Sabra Health Care REIT Inc (SBRA) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT, Inc. Second Quarter 2014 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.

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition 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 that is on file with the SEC, as well as in our earnings press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC 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, Tayla. Thanks everybody for joining us this morning. I appreciate it.

So for the quarter, we recorded 33% revenue growth quarter-over-quarter, 39% normalized FFO growth, 29% normalized AFFO growth. We've closed on $184 million in investments to date. Our pipeline currently stays where it has been, which is approximately $400 million. Of that $400 million 65% of that is senior housing. I'll try to be little bit more specific [essentially where] we are on a go-forward basis, we've got [$400 million] in the pipeline. We are actively working on $260 million. Of that $260 million, $235 million are traditional sale leasebacks. And so the year is shaping up actually to be quite a bit different than last year where a lot of the investments were focused on development opportunities. This year, the majority of our investments are more traditional sale leasebacks and more of our bread and butter.

In terms of cap rates and competition, there's been some compression on cap rates and really we think for at least one specific reason. Historically we saw the non-traded REITs bid up properties, but they got big enough that least for us and I think some of the peers that we compete with they weren't playing sort of in the same circle that we were. So there was really no price dislocation. Now we're seeing financial buyers come in who seem to think that it's a great time to enter senior housing and in all likelihood will be a little bit surprised when they have to exit those properties five to seven years out, but they are clearly bidding up for properties and they are bidding on small portfolios.

We do see some of those guys. Now they usually are competitive only in circumstances where the entire business is being sold. In those circumstances where the operator wants to stay in place, then they tend to be focused on doing things with REITs like Sabra, because it's a long-term relationship and that's what they are focused on.

So when we get involved in bidding on properties where the business is being sold, if there is a financial buyer in place that's bidding, they typically get to bid 15%, 20% higher just to get into the second round and so we won't play in there. Fortunately, there is so much product out there and so much sale leaseback potential out there and opportunities out there that we feel that we've been able to hit our numbers and actually this is the best shoot that we had so far to-date. And once again we will reiterate that we expect to meet our numbers this year, both in terms of the volume of acquisitions that we previously stated and in terms of reaffirming our guidance as well.

We also announced with our earnings release that we have new revolver commitments that provide us for the first time with an unsecured revolver, as well as expand liquidity with lower pricing and Harold will provide the details on that on his talking points. I also want to note, because we talked about this a lot over the last year or so, the problem that the skill sector has had with observation day used by hospitals negatively impacted skill mix.

Congress is currently working on a bipartisan bill to fix the observation day issue. So those patients having hospital stays classified as observation days will still qualify for Medicare benefits in skilled nursing facilities. We can't predict obviously with where Congress is whether it's going to [get done or not]. cautiously optimistic is two reasons; one is bipartisan, second is the beneficiary issue in an election year. So hopefully that will gain some momentum, so we'll see.

In terms of coverage, Genesis' fixed charge coverage was essentially flat at 1.24. In terms of coverage for the portfolio, trailing 12 EBITDA coverage for the portfolio was 1.24 versus 1.34, driven by the skilled portfolio at 1.18 versus 1.28. The driver for the first quarter was severe weather issues, which we talked about on our last call and that primarily impacted the scheduling of therapy services, which has a direct relationship to skilled mix and revenue that's generated out of that skilled mix.

One of the things that will change in terms of our reporting going forward and how we'll give a little bit more detail on it is Genesis, which -- because of the size of Genesis in our portfolio, it still dominates our rent coverage on the skilled facility side. a lot of facility-based benefits side and so it's not reflected in coverage. Genesis will be providing that information to us on a regular basis going forward, so that we will have a better sense of what the facility coverage is, if in fact they allocated all those costs to the facility level and that will result in improved coverage on a go-forward basis. And what they do is really typical [to] what a lot of the larger corporations do and they keep a lot of things [topside] when they true up things and the like. So Howard will talk about that in a little bit more detail, but it's also one of the reasons that we focus on the fixed charge coverage, because that's really the more important coverage for us when it comes to Genesis, since we have the corporate guarantee.

Trailing EBITDARM coverage for the portfolio was 1.63 versus 1.77. The other comment I want to make on coverages on the acute hospitals, one comment is we don't have two. So, any change in coverage, it's going to have a pretty dramatic effect, because it's only two hospitals. And I'll give you a breakout and what we normally report or break out individual acute hospitals, but I think in this case it's warranted.

For Texas Regional Medical Center, our coverage for the trailing 12 was over two times and that does not reflect the new lease with Tenet. And again, just to reiterate on that situation that was an opportunity for us to align ourselves, moving from an independent operator with a one-off hospital to obviously a large well-respected national hospital operator. It improves our credit, improves our escalators and the concession that we took on rent as a result of that was really our choice to do so, we think, beneficial to the portfolio overall, because of the quality of the credit. So that [was] over two times.

Frisco Medical Center, which is the Forest Park Hospital was a little bit over 1.5 times and that's really a function of them going in network and so coverage had been well over two times [in] the previous two quarters on a trailing 12 basis and as they continue to grow in network that coverage will decline until volumes start to improve. We're already seeing volumes improve on those contracts that they currently have in place. They won't have all the network contracts in place until [probably through] the third quarter. So it will be a little while before we see those volumes improve. But it's as expected and still a decent coverage and again truly a function of them growing [their] network and then again volumes will improve as time passes on that.

Portfolio occupancy for the trailing 12 was 88.2%, down from 88.8%, with decreases in the skilled portfolio and increases in the senior housing portfolio. Total portfolio and skilled occupancy were flat sequentially. Our skilled mix dropped to 35.6% from 36.9%, also down sequentially from 36.4%, which we don't normally see from the fourth quarter to the first quarter on a sequential basis. That was attributable to the weather issues.

And with that, I'll turn the call over to Harold to address the rest of the issues.

Thanks, Rick and thanks everybody for joining the call today. I am going to provide an overview of the results of operations for the second quarter and then our financial position at the end of the quarter and then I'll talk a little bit about our revolving credit agreement.

For the three months ended June 30, 2014, we recorded revenues of $43 million compared to $32.3 million from the same period in 2013, an increase of 33.1%. Interest and other income totaled $5.5 million for the quarter and included $4.1 million of interest income and [$0.4 million] of preferred returns on our total investments in loans receivable and other investments of $225.8 million. As of June 30, 2014, 46.8% of our revenues were derived from our leases to subsidiaries of Genesis, down from 60.8% a year ago.

FFO for the quarter was $22 million and on a normalized basis was $25.1 million or $0.57 per diluted common share. Normalized to exclude a $2.9 million write-off of straight-line rental income, primarily associated with the lease amendment we entered into with Tenet Healthcare for our Texas Regional Medical Center this quarter.

In addition, a $0.2 million loss on extinguishment of debt was normalized out of the FFO related to debt refinancing activity that occurred during the year. This normalized FFO compares to $15.6 million or $0.41 per diluted common share for the second quarter of 2013, an increase of 39% on a per share basis.

AFFO, which again excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses, was $23.5 million and on a normalized basis was $23.6 million or $0.53 per diluted common share, compared to $15.7 million or $0.41 per diluted common share for the second quarter of 2013, a 29.3% increase on a per share basis. 2014 AFFO was normalized to exclude $21 million of the cash portion of the loss on extinguishment of debt.

For the second quarter of 2014, we reported net income attributable to common stockholders of $12.2 million or $0.28 per diluted common share, compared to a net loss of $3.2 million for the second quarter of 2013 or $0.09 per diluted common share. G&A for the quarter totaled $7.9 million and included stock-based compensation expense of $2.3 million, the $2.9 million write-off of straight-line rental income discussed previously, and $0.5 million of operating costs for the RIDEA joint venture investments, as well as acquisition pursuit costs of $0.2 million.

Our ongoing corporate level cash G&A costs were $2 million, compared to $1.7 million in the second quarter of 2013. These corporate level cash G&A costs totaled 4.7% of total revenues for the quarter, compared to 5.4% in the same period of 2013, demonstrating our continued leveraging of our infrastructure as we grow the topline.

Interest expense for the second quarter totaled $11 million, compared to $10.1 million for the same period in 2013 and included the amortization of deferred financing costs of $0.9 million in 2014 and $0.8 million in 2013. Based on debt outstanding as of June 30, 2014, our weighted average interest rate was 5.17%. This weighted average rate includes only permanent long-term debt with maturities not starting until 2021 as we have no borrowings outstanding on our revolver at quarter end.

During the quarter, we recorded an adjustment to the fair value of a contingent consideration liability associated with an asset acquisition, resulting in non-cash other income of $0.7 million.

Switching gears to the statement of cash flows and to the balance sheet, our investment activity for the quarter consisted of the acquisition of one senior housing asset for $23.8 million, which included the assumption of a 4.84% uninsured mortgage loan of $14.1 million. In addition, we made three preferred equity investments totaling $6.4 million, one new debt investment and additional funding with existing loan commitments totaling $18.1 million. The weighted average year one yield on our new investments during the first six months of 2014 was 8.3%.

Cash flows from operations totaled $28.9 million for the six months ended June 30, 2014, and $49.8 million, excluding the $20.9 million one-time payment, primarily related to the early extinguishment of debt in the first quarter. This compares to $32.2 million during the same period of 2013, excluding a $9.2 million payment related to early extinguishment of debt in 2013. This is a 54.6% year-over-year increase in our cash flow from operations.

Net cash provided by financing activities of $145.9 million during the six months ended June 30, 2014 included our public offering of 8.1 million shares of common stock at a price to the public of $28.35, resulting in net proceeds before expenses of $219.1 million. These proceeds from the offering were used to pay down the revolver and for general corporate purposes.

In addition, we repaid a $29.8 million of variable-rate mortgage indebtedness during the quarter, having an interest rate of 5% per annum. This left the Company with a total of $125.4 million of secured debt, all of which has a fixed rate as insured by HUD, also having a weighted average effective interest rate of 3.96% and maturities starting not until 2031. We do expect to pursue an additional $28.7 million of HUD-insured debt over the balance of 2014.

During the second quarter of 2014, we had limited activity on our ATM program selling 69,900 shares of common stock at an average price of $27.77, which raised proceeds of approximately $1.9 million. As of June 30, we had $55.2 million available for future issuance under the program. We paid quarterly preferred and common dividends totaling $20.9 million during the second quarter and maintained an adequate level of cash and cash equivalents of $15.1 million as of June 30, 2014.

Also, as of June 30, 2014, we had total liquidity of $304.5 million, consisting of currently available funds under our revolving credit facility of $289.5 million and available cash and cash equivalents of $15 million. 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 June 30, 2014. Some of those metrics include the following based on defined terms in the credit agreements. Consolidated leverage 4.12 times, consolidated fixed-charge coverage ratio 3.23 times, minimum interest coverage ratio 4.17 times, total debt to asset value 39%, secured debt to asset value 7%, unencumbered asset value to unsecured debt 206%.

Just a couple of details, as Rick alluded to on the new revolver that we're working on. As of July 30, we had received commitments totaling over $500 million for a new unsecured revolving credit facility, which will replace our existing $375 million secured revolver. This new $500 million revolver will provide us liquidity of approximately $515 million and lower our borrowing costs under the revolver significantly.

We will be working over the next few weeks to close the new facility and expect to have the following terms. A four-year term with a one-year extension option, a $250 million accordion feature, a leveraged based pricing grid with improved pricing across the board, including a 90 basis point improvement over our current rate based on our leverage metrics as of June 30, 2014, then a rating-based pricing grid tied to our debt rating once we achieve investment grade with two of the three rating agencies.

Overall, the recent capital markets activity, along with this $500 million unsecured revolving credit facility, has created the capital structure that provides us a strong liquidity position to fund future growth and has lowered our cost of capital, so we can continue to compete for quality accretive investment opportunities that will continue our diversification from our largest [tenant] and into more private paid senior housing. It also continues to move us toward our goal of achieving investment grade rating by the rating agencies.

Finally, I'll just add a little bit to the comments Rick made on how we will change our reporting of our SNF EBITDAR and EBITDARM coverage amounts. As Rick mentioned, Genesis records various facility level costs on a budgeted basis and when such costs are trued up to actuals, those adjustments are not always recorded at the facility level financial statements, rather they are recorded up at the corporate level.

In addition, certain services, such as rehab therapy, provided to the facilities by Genesis therapy company include an intercompany profit component. As such, costs at the facility level are not reflective of actual cost incurred in certain circumstances. The impact of capturing these amounts in the facility level financial statements on our SNF portfolio, EBITDAR and EBITDARM coverage levels for the second quarter, which we reported at 1.18 times and 1.63 times respectively, would have been increased to 1.26 times and 1.72 times respectively, based on estimates provided by Genesis.

As Rick alluded to, going forward, we will work with Genesis to determine the impact of such items on our portfolio financial statements in the future and report EBITDAR and EBITDARM coverages on our portfolio, inclusive of those items.

And with that, I'll turn it back to Rick.

Thanks, Howard. Why don't we open it up to Q&A now?

(Operator Instructions) Emmanuel Korchman, Citi.

Can you provide an update on the Forest Park Dallas deal, the one that had the put option in light of sort of what's happening with Frisco with the change from that and the volume shift there?

No different than what we talked about earlier. They're just working on getting their volumes up. They're almost completely in network now, but not all the way there. So, we've got plenty of time on that mortgage. So we'll exercise the option whenever we see coverage get top probably something in excess of two times. There is no rush in our part to do with that mortgages in place for a few years. Obviously, we expect to exercise it before that and the purchase price, as you'll recall, of [168], of which the mortgage is [110], was the maximum purchase price. And so, if they get to a coverge level that is less than 2.5 times and we still feel comfortable enough to exercise the purchase option, we in fact may wind up paying less than the [168]. So, if we are getting a return on our mortgage, we're happy to live with that for the time being, and when it's [appropriate] we'll exercise it.

And then going back to your commentary on sale leasebacks or sort of more traditional investing, you may get the remainder of the prospects for this year, rather than development pipelines. Couple of questions there. Are these going to be sort of structured the same way they've been able to structure things with pipelines and there's still a development component? And the second question is, is there anything sort of changing in your view that you want to do more sale leasebacks rather than developments or is that just sort of the opportunity set and you are taking advantage?

Yeah, it's not a matter of doing anything really by design this year. Last year it was because -- last year we were really focused on getting as many development partners lined up as possible. And so we have [6 level] of formal and informal pipelines, and so a lot of projects are sort of breaking ground within relatively short period of time. And so there was a lot of investing activity related to that. Now it's going to take time for those things to mature and for us to exercise options. And you'll see these properties come on more sort of one at a time . So that's really why there is less development investment, if you will, and there is actually -- we've actually seen more sale leaseback opportunities this year than last year. So, yes, we're just taking advantage of that. And it's premature fact that those opportunities are more towards the senior housing side and the SNF side, [place to we] want to go anyway.

Juan Sanabria, Bank of America.

I was just wondering for some clarification in terms of what is or isn't included in guidance with regards to the future acquisition in the pipeline you've noted and within that pipeline if you could just give us a sense of clarity as to what may be related to options for future take-outs that you currently have in place, versus sort of new incremental acquisitions?

Well, the guidance as we stated after we reaffirmed [to exit the equity] offering only assumes a small amount of investment, [regardless] of whether that investment is development related or sale leaseback related. So our expectation is that if we hit our numbers, which we expect to hit relative to the amount of volume this year, we could exceed guidance. That's going to depend on sort of the timing of those acquisitions, it's really just a function of that. So I think the opportunity is there for us to exceed guidance. It's just a function of how much and timing, but how do [you cut it] as well as we hit our numbers we expect to in terms of total investments for the year, it's really going to bode well for 2014, because our year-over-year growth in 2014 over 2013 is going to be really strong, as it has been obviously with almost 40% normalized FFO growth as you saw in the current quarter. Does that answer your question Juan?

Yeah. And does that a pipeline include any, I guess, options? Emmanuel sort of asked about the Forest Park. Is there anything else? (multiple speakers) pipeline?

No, the pipeline is almost entirely sale leaseback. And of the 260 that we're working on, 235 of that is sale leasebacks, but there is no assumption on [with those] hospital being exercised this year in that pipeline.

And can you talk at all about any cost pressures some of your operators may be seeing on the senior housing side, either on the labor, or the food costs, or maybe insurances bought? Is that an issue that has come up at all with your discussions with the operators?

No, not at all. Their coverages has been really [steady]. Occupancies improved really nicely as our senior housing portfolio is maturing. So we haven't seen any issues on the cost side and haven't gotten that feedback either.

Let me just clarify one thing there. I think they would expect some labor cost increases. Also that's just in line with acuity going up and they should be capturing that on service charges. So that's just sort of a natural evolution of the model, but nothing .

And then just going back to one of the previous questions on sort of development versus sale leaseback, do you have a sort of target that you feel comfortable with that you're willing to have as a percentage of total investment dollars or what have you and sort of a ceiling for development type investments, whether it's preferred equity investments or construction loans or anything like that, just as a way to help us frame your exposure there?

We really don't have a target. The exposure is never going to be very much even with all the development that we're doing. Obviously we have a lot going on and the reason [it's] going to be very much, it is really twofold. One, sale leaseback is [originally] our primary focus details. Our most important goal here still is to diversify away from Genesis to keep getting that number down and to diversify asset class. Secondly, the amount of investment on every preferred equity strip, which is how we typically provide financing to the development projects, is minimal. So if you look at any individual project that may be call it $10 million to $15 million, you're looking at $2 million to $4 million in preferred equity on any one of those projects. We could be doing [three dozen] of those projects and it's still going to be dwarfed by our other investment activity in traditional sale leasebacks.

Josh Raskin, Barclays.

with Jack as well. So, appreciate all the commentary on the pipeline and the current investments. But I guess, on your current operators, we're seeing better trends from the hospitals in terms of admissions and I'm wondering is it too early to see some of the downstream effect on some of the SNF's -- I don't know if you want to break out Genesis separately, but are you seeing any additional volumes at your operator level?

We really haven't seen it yet. I would expect that to be the case, but there is a real problem here with the observation days. I know I keep talking about that in every call and I know but it's a real issue, it's a real problem. And that's why we're sort of cautiously optimistic about this latest potential legislation from Congress, because as long as there is a three day qualifying [stage] in order for people to qualify for Medicare and skilled nursing facility, then the observation days just killed that and facilities don't want to take patients from hospitals that are too high acuity before they can get his Medicaid for it.

Yes. I mean -- because that will anniversary in another quarter here -- in the next quarter. So, I assume it seems like there's just little bit of a lag, right, the hospital admits come in and then it flows downstream. So, you guys are optimistic more around the fourth quarter then?

I am not going to be completely optimistic until the observation day issue is . I mean if you look back two years ago, where stilled mix was going in our sector generally, it was going up on a regular basis. So there might be some trickle down in the fourth quarter, which we would then report in the first quarter, but I don't think there is going to be a real improvement in the topline until the observation day issue is resolved. I do think that it's just a matter of when and not if, only because it is a beneficiary issue, it's not a provider issue. If it's a provider issue, then Congress it can be less sensitive to it, but as a beneficiary issue, as these numbers continue to grow in terms of people that have been denied benefits that are theirs, then the public outcry from the start will be felt greater and the actions being taken now with our lobbying group and Congress simply because there's no better time than an election year to try and take advantage of the beneficiary issue.

Hey guys, this is [Jack]. I had one more question on the operations on the SNF side. One of the things we've been tracking is managed long-term care and one of the states that switched earlier this year was Florida. I was wondering if your operators in that state have seen something? You usually see some sort of step function or is that just longer-term trend we're seeing where that population is getting more managed?

That's a longer-term trend. We're not seeing anything yet at this point, it's still a pretty small percentage of the overall occupancy in the facilities. And yes, so it's going to take some time, I think. The operators are going to always prefer to take those residents or those patients on the Medicaid and that by the way is unaffected by observation days. So there's an advantage there. The managed care rates are going to be at something of a discount than Medicare rates, but they certainly will be pretty good. But it's going to take a while for it to filter down I think.

Paul Morgan, MLV Investment Bank.

Just on the Genesis EBITDAR coverage changes that you mentioned, is that just -- I think it's just that being a step up or is there -- would the trend look any different once you report it the new way?

I mean, directionally it's still going to be [lighter quarter for] trailing 12 months than the previous quarter, but you still had a higher base to begin with. Is that what you are asking?

Yeah. I'm just wondering if the fact that the costs were being allocated differently, if that component of the business would have meant that the directionality of the coverage would be slightly different or whether -- you're just going to start reporting slightly higher numbers really?

Yeah, I don't think it would be different directionally, but the numbers will be higher on a go-forward basis.

And then you talked a lot about diversifying into private pay and lowering the Genesis share. I mean how do you think about -- when you think about assisted living and memory care, the supply picture when you're underwriting, some of the new investments you've been doing like in Texas and Colorado, kind of managing kind of the risks of that side of the equation versus your efforts to boost the private pay share?

So our focus all along has been to -- we want to keep an eye on the development that's happening in the areas that we go into knowing that that's never going to be a complete picture, because in certain states there are lower barriers to entry than other states, Texas being the prime example. But we have tended to focus our development opportunities in secondary and tertiary areas and that's why we do think we have a little bit of a edge there, because we are sticking with local or regional operators that really know those markets, they're small MSAs and sort of big guys tend not to go there and land is cheaper, construction costs are cheaper, you can build a 60 unit facility and fill it more easily with private pay. You don't have to build 150 or 200 units facility. So we're trying to edge up that a little bit by just being cautious about where we're building and trying to pick our spots where our operators really had known those communities, hence they have a little bit of a leg up, and again, the big guys desirable for them to go in there.

And then just lastly, it is kind of setting expectations for the hospital coverage. I mean I know there is moving pieces in terms of how the network contracts get negotiated and volumes start to increase. But if I think of the back half of the year, I mean is it right to think of a boost in coverage coming out of the rent change at Texas regional and then maybe starting in Q4, maybe not too early next year kind of improvements coming out of Frisco?

Yeah, I think that's exactly right. You'll see a more immediate change in coverage , because the tenants -- and not really just because of the rent change, but because of the contract rates that they'll bring in with them and the cost advantages that they will bring in with them. So it's really a combination of those three components. So even in the event that [likely] the same you'd still start to see rent coverage improvement in the tenant facility. In terms of Frisco, yeah that's exactly what I think, it's earlier next year before we start to see improvement, because the last [network] contract doesn't come in place until the third quarter, and [that's] halfway done, so it will take a while to build volume off of that.

Omotayo Okusanya, Jefferies.

just a couple of quick ones. First of all, G&A for the quarter just seemed a little bit higher than your usual run rate. Just wondering if we could get some backdrop on that?

Yeah, it's actually, Omotayo, we hired a few people here at the Company. We almost added 20% or 30% to our workforce, which is going to people. So it is up a little bit from that perspective. But if you look at what I would call our run rate on the cash corporate level G&A costs, last year it was around $1.7 million, this year, it's around $2 million. So, again, accounting for some hires and things like that. But I think that area of around $2 million in cash that should become where we are, kind of given where we're at from a size perspective for the foreseeable few quarters. So, there's a lot of moving parts there. I tried to walk through a lot of that, but on a cash corporate level basis, somewhere around $2 million is where we're at, and I think where we'll be.

And as a percent of revenue, obviously that drops quite a bit the last couple of years, it's still great leveraging. It's [allows us] to leverage things, because our investment activity is so strong relative to our infrastructure guys.

And what are these new employees, which areas are they going to? Is that they are more finance or reporting guys, operations guys?

Acquisition support and accounting support.

And then second question, I just wondered if you guys have touched base with the rating agencies recently and kind of in the overall viewpoint in regards to you guys getting credit rating upgrade, if that's changed materially or how were you kind of feeling about hitting some of their metrics that kind of gets you the investment grade rating that you want?

We haven't yet, Tayo. We've got meeting scheduled with them in September. So we'll have an update on our next earnings call, but, yes, we stay in contact with them periodically throughout the year. The last meeting we have with them, they obviously laid out some bogies for us for getting to the next level. I think what we've done this quarter moves us in that direction. It still continues to be a very much driven by getting Genesis down and to some extent, getting skilled nursing down as a percentage of our portfolio. So we still have some work to do to get to investment grade, but I think we've made good steps here and like I said, we'll have some more color on that next time, next quarter.

And you should also expect us to [bring future] at some point as well. So have faith.

Then, just one more from me. Thanks for indulging me. And Rick just again, this idea of cap rates compressing, could you kind of talk about the more competitive deals, kind of what you're seeing in regards to cap rates in the skilled nursing side as well as the senior housing side?

So, on the senior housing side where last year we can get a lot of things done at an 8 cap, now we're looking at 7.25 or 7.5 [cap] for assisted living memory care. For skilled nursing, we're seeing -- we used to see sort of best to the class facilities, than the skilled nursing asset class at about 9%, but still a lot of the more traditional stuff closer to 10. Now we're seeing pressure pushing into the eights.

And just to be clear, that's leased -- particularly on the SNF it's relevant, that's all lease rate, and we use about a 1.5 times coverage (multiple speakers). So to give you a gauge of where things are headed.

Rob Mains, Stifel.

Rick, when you talked about seeing financial buyers in the market, is that for senior housing or is that across asset classes?

It's senior housing.

I haven't really seen them show up in the skilled nursing segment at least materially, but then again, we're not looking at a lot of skilled nursing facilities these days. We know that they have some of the [PER] in a hospital sector. It's not that we haven't come across in our deals. It's really that they are driving very much interesting I'd say private pay senior housing across the care spectrum there -- across the acuity spectrum there.

And then in terms of competition from other REITs, has that changed at all?

No, that hasn't changed. It's still the same group of us there, focused on the small portfolio deals versus the larger deals. With the larger deals, I would say that some of us are also now looking at larger deals as well. Certainly for us, I think as I've mentioned on previous calls, our cost of capital has decreased so dramatically and that we really have the opportunity to look at larger deals and to at least be competitive. Whether we win or not at the end of the day is one thing, because there may always be someone, especially the [three bigs] or a NorthStar that are going to pay whatever it's going to take to grab some earnings, but will still have to be competitive, and that's a place that we weren't at a year ago.

Then kind of a two-part question. We've heard a lot about the competition hitting you hard. And what do you think is driving down cap rates for skilled nursing and why not do more in that sector in your view?

Well, I'm not sure exactly what's driving that and clearly Omega has done some big deals, where they've paid up and it's a little bit different than what we saw in senior housing when in 2003 when the three big REITs were really competing for volume deals, the prices that they were paying up weren't really translating down to our level. But the pricing that we paid for some of these bigger SNF deals just seemed to be getting pushed down to the small portfolio level. You'll see in the last -- for us I would say that we're always going to buy skilled nursing facilities, we're just going to buy more senior housing facilities and if we find a good skill asset that a year ago was at 9.25 and now it's going to be [8.75], it doesn't mean that we won't do that deal frankly, because our cost of capital has come down and that our spreads are going to be really good and we'll still be willing to pull the trigger on those.

And last question, I just want to clarify the answer you gave Josh about the observation stays. Is the issue that an entire stay is being quoted observation or that's being split inpatient observation and not getting the 72 hours inpatient?

Let's hear that one more time, Rob.

The observation stay issue, do you have like patient presents for a joint replacement that their entire stay is being quoted as observation/outpatient or are they just not getting the 72 hours inpatient?

They're just not getting the 72 hours inpatient.

So some of it's inpatient, some of it's out?

It may be. I mean, I don't know specifically. So it may or may not be, but [enough of] it isn't, they all qualify for the 72.

Michael Carroll, RBC Capital Markets.

Could you guys remind us how the price is decided on the senior housing development projects, is that pre-negotiated?

Yes. What we do is we -- in the context of a pipeline or in the context of any agreement we pre-negotiate a formula that is based on an annualization of actual EBITDAR at the time of the exercise and we have a set coverage ratio and a formula for cap rate. So we have typically a floor for the cap rate as well. So [it's a lot less then].

So you are going to be able to buy these assets at better cap rates than I guess where some of these are trading at currently in the market?

Yes. Whether that -- I can answer the same with the same answer in 24 months. I don't know, but today I can say yes.

And has that formula changed? I guess you won't have that pre-determined with the two pipelines, you have a ones that are not, I guess, official?

Even the non-pipeline deals, wherever we have a forward purchase that is more than a few months out, we'd create a formula like that.

The only difference between the formal pipeline deals we have and the informal, the formal pipeline deals have a formal agreement incent, if you will, for say 10 projects, where the other ones just don't have that in place. But how we approach those projects are exactly the same, which is doing it as they come as opposed to .

And is there a reason why the Forest Park construction loan, there is only about $50 million drawn on that? It seems like that the draw is not coming in quickly as it should be?

To answer to your question, I don't think there is any delay. In other words, I think that the project is set up to be completed in the next month or two. And so, probably like any other project that I've seen, you've always got a holdback, it's just a delay in time for the final draws to come in. So I think that's really what we're seeing.

You can't obviously [retain arrears] after the work is completed and there is always a time lag plus, as Harold said, retain till the very end to make sure that there's this [take over] with the contractors.

And then my last question is related to the straight-line rent write-off. It seems like it was -- I know it's kind of modest, but it seems like it's about $500,000 higher than what was previously reported. There is something different there?

Yes, we've got the two assets that we're working through bringing in new operators and those straight-line rents were also written off.

Okay. So, there's an addition to the hospital?

Yes, we had two SNFs that will bring in new operators, but it's not material. But we have the opportunity to bring operators we're going to work with.

(Operator Instruction) And I'm showing, we have no further questions.

Thanks everybody for your time today. And Harold and Talya and I are available for any follow-up that you'll may want to have and have a great day. Talk to you soon.

This does conclude today's conference. We thank you for your participation.