Sabra Health Care REIT Inc (SBRA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT, Inc. fourth-quarter 2014 earnings conference call. Today's call is being recorded. And I would now like to turn the call over to Talya Nevo, 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, 2014, to be filed with the SEC today, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as 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, appreciate it. Good morning, everybody. Thanks for joining us, and like I said, good afternoon to those of you on the East Coast. After I finish my talking points, I'll kick it over to Harold Andrews, our CFO, and then we'll go to Q&A after that. So we finished off our best year yet, our strongest year yet with a good fourth quarter.

We had 48.3% revenue growth, 8% normalized AFFO growth, 16% normalized FFO growth. We had ratings initiated by Fitch with a BB+ rating. And we had a ratings increase in January from S&P to BB for unsecured notes.

Our focus continues to be on getting to investment grade, and it's hard to know exactly when that will happen, but we believe sometime in the latter half of 2016 that we should be able to get there. And for us it's more a function of, in the anticipation that at some point interest rates we will go up, we want to make sure we have an investment-grade rating so that we can continue to work on lowering our cost of capital.

Our Genesis exposure was reduced from 51% to 36.2% on a year-over-year basis. Our skilled transitional care facility exposure was reduced from 69.5% to 53.5% on a year-over-year basis. And our government reimbursement exposure on a year-over-year basis reduced from 59.2% to 46.1%. We are reaffirming the guidance that we put out earlier in January.

For the fourth quarter a summary of our investment activity. We did $92.6 million in investments, of which $84.9 million were stabilized assets and $7.7 million were development investments. A number of those have been announced previously.

We also successfully delevered our balance sheet by close to 0.5 turn through an act of issuance of our ATM. Our current pipeline is consistent of $350 million, which is pretty much where it sat at for quite a long time. And also along with $350 million, about 65% of the deals we're seeing are senior housing, with the remaining being skilled nursing with transitional care facilities.

In terms of investments going forward, we're still focused primarily on senior housing across the spectrum, AL memory care and independent living. We will continue to focus, from a secondary perspective, on adding more skilled nursing.

We're close to almost 50% exposure on skilled nursing. And that was really our initial goal. And as we hit that 50% and get below it, we'll probably will be a little bit more flexible on how much skilled nursing we do, but we still are focused on diversifying asset class.

From a balance sheet perspective, our focus there is to maintain our leverage somewhere around 5 times. From a rating agency perspective, our credit stats are already investment grade. So we don't feel the need to delever through, for example, the -- through doing a secondary offering, for example.

Instead, as we continue to do investments over the course of this year, we'll use our revolver and we'll match funds with our ATM so that we have a neutral balance sheet approach to investments over the course of this year. At some point in time we may look to delever a little bit more and get into the 4s, but for right now, being around 5 is something that we're very comfortable with and actually gives us a lot of breathing room with the rating agencies in terms of achieving our goal of getting to investment-grade ratings.

From a cap rate perspective, it's a little hard to assess right now because it's so early in the year where cap rates are going. It kind of felt like on the senior housing side, cap rates had sort of bottomed out. We weren't as sure about skilled nursing.

We've seen some deals recently that have gone for pricing both in senior housing and in skilled nursing, and these are small deals, and small as defined as being under $100 million, that have gone for lower cap rates than we saw last year, not as low as the large deals go, but certainly creeping towards that. But until we see some announcements, we don't know whether those are deals that are being done by PEs or by the non-tradeds or by our peers.

If they are deals that are being done by the non-tradeds or the PEs, then it is what it is, and we've had that competition for quite some time now, and they are always going to pay more than we're going to pay. If they are deals that are being done by our peers, then that may indicate there might be a little bit more cap-rate compression, and I think more on the skilled nursing side than on the senior housing side. So that remains to be seen.

In terms of our overall strategy, our focus is to continue to be less dependent than we have been historically been on the external acquisition market by focusing on our development pipeline, by focusing on our existing relationships. Last year about 30% of our investments came from existing relationships, which is not anywhere near the number that we want to get to, but that's over double the number it was the year before. We currently have 29 relationships and look to increase that pretty significantly, hopefully, over the course of this year and certainly next year. And thereby increase the number of investments that we can rely on from existing relationships.

From a coverage perspective, Genesis fixed charge coverage ticked up a little bit to 1.26% from 1.23% (sic -- see press release, "1.22%"). Genesis, as you all know, is now public. I believe they're reporting earnings tomorrow. The skilled deal will bring some additional advantages from a synergy perspective. And we would expect that the fixed charge coverage will continue to improve over the course of the year as a result of that deal and as they focus on some additional efficiencies.

The other thing I want to address relative to Genesis because we have been getting questions on it, and that is whether we are going to be working with Genesis on divesting any of the assets that are currently in our portfolio. And answer to that is, it's possible that we will. We will be having discussions and have had some discussions with them.

But for us, while you always want to see your operator divest itself of assets that you don't want it spending its time -- you don't want them their time on, it's got to be a deal that is advantageous to us. Meaning that we're not willing to take much dilution, if any, in terms of putting a deal together with Genesis, simply because we have a corporate guarantee, and even if we knocked off a small number of assets, it's not going to do that much to the fixed charge coverage anyway.

So we'll look forward to having constructive discussions with them. We'll see where it goes. But it's got to be a deal that works out for us as well as working out for Genesis. And even in the absence of doing any divestitures at Genesis, if you just assume sort of $300 million in deal flow this year, we will still get Genesis down to 30%. And then get them into the 20%s next year anyway. So the exposure will continue to drop, regardless of whether we do divestitures or not.

In terms of coverage for the rest of our portfolio. The Holiday fixed charge coverage was 1.24%. The Tenet fixed charge coverage was 2.11%. Our skilled transitional care portfolio coverage was 1.21% on an EBITDAR basis, 1.58% on EBITDARM basis. That's slightly down sequentially, which we would have expected because the third quarter is the most seasonally light quarter for the skilled sector. On the senior housing side, the EBITDAR coverage was 1.25%, the EBITDARM coverage was 1.45%, and that's slightly up sequentially.

On occupancy and mix, our skilled transitional care occupancy was down 40 basis point to 88.1%, which again is typical of the third quarter. What surprised us in the third quarter was that skilled mix was 37.5%, and that was up 110 basis points. And we usually don't see an uptick in the third quarter because of the seasonality. So that was a nice surprise. I'm not sure it's an indication of anything, certainly relative to what we've experienced the past couple of years with observation days, but we'll take it while we have it.

For senior housing, occupancy was 90.3%, and that's up 40 basis points sequentially. Our senior housing occupancy, when you look at it on a sequential basis or a year-over-year basis, continues to improve. And with that, I will turn the call over to Harold Andrews.

Thanks, Rick, and thanks everybody for joining today. I'll provided an overview of the results of the fourth quarter and our financial position as of December 31, 2014, along with a summary of the various investing and financing activities during 2014. For more details of our annual results, I would point you to our Q4 earnings press release and our Q4 supplemental, as well as our 2014 10-K, which will be filed with the SEC later today.

For the three months ended December 31, 2014, we recorded revenues of $55.7 million, compared to $37.6 million for the fourth quarter of 2013, an increase of 48.3%. Interest and other income totaled $6 million for the quarter, up from $3.3 million in 2013. This $2.7 million increase corresponds to the increase in our loan and preferred equity investments from $185.3 million at the end of 2013 to $251.6 million at the end of 2014.

FFO for the fourth quarter of 2014 was $30.2 million and on a normalized basis was $32 million, or $0.57 per diluted common share. Normalized to exclude $1.7 million of nonrecurring facility operating expenses associated with transitioning two assets to new operators, which we have discussed in prior calls. This normalized FFO compares to $19 million, or $0.49 per diluted common share for the fourth quarter of 2013, an increase of 16.3% on a per-share basis.

AFFO, which excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses, was $28.8 million, and on a normalized basis was $30.5 million, or $0.54 per diluted common share, compared to $19.5 million, or $0.50 per diluted common share for the fourth quarter of 2013, an 8% increase on a per-share basis. AFFO also being normalized to exclude the $1.7 million of nonrecurring facility operating expenses.

Net income attributable to common stockholders was $19.7 million, or $0.35 per diluted common share for the quarter, compared to $10.4 million, or $0.27 per diluted common share for the fourth quarter of 2013. 2014 net income includes a gain on the sale of real estate of $3.9 million, or $0.07 per share, related to the disposition of three skilled nursing facilities.

G&A costs for the fourth quarter of 2014 totaled $9.3 million and included stock-based compensation expense of $3.5 million, $2.2 million of facility operating expenses, and acquisition pursuit costs of $0.5 million. The facility operating expenses were comprised of $0.5 million of operating costs from our one RIDEA joint venture investment and $1.7 million of the nonrecurring facility operating expenses discussed previously. Excluding these costs, our recurring G&A costs were $5.6 million of total revenues for the quarter, up from 5% in the fourth quarter of 2013.

The interest expense for the quarter totaled $14.3 million, compared to $10.6 million in the fourth quarter of 2013, and included the amortization of deferred financing costs of $1.2 million in the fourth quarter of 2014, and $0.9 million in the fourth quarter of 2013. Based on debt outstanding as of December 31, 2014, our weighted average interest rate, excluding borrowings under the unsecured revolving credit facility, was 4.66%, compared to 5.96% as of December 31, 2013, a reduction of 130 basis points.

Borrowings under the unsecured revolving credit facility bear interest at 2.27% at December 31, 2014, compared to 3.17% at December 31, 2013, a 90 basis point improvement year over year. This improvement was a result of improved terms in our $650 million unsecured revolving credit facility that was amended in September 2014. Finally, during the quarter ended December 31, 2014 and 2013, we recognized $0.7 million in other income and $0.2 million in other expenses, respectively, as a result of adjusting the fair value of contingent consideration liabilities related to the acquisition of certain real estate properties that have earn-out possibilities.

Switching to the statement of cash flows for the year and the balance sheet at the end of 2014, our cash flows from operations for the year ended December 31, 2014 totaled $85.3 million and $106.2 million, excluding the $20.9 million one-time payment primarily related to the early extinguishment of debt in the first quarter. This compares to $71.3 million for 2013, excluding the $9.2 million payment related to the early extinguishment of debt. This is an increase of 48.9% year over year.

Investment activity for 2014 totaled $868.6 million, increasing our total investment portfolio from 133 assets at the end of 2013 to 180 assets at the end of 2014, a 35.3% increase. This investment activity comprised of investments in real estate of $787 million, investments in loans receivable of $66.2 million, and preferred equity investments of $15.3 million.

These investments had the combined first-year cash yield of 6.6% and excluding the Holiday portfolio 8.5%. The investment activity was financed with 45%/55% mix of debt and equity, resulting in a continuing strong net debt to adjusted EBITDA ratio of 5.08 times at a pro forma basis as of the end of 2014, compared to 4.74 times at the end of December 31, 2013.

This financing activity included issuing a total of $500 million of aggregate principal amount of 5.5% senior unsecured notes and issuing 200 million shares of our common stock, which provided net proceeds of $517.3 million before expenses. This included 4.4 million shares issued through our ATM program in the fourth quarter of 2014, which provided $121 million of net proceeds.

As of December 31, 2014, we had total liquidity of $443.7 million, consisting of currently available funds under our revolving credit agreement of $382 million and cash and cash equivalents of $61.7 million. This was up from liquidity of $139.4 million at the end of 2013. We also have $76.5 million available under our ATM equity program as of December 31, 2014.

We were in compliance with all of our debt covenants under our senior notes indentures and our unsecured revolving line of credit agreement as of December 31, 2014. We continue to have strong credit metrics, which are demonstrated on the first-time rating of our senior unsecured notes by Fitch ratings of BB+ in the fourth quarter, as well as the increased ratings from S&P from BB- to BB in January of 2015.

Those key credit metrics include on a pro forma basis, as of December 31, 2014, net debt to adjusted EBITDA of 5.08 times compared to 4.74 times in 2013; interest coverage 4.29 times, up from 3.85 times in 2013; fixed charge coverage of 3.34 times, up from 2.76 times in 2013; total debt to asset value of 43%, down from 52% in 2013; secured debt to asset value 5% down, from 17% in 2013; and unencumbered asset value to unsecured debt of 246%, up from 163% in 2013.

On January 12, we announced that our Board of Directors declared a quarterly cash dividend of $0.39 per share of common stock and $0.44 per share of Series A preferred stock. Both dividends will be paid on February 22, 2015, to stockholders of record as of the close of business on February 13, 2015. Dividends paid on our common stock in 2014 totaled $71.2 million, representing 71.4% of our normalized AFFO for the year.

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

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

Thank you.

(Operator Instructions)

Josh Raskin, Barclays.

Thanks. Good morning, guys. I know you gave some color on the pipeline, and that was helpful. But I guess just curious if you're seeing more incoming calls or if this is more proactive [stuff] or reaching out? I'm just curious to characterize how the investments are sort of coming into the pipeline.

It's mostly incoming calls. We've had more inflow at this point in time of the year than we typically have at this point in time of the year. I mean as usual, a lot of the stuff that you dismiss relatively quickly, but we have a lot of things we're working on. We will see how it all plays out, but we feel good about the level of activity.

And the size of the deals? If you're sort of thinking year over year, a year ago at this time are the size of the deals change? Are you getting more incoming calls for larger deals, is that fair to say?

Josh, it's Talya. I think there's been a sense right before Christmas there's been a spate of larger deals, and I'd say a bias towards the skilled nursing sector. And larger, I mean sort of $300 million and up. On the other hand, we're seeing quite a lot of transactions are in the $20 million to $50 million range as well, with probably more of those being senior housing, or small portfolios of senior housing. So we're really seeing everything from $10 million to $1 billion. That's the range, and it's a big range.

And Josh we're not interested in giving a large scale deal. So even though we're seeing larger portfolios like that, we're not interested in them.

Okay, that's helpful. Then specifically on skilled nursing, the rate as we calculate it was up a little bit more than that 2% October bump. I guess it was it up more than we would have thought. Was there some sort of mix issue in your skilled portfolio that went into that sort of increase in rate per facility?

Yes. When those rates get published they're aggregate rates based on histories. Every individual company is a little bit different. And my experience, when I was in the operating side, because we were so focused on increasing acuity and short stay was, our rates at Sun were always slightly higher than the national average.

Okay. So you think that will kind of sort of continue. And then I guess the last question on skilled. Maybe because you obviously (inaudible) there. Maybe your thoughts on what's going on in skilled. It sounds like, just based on your earlier comments, that there's some bigger deals out there. Not all operators are created equal, obviously. And we're starting to see that in this environment. I'm just curious. You guys talked about reducing the exposure to Genesis. It sounds like that's pretty much where your additional target was. Do you think skilled is of more interest or less interest now? I'm just curious on your take on the landscape there.

A couple things. I think for us specifically as we get our skilled exposure down to 50% and lower, we will be a little bit more flexible in doing more skilled deals. But that said, we don't want to do -- for us to do a $200 million, a $300 million, a $400 million skilled deal really pushes our metrics pretty dramatically in the wrong direction. So, we're willing to do more. And we're not going to bypass any bidding on any skilled deal that we like that's sort of under $100 million. That's really the focus.

I think generally speaking, I think one of the reasons that we're seeing so much product on the skilled side is there has been some more cap rate compression. There were a couple of larger portfolios, call it $300 million plus. Two of them that were done in the latter part last year. One of our peers. And one was in at 8.5% cap and one was a little bit closer to 8% than that. I think for those, those are pretty -- they're good assets, they were pretty vanilla nursing homes, but you pay a premium for larger portfolios.

The Oklahoma deal that we did in the fourth quarter, that was an 8.5% cap. But remember, that was all transitional care. It is all Medicare managed care, private rooms. So that sort of a New World product. So, I think that sellers are looking at the environment and saying, hey, maybe we can get 8% to 8.5% caps even for small deals, We'll see if that's the case. There was a deal recently that we bid on. It was three facilities. They were nice assets, but they were just sort of traditional long-term care facilities. And we put what we thought was a pretty aggressive bid on them. And we've got beat by 10% to 15% by two other bidders.

That goes to the comment I made in my opening comments, and that is if those bidders that beat us out are non- traders or PEs, then that's fine, because that is what it is. They're always going to pay more. But if the winning bidder on those three facilities is one of our peers, then all of a sudden you're seeing a small skilled deal going for something in the low to mid 8% caps. Even though they're sort of traditional long-term care facilities, they're not the high acuity short stay facilities that you would pay up for. But I think part of the mentality out there is that even if your paying 8%-plus instead of 9%-plus for a skilled facility, it's still a really good yield. So I think there's been some refocus on, hey, it's just a really good deal, regardless of the fact that there may be some disconnect where there's usually trade.

Got you. Just a quick numbers question. Stock-based comp up a little bit. What's a good run rate for 2015?

Well, we took the full year of $9.9 million in 2014. The hard part about the question is, what's our stock going to do over the course of 2015, which could have that swing pretty dramatically. The year before it was about $7.8 million in 2013. So I think somewhere in that range between those two numbers is probably a pretty good estimate for kind of the normal course if we see, [use to cover] a reasonable stock -- I should say a typical stock increase over the course of the year, as you might expect. But again, it could be significantly different.

The other thing that compounds it is it's not just a function of us getting our annual grant. The management team continues to take all of its annual cash bonuses in the form of stock, not cash. So really since Sabra's inception we've never taken cash bonuses. And for this latest year, the same thing. So that compounds the impact.

Okay, thanks.

Juan Sanabria, Bank of America.

Good afternoon, guys. Just a question on skilled. It seems like yourself and maybe some of your REIT peers are a little bit more interested in looking at SNF opportunities, like you said partially because of the yield, maybe. But could you just speak to what your sense is on the level of scrutiny by various government agencies? Obviously a lot of focus on Manor Care. And now recently there a negative article on Kindred in the press. Do you sense there's more scrutiny on reimbursement assets and by the government to clawback -- to make some clawbacks potentially?

No, I don't. I'll be specific on each situation to the extent that I can be specific. On the Kindred situation, one, it's a media-focused attack, so they have their own agenda. But I would say this, when I read that article, Kindred -- assuming there are doctor's orders for all those patients, which there are, Kindred works within the rules of the system. And if the doctor's orders want a patient to stay in for X number of days, then and allows them to maximize the system. That's just the way it works.

So we -- and on the operating side, you always wanted your operators to maximize the system. Didn't mean you were crossing any lines. You're just maximing the system within the rules. But the way CMS typically works is they change the rules on you kind of on a regular basis. The operators always figure out how best to operate within the system, within the rules, and they do maximize. And then as soon as they start maximizing, CMS changes the rules again. That's like normal cycle stuff.

So that said, I think everybody on the call knows my view in the long run of L tax and IRS in the context of the changing reimbursement environment where you're going to have a level playing field. A lot of this stuff's going to go away because once you have of a level playing field, whether it's neutral [starts], reimbursement, whether it's capitation, whether it's double payment, it is a level playing field which I love for the skilled assets. I think that gives them a great advantage because the skilled providers have shown a lot of nimbleness relative to climbing up the acuity scale, more successfully so on the rehab side than on the bed side at this point. But still very successfully where the asset classes, the L tax and the IRS would have to somehow reduce their infrastructure costs dramatically to accommodate much lower reimbursement than they've ever been used to. And that will have a dramatic impact on their margins, if not their viability. So that's kind of my view of the whole thing.

On the Manor Care issue, that's not really so much a government focus but it's a [qui tam]. You have a whistle-blower lawsuits. And they happen. I don't think -- I don't believe they're commonplace. I've been around long enough, I think, to say that. Kindred's had one, Genesis has had one. I ran three publicly-held companies, as you know, in that space and I had one qui tam over 20 years, or whatever it was I was running those companies. And you'd never really -- and none of us know, and none of you guys know by reading that stuff whether there's really any merit there.

In the case of the one that we defended, whenever that was, it was a whistle blower -- the whistle-blower was a disgruntled ex-employee. There was no basis in the case. We won it. We didn't have to pay anything out. But it took a couple of years and a lot of legal expenses to kind of get through it, because in any sort of whistle-blower case the whistle-blower always gets the benefit of the doubt on the part of the government. The companies don't get the benefit of the doubt. So they happen, but they're not commonplace. And they're unpredictable, but there's nothing to indicate any trend here. Because again, it comes from an individual that's reporting something as opposed to government agencies putting their focus on an entire sector.

Got it. And then just following up on your initial entry points about Genesis and potential asset sales. Could you just maybe provide a little bit more background or color on where you stand in the process? Are you just simply trying to negotiate, like if you sold them at X what the rent hit -- what rent reduction you might be willing to take, or are you kind of not even at that point yet? Just a sense of where you are in the process and the potential timeline.

So it's very early on. So I think if we came to agreement on anything by the time you actually got asset sales done, I think best case scenario you're talking towards the end of this year. But I think for us, yes, I think the question is how much of a rent hit, if any, are you willing to take. And we don't have a whole lot of flexibility there from our perspective. We don't have a whole lot of incentive, if you will, to be diluted in any transaction.

It's different if you are one of the larger REITs and you can take a little dilution and you can get that back plus growth in one fell swoop because you're going to do a $2 [billion] deal, right? That's not us. We don't want to take two steps forward and one step back from a growth perspective. So I think -- look, they're great guys. They're a really good management team. They have a lot on their plate with the Sun deal and now the skilled deal. And I think on both sides you've got two management teams that respect each other. They're very reasonable. And hopefully we can get to a place that makes sense. Because as I said earlier, you'd prefer your operators not to have to focus too much of their efforts on assets that really aren't going anywhere, but again it's got to be something that works for us.

Okay. And just a last quick question. Could you give us any color on the SNF dispositions you did in the fourth quarter in terms of cap rates and timing of the transactions?

Yes. So there were three facilities in Connecticut with (inaudible) operators who -- we have two other facilities with them. We hope to grow with that operator. They're actually really good operator. Connecticut is a really tough environment, and they just didn't want to operate there anymore.

And when we looked at the facilities, we didn't feel great enough about the facility to say, okay let's just move those to another operator. And particularly because in the results of the sale -- well, it was a slight gain to us. So from a cap rate perspective -- Harold, do you know what the cap rate was? What it sold for?

I don't know what the cap rate was and it sold for. I just know that obviously when we evaluated the impact on our rental stream it wasn't that significant to us. And as Rick said, the fact that we were going to post a gain and not a loss on the transaction, then it just made sense to move forward with it.

And the differential in rent, it is included in the guidance that we put out.

Right.

Thanks, guys.

[Sami Cross], Citi.

Hi, thank you. I wanted to ask you just to clarify. At the beginning you said you were looking about $350 million in the pipeline. Is that the kind of activity that you'd like to complete this year in acquisitions, or that's just the pool of potential acquisitions?

That's just the pool of potential acquisitions. We may get 20% of those done, but it gets replenished every week. We knock this out of every week, gets replenished every week. We're going to be opportunistic. I think our normal bread-and-butter stuff sort of gets you to the $300 million plus level, which is what we did last year and pretty close to what we did in 2013. If there are opportunities to do larger deals, then we'll do those larger deals. And larger deals, I think for us is anything over $100 million. Larger deals doesn't automatically mean another $0.5 billion plus deal like Holiday. But it's just deals that are bigger than the $20 million to $50 million range that -- we do a lot of those. We do a lot of those.

So we'll see. And one of the things I'll just reiterate, and I discussed on the last earnings call, is in terms of doing a very large deal, for us the Holiday deal was transformational. We've seen a really nice impact from that from a number of different perspectives. So if we were to look at a very large transaction here going forward, it would have to be pretty easily accretive. And we'd look at it on a balance sheet neutral basis. Because at this point, in all likelihood it wouldn't be transformational. It be nice gravy for us, but it would really be transformational. So we can't really predict how much we're going to do this year. If we did $300 million, I wouldn't be surprised. If we did $800 million, I wouldn't be surprised. We're just going to be opportunistic.

Okay. And the other thing I wanted to ask you, and we can -- probably we'll need to talk to you more offline on this. But we're having some trouble getting to your guidance ranges. And I think if you look at the consensus forecasts, other analysts are having trouble getting there as well. Does your guidance assumes additional share issuance, but no acquisition activity? Is that maybe one reason why --?

Our guidance is just essentially organic growth off of last year. It doesn't assume any acquisition activity. So if --

And no additional share issuance?

Right.

It doesn't assume any additional share issuances. But if you think about it, it is a range. And so when you think about what could cause guidance to move within that range with no acquisition assumptions in there, it could be some share issuances, it could be our G&A costs. It's kind of hard to nail down, if you will, a particular number. But there are several factors that go into creating the range and certain things that we consider when we think about the range, including our leverage levels and our G&A costs.

And look, we -- a couple of things. There's always a disconnect here between us and the research estimates on us because everybody out there has modeled in investment activity. And we don't do that nor do, I think, most of our peers do that. So that's really the driver. Going back to what I said in my opening comments, we really want to be mindful of our balance sheet. And so from an equity perspective in the ordinary course of business for us, again the bread-and-butter type deals, we will use the ATM to match funds and take a balance neutral stance to our investment activity.

So we're certainly not contemplating at this point doing anything more than that, such as a secondary offering, a follow-on offering. Hopefully that answers your question. And we have our own internal forecast, obviously, where we do have investment assumptions. We don't really have a concern about, over the course of the year, meeting expectations.

Okay, that's helpful. Thank you.

Paul Morgan, MLV.

Good morning. Now that you've got several months of Holiday under your belt, any takeaways from kind of looking at the portfolio and seeing what is going on operationally?

Sure. We're very happy. They're doing a really nice job. There's been a slight uptick in occupancy. The operations are just extremely steady. Our asset management team has been in a bunch more of the assets since we close the deal, and the consistency from center to center is -- kind of going back to what I said when we announced the deal, I've never seen a culture in an operating company applied so consistently in every single facility.

So that's why, when we got some questions early on about is this tranche facility as good as your other tranches that got sold. Yes, it is. And I think that as Holiday looks -- or [Fortress] looks to do best. The rest of the Holiday portfolio, or the real estate component of the portfolio, I think the asset quality will be very consistent all across the way.

How do you think about as more tranches become available the trade-off between kind of rolling things in to your portfolio versus kind of managing pricing on one side, but also concentration on the other?

I think there's a Holiday portfolio out there now. It is larger than the one that we acquired. And we just can't do something like that. We'd have to change our name to Sabra Holiday REIT or something. It just doesn't work. So if they want to spin off smaller chunks of that, we'd love to look at that. But we're not going to do another big Holiday portfolio. It doesn't make any sense. It's way too much exposure.

We would have a lot less to talk about Genesis and a lot more to talk about Holiday.

Right. We'd do the I/L read if we did $1 billion on top of what we already did.

Okay. And then you didn't really mention much in the way of what you're seeing in terms of development opportunities. I mean, how do we think 2015 might shape up in terms of new deals for development size?

We are -- well, first of all, we're seeing a consistent and steady stream of opportunities from our existing development partners. We are seeing some additional development. I think there are real ebbs and flow to new development deals. So while we're still seeing some, I'd say right now there's probably -- it feels like a little bit less than we probably saw three months ago. But that might have been more than we saw three months before that. So I think -- I'm talking about pretty subtle ebbs and flow that are just natural.

There's -- and overall, we're seeing an interest across most of the regions, but I would say probably the Eastern half of the country mostly in developing new assisted living, assisted living memory care, memory care facilities. That's kind of the bulk of where people are focused on, probably more in the combination assets. And I think it's probably more weighted towards the Southeast and then extrapolate further from that to the Mississippi.

And we would fully expect to add more development partners this year. We just can't predict how many it's going to be. It's going to continue to be an important part of our focus. There's a lot of so-called developers out there that haven't done senior housing and think they know, and that's part of the problem with some of the product that is out there already. So we see a lot of that stuff that we just discount. For us it's really critical that we partner up either with a developer-operator or a developer who is aligned with an operator that we trust, so that the actual design of the facility is resident- and patient-centric and sort of fits the New World order.

Is it a material -- is it in your $350 million pipeline? Is that how you characterize it, or it separate? And if it's in there, is it a material part of that?

It's not in there.

It's not. I don't -- I count that as $0.

Okay. And then just lastly. Just on the G&A, I mean, how should we think of it for 2015 in terms of a run rate, given some of the pieces that are moving in and out of it? I mean, should we model it as a percent of revenues based on kind of where you were in the fourth quarter? And then maybe if you have any color on the nonrecurring operating expense hit in the fourth quarter, too.

Sure. I think one way to think about is if you kind of assume our recurring cash G&A being somewhere in the 5% of revenue range. And then add -- and then you have to add on top of that some cost for our RIDEA joint venture, which typically runs around $0.5 million a quarter, which is obviously a cash item, but it is captured in the G&A line item.

Then, obviously you've got the non-cash stuff, which we've talked about already on the non-cash compensation, which again can fluctuate pretty dramatically. But it can be anywhere from $7 million to $10 million for the year. And then on the one-time cost of the nonrecurring items, again those are two assets that are being transitioned to new operators. One of them has been fully transitioned. The other one, we're in the final stages of negotiating a lease with the new operator Both of those costs are associated with the time period before the leases are in place.

In the one case it had to do with -- the one that the lease is already in place had to do with some old billing issues that came up that resulting -- and that's not collecting fully the amounts that we should have collected during this short time period. It's about $900,000. In the other cases it's just funding operations while the operator is managing the facility and putting in place their systems and negotiating the lease. That should be coming to a close quickly as well. So they're truly one-time and nonrecurring in that it's just during this period when we're operating them. And we won't be operating -- we are operating one at this point and the other one, that should be coming to a close very quickly.

The two facilities combined, these are small facilities. But the two facilities combined will leave it, worst case whole on rent. We could be actually slightly better.

Great, thanks.

Michael Carroll, RBC Capital Markets.

Rick, you mentioned that you expect Sabra to become investment grade by the second half of 2016. What does the Company have to do to achieve that rating?

Probably hope is better than expect, because you never know with the rating agencies. So I don't them calling me up after this call. But basically what they said to us is our balance sheet is there, and it's just a function of size and diversification. Diversification really from Genesis. But they don't give you sort of the fine line that you have to do to get there. I think for Genesis, once we get them under 30% we are not that far from that. I think we will be in pretty good shape.

The size of the REIT is sort of completely subjective. But one of the reasons that we were happy to have Fitch rate us is, because you need two out of three. And the fact of the matter is, is that Moody's is much more skittish than both S&P and Fitch when it comes to skilled nursing exposure. And I know you saw that they finally made Omega investment grade, but it took Omega getting to a $10 billion market cap for them to actually do that. So that was the reason that we wanted to have Fitch in as well, so we still have two out of three.

So I think based on our conversations with them, when we say sort of second half of 2016, we just look at our existing growth rate, we look at some other REITs relative to when they received investment grade, and make a judgment based on that.

Okay. Then you also said that going forward you could delever but you're not going to do it necessarily now. Can you can you give us more color on that?

I think we're -- having delevered somewhat over the course of the month of December to get us closer to 5, we're comfortable with that. It actually gives us a lot of breathing room with the rating agencies. And for us to delever more aggressively now would require a follow-on offering. And we just don't see any reason to dilute our shareholders just simply to delever at this particular point in time lower than we already are. We don't see any real advantage there to doing that. And frankly don't think that the reception would be that good to it as well, although we're not going to make strategic decisions based on what we think the reception is going to be to our decision-making.

Okay, great, thanks.

Yes.

Todd Stender, Wells Fargo.

Just a couple quick ones. And thanks for the color on how big your pipeline is. Can you give us a feel of what the mix might be for property acquisitions versus, say, loans or more preferred equity investments that we saw in Q4?

I think at this point because we're so far along with our existing development partners that the amount of investment activity that's going to be development-oriented versus stabilized assets is going to be pretty small. I don't know if it's going to be a small as it was in the fourth quarter, but it's going to be pretty small.

If you go back over the last couple of years, where our investment activity on development projects was a significant percentage of our activity was really in 2013. And that was because that was the year that we got a lot of these relationships going to begin with. So everything since then with our existing relationships has been incremental. And my guess is any new development relationships that we start, because most everything we do is in the form of relatively small preferred equity strips with pretty high returns, that it will continue to be incremental.

Thanks, Rick. And I think you pretty much answered this question, but just kind of circle back with the Genesis concentration. It will likely get diluted over time as you acquire more this year in particular, and certainly I think you were getting towards a 30% for the portfolio number just for the rating agencies. But how do you kind of weigh the fact that Genesis is now public, they're arguably more financially sound, greater availability capital to them? And how does that kind of look at -- and how you weigh that, I guess, with what's best for your stock multiple?

I think for us, we think it's great that they're public, because they've got complete transparency there. I know when we did the split with Sun, one of the things that we benefited from, despite the fact that we only had one tenant. So that was, on the one hand a negative; on the other hand the value creation opportunity was the fact that they were still public at that time. And that gave everybody a comfort level. When they went private everybody -- I don't want to say they were on edge, but there were just a lot more questions because everybody then becomes dependent upon us representing how they are doing.

We're not going to have to do that now. They will have better access to capital. I think it's going to be a lot easier for them to manage their balance sheet. As I mentioned, the skilled deal, they're getting a company that has some really nice assets but it's been under-managed. So I think there's opportunity there to improve coverage, not just from the synergies but from operational improvements over time that will take longer the synergies, obviously. So we think that that's all good and we think they have an operator as well respected as Genesis being public just helps the sector.

I mean, things were a lot -- I think it was better for the sector when there were a decent number of publicly-held companies so everybody could look at a variety of data points. And if there was one company out there that was a problem, people didn't extrapolate from that and say, is this an industry issue. It was easy to say, no it's company-specific, because we have all these other data points. So I think it's helpful for the industry. And I think the other REIT executive teams that have skilled exposure, even if they don't have exposure to Genesis, would say the same thing.

That's helpful. Thanks, Rick.

Sure.

(Operator Instructions)

George Hoglund, Jefferies.

This is a question for Harold. Not sure if I missed this in the prepared comments, but can you talk about the provision for doubtful accounts in the fourth quarter?

Sure. In the fourth quarter we booked a $600,000 provision for doubtful accounts. And our policy, if you think about it going back over the course of the four years as we've grown, initially we had obviously one tenant and then we've added tenants. And now we're up to 29 relationships. And as we started to think about our policy around reserves for both straight-line rents that are recorded -- because, as you know, we have a very significant amount of straight-line rents that we're booking every month. There's a big balance there. But along with just our collectibility on interest payments and everything else, we made a determination based on our history this last quarter.

This last year, I should say, where we did have, as an example the TRNC transaction where we wrote off some straight-line rents, that we would take a broad perspective view of our portfolio and apply some parameters around coverages and other aspects of the portfolio. And create a general reserve around collectibility of straight-line rent. So the upshot of it all is there's nothing specific. There are no specific issues around any of our assets or portfolio. This is kind of a general reserve item like you would see any company doing. And the timing was prompted really just by the fact that now we're getting larger and a more diversified portfolio of assets. And thereby we kind of have some history and some basis for making some general assumptions about collectibility.

So I don't expect you'll see a lot of changes there. We'll see what happens, but the criteria is such that I don't expect there to be a need for a significant amount of reserve. But we wanted to have something on the books to reflect that.

And most of our peers do have -- they do have reserves in some form or fashion. The methodology is kind of all over the place relative to how companies approach it. So -- but we were an outlier for all the reasons that Harold talked about. And there was no reason for us to continue to be an outlier. So it was really a function of us having a prudent accounting policy as opposed to it being triggered by any sort of events within the Company.

And do you think this will be something we will see on a quarterly or sort of annual basis going forward?

We will evaluate it quarterly.

Okay. And then as --

As Harold said, it shouldn't -- unlike the stock comp which kind of moves it all over the place, you're not going to see that with this.

Okay, thanks. It's helpful. And just one more, I guess for Rick. I mean, just looking at the overall SNF environment and looking at some of the key things, whether it's the three-day observation rule or the shift from Medicare to Medicare Advantage or just increased regulatory scrutiny. What do you see as sort of probably the most important issue for 2015 and how the operators are going to be dealing with it?

I'll cut to a couple of things. One, just want to point out I don't believe there's increased regulatory scrutiny. I don't think there's any data out there to indicate that. There are a couple of company-specific things that we talked about earlier that have occurred, but there's not a general increase in regulatory scrutiny and I don't expect there to be that.

I think the two things that I look at for 2015 are, is there going to be a doc fix finally, a permanent doc fix, not to kick-it-down-the-can doc fix? And if there is, what's the pay-for going to be on that? I think the industry believes that the pay-for-it comes from a lot of different players and that it would be reasonable. But to this point obviously Congress has not been able to get that done, even though everybody wants to see it done. It's got bipartisan support, it's actually got industry support. So let's see. So that's one thing I look for.

The other is hopefully an end to this observation date issue. That's a real positive if that happens, because you can look at the decrease in skilled mix throughout the sector over the last couple of years and attribute it directly to that. So those are really the two things that I look for. So if it's a doc fix, it will be a one-time thing. Maybe it's mildly negative, but it's not dramatic. And then observation days, if they get addressed then that's a positive. And if not, it still is what it is.

On the managed-care, the Medicare Advantage issue, that's not a new issue. That's been going on for years. And it's been really slow growth. Most residents in skilled nursing facilities still opt for Medicare fee-for-service. I think over some period of time you'll continue to see Medicare Advantage growth in the sector, but it's still a relatively small percentage compared to Medicare fee-for-service.

So that's a multi-year kind of thing. And one of the keys there, too, is on a local facility basis if you could manage it so that Medicare Advantage isn't just replacing Medicare fee-for-service patients, but in fact is replacing Medicaid patients, that is actually a plus. Because while it's certainly true that Medicare Advantage reimburses less than Medicare fee-for-service for the same patient, any Medicare patient, whether it's Medicare fee-for-service or Medicare advantage has much better reimbursement with only incremental additional costs than any Medicaid patient does.

Thanks very helpful.

Sure.

(Operator Instructions)

We'll pause for just a moment. It appears there are no further questions. Id like to turn the conference over to Mr. Matros for any additional or closing remarks.

Thanks very much. Appreciate everybody's time today. And as always Harold, Talya and myself are available for any follow-up calls. And we'll be happy to spare as much time with you as necessary. Conference season is coming up, so we've got several conferences we'll be at over the next six to eight weeks. Look forward to seeing everybody out there. Thanks again. Have a great day.

Once again, that does conclude today's conference. We thank you all for your participation.