Sabra Health Care REIT Inc (SBRA) 2014 Q3 法說會逐字稿

Please stand by. Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT, Inc. Third 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, Ms. Nevo.

Thanks Deanna. Before we begin, I want to remind you that we will be making forward-looking statements in our comment 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 and our Form 10-Q for the quarter ended September 30, 2014, that are 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 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. And thanks everybody for joining us this morning. I know you guys have a lot of calls on top of each other today. So we really appreciate your time and attention. We delivered another strong quarter with 34% revenue growth, 9% normalized FFO growth per share, 19% normalized AFFO growth per share. We increased our dividend 2.6%.

We've done $863 million in investments to-date and we've included in that number as $82 million that we've done since quarter-end. Included in that $82 million, one of the things I want to highlight is, we did a skilled nursing deal in Oklahoma three facilities that really transitional care facility didn't have the license to skilled nursing facilities.

The company's vision and essentially what they did was they bought traditional nursing facilities, they cut it them putting in almost all private pay rooms and two and the third facility is still in process, as far as that goes. Two of the facilities have decertified for Medicaid program. The third facility only has two Medicaid patients left in it. So these are really the new model. Their short stay or Medicare or managed care primarily private pay rooms, very nice accommodations inside and these are the kind of facilities that we'd like to do more, but there really aren't very many operators at this far long in terms of developing the model, so they're sort of few and far between. But we are happy to be partnering with Vision as a new tenant and they're looking to grow the company. So we anticipate more of this model with them. And we refer to them really as transitional care facilities, because that's what they are. Individuals go there post surgeries for a short period of time, and then they go to a lower level of care whether that's back home or it's to assisted living or -- and home mental health care.

So we don't really use the term just post-acute care and we know that's been getting a little bit more popular recently, primarily because from a technical perspective, there is several definitions for post-acute care in terms of the settings that people are in.

So just want to highlight the Oklahoma facilities and that they are different than your traditional skilled nursing facilities. Our pipeline currently stands at $350 million, about 65% is senior housing, about 35% is skilled nursing. We do expect to have more investments close prior year end, although we do not expect that to be a material number. We're also reaffirming our guidance and that guidance does include the acquisition costs that we delineated in the press release.

I want to spend a few minutes talking about our strategy and our focus and to really reaffirm that. The Holiday deal was a deal that we viewed as opportunistic, it really accelerated where we wanted to go as a company in terms of our goals from a diversification perspective in terms of getting to investment grade more quickly, but it was really just a unique opportunity that we do this transformational for us, but it did not. As you can see divert our attention from our bread and butter deals having done $82 million of that since the Holiday deal was announced.

Those deals have been our focus there. It's been our growth driver. It will continue to be our growth driver. The yields is still very good on those kinds of deals, because it's still translation of certain big premiums, you have a larger portfolios. So what's happening with cap rates on the smaller deals that we stay focused on. So you will continue to see us focus on those deals. Because at this point, if you look at Genesis, for example, we've got genesis just under 36% now. Just doing our normal bread and butter deals have normal volume over the next year will get Genesis down to 30% or better.

So we don't need to do another transformational deal, if you will, to get us where we want to go. Anything that we do, if we happened to do a bigger portfolio, it's really just gravy at this point and we need to be much more easily accretive that we are going to consider that and we've actually been shown since the Holiday deal and since we dropped out of a couple of other large portfolios we are looking at. We have been shown two other pretty decent sized senior housing deals that we passed on, just to sort of stress the point to you all. And along with getting Genesis under 36% now, our skilled nursing/transitional care exposures down to 54% and our private pay is up to just under 54%.

The other thing I want to focus on is our development pipeline and our focus there. That's been a strong focus for us. We have seven different development partners and if everything that we have developed to-date and everything that we anticipate to develop that's currently in our pipelines. Once all that is stabilized, that will be another $446 million in new assets coming into this type of portfolio which is a pretty significant percentage of our asset base. We will have a largest percentage of new assets in this space.

29% of our investments this year came from existing tenants, that's up from 12% last year. And again, that's another focus for us is to continue to build up our tenant base, which currently stands at 26 tenants and to continue to do repeat business and between the development pipeline and during repeat business with existing tenants and getting referrals from those existing tenants, we become less susceptible to the vagaries of the external acquisition market.

And then you're all familiar there are couple of other healthcare REITs out there, they're doing nice job of doing repeat business with tenants and so to us, it's about the relationship, and we're pleased to see that number accelerating at the rate that it's accelerating.

Moving onto coverage for Genesis, Holiday and Tenet, we're going to be reporting fixed charge coverage going forward. Where in the past, we've provided fixed charge coverage and facility based coverage, which based on feedbacks that we got on with some level of confusion and the fact of the matter is that fixed charge coverage is a true measure because we have corporate guarantees and so along those lines, Genesis's fixed charge coverage was stable at 1.23, it was 1.24 for the last quarter, Holiday is 1.25 and Tenet is at 2.17.

Our skilled nursing/transitional care portfolio is at 1.25, EBITDAR 1.67, EBITDARM sequentially, at slightly down from 1.28 and 1.71. Our senior housing portfolio was 1.21, EBITDAR 1.41, EBITDARM and that's somewhat up sequentially 1.16 and 1.37. Occupancy for the skilled portfolio was up 60 basis points sequentially to 88.5%, skilled mix is up 80 basis points sequentially to 36.4%, although we are down somewhat on year-over-year basis. Senior housing occupancy is down sequentially 50 basis points to 89.9%, that's up 60 basis points year-over-year.

And with that, I'll turn the call over to Harold Andrews and following Harold's presentation, we'll go to Q&A.

Thanks, Rick. And thanks everybody for joining this morning. I'm going to provide an overview of the results of operations for the third quarter of 2014 and our financial position as of September 30, 2014, including pro forma information to take into account activity during and subsequent to the quarter.

For the three months ended September 30, 2014, we recorded revenues of $44 million compared to $32.9 million for the same period 2013, an increase of 33.6%. Interest and other income totaled $5.8 million for the quarter and included $4.6 million of interest income and $0.5 million of preferred returns on our total investments in loan receivable and other investments of $250.7 million.

Pro forma for transactions completed after September 30, 2014, 35.9% of our revenue is derived from our leases to subsidiaries of Genesis, this is down from 60.6% a year ago. FFO for the quarter was $24.4 million and on a normalized basis was $24.6 million or $0.51 per diluted common share normalized to exclude $0.2 million loss on extinguishment of debt. This normalized FFO compares to $17.9 million or $0.47 per diluted common share for the third quarter of 2013, an increase of 8.5% on a per share basis.

FFO for the quarter included acquisition pursuit costs that were higher than what we have historically incurred, which totaled $2 million or $0.04 per diluted common share. Such costs primarily related to the acquisition of the Holiday portfolio. Normalized FFO would have been $0.56 per diluted common share excluding such costs.

AFFO which excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses was $24.6 million or $0.51 per diluted common share compared to $16.3 million or $0.43 per diluted common share for the third quarter of 2013, a 19% increase on a per share basis.

For the third quarter of 2014 we reported net income attributable to common stockholders of $14.6 million or $0.31 per diluted common share compared to $9.2 million from the third quarter of 2013 or $0.24 per diluted common share.

G&A costs for the quarter totaled $6.2 million and include stock-based compensation expense of $1.5 million, acquisition pursuit costs of $2 million and $0.5 million of operating costs from our RIDEA joint venture investment.

Our ongoing corporate level G&A costs were $2.2 million. These corporate level cash G&A costs totaled 5% of total revenues for the quarter. Interest expense for the third quarter totaled $10.5 million compared to $9.7 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 September 30, 2014, our weighted average interest rate was 3.88%. Included in the September 30, 2014, total outstanding debt with borrowings under our unsecured revolving credit facility totaling $614 million with an effective interest rate of 2.46%. These borrowings were primarily used to fund the Holiday acquisition that closed on September 25, 2014.

On October 3rd, we completed an equity offering providing $160.6 million in proceeds before expenses. And on October 10, we issued $150 million aggregate principal amount of unsecured bonds in 2021 having a yield to maturity of 5.59%. Each of these capital raises were used to pay down the revolving credit facility.

In addition, on October 10, 2014, we exercised an option to convert $200 million of the outstanding borrowings under the revolving credit facility to a term loan, having an effective interest rate consistent with revolving credit facility of 2.46%.

Concurrent with the exercise we entered into a five-year interest rate cap contract that caps LIBOR at 2% on a notional amount of $200 million. The impact of these post quarter end activities was to reduce borrowings under the revolving credit facility to $140 million after funding post quarter and acquisition activity and to reduce our weighted average effective interest rate to 4.42% from 5.17% at June 30, 2014.

Switching to the statement of cash flows and balance sheet. Our investment activity for the quarter and subsequent to quarter-end was highlighted by the $550 million Holiday portfolio acquisition consisting of 21 independent living facilities. This acquisition provided significant benefit to Sabra, including a significant step toward our stated objective and diversification of tenants and asset classes.

In addition to the reduction in our Genesis concentration mentioned earlier, we've now reduced our exposure to skilled nursing/transitional care assets at 54.2% of revenues. Also it's important to note that while the Holiday portfolio has a GAAP lease yield of 7.14%. The annual rent escalators of the greater of 3.5% in CPI beginning in year four have no cap, as such the actual yield for the portfolio over the life of the lease has an additional upside over the 7.14% GAAP lease yield.

In addition, we completed other investments totaling $120.1 million consisting of four memory care facilities, four assisted-living facilities, four skilled nursing/transitional care facilities, one preferred equity investment for the development of an assisted living facility and three new debt investments. Two loans associated with senior housing development projects and one loan associated with the skilled nursing/transitional care facility and two memory care facilities.

The weighted average year one yield on all of our 2014 investments is 6.6% and excluding the Holiday portfolio is 8.7%. Cash flow from operations increased 32% year-over-year for the nine months ended September 30, 2014 to $77 million excluding a $20.9 million one-time payment primarily related to the early extinguishment of debt in the first quarter and a $15.1 million rent deposit received during the third quarter.

Net cash provided by financing activities of $743.2 million during the nine months ended September 30, 2014, plus the debt and equity raised, subsequent to quarter-end were used to fund the acquisition activity discussed previously. Year-to-date we have raised equity capital totaling $390.4 million issued incremental unsecured bonds totaling $288.7 million and utilize a $200 million term loan provision discussed previously, to provide long-term capital to fund our growth during the year.

This is a mix of 56% permanent debt at 44% equity. In addition, we increased the capacity under our revolver to $450 million on an unsecured basis, reducing the cost across the pricing grid by as much as 90 basis points in providing an even lower pricing grid once we obtain investment grade ratings. After funding all acquisitions to-date, we continue to have $312.9 million in pro forma liquidity including $310 million available under revolver.

During the quarter we had limited activity in our ATM program selling 365,000 shares of our common stock at an average price of $28.28 per share, which raised net proceeds of approximately $10.1 million. As of September 30, we had a $44.8 million available for future issuance under the program. We paid quarterly preferred and common dividends totaling $20.5 million during the third quarter of 2014. On November 3rd, our Board of Directors declared a quarterly dividend of $0.39 per share of common stock, this represents a $0.01 increase over the prior quarter and a $0.05 increase over the $0.34 dividend declared last year, 14.7% year-over-year increase.

We were in compliance with all of our debt covenants under our senior notes indenture and our new unsecured revolving line of credit agreement as of September 30.

Our key metrics include the following on a pro forma basis to include all investment and financing activity to date, based on defined terms in our credit agreements. Debt to adjusted EBITDA 5.43 times, fixed charge coverage ratio 3.26 times, interest coverage ratio 4.46 times, total debt to asset value 49% and secured debt to asset value 5%, unencumbered asset value to unsecured debt 216%.

Finally, a couple of quick comments regarding the changes and how we report rent coverage amounts. Facility level coverage is presented by asset class for stabilized assets, they do not have a significant corporate guarantee. And as Rick mentioned earlier, for assets with a significant corporate guarantee, we present a fixed charge coverage ratio for the relevant guarantor entities total operations. This fixed charge coverage disclosure issues for the Genesis, Tenet and Holiday portfolios.

With that, I'll turn it back to Rick.

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

(Operator Instructions) Joshua Raskin, Barclays.

Hey, Josh.

Hi, this is actually (inaudible) on behalf of Josh. Thanks for taking my questions.

Sure.

Just a couple of questions, the first one, can you help us differentiate the Holiday assets from other senior housing assets and what are some short-term opportunities to increase your NOI there?

I'm not sure which mean by differentiating them, we weren't operating them so they're not really -- so we provide the rent fee -- fixed charge coverage, but we weren't operating them yet. So you'll see more data on those on a go-forward basis. But in terms of the NOI option is going forward, remember these are -- they are all triple-net, they're all triple-net lease, so the NOI opportunity is unlike the other Holiday deals that were done, this one we have no cap on our rent escalators.

So we're 4% in years two and three, we're 3.5% thereafter. But again, there's no cap. But that's a material difference we think versus the other deals that we're done with a Holiday portfolio and helped in our mind to mitigate the cap compression that had occurred between the last set of deals and the deal that we did. Beyond that we see quite a bit of operational opportunity, more so in the seven more recently acquired facilities of the 21, but still operational upside in the other 14. That simply will give the operator more push relative to rent coverage and to absorb those escalators on a go-forward basis. So really what we should anticipate is again NOI growth of 4% for the two years, 3.5% thereafter and then as interest rates go up if CPI exceeds that 3.5%, then there will be that much more NOI growth.

Okay, great. Are you seeing any changes in SNF pricing, especially after the recent OHI and Aviv announcement?

Yeah. A little bit with their results, but was already some cap rate compression on SNFs. I mean, basically, whether you look at the larger portfolios or certainly under $100 million deals that are our primary focus, as well as some of our peers, there's been 50 to 100 basis points cap compression depending on the deal. Right.

So to give you a little bit more specific on our Oklahoma deal, for example. That was very high end skilled nursing facilities as I said and we've got an 8.5% cap rate on those a year ago, that's probably 9% cap rate, maybe a little bit higher. So that's kind of the difference. So, sort of the best in class. I think we've seen a 50 plus basis points on cap rate compression. So the more traditional long-term care facilities that still have a very healthy percentage of Medicaid patients. I think there is still closer to around 10% cap rates, maybe 9.5% and before you've never seen below 10%. So I'd say 9.5% to 10% range on those.

Okay, great. Thanks a lot.

Yeah.

We'll take our next question from Emanuel Coachman with Citigroup.

Hey, guys. It's [Archana] for Manny.

Yes, hi, Archana.

So, on the earnings release you guys talked about some of the bread and butter deals and we can expect additional transactions prior to year end. Could you give us a bit of a -- making up a bit of color on the composition of the pipeline going forward?

Yes, well, the transactions that we expect to complete by year-end, all going to be material at this point, we got most of it done. But the composition of the pipeline is really identical pretty much to where it's been, I would say, over this [two] months or so Talya.

I think that's right.

About 65% senior housing, but we say that senior housing in our pipeline is almost all assisted living memory care, not independent living. And then the other 35% is skilled nursing. And again on the skilled nursing stuff that we're seeing it's more traditional skilled nursing as opposed to the Oklahoma portfolio which kind of, as I mentioned earlier, it's really where the model is going, so most operator issues aren't there yet.

Okay. Great thanks. And also the additional coverage, six coverage ratios they are very helpful. Could you give us some color as to why the holiday portfolio is at that 1.25. It seems very much in line with the Genesis portfolio. Is there something additional that we should kind of keep in mind or do we see that pick up a little forward, going forward?

Well I think our view is for includes holidays in a tenant living the 1.25 coverage is pretty strong. For Genesis we would like to see it get a little bit stronger and we expect it to post the skilled merger and what they get through the integration of that merger. The skilled facility portfolio, it's just a more complex portfolio. As you know, over the past few years they've gone from the rate changes, it's recovered from rate changes and then they have the integration of the Sun portfolio. So, we're comfortable with the Genesis coverage.

We do expect it to get better. The holiday coverage is actually pretty strongly I think at [125].

Okay, great. Thanks for that color.

Paul Morgan, MLV Company.

Hey, Paul.

Hi. Good morning. So forth, the -- is there anything about the acquisition mix for the post holiday. Does it make you more inclined to pursue more sniff deals since you have had your objective to raise the private-pay share before. I mean do you think now with key sort of this study like you say 55-35 mix where maybe you had a buyer and grow the private-pay share.

Yeah it's a good question. I think we still want to focus more on senior housing and skilled nursing. We really love the Oklahoma portfolio, because it sells sort of far ahead of the curve in terms of where the model is going. So when you see skilled nursing facilities that have an excess of 40% skill mix, they're really going in the right direction. So for us, we're just trying to be a little bit tricky I guess in terms of trying to find -- knowing that we're not going to see a (inaudible) many portfolios like the Oklahoma where they're all skill mix, but trying to find facilities that either have demonstrated that they are actually changing their model to more short stay or they have the potential to be there. So they've got (inaudible) in place, they have the right strategy in the right markets to do so. So, these skilled mix may be lighter on the day we buy it, but we see the upside there. So that's, I think the main thing for us and we're happy to do bunch of that if we can find it, but that's really the criteria. And so if we can find, a lot of skills, assets tested that kind of criteria and that means instead of doing 35% skill facilities we do over 40% then that's kind of the way to play out.

But we want to really look at it with that in mind.

Okay, great. That's helpful. And then on the hospital (inaudible) about the coverage reporting and the -- looks like the gap (technical difficulty) a little bit, maybe you set little color on how those (technical difficulty) and then going to a transition process you talked about four and then lastly whether more recently, there's been any dislocation because of the Ebola in Dallas and whether that's diverted admissions towards your hospitals or postpone procedures, et cetera?

Yeah, nothing on the Ebola piece, because our -- the Frisco hospital as well as the Dallas hospital, which we don't own yet, but we just have to mortgage on, sold private-pay they are just -- I think that (inaudible) across the wrong way but I just don't think that population is going to those hospitals, because those hospitals focus on procedures that are really short stay from an in-patient basis, they are all rehab oriented. It's a very different kind of population.

In terms of the Frisco facility, so we really -- so we only have two hospitals, so the tenant facility, which is TRMC has covered with a fixed charge coverage. On the Frisco facility, they are now all in network and basically what we found is knowing that as they went from outer network to in network until their volumes started kicking up that rent coverage wasn't yet light and just reporting rent coverage on the one hospital really created we thought was unnecessary consternation. And so, what we will tell you is that it's now been three months since they have gone fully in network and those three months, it had the three-bed volume on so they've ever had and each month has been better than the rest. But because we reported at trailing 12 basis, it's going to take a while for that to sort of pick up. So, we're fine with the hospital they are going, exactly in the direction that we expect them to, the volumes are picking up as we expected them to with all of the payers in network now. And what's the kind of smooth out on a trailing 12 basis. And it really stabilized, then we'll go back to reporting that at the facility level.

Okay, that's great, thanks.

Yeah.

Juan Sanabria, Bank of America.

Hi, good morning.

Hi, Juan.

I was just hoping you could give us a little sense of a couple of things on the balance sheet side, I guess first on the ATM. What do you think you could raise all else being equal, on a quarterly or annual run rate to kind of help delever? And then secondly, just on the timing of when do you think you could get an investment grade rating, post the holiday transaction?

Sure. So on the ATM program, obviously, the recent equity offerings that we've done have made the ATMs more productive given that its increasing our volume and we'll increase our volume of shares trading on a daily basis. So that's a positive from the equity offerings in addition, just to raising the capital.

And so looking forward, first of all, we can't do anything on the ATM until our lockup period is closed for the equity offering for the next 30 days or so. So you won't see a ton of activity in the fourth quarter. But once December comes around we can kick it back off and you have to keep in mind we can only use it about seven months out of the year, seven months out of the 12, the worst time we are in blackout periods. So, somewhere in the $20 million to $30 million range per month is doable, it's possible. And so, you can extrapolate from that doing something around $125 million to $175 million between now and the end of next year is possible subject to our, obviously our shares price holding up of being in an attractive level. And that can get our leverage back down. If we were to do that and continue to make acquisitions consistent with what we did this year, and excluding the holiday portfolio, so that can get our leverage moving back down to around five or below five times and so that would be a nice place to get from a leverage perspective and we have that opportunity again, without having to go out and do anything that would affect the stock price on a large-scale.

That level of $125 million to $175 million, will be kind of right in the sweet spot around doing something that wouldn't have a significant impact. And from a perspective of investment-grade rating, I think we're still away. I think we are getting close to the above one level. But obviously rating agencies won't telegraph to you a specific time and even really specific details of what they are requiring because there's some subjectivity around concentrations in the size.

All our stats indicate we should be rated higher and with this transaction with holiday, we would expect the next [quarter] we have a really good shot at having another bump that would still leave us to one notch below investment grade.

So, if I'm guessing, it's probably 18 months out before we could see something like that kind of given our normal acquisition pace, but it's speculation.

Okay, great. And then on the hospital side, on the Forest Park assets where you have the opportunity down the track to buy those assets. Are those assets now transitioned to insurance networks where they in-network and are you seeing the same sort of stats of a volume perspective and a coverage perspective to where you'd expect that when you have those options that you'd be comfortable executing those opportunities to acquire those assets?

Juan, the Fort Worth facilities -- the construction really just finished. So, we're a long way away on that one. But other than I would say that because Dallas is the first facility with every facility that they opened after that, they just sort of got better at it and they went in-network more quickly, so we would expect Fort Worth to get off to a quicker start. Dallas has taken the longest because it's the largest hospital and they stayed out of network, the longest, that we're seeing similar trends there, that's what we saw -- that's what we are seeing right now at Frisco, where as they gone in-network, volumes are starting to increase, but Frisco is doing really well in that regard.

So, we've got, I think what year-and-a-half left on the option on Dallas, so we still have plenty of time there, although we would expect that they kind of be there before them.

Okay and then on the sort of transition care, Oklahoma portfolio, just what's your sense of how long it takes a product or a new asset to stabilize, given a shorter length of stay? And sort of what's required from a staffing level to kind of get the volume it and get the referrals from hospitals to make the model work.

Yes, so I think with the Oklahoma facility, and it's probably relatively decent proxy, they almost had to empty the facilities when they were getting in and I would say, it took them up to a couple of years to fully stabilize, to the point where they are at the point that we acquire them, maybe a year-and-a-half. So I mean there are a couple of factors that go into it's the market that you're in [and that it kick] good markets and really did a good job kind of ahead of time developing relationships with the primary referral sources. And then it's the execution of the management team, is the management team good enough to go there and -- but I think the way they did it made it a little bit easier, because there were most facilities in the sector are getting rid of their three bedrooms, moving on to two bedrooms that these guys got in their facilities completely, and listed all private rooms in place. And that made them more attractive more quickly, but I would say, so they took a very different approach basically emptying and gutting the facility and starting from scratch as if within this building, where 99% of the rest of the sector is just doing it through attrition.

They're putting new clinical programs in place as the Medicaid population kind of attritions out of the facility. Then they're focused on just doing Medicare and Managed Care admits and for most of the operators in our skilled portfolio, including Genesis, over 80% of their admissions are currently short stay patients.

It's just that you still have a long-term care patient that in those buildings that are still going to be there for while and also primarily Medicaid. So the transition just takes longer, if you're just evolving the model over time within your existing business. From the staffing perspective, the great thing really about the model when you get to primarily short stay patients is that 90% of your costs are fixed, when you think about the administrative costs, house keeping, maintenance, laundry, dietary and your based nursing staff is always going to be there anyway.

So you're getting a much higher reimbursement rates, certainly compared to Medicaid. On the Medicare side, you're getting three to four times a Medicaid rate. On the Managed Care side, may be it's 2.75 times to 3 times higher than the Medicaid rate and your additional staffing costs are incremental. So, you're going to (inaudible) rents, you're going to have very few of any LTMs whatsoever. You are going to have more rehab staff, but the other thing to note here is as you increase the number of [range] you have and maybe you have gotten your practitioners and you increase the number of therapists that you have that's also resulting in a higher revenue base.

So you are actually offsetting that cost by pushing your [acuity] up and pushing your reimbursement up. So the pull-through on your margin is pretty good because you've got so much of your cost in building that already fixed.

Thank you.

Yes.

Chad Vanacore, Stiefel.

Hi, good morning.

Hi, Chad.

Good morning.

It looks like you're running a right to asset right now, is that something we should expect to grow in the portfolio going forward?

That right to asset is part of our First Phoenix development pipeline. That was the first pipeline that we did. It includes 10 facilities. It's never going to -- even once all 10 facilities are stabilized, it's never going to be much because the way we structure that right is, we own 100% of the real estate, and only the -- only (inaudible)JV and that's 50-50. So, it's just never going to be material and that's all we have in that portfolio. That's right to asset.

Okay. And then speaking of the underlying portfolio, you shifted your mix a lot this quarter. Just doing your bread and butter deals, where do you see your target -- ultimate target mix going to and then how long do you think it takes to get there?

I don't know that we have an ultimate target mix, but I would say, over the next 12 months, just doing our normal stuff, we will get Genesis to 30% or better, and we want to keep set again that number down closer to 20%. We like to get skilled nursing under 50% and it's pretty close right now. So just doing our normal bread and butter stuff on that over the next 12 months. We can actually get there quickly, depending on sort of what the mix is of the deals that we do. So and then we'll -- we have a stronger target I think to getting Genesis down than for getting skilled nursing down. So once we get it down at 50%, may be the next target is 40% but we also don't want to shy away from doing good skilled nursing deals.

Thanks for your time.

Yeah.

Tayo Okusanya, Jefferies.

Hi, Tayo.

Hi everyone. Just a couple of quick ones, if you do end up with a credit rating upgrade sometime next year, could you talk a little bit about how much of that impact will have on your cost of debt?

Well, it wouldn't have any impact on our current outstanding debt. On the revolver, if we can get to investment grade, it will see cheaper borrowings on the revolver. We will have to have two out of the three, so the next step up wouldn't affect the revolver borrowing.

But if you think about doing our next bond offering, you could see anywhere from the 75 basis point to 100 basis point difference in pricing. And really, in the last, call it, 12 to 18 months, being a very highly rated, non-investment grade borrower, that's actually been a pretty good spot because investors have been really looking for yield, and so it's been pretty tight to the lower rated investment grade borrowers. And so I think just getting that next bump, again 75 basis points to 100 basis points improvement possible would be obviously a great thing for us. But again we don't have any near term needs for borrowing, and so in the near term, it wouldn't have an impact on our borrowing cost.

The other point, I would make, Tayo, is that interest rates are going to go up, even though they -- I think a lot of price haven't moved much in the past couple of years, but they all are going to go up and so part of our desire to get to investment grade sooner than later relative to all the activity we've been involved in, is -- what we've been raising debt at, 5.375%, 5.5%, that's historically investment grade, right?

So, as interest rates start moving up, once we get to investment grade, it may not be that much better than that at that point in time. We just want to make sure, we are in the best pace possible to access the lowest capital available. So we're trying to anticipate that this environment is going to change and position the Company, so that it's advantaged in that respect.

Thanks. That's helpful. And then, second of all, the hospitals that haven't gone in network, I know, you're not providing the trailing 12-month coverage. But is there a sense you can just -- (inaudible) whether we can just get the number for the past three months, just to get a sense of how things have been progressing?

Well. Truly, only one hospital that we're talking about, that's Frisco. The covering of it and it's getting better, each month has been better than the last month. So we'd like to see them get up over two times. That may take them a while to get there. But they are directionally -- they're headed that way. So, it just going to take a while.

And that covering the rents right now?

Yes.

Okay, that's helpful. Last one from me. I appreciate your indulgence. With the Omega and Aviv transactions -- I mean, they're now becoming by far the largest player or public entity is fully focused on skilled nursing, how do you kind of think about how that's changing the landscape and how you can expect them to compete against the combined entity?

So actually, I don't think of change of a landscape at all. And the reason I say that is because, Omega and Aviv have done a really, really good job at building a very broad tenant base. And if you exclude some of the larger deals that Omega has done, all the deal activity that you see out of Omega and Aviv is weekly business with their existing tenants. They have been very successful doing that. So, you've got two companies that combined that kind of do it the same way. So, it doesn't really change anything competitively. There is -- I don't know if they're going to look at more external [sort of] deals rather than their existing tenants when they haven't done that before, but the other thing I would say is that, other than the large portfolio deals that [Taylor] has done where -- like everybody else of large portfolio deals, you pay a premium for those portfolios that his normal stuff kind of like normal stuff, we value those assets the same way. So when it comes to kind of the $100 million deals, it's $20 million, $30 million, $40 million portfolios, he's not going to, I don't believe that he was starting paying up for those, he is going to pay the same cap rates that he has paid for those size of deals before. So, I actually don't think it changes anything.

That's helpful. Thank you.

Yes.

(Operator Instructions) And at this time, I'd like to turn the call back to Rick Matros for closing comments.

Thanks for everybody's time today, appreciate it very much. Again, I know you guys have a crazy busy day with the lot of calls today and then NAREIT starting tomorrow and I will be seeing a lot of you at NAREIT and look forward to that. And as always, Harold, Talya and I are available for additional calls, just email us or give us a call on ourselves since we're traveling and we'll get back to you expeditiously. Thanks, have a great day.

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