-end we have been very active in both managing our balance sheet and continuing our investment activity, closing on the $90 million investment to acquire the Nye senior housing portfolio Rick discussed earlier. Our balance sheet management activities consisted of the following. Number one, we issued $350 million of 5.5% unsecured bonds that are due February 2021.

We also retired all the remaining $211.3 million 2018 bonds, having an effective interest rate of 7.75%. We refinanced $44.8 million of variable rate mortgage notes were due to mature in 2015, with mortgages guaranteed by HUD at a fixed rate of 4.25%, fully amortizing between 2039 and 2044. We paid off another $12 million of variable rate mortgage notes that were to come due in 2015 using our revolving credit agreement.

We received HUD commitment for a new mortgage on the properties and a fixed rate of 4.1%, which will be fully amortizing through 2044. This new HUD loan is expected to close by the early second quarter of 2014. This investment and financing activity in early 2014 results in quarterly -- ended December 31, 2013 pro-forma normalized FFO and normalized AFFO of $0.56 each, as increases of $0.07 and $0.06, respectively, over the actual results to the fourth quarter of 2013.

After completing the various financing transactions, our pro-forma weighted average cost of debt declines to 4.85%, a drop of 56 basis points from the actual at December 31, 2013. In addition, our Genesis revenue concentration and skilled nursing post-acute concentration declined to 48.5% and 68.8%, respectively, on a pro-forma basis. Our pro-forma liquidity increases to $143.9 million.

The two debt covenants that most significantly influence our borrowing capacity to fund our growth are impacted as follows. First, our pro-forma consolidated leverage increases to 5.17 times compared to a maximum under our revolving credit agreement of 5.5 times. Our pro-forma unencumbered assets to unsecured debt remains at 163%, compared to a minimum allowed under our unsecured note indentures of 150%.

With respect to how our debt covenant levels and liquidity relate to our expected investment activity of up to the high end of our 2014 guidance range of $400 million, let me make a few comments. First, given the typical lease rate range for our acquisition targets, we believe we have ample room under the leverage covenant to fund our expected 2014 acquisitions using availability under our revolving credit facility, along with the expected 2014 activity under our ATM program.

Regarding our liquidity needs to fund an additional $310 million of investments in 2014, our capacity under the unencumbered asset to unsecured debt ratio will increase and provide us with opportunities to add assets to our revolver borrowings base as we make investments in our unencumbered assets. Currently, we have $279.6 million of total capacity on the revolver. We expect to increase that capacity to the full $375 million commitment during 2014 in one or more tranches over time.

This will provide an additional liquidity of $104.4 million. This increased revolver capacity in the ATM program will provide us with liquidity to fund our expected 2014 acquisition activity. As an example, current pro-forma liquidity puts an additional revolver capacity of $104.4 million and an estimated $100 million of capital raised to the ATM program would provide us with just under $350 million in liquidity for investment activities. Based on this, we do not have an immediate need to seek additional capital through a follow-on equity offering.

However, we will be opportunistic during 2014, in determining the appropriate time and size for such an offering, dependant on part on the timing and size of those estimates we are able to complete. Furthermore, we do not expect raise capital in amounts that would create significant excess cash on our balance sheet for any significant amount of time. Our capital structure objectives continue to be to maintain adequate liquidity and proper leverage to support making strategic accretive investments with an eye toward improving our credit ratings over time.

Finally, just a quick comment on our improved debt maturities. With the recent capital markets and re-financing activities, our debt maturities have improved such that after the final HUD refinancing we expect to complete in 2014 of approximately $29.9 million of mortgage debt that is coming due in 2015. We will have no debt obligations maturing before the revolver matures in 2016, after taking into account the one-year extension option we have on the revolver.

After that, our mortgage debt will be fully amortizing, with an average weighted average remaining term of 28 years and our next bond maturity won't be until 2021. This puts us in a great position relative to our capital structure, allowing us to focus our capital raising activities in the next several quarters on funding acquisitions. With that, I will turn it back to Rick.

Thanks, Harold. Why don't we open it up to your questions, now?

(Operator Instructions)

Emmanuel Korchman from Citibank.

Maybe, Rick, you provided some clarification on how you think about acquisitions and guidance. Maybe I just got confused a little bit, but you said previously $350 million to $400 million of acquisitions in guidance -- that's included in FFO or that's not included in FFO? Then, I just got lost on how you are treating Nye. So does that mean that you are now at, effectively $440 million to --?

No, okay, our guidance excluded all acquisitions. We wanted to guide you guys for modeling purposes what we expected to do in acquisitions but we don't include acquisitions in guidance, simply because you can't control the timing, so with (multiple speakers) --

But when you closed Nye, you still excluded it?

That's right. We're not going to update guidance every quarter or every time we do a deal.

Emmanuel, part of the difficulty with it, is you can't take it in isolation and look at one acquisition and update guidance when you don't know the rest of the year, the timing of acquisitions, and the timing of capital raising activities. You're constantly chasing after something that is very, very hard to catch up to, if you don't have a crystal ball about your capital raising activity later in the year.

In the past, Manny, we have updated guidance once we were further into the year and we had a better sense of all that timing. So, as I stated earlier, we may do the same thing this year. To answer your other question -- yes, go ahead.

But for the time being there's going to be a disconnect between where The Street will be and your guidance?

Yes and that's pretty much in line with all the other healthcare REITs. None of us include acquisition functions in our guidance. Typically, people -- based on what we tell them about, what we think it's going to happen from an acquisition perspective -- and we were more specific than most this year when we said $350 million to $400 million. About $170 in the first half of the year, that should allow some directions from a modeling perspectives.

In terms of Nye, Nye was included in our assumption that we would do $350 million to $400 million in deal activity this year. So, subtract the $90 million from the $350 million to $400 million and that's our expectation for the rest of the year.

So, effectively, if you don't close anything else in the fourth quarter, you are at your half of your first quarter -- half of your first half guidance?

That's right.

The other question is following up on Nye in general. Is this -- do you expect to see structure similar to New Dawn or one of your other long-term pipeline partnerships? Or is this just the six assets that were transacted upon?

It was just the six asset. New Dawn, Meridian, First Phoenix, and then, to some extent, Forest Park, those have pure development components to them. In the case of Nye, they are existing stabilized assets; they want to expand the number of beds they have in most of those assets. So we will finance that for them but that's obviously not greenfield development. Then, they will be looking to grow the portfolio beyond that with other stabilized assets and we will be their capital partner on that.

Right now, it's just these six assets that they operate?

That's correct.

Thank you.

Michael Carroll with RBC Capital Markets.

Rick, with the Genesis fixed charge coverage ratio, I know you've been pretty optimistic that this will improve meaningfully over time. Where do you think this ratio could stabilized and how long will it take to get there?

Prior to the platform migration, they had two quarters in a row of 1.29, and are getting closer back to that in the fourth quarter. So we expect that to settle around 1.3. I don't want to say, at this point, that they will do better than 1.3. We are comfortable with 1.3. We have somewhat level of optimism.

Primarily because once you've done a big deal like this and you finally have everybody on the same platforms, it's a hell of a lot easier to manage. Whether that yields better results or not, we will see. I'd like to think yes, but at this point, I'm just most comfortable with saying that 1.3 should be comfortable number for them and it's a certainly a comfortable number for us.

Okay and then can you give us some color on the potential new investments you mentioned with Forest Park? What are some of the hurdles that you need to get through to complete these deals? They have, what, how many assets that are currently in operations that you don't own yet?

Mike, it's Talya. They have one property that is open that we do not own or have an investment in and that's their hospital in South Lake. The group that -- NRG, who is the developer, does not control that asset. There are other investors in there alongside them. So we will wait to see how that plays out.

Otherwise, they have one asset in addition to Fort Worth that -- Forth Worth, we are financing, but they have an additional asset under construction and one that they are planning to begin construction on. So there's nothing other than South Lake that is operational today that would be up for grabs imminently.

Correct. In terms of what we have on our plate with them right now, we've got the mortgage with the purchase option on the Dallas facility that we would look forward to exercising at some point this year. That mortgage is $110 million in the purchase price is $168 million, so there would be an additional $58 million there. Then, we've only partially funded the Fort Worth construction loan and that will -- they will be finished building that in the spring, so that will be fully funded sometime in the spring.

Those are the two that are actually pending and, again, since NRG, the developers, control the two new projects they've started on, hopefully we will be able to work with them at some point -- that's a little bit further down the line.

Okay. Can you guys quantify the senior housing development deliveries that are going to start coming online in 2014? How much can we expect to move into your portfolio in 2014? I know 2015 will be a much bigger number?

There's not a whole lot in 2014. 2015 is really when everything starts maturing, and then obviously 2016, as well. But there will be some continued development this year, but Talya do you have any --?

That's exactly right. What you are going to see is construction completion in mid to late 2014, which means, that call it a 12-month lease up, just for sake of round numbers, will get you to 2015 stabilizations.

Some a little sooner in 2014, some a little later, some into 2016, depending on the size of the asset and the property type. But that's when you're going to start seeing -- it's probably the latter half of 2015, where you start to really see things start to come online into our portfolio as stabilized properties that came in through a development pipeline.

The only comment I would make, Mike, is that in terms of pace of development, everybody's on target with First Phoenix. We started at four projects with a couple of more that we will be doing additional funding on. We are at four projects on New Dawn; we expect to be funding a couple of more with them, as well.

Everybody's on target with the pace that they stated they would be at when we first entered into these agreements. Meridian also is actively looking at additional projects right now. We expect to have some nice deal activity with Meridian, but as Talya said, it's all construction development stuff, primarily in 2014.

Okay. Great. Thanks.

(Operator Instructions)

David Shamis from Jefferies.

Rick, just going back to Genesis. I'm hoping you can elaborate a little bit on the disruption you were talking about from migrating to one operating platform. What was it exactly in that, that caused EBITDAR to drop so much?

I don't know how people can really visualize it, but when you are an operator and you get acquired and the operating -- the IT clinical platform that you've been working on gets changed completely. The amount of training and education that goes into that, billing, coding all that. It's a huge use of everybody's time that diverts them away from their daily activities. When you go into their dietary department and you give them all new menus, you tend to see spikes in food costs until they get a handle on it, as well as just acclimating to all that new activity, they are going to have new vendors, as well.

You look at that all across the line. I think that, Genesis' focus was -- earlier in the year with the synergies, the thing that they were doing didn't really affect the field. It was all overhead integration stuff and reductions of overhead and things like that. They chose to enact smartly, even though it's more disruptive to migrate all their platforms over at essentially the same time just to get it over and done with, rather than drag it out over a few quarters, which might have been easier for the operations, but just what have seemed to drag on for longer time.

It might be hard for you guys to visualize, but I've been in operating. When you are out the field, and all of a sudden everything that you have been used to -- and you've got a whole new -- you've got an all-new codes for accounting. Your GLs change completely. Everybody is focused on change and they are not as focused on day-to-day. It affects everything, in terms of the operational focus, including an increase in expenses and they saw an increase in expenses. That should come down.

Okay. That makes sense.

I'm not sure how helpful that is, but it's brutal.

That's helpful. One for Harold, I'm trying to understand the borrowing capacity under the revolver little bit. I know your maximum commitment is $375 million, but if I'm looking at this correctly, you have borrowing capacity of about $270 million. Can you just help us understand the borrowing base calculation that you are using? What would need to happen for you to get the full $375 million available?

Sure. It's a good question. The $270 million is tied into specific assets that we put into a borrowing base and that borrowing base is basically calculation on a mortgageability amount that they go through. Based on the rents that we are receiving and how much assumed debt could be supported by that rent, dictates how much that asset gives us credit toward our availability. So because we are always in this mode of managing both the unencumbered assets to unsecured debt test, which has to stay about 150%.

We haven't been able to fully put assets into the borrowing base as we've been opportunistic in taking advantage of the high yield debt market. We've managed that level of capacity to that, as you point out, $270.6 million to date. But what's happened is all of the assets that are required to support that are set aside. Whenever we go out and buy an unencumbered assets, it creates more capacity under that unsecured asset -- excuse me, unencumbered asset to unsecured debt test.

As an example, when we bought the Nye portfolio, we've now increased our availability. We can take assets that encumber them, put them into the borrowing base and create more availability. We are in the process of putting some additional assets in right now. Which should take it up closer to $300 million to $320 million over the next several months. Then, as we make more acquisitions through the course of the year, that will free up more assets to put into the borrowing base -- encumber them into the borrowing base, and by the time we get to -- call it, late third quarter -- we expect to have the full $375 million available.

Great. That's very helpful. Then, just last one. I just want to talk a little bit about liquidity -- and sorry if I missed this earlier. You mentioned you have $140 million of liquidity and then given expected acquisition volume of $350 million to $450 million, you had mentioned earlier that you're are targeting about 4 times leverage.

How should we think about capital raising for the rest of the year? Is it primarily just going to be ATM? I know you mentioned that you don't really expect to do bulk a equity offering. But how should we be thinking about sources and uses overall as you complete these acquisitions? Is preferred part of the mix, as well?

Preferred is not part of the mix. We're going to stay away from debt for the rest of the year because we're do want to get our leverage down. We may, in fact, look at the equity markets. We are going to be opportunistic. The advantage that we have right now is that we are not beholden to doing anything. But we do want to be opportunistic, we do want to get our leverage down, and the way to do that is to address the equity markets.

If the markets are right -- you've seen us be opportunistic really over the past couple of years and going out to raise money, even though it's been primarily on the debt side. When we didn't even really need it. But it's really been great for us to reduce our cost of capital. It's possible that we will do something. It's certainly not imminent. We are just going to play it by ear and jump on it when it seems appropriate to jump on it.

Great. Thanks a lot, guys.

Rob Mains with Stifel.

Follow-up to that question -- you did, Harold, you said $35 million on the revolver in the fourth quarter. Do you have a sense as to how much you could do on that in any given quarter? Or a target that you have internally?

Over the course of the year, we can do max that $175 million -- I'm sorry, on the ATM. Is that what you meant, Rob? The ATM?

I'm sorry, yes, ATM.

Yes.

We did $38 million in the fourth quarter. That was on the high end of probably what we could do. We had a couple of reverse inquiry that were larger blocks. So, I would -- I think we -- in our own mind modeled between $20 million and $25 million a quarter -- or excuse me, a month. You can really only utilize an ATM program 7 months out of 12 months because of the blackout periods that occur. Based on that here, you are looking at around $150 million, $175 million, realistically, can be done.

In addition to the blackout periods, we are limited by our volume, our daily volume.

Right. Rick, the Nye portfolio, could you describe it -- I know it's combination buildings, for the most part. Conceptually, what it consists of?

It's Talya, here. Yes, is the short answer. Some of the buildings --

Good enough. (Laughter)

Some of the buildings --two of the buildings are all SNF. But most of the -- and the balance are a mix. One building is predominately IL, but it has some AL in it. Another building has mostly -- is mix IL, AL, and has had an expansion on its SNF -- so that has a true continuum of care in place. It's really a mix, individually.

From a dollars perspective, Rob, it's about -- from a top-line perspective, about 60% is SNF and 40% is senior housing. From an EBITDA perspective, it is flipped -- about 60% of it is senior housing and 40% is SNF.

Okay and are you seeing a lot of those sorts of combination buildings in the portfolio? The reason I'm asking is, when you've got that sort of mix, does that change the cap rate? And that is, is it just going to be a blend of those figures that you gave us earlier, Rick? Like 7% for IL, 7.5% for AL -- or 7.5% to 8% for AL. Or, does that move the cap rates one way or another?

In the Nye deal, we really did try to blend it -- we just look at the number of beds in units and looked at the traditional cap rate ranges for those different asset classes and blended it. And came out to just under 8%, all-in because the majority of the beds are not SNF beds.

We also looked at the cap rate component and we also looked at it on a coverage component, as well.

Right.

Okay. That's all I had. Thank you.

(Operator Instructions)

Collin Mings with Raymond James.

Just a couple of quick follow-up questions. Just on the -- can you talk about just the earn out that is related to the Nye portfolio and just the targets related to that? Then maybe just put a little bit more color around just the expansion projects and different opportunities you see going forward, as part of the portfolio?

Sure. There is a time window in which we are giving them an earn out opportunity. It really has to do -- we will fund these projects that they have slated and value creation at similar type underwriting as what we did at acquisition, but escalated for time value, if you will. 3% escalation on the lease rate. Any value created above and beyond cost is -- they get paid for, in the capital of that and our rent was reset.

We are doing it portfolio-wide. So it's a one-time event, not per project, not individually. It's almost -- you could characterize it as a promote for them. What happens is -- to the extent that they have major improvements in operations and in one facility even though they haven't put a lot of capital in there, that ups the credit -- the credit, if you will. A credit enhances everything else. They get a benefit for that. So it really does work like a promote.

What was the second piece, you asked? What kind of projects? One of their buildings, which is, I would say, almost their flagship building is in Lincoln, Nebraska. The just did a new -- it's a mid-rise building that they bought and converted and it's been IL/AL. They had a small number of SNFs beds. They just completed an addition -- a mid-rise addition, that is SNFs. There is one or two patio homes there -- one or two.

They want to -- they have a master plan for that facility, to add patio homes, to add more IL/AL. They have a grand scheme for that. That's the scale of that one. Others, they have much are more modest. It's an opportunity to add beds in a location, like Meadow View, where -- and also it's Nye Place. That they have an opportunity to add some beds and put them into service and it's very simple. Not brand-new master plan construction. They really vary.

Okay. Great. Thanks for the extra color. Good luck during the quarter.

They are really the premier operator in Nebraska. They've been there for a really long time. They had great regulatory assets. Just as an aside, for those that are interested. Anybody that's seen the Nebraska movie, which was directed by Alexander Payne who is from Omaha. Two of the residents from the facilities are in the movie and one of the administrators is in the bar scene in the movie. They had the red carpet premier days after we were out there visiting the asset.

The evening we were there.

The evening we were there. But everybody was really excited about getting themselves on the map. That was pretty cool.

You can put Norfolk, Nebraska on your list of places to go visit.

At this time, this concludes our question-and-answer session. I'd like to turn the call over to Rick Matros for closing remarks.

That was probably as good a closing as I can do. (Laughter) Thanks for your time. We are all available to take follow-up calls with you guys. For those that are going to be at the Citi conference, we look forward to seeing you there next week and we are just looking forward to having our best year yet. Thanks again for your support. Take care.

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