Sabra Health Care REIT Inc (SBRA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT's second quarter 2015 earnings conference call. This call is being recorded. I would now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead, Ms. Nevo.

Thank you very much. Good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding the acquisition and investment plans, our expectations regarding our financing plans, our expectations regarding our Forest Park Investments, and our expectations regarding our future results of operation. 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 and our Form 10-Q for the quarter ended June 30, 2015 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 Exhibits 99.1 and 99.2 respectively to the Form 8-K we furnished to the SEC yesterday. These materials can be accessed in the Investor Relations section of our website at www.sabrahealth.com. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Talya. Thank you, everybody for joining us this morning. I'll start the call off by giving everybody an update on Forest Park since that's almost in everybody's minds. And I think as everybody is aware, we've been negotiating a solution to this with a new management team who on their end is bringing in new capital. The Dallas facility has been renegotiated as you can see in the disclosures. The loan was funded, and we have a much more favorable purchase option on the Dallas facility, if in fact, we choose to exercise that purchase option, and I would remind everybody for Dallas and the Fort Worth facility, we're in a different situation than we are at Frisco, which is we've got debt investments there. The value of the real estate far exceeds those investments and we have another 15 months or 16 months before we even have to make a decision on whether we want to exercise the option on those facilities. We did get new appraisals done for our three facilities and the appraisals reinforced our original thesis and notion that the value of the real estate on the three facilities combined exceeds our investment and with operations get that much better.

On the Frisco facility, we negotiated the memorandum of understanding, as you can see in the disclosure, and the loan was funded into escrow but the loan has not closed yet, it's been a few weeks now. So, we are concerned that it may not close. We don't have enough clarity of information because it's being negotiated between the new management company and lender as to whether it will close or not. So we're going down a couple of different paths right now. One, we are in early discussions with another hospital company that is interested in coming into OpCo for actually the entire platform, not just our hospitals. It remains to be seen whether that's the path we choose to go down. The other is we will be starting a process to look at divesting the Frisco facility. So, simultaneously, we would go down in three different paths. We'll work with the current operators, we'll be having continued discussions with the substantial new operator and we'll look at divesting the facility.

From an operating perspective, for the month of June in Frisco, their case volume on a year-over-year basis, actually for May was up 28%, and based on the memorandum of understanding, they had positive EBITDA coverage for the month of June. A couple of other points, I want to make here, there's been an outsized reaction to this. We're not happy about this as we've said but we will get this fixed. If you look at the memorandum of our understanding, and you look at it in the context of our overall revenue. It's a 1.8% reduction on cash revenues and 1.4% reduction on GAAP revenues for the year, and so it's a de minimis impact on the company. And so, I think everybody needs to keep that in perspective, the commitment that we are making to everybody on this is we're going to resolve this one way or another, whether it's to have viable continuing operations. We see a lot of value here. There is enough interest in these entities that everybody else sees the value as well. And we will be happy to have a solution like we came to our tier and see where the Tenet came in that took over OpCo for us on that hospital and hospital is doing really well.

But that said we do not want this to linger as the best solution is to divest Frisco and that's simply what we will do is. There is no ego involved here. We just want to get resolved. And our commitment is that it will be resolved and hopefully everybody can now put that in perspective, and then we can move on.

In terms of the quarter, generally, we had a very strong quarter. We had investments for the quarter of $341.1 million. We have updated an improved guidance and just as a point of clarification on improved guidance, even though the guidance assumes a total of $540 some odd million in investments for the year, the additional $200 million in investment that we expect to close beyond what we've already closed have really negligible impact because of when they close. So if we wanted to get anything else done this year beyond what we currently have done, the impact on our new guidance would be negligible, flat on FFO and penny or two on AFFO. So, with that said the additional $200 million, that we have disclosed that we put into guidance or deals that are not speculative, these are deals that we've been awarded. We're working on documentation, and we fully expect to close those deals. Whether or not we get anything else close this year remains to be seen we're working pretty diligently and doing that we still have very busy pipeline.

The pipeline currently stands at $800 million, and that $800 million is [unstabilized] assets, excludes development projects and the entire pipeline a little bit unusual, but the entire pipeline at this point senior housing. In terms of the competitive environment, we're sensing that we may be at a bit of an inflection point, as everybody knows, it's really been a seller's market, there is a lot of product out there, but more and more we're seeing busted deals, we're seeing deals being re-circulated and these are still one-offs. There's the small portfolios. I got a call yesterday on a large deal, that we have passed on with the process fell apart and then how this seller is looking to adjust their pricing expectations. So, hasn't really impacted pricing yet but it kind of feels like we may be at an inflection point there. We've also increased our dividend for the quarter to $0.41, a 5.1% increase.

In terms of operations and turning to those now, Genesis fixed charge coverage improved as expected to 1.27 and Tenet hospital coverage improved to 2.41, Holiday coverage was stable at 1.19, and our skilled nursing/transitional care portfolio EBITDAR coverage was 1.22. Our senior housing EBITDAR coverage was 1.27. For other operational statistics, our skilled nursing /transitional care occupancy was down [60 basis points] to 87.6%, which is still actually pretty strong number. Our skilled nursing mix was up 110 basis points, and that's really the key stat that we focus on. As mentioned on the last call, with our [SNF] acquisitions, our most recent SNF acquisitions have been kind of the new world order model very focused on much higher complex medical care, chronic patients, transitional care patients, OpCo surge, and this is having a positive impact on our skilled mix in the portfolio. And so the improvement you see in skilled mix is a result of the strategic focus that we have as a REIT on clients who build up that skilled nursing/transitional care portfolio with operators that are moving their model into where we think the whole sector needs to be going. At the same time, as we mentioned on the last call, we've divested a few facilities. We have divested three traditional long-term care facilities in Connecticut at year-end. We just closed I would say about two facilities in Texas. These were memory care facilities. And so we were just tweaking the portfolio a little bit both on senior housing and skilled nursing to divest those assets that we don't think have real long-term value or growth for us. In both those divestitures, we have a gain on sale, so we have to take advantage of [shapeable market]. And our senior housing occupancy was very strong at 150 basis points and 90.4%.

And with that, I will turn the call over to Harold who will give you all these normal detail plus a little bit more detail on Forest Park. Harold?

Thanks, Rick. Yes, I'll provide an overview of the results of operations for the second quarter and our financial position at the end of the quarter. And I'll also provide some details around the Forest Park investments and our updated guidance for the full-year 2015. The three months ended June 30, 2015, we recorded revenues of $56.6 million compared to $43 million for the same period in 2014, an increase of 31.7%. As of June 30, 2015, 32.1% of our annualized revenues are derived from our leases to Genesis, down from 46.8% a year ago. In addition, our annualized revenues from senior housing assets has increased to 33.6% up from 13.4% a year ago. FFO for the quarter was $27 million and on a normalized basis, was $31.4 million or $0.53 per diluted common share. This was normalized to exclude $4.3 million of non-recurring or unusual acquisition pursuit costs, proceeded with the Canadian portfolio and the NMS portfolio acquisitions. And a $107,000 of facility operating costs associated with an asset transitioned to a new operator in 2014. This normalized FFO compares to $25.1 million or $0.57 per share for the second quarter of 2014.

AFFO, which excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses, was $30.7 million and on a normalized basis was $30.8 million or $0.52 per diluted common share compared to $23.6 million or $0.53 per share for the second quarter of 2014. 2015 AFFO normalized to exclude the $107,000 of facility operating costs previously mentioned. For the second quarter of 2015, we reported net income attributable to common stockholders of $14.3 million or $0.24 per diluted common share compared to $12.2 million or $0.28 per diluted common share in 2014.

G&A costs for the quarter totaled $9.9 million and included stock-based compensation expense of $1.8 million, $0.5 million of operating costs for RIDEA joint venture investments, $107,000 of facility operating costs mentioned previously and acquisition pursuit costs of $5.1 million. Our ongoing corporate level cash G&A costs were $2.4 million compared to $2.1 million in the second quarter of 2014, representing 4.2% of revenues for the quarter compared to 4.7% of revenues for the same period in 2014. At the close of the quarter, we recorded a $3 million provision for doubtful accounts. This provision was recorded primarily to increase our reserves to $4.6 million for cash rents owned and the straight-line rental income receivable associated with Forest Park Frisco. The reserve was increased in light of the uncertainty around the additional financing expected to receive during the quarter and the continued financial difficulties experienced by the hospital. I'll provide some additional color on Forest Park in my concluding comments. Interest expense for the second quarter totaled $14.1 million compared to $11 million for the same period in 2014 and included the amortization of deferred financing costs of $1.3 million in 2015, and $0.9 million in 2014. Based on debt outstanding as of June 30, 2015, our weighted average interest rate excluding borrowings under our unsecured revolving credit facility was 4.53% compared to 4.66% at the end of 2014.

During the quarter, we recorded an adjustment to the fair value of a contingent consideration liability associated with an acquisition resulting in non-cash other expense of $0.1 million. Additionally, we recorded $1.7 million gain on sale of real estate associated with the disposition of one skilled nursing asset previously released to Genesis. Switching to the statement of cash flow and balance sheet, our investment activity for the quarter consisted of the acquisition of ten senior housing facilities and three skilled nursing facilities for aggregate investment of $321.5 million. In addition, we made two new preferred equity investments and increased our investment in two other for a total of $4.8 million as well as increasing our debt investment by $14.4 million. The weighted average year one yield on our new investments during the first six months of 2015 were 7.5%. This investment activity was funded with a mix of debts and equity, including the assumption of three mortgage notes associated with the Canadian portfolio totaling $19.7 million with an annual interest rate of 3.74%, a new CAD90 million loan, five-year term loan with the variable interest rate at June 30, 2015 equity offering, which provided $147.9 million and borrowings under our revolving credit facility of $96 million. We also entered into an interest rate swap agreement associated with the Canadian term loan (inaudible) fixed Canadian dollar offer rate portion of the interest rate at 1.59%. Cash flows from operations totaled $51.3 million for the six months ended June 30, 2015, compared to $49.8 million in 2014, which excluded a $20.9 million one-time payment in 2014 related to the early extinguishment of debt.

During the second quarter of 2015 we had no activity in our ATM program and as of quarter-end, we had $76.5 million available for future issuance under the program. We paid quarterly preferred and common dividends totaling $25.7 million during the second quarter and on August 4, declared a $0.41 cash dividend to be paid to common stockholders on August 31, 2015, representing a 5.1% increase over the prior quarter dividend of $0.39 per share. As of June 30, we had total liquidity of $334 million consisting of currently available funds under our revolving credit facility of $328 million and available cash and cash equivalents of $6 million. We were in compliance with all of the debt covenants under our senior note indentures, our secured revolving line of credit agreement and our term notes as of June 30 2015 and continues to remain strong credit metrics as follows, our consolidated leverage ratio of 5.59 times, our consolidated fixed charge coverage ratio of 3.33 times, our minimum interest coverage ratio 4.41 times, total debt to asset value of 45% and secured debt to asset value of 5%. Ratio of unencumbered asset value to unsecured debt 235%.

Now I'll switch and provide a little more details on the Forest Park investment. First I'd point your attention to the detailed discussion of Forest Park in the MD&A section of our June 30, 2015, 10-Q filed yesterday. A few highlights are as follows. In May 2015, we reached an agreement with Tenet to be paid $1.7 million of deferred rents through May and to modify the lease to provide for repayment of the remaining deferred rents over time and to lower the monthly base rent amount going forward to provide cash flow only to the hospital while it executed on its operational improvement plans. This modification also provided for percentage rents and most contingent upon the hospital obtaining additional financing, which is expected to close in June. As of July 21, debt financing had not been secured and we have amended the agreement to lower the upfront payment to $250,000 to provide the hospital with additional liquidity. This funding has yet to close and there continues to be uncertainty as when it will be closed and released from [escrow] to the hospital.

In addition, if closed, there is uncertainty with it such funds will provide the hospital with necessary liquidity to operate under the modified lease terms. During this uncertainty, we recorded $4.6 million reserve for unpaid rents, which totaled $4.5 million and the straight-line rental income receivable, which totals $4.7 million as of June 30, 2015. The amended agreement entered into in June, July provided at the time of closing the new financing the terms of the lease will be modified to include the following provisions, the payment of $250,000 for past due rents, reduction of monthly rents to $550,000 effective June 1, 2015, with annual increases in the following four years of $50,000 per month in each year. A new percentage rent provision based on revenues, which will provide us the opportunity to recoup up to 125% of rents per the original lease over the life of the amended lease.

The base rent reduction represents 1.8% reduction in our consolidated annual cash revenues and 1.4% reduction in our consolidated annual GAAP revenues before considering potential percentage rent payments. In addition to rents from the hospital under the modified lease represent 3% of our annual cash revenues and 3.9% of our annual GAAP revenues as of June 30 2015, also before considering potential percentage rent payments.

Taking into account the additional reserve record for Frisco during the six months ended June 30, 2015, our normalized FFO and normalized AFFO per share include $0.03 and $0.05 respectively from the Frisco investment. In other words, if the revenue from Frisco were completely eliminated from our financial statements, our normalized FFO and normalized AFFO would be lower by only $0.03 and $0.05 respectively.

Couple of quick comments with respect to our $110 million Dallas mortgage loan, we currently have $1.9 million of deferred interest owed to us, and the borrower is current on its interest obligations under the terms of the deferral agreement. Based on the expected cash flows at the borrower, through its lease with the tenant in Dallas, we expect to have this deferred amount repaid by mid-2016, and we expect the borrower will be able to timely pays debt obligations to us in the future.

Our investment in this mortgage loan is less than the estimated fair value of the real estate collateral based on a recent third-party appraisal, and as part of the interest deferral agreement, we eliminate the borrowers, limited ability to require us to purchase the facility, and lowered our option strike price to an expected price of between $115 million and $137 million.

Regarding our Fort Worth, our investment of $59.8 million, as of June 30, 2015, is well below the estimated fair value based on a recent third-party appraisal, and the borrower is current in its debt obligations to us. In addition, our purchase option is based on the value of the real estate, should we choose to exercise it.

In addition to the lease modification agreement with Frisco, we have explored, and we'll continue to explore other alternative solutions for Frisco including replacing the tenant or selling the asset. For Dallas and Fort Worth, we will continue to monitor performance of the hospitals, and evaluate the benefits of the exercising our options to purchase those assets. In connection with evaluating our options, we did obtain third-party appraisals for each of these assets and while each asset its situation is separate and distinct, in the aggregate, the estimated fair markets value of our Forest Park investment indicates the possibility of several options whereby we can realize our aggregate investment value. Finally, I would like to make a couple of comments related to our updated guidance for 2015.

We have increased our normalized AFFO guidance range from $2.05 to $2.10 up to $2.12 to $2.15. We also adjusted our normalized FFO guidance from $2.19 to $2.24 to $2.21 to $2.24. Included in the numbers are the following, acquisitions of $543.9 million or additional $194.6 million over what we've closed to-date. This represents transactions that we have a high level of confidence will be closed by year-end. It also includes asset dispositions of $15.6 million. It includes the completion of the Genesis buyback transaction discussed in the first quarter, which includes a $20 million payment, they have excluded from normalized FFO and normalized AFFO, and a related real estate impairment charge associated with the expected disposition of three of those five skilled nursing facilities. To remind everyone about the deal with Genesis, the buyback will result in a reduction of annual rents from Genesis of $2.1 million and for two of the five assets, we will explore bringing in new tenants to operate them.

Our full-year guidance for normalized FFO and normalized AFFO includes a $0.07 and $0.04 impact respected to the Frisco reserves recorded in the first half of 2015. We have assumed no additional reserves will be required for Forest Park assets in the second half of 2015 and assumed rents for Frisco beginning June will be based on the terms of the amended lease discussed previously.

Finally, to put the significance of Frisco on our 2015 expected results into context, our full-year guidance which includes $0.10 per share for normalized FFO and $0.09 per share for normalized AFFO related to the Frisco hospital were less than 5% of each of the high-end of the range. And with that, I'll turn it back to Rick.

Thanks, Harold. We'll open it up to Q&A now.

Tremendous experience in the acute hospital sector. You know all that checked out really well. But when it actually came to the execution of that transition. They sell and so and as we sell and we have given ourselves a break on that self-critique, I'm not sure signs of weakness that we could have that would have indicated. That wasn't the right management team, which is what turned out to be the case. But that also goes. I think my earlier comment that on a go-forward basis. And so I guess that there is the ultimate takeaway for us is that anything that we may or may not do. And in this asset class. And we have built. As I said, we have no plans to do any of that. I mean the foreseeable future. It would have to be wearing a large enough operator. That we felt the resources and infrastructure with there to sustain any kind of bumps in the road, the beverage business. As John pointed out some months great, thanks. It's edited your guidance makes our comments about remaining a leveraged neutral to find the incremental $195 million of deals in the pipeline. Are you assuming, I guess you could use of the ATM to fund that and how do you think about I guess your cost of equity given how the stock has been last couple of days. Yes. 2 weeks yeah, so. So to be clear, you're right. The guidance does include assume assumption of being leveraged neutral. It also assumes that we're issuing equity at basically where the price is today and it assumes doing somewhere around 100 million on the ATM to keep a leveraged neutral. And so, obviously, we'd like to see the stock price improves based on the, the cap rates that we have for these acquisitions that we're looking at and the spreads that we'll get even if the stock price today or comfortable issuing equity at this level to those levels. We obviously will be judicious about it and don't want to get super aggressive and we just want to match fund to maintain leverage, but obviously a stock. The stock price was better you would give us an opportunity to further delever. But we're not going to force that issue at this point. Just a last question then just for Rick, any thoughts on the potential change of enforcement rather to be that for Christmas no, actually, a lot of infill nursing providers one everybody knew these changes were coming, whether it's not, whether it's a re-admission changes or on the skin condition

Thank you. (Operator Instructions) Josh Raskin, Barclays.

Hi, thanks. Harold, I just want a quick follow-up, I just want to make sure I get the numbers right. When you say Frisco is $0.10 normalized FFO and $0.09 for adjusted. What was the $0.03 and the $0.05 from Frisco that you had mentioned before?

As you related to our guidance or as you related to our actual numbers. Because the $0.03 and the $0.05 relates to the first half of the year. So based on the $0.03 and the $0.05 or what's your actual numbers through June and $0.09 and the $0.10 include booking additional revenues under the amended lease for the balance of the year.

Additional reserves?

Additional revenue, no additional reserve.

Right, that's why it's a little bit more on the normalized FFO, okay. So that's helpful. And then, just second there was a mention obviously in the prepared remarks Rick about competition and it not impacting pricing. So, I guess you know what is your commentary around in terms of what is it impacting? Is it just impacting sort of there is a glut of property out there now? Or what exactly is the competition creating?

Well, I think a lot of us have been talking about there's been just a lot of product on the market because people have viewed this as it's not the peak or high point in the market. So all the brokers have been shaking the trees, and so convincing people to sell -- they just might not ordinary sell at that particular point in time. So that continues what we've seen differently more recently, it was seeing deals break down, and we're seeing deals get re-circulated at lower pricing. So, now it's early on -- so that and inflection point, it hasn't really caught up with general pricing yet that remains to be seen. But we're just seeing some changes in the market now that would indicate to us that maybe we have hit a peak and maybe we'll see some changes in pricing going forward but it is too soon to tell.

And that's all senior housing, is that what you were saying?

It's senior housing and skilled nursing.

And then, just lastly, I mean obviously maybe even in context of Frisco there has been a couple of hospital assets. I know they might have been a little bit big for you guys to look at but your thoughts on hospital assets changed and do you think there is opportunities there?

No really it hasn't changed I think. There are couple of things here. In the case of our first hospital TRMC, we had sort of a one-off operator out there and as we saw it was tougher than to compete in the market, and then when tenant came in and took over OpCo things have changed dramatically there. So, I think with the right infrastructure, right operator, I think the hospitals are generally in good shape by the go-forward basis but I think as most people think that it benefits from ACA. It's a little bit different with Forest Park investment because they are private hospitals, physician-owned, and so I think the question there is could we bring in an operator that can sort of keep that specific model intact and still having been successful? I think that that's a distinct possibility. Are you better off bringing in one of the guys well-familiar with that will operate those hospitals on a more traditional basis although they are always going to have a certain advantage there because the real estate in this case is so high and then there are high-income markets and all that. So, it'll be a little bit different than the traditional model. So, that's part of assessing the solution for Forest Park, generally. But due to your question, we think the acute hospital market is still a good market. I think for us, we need to get this resolved, and as I said earlier, we're committed to getting it resolved. And you'll see our focus remain on senior housing into a lesser extent skilled nursing at least for the foreseeable future.

Okay. Thanks, Rick.

Yes.

(Operator Instructions) Smedes Rose with Citi.

Hi, thank you.

Hi Smedes.

On Frisco, I understand that it's a relatively small part of your overall revenues but if you were to assume kind of a reasonable rent coverage and assume a similar cap rate to what you guys paid 8.5% to 9% I think at $120 million, what do you think the value of the asset could be now if you were to sell it?

Well, a part of the reason we got the appraisals done was to give us a sense of where they could come in. Frankly, we don't want to get into that and make any assumptions in that going forward because we're going to start a process here. We want it to be a competitive process. We just don't want to negotiate against ourselves, and certainly on a call like this.

The other question I had is we were looking at the coverage of the skilled nursing portfolio and it just seems like it's been on a little bit of a downward trend but then your remarks are that coverage has improved Genesis and it seems to have sort of stabilized or gotten a little better at some of your other operators. Can you help me kind of square at those two? Or is there something what I might not --?

No, I think part of the issue for us -- we talked a little bit about before, we're reporting coverage on stabilized properties and we don't have that many stabilized skilled facilities outside of a Genesis portfolio and so like on a same-store basis, for example, there's only 19 facilities in there and we have four of those facilities that on a year-over-year basis had some operational issues. Nothing that we're long-term concerned about. But when you're reporting on such a small number of assets, it only takes a few of those to sort of bring down the whole. But we don't have any assets in that group that we've got long-term concerns about. Obviously we have done a little bit of tweaking like with the Connecticut on assets that we'll sell a few of the Genesis assets but you're not going to see a whole lot of divestiture activity there. So, it's really just -- a really small base in numbers that we're reporting on and for couple are having a few down months and then it just froze everything off.

And if Genesis were to buy out the other two leases, what kind of amount would that be and what would it do on the rent side?

Well, they are buying out all of the leases.

All five of them?

Yes, they're buying out all five. The agreement we struck with Genesis is that we'll reduce their rents by $2.1 million. And if we're able to re-lease those two buildings by an amount greater than $400,000 per year, we'll give them a little more relief. So it's going to be on the margin, it could be another couple of hundred thousand of rate reduction from Genesis if we replace those with other operators but there is, that's basically the whole deal. There's no more amount coming back to Sabra.

Juan Sanabria, Bank of America.

I just wanted to follow-up on Forest Park, sort of a big picture question and kind of pick your brain about, what do you think maybe you learned or what you got wrong or that you could maybe appreciate as a risk for Forest Park that you could take as a lesson kind of going forward?

Sure. I appreciate the question. So at the time I think from a diligence perspective, we did exhaust the diligence and as you know, engaged a third party to do sort of a [future assessment] of everything about the business and the market. So I think we feel comfortable there even in hindsight. The risk I guess whereas we knew that the hospitals will be transitioning from out of network rates with the insurers to in network rates, and at the time, we were comfortable with that the existing management company would be able to effectively negotiate that transition and look at any kind of situation regard to the asset class, you're always betting on management. And these guys had tremendous experience in the hospital sector. All that checked out really well but when it actually came to the execution of that transition, (inaudible). We self-critiqued this and we haven't given ourselves a break on that self-critique, I'm not sure what signs that we could have missed that would have indicated to us that it wasn't the right management team, which is what turned out to the case. But that also goes I think in my earlier comment that on a go-forward basis and so I guess the ultimate takeaway for us is that anything that we may or may not do in this asset class and we have no plans, as I said, we have no plans to do any of that in the foreseeable future. It would have to be with a large enough operator that we felt the resources and infrastructure there to sustain any kind of bumps in the road because every business at some point has some nuts in the road..

And I think your guidance makes comments about remaining leverage neutral to fund the incremental $195 million of deal that's in the pipeline. Are you assuming guess use of the ATM to fund that and how do you think about I guess your cost of equity given how the stock has been the last couple of days or the last few weeks I guess?

To be clear you're right. The guidance does include an assumption of being leverage neutral. It also assumes that we're issuing equity at basically where the price is today and it assumes doing somewhere around $100 million on the ATM to keep leverage neutral. And so while well obviously we'd like to see the stock price improve based on the cap rates that we have for these acquisitions that we're looking at and the spreads that we'll get even if the stock price today we're comfortable with issuing equity at this level to those levels. We obviously will be judicious about it and don't want to get super-aggressive as we just want to match funds to maintain leverage but obviously if the stock price was better you would give us an opportunity to further de-lever. But we're not going to force that issue at this point.

Just a last question and you for Rick, any thoughts on the potential change of enforcement rather to go for business?

No, actually, a lot of these skilled nursing providers warned everybody knew these changes were coming, whether it's the re-admission changes or condition changes. Everybody knew that that stuff was coming and many of the providers out there have already operationalized a lot of that stuff. So, the estimate on the cost of implementing all that in my discussions with the trade association that represents most of the providers in the sector, it's really hard to validate that number simply because there were so many providers that have already operationalized a lot of that. I know four of the providers that are in our portfolio. They've all been working on this stuff for quite a while. So there are things that should happen, I think it will improve the business, it will improve the overall quality of the business, it will improve outcomes. So over time everybody needs to sort of get with this and do it the right way. So I'm not really bent about it.

Rich Anderson, Mizuho Securities.

Rick, how would you characterize or prioritize I should say the three options that you verbalized earlier in the call between sell, the real estate sell, or change OpCo or execute there is the say it reset plan?

It's a fair question. I think we want to because it's taking like long to try to get this close. At this point, we don't want to wait any longer which is why we're assuming other options. So, we want to go through down all these paths simultaneously. And then have -- be able to look at all those options that we have in front of us and make the best choice. This is the team we have. And so, it's really easy to stand here and say, the best, easiest thing to do is just get this thing now, just the best, the Frisco hospital. But we want to make sure, we're doing that for the right reasons. So this really that's kind of where you want to go. But if we can get the right operator and even with all the problems the hospitals have and you can see a modicum of improvement here and they're struggling. Anytime you've got noise around a business it affects your business. But what we saw happen at TRMC was a great outcome for us and that's a great asset. And the value continues to build there because of what tenant is doing. And so we can come up with that sort of reasonable option we'd like to do that. But we're not going to let this linger and we are completely comfortable with divesting the asset. So, I know that doesn't specifically prioritize it for you except that hopefully you understand that. We're going to be done with this one way or another.

Yes I think that biggest problem is you're spending so much time on this call, talking about it when you could be talking about all the other good things that are going on, and that goes away instantly with the sale. So, turning to other topics, you mentioned the pipeline of $800 million, 100% of that is senior housing. What do you think of that in terms of coincidence of the supply issues that are hitting the market, maybe, current owners are frightened by that. Do you think that supply is playing a role in people's desire to sell senior housing today?

I think it's less -- that could be a part of it. This is Talya speaking. I think a bigger part of it is, there is a sense that feeding frenzy in a market and the demand by buyers is not going to last forever and better get in now while you can. Rick mentioned the brokers have been out there holding seminars, webinars, advertising that now is the time to sell and they've been working of potential sellers who haven't necessarily been focused on a sale to do so. I think that's generated actually a lot of the activity. You do have some institutional investors who are trading out, rotating out of certain assets they've been in for some period of time. You have assets that have been developed and are pre-stabilized or reaching stabilization and are being sold, you have those, but I think a lot of the product we're seeing is people who are thinking well if I am ever going to sell, maybe, now is the best time to sell.

Third question, a lot of your peers that are engaged in their RIDEA structure, now it's not your thing, but are hanging their head on the flu season as to why things are slowing down with eastern part. Are you seeing flu impact your numbers or have you in the past sort of three, four, five months?

No, I don't get it. I don't see it in our senior housing portfolio. And I also don't see it in our skilled nursing portfolio for what it's worth, having spent so many years operating in the business. On the skilled side, we always benefited from the flu season. Because you had more patients coming with respiratory issues, you had more Medicare coverage, and so we're not seeing any of that. So everybody is brought into this whole narrative for whatever reason. But we haven't seen any evidence of it.

Well, I haven't, so I'm asking you. And then, last question, maybe to Harold, Genesis, do you just have the timings of third or fourth quarter the buyout?

It's likely in fourth quarter.

Okay, great. Thank you.

Thank you.

Michael Carroll, RBC Capital Markets.

Have you guys started marketing the assets for sale, the Forest Park assets, and then how would you position the sale? Would it just be the Frisco assets or would you be willing to sell all of them?

We haven't formally -- we are in conversations to get it started. So the process should start in the near term. In terms of positioning, yes, I think at this point we are just going to sell the Frisco assets. We are in a different position in the other assets besides the fact that we are over-collateralized, we don't own them yet, right it's just a dead investment. So there are a number of steps that we have to go through to be in a position to sell those and so it over capitalizes, Fort Worth, is for example to make the additional investment right now to exercise the option to purchase it. We don't think it's a smart thing for us to do. So it would just be the Frisco asset, and that's the one that's really concerning anyway for everybody.

And the hospital that's interested in the whole platform, is that the same NASDAQ-listed operator you mentioned in the last call?

Yes.

And is that operator willing to take just Frisco or would it have to be all or nothing?

And it's not all or nothing but they want at least several of the hospitals. They're talking to one of the other hospitals that's not one of ours. They didn't want to just do one though. They wanted to get a few under their belt. They have a pretty significant physician network that's part of their business. And so one of the reasons that they want more of them -- they want few of these hospitals if not all of them is that they can bring physicians into these hospitals relatively quickly. And it just helps their business model -- that's one component of their business model.

And they are interested in purchase it, not lease it, correct?

No, they (inaudible) just OpCo. They would lease it.

And then my last question on the Frisco asset, have you seen many physicians, I guess leave the hospital recently or has the operator been successful bringing in new physicians at all?

We haven't been losing physicians but we haven't yet been getting new physicians and so you are basically static. The fact that they had the volume improvement that they had year-over-year in May says the last of existing physicians that are there. They could just bring more cases in. But clearly if this was resolved, then not only will they be able to bring new physicians in, but they would be in a better shape as vendors, they will be able to handle more cases than they can currently financially handle and that's the restriction on that right now what they actually can financially handle. And that was one of the reasons we felt good about the memorandum of understanding, because even given sort of all these headwinds that they've got going against them, the memorandum of understanding was supportable and their June results demonstrated that. But again the whole thing is just taking too long. And so well to the earlier question, I didn't exactly prioritize, which way we'd go. I'd say it's more likely than not that we won't have the asset.

Tayo Okusanya, Jefferies.

When you talk to the Forest Park guys, what exactly are you telling you in regards to the delay in the financing? what's really causing that?

They are telling us that [the lender] needs to get some legal consent, they have had a hard time getting. Frankly, Tayo, we're particularly after they funded Dallas, and then funded Frisco into escrow there was no reason not to expect that Frisco was going to close. So whether there's something else going on or not that they are not being candid with us about that may be the case. So we're kind of over it, we are tired of waiting and we're tired of listening to what they have to say.

Got it. Okay, that's fair. And then Harold, in regards to the straight-line receivables and as well as the unpaid rent receivables, how much at this point is not reserved for?

$4.6 million is not reserved for.

Okay. So $4.6 million, in total. Okay, so that's --

Yes, it's about $2.2 million on -- $2.3 million on the cash unpaid rents is not reserved for.

I'm sorry, say that again, $2.3 million of cash rents is not --

It's about $2.3 million of cash and about $2.3 million of straight-line rent receivables are not reserved for.

Okay, that's helpful. And then just the last one from me on this topic, I mean if they ultimately end up not being able to get the financing, how do you kind of think about next steps?

Well, that's really what I was talking about earlier, we're not waiting for them to get the financing at this point. We're talking to this other operator, that we think it's potentially a viable option. They've got a real high level of interest. So we're not taking that for granted either. The outcome that has the most predictable ending is to go through a sales process with Frisco. And that's why we are going to undergo that process. These guys may get the funding, they may not. This other operator may be viable, they may not. We feel like we've taken enough time here to let the new management company play this out and we need to have another process in place that definitively resolves this once and for all. And as we're going through the sale process, one of these other options turns out to be viable, then great, then we do that. But at this point we need to have a definitive end to this whole thing. Again to the earlier point, this is a pretty small piece of our revenue base and look how much time we're spending on it. And we had a really damn good quarter, we're having a really good year. And the reaction to this is really outside. This is not the [prediction] of our rate exposure.

I would just add one comment to that and that is the other thing we haven't talked a lot about that's out there and it is in the 10-Q MD&A discussions that we do have guarantees from the physicians and those guarantees total somewhere around $20 million. So that gives optionality for a couple of things. Number one, if we were to do an outright sale, there is some ability to recoup the rents that were unpaid at the time of that sale. Secondarily, it gives us some optionality to allow us to if we're going to bring in another operator to get cooperation out of the physicians as we negotiate how we might structure that new lease and their guarantees, they would be given them some relief on their guarantees. So while there is the potential approval to sell outright, there is the chance that we would never collect any of those rents. Through the normal course we still have the support for those guarantees that would be considered as well.

And the other point Tayo I'd make is we've been in continued communication with the Chairman of the Frisco Board who is a physician, most of the Board are Physicians, and we've got a very good relationship with them. We're cooperating with each other. Their whole thing is they want Frisco to do well, they want to stay there. They want to be able to bring more docs in. They appreciate the fact that we have been a really supportive and flexible landlord through the sort of the difficult times that they're going through. So we've really made an effort to maintain transparency with these guys and talk with them on a regular basis, including just twice even the last week and we've attended their Board meetings. So from that perspective and just to add on to Harold's point, we're making sure that we've got everybody on board with whatever direction that we go in including not just sale of the facility, which we have discussed with the Board but also this other operating companies. They have had discussions within they like as well. So, nothing is being done kind of behind closed doors because we've recognized and fully understand obviously the value that they bring to the table and I just think that we don't want to take too much credit here, but I think that transparency has helped the situation in terms of the fact that we haven't been losing physicians here.

And then Harold, just one for you, during the quarter, there was kind of -- you called it unusual acquisition pursuit cost that you actually took out of FFO. And typically, you take the acquisition pursuit cost out of or you added back for your adjusted FFO? Just wondering what that unusual piece is related to, that was part of FFO?

Yes, so there is a couple of things there. They all relate to the acquisition of our Canadian portfolio and the NMS Portfolio. So a lot of those had to do with costs. It's just getting all the legal, and accounting, and financial stuff in place or moving into Canada and so they are kind of one time, how do you deal with all the issues around Canadian legal environment, the Canadian accounting environment, or FX, hedging, all those things that went into that aspect of it were part of that number. And then, although even bigger piece than that was significant transfer taxes that we paid on those portfolios, and we don't typically pay. Those totals about I want to say $3.6 million. And so, if you look at kind of the impact on our FFO number, historically, our acquisition pursuit costs run somewhere around 50 basis points as a percentage of revenues. I'm sorry, 150 basis points as a percentage of revenues. We were in like 900 basis points. And a lot of it's because the revenues weren't in the numbers for those acquisitions as they occurred at the end of the year. So we took a look at all those costs and said well, these are one-time unusual stuff that you don't typically see and normalized those out to give a better picture for what things look like, excluding those unusual and one-time items.

Got it. Okay, that's helpful. Thank you.

Thanks.

Chad Vanacore, Stifel.

Hi, good afternoon.

Hey, Chad, how are you doing?

Good. So Harold touched on this, but can you describe are there any other downside projections that you have in place on Forest Park in addition to the guarantees?

No, there aren't. I think given the value that we think the hospital has even given current operations, we're comfortable with going ahead with the sales process.

And then, on that subject, so last quarter you mentioned that you could have explored a sale but you thought you'd be giving up too much upside. Do you now see a greater upside than originally thought given the appraisals or is the sale just a more definitive way to end the issue?

The sale is a more definitive way to end the issue. And really as I said earlier, there's just as we are spending all this time discussing it, you just want to be rid of the whole damn thing right. But the reality is these things have been really under-managed and there really is upside. That's why there is sort of a part of you that wants to still explore that but it's gone on too long and we don't want to continue to explore the options of staying in there on a long-term basis without pursuing the sales option at the same time. And otherwise, this thing can go on and on, and we want to be able to not just look at ourselves but with you guys in the eyes and say we're going to be done with this one way or another.

All right, then, and then just on the Genesis buyouts that covers all five facilities that are being divested. How's that going to be accounted for on the P&L?

Which aspect?

The $20 million?

The $20 million comes in as revenue and is part of our FFO number. That's why you see us in our guidance normalize it out. And then there will be -- once we make the determination to divest the three assets, then we will take an impairment charge. And keep in mind these are legacy assets that we got at the spin that have historical book values that we inherited from Sun. And so the assumption there is that those three assets are actually closed or are going to be closed. And so there's not any operational value in those, it's really just the real estate value. And so if there's an impairment charge that you also see in there in the guidance associated with that.

Alright, and then, just one quick one. So if the additional $200 million of acquisitions or guidance is negligible to 2015. Does that indicate that you would expect most of those to close in the fourth quarter?

They are going to close either in the fourth quarter or well enough into the third quarter but they have almost no impact on the numbers.

Todd Stender, Wells Fargo.

Hey guys thanks for staying on and taking my question. Most of my questions on Frisco have been answered but for Harold, you spoke a little bit about getting us updated third-party appraisals on the Forest Park loans. Any details you can share from those appraisals, maybe just to get a sense on the loan to value, and any reduction in real estate value since it was underwritten any details you could share?

The details I would provide is there for both Dallas and Fort Worth. The appraisals came in excess of our book value and in the case of Fort Worth by a large margin, I would say that from the real estate value perspective. I don't think that that has changed dramatically because it's not really focused on the operations within those assets, it's really just based on the market and what that real estate is worth. I would say, too, that, just looking at the transactions as Rick had said that have recently closed that I think bolsters an opportunity for us to come in even at a higher levels than those appraisals may indicate. And so we don't want to provide numbers, if you will, from those appraisals, we are going to just let the process take place without as Rick said, opening up an opportunity for us to have to negotiate against ourselves.

Okay. Fair enough. And just finally on holiday, if we can just get an update there, looks like coverage was essentially unchanged from last quarter, where do you think that's going to look like, maybe by year-end. And how did this compare into your expectations when you originally bought the portfolio?

I don't think it's going to change dramatically, remember it's all [IL], So you're looking at 1:1 coverage at the facility level, so with the corporate guarantee I don't think it's going to be much different, it's kind of where we thought it would be.

Great, thank you.

We'll now take a follow-up from Smedes Rose.

Hey, it's [Michael Donovan] speaking. Rick I just got a question, just in terms of equity and sort of acquisition volumes, and I guess if you step back, you've raised almost $700 million of new equity through the three issuances in ATM literally, I think just in over a year. Stock is clearly one part of it (inaudible) but part of it may be other things. I don't know, do you step back and sort of say you know what maybe the market is telling you something, maybe I should take my foot off the gas, maybe I should stop issuing so much equity in buying not the market value my stock and my company appropriately rather than just continual -- pump it out, pump it out, pump it out?

It's a fair question I would say we don't look at it that way. We think that when you look at the pattern on how the stock behaves through the end of last year for the holiday deal the equity offering in conjunction with that the ATM activity that we had, everything happened where we expected to happen. We had a nice run in the stock. Fitch came in at BB+, S&P bugged us as we expected. And prior to the day that we announced the Forest Park issue, even though the group was down for the year, we were at the high end of that range. So I think prior to Frisco and Forest Park generally our performance has been rewarded. I think the story has been understood, and I don't think the market was telling us anything different. I think initially with the Forest Park disclosure, I think we understood the reaction because we didn't have a whole lot to talk about from a detail perspective on the last earnings call. I think it's hard for investors to get their arms around hospital assets to where they have they around other assets generally and these are even more unique given the fact that private pay physicians owned, so I think at the time we understood the reaction as we went out in [certain non-deal] roadshow and talked about what we're trying to get accomplished in NAREIT we came off of our lows, but at this point, I think we've already said we certainly we think the reaction at this point is outsized. But prior to that announcement, Michael, we didn't see any data point that would indicate to us that the market was telling us to slow down. We talk to our investors on a regular basis. We got some very large shareholders who have really been very comfortable with our strategy, who actually think that the reaction to Forest Park has been overdone. And so that's a long-winded answer to your question.

And I would just add to that because I think Rick alluded to briefly about the rating agencies. I do think that our investors and us view moving toward investment grade as a very positive step. And so that's part of the -- obviously the thinking as we think through the growth strategy. And as Rick said, we've been, other than the Forest Park announcement, been rewarded for that and people obviously have viewed that growth. And when we look at our acquisition spreads and we're getting on investments it's something that we're comfortable with and moving toward investment grade, which, again only requires us to grow and diversify from Genesis, as an important part of the strategy.

It applies in the yield on the $350 million or so or $340 million or so in deals we have done this year in just under 8% and it's quite good on the $200 million that we're working on closing now. So just to reinforce Harold's point, we're making really good investments that are changing our portfolio in a way that allows us to get to investment grade.

And how much more can you close before you have to start hitting the ATM. So how much capacity do you feel you have at this point?

As stated, we already, we assumed in these guidance numbers that we would do around a $100 million or so in the ATM. So that's the deal that we're closing on will be done on a balance sheet neutral basis. So we're completely comfortable that we can just do that much more, keep our leverage where it is, and that finishes up the year first.

So $200 million more of acquisitions with $100 million off the ATM at some point here in the late in the third, into fourth quarter. But after that you didn't have to get a larger ATM or do another marketed deal?

Yes, that we would -- our strategy is to always have an ATM program in same place, just because it gives us that optionality and it's the cheapest way to raise equity. So as I mentioned, we only have about $70 million something available. So that indicates at some point we'll put another ATM up probably sooner than later, but it doesn't mean we'll tap it, but we'll put one up.

Yes, and in terms of sort of going forward it's really like any other [REIT] we'll use the revolver, we'll use the ATM to match funds, if there is a deal that's large enough that it would dictate that we do something different in the market simultaneously like we did recently, then we'll do that. In that case it all really worked to our advantage, because the Canadian deal came before the skilled deal, the Canadian deal was funded with debt, because that was the best way for us to finance our deal to eliminate tax leakage, because it was a Canadian deal, and we didn't want to lever up when we announced that larger skilled deal, and so doing a bought deal that night, which frankly was a really good deal for us. It was a phenomenal book. We had a pretty light discount on it, and so it worked out. But it's no different in the behavior, I think any of the other REITs that are really growing.

Alright, and almost just sounds like I guess to resolve this (inaudible) issue before you embarked on any potential larger capital commitments. Because I think the last thing that your shareholders want would be even if you have a positive spread more equity issue than a discount not being able to take advantage of accretive investments. So --

That's exactly right, that's what the mindset and that's what the expectation should be. We are hearing no other questions. We thank you all for your time today. And we are available by phone and email as we always are. We've got a non-deal road show in the Midwest next week, and so we'll be seeing a number of you, middle of next week, and we look forward to that. Thanks very much for your time and support, I appreciate it.

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