Sabra Health Care REIT's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Sabra Health Care REIT (SBRA)
by: SA Transcripts

Sabra Health Care REIT Inc. (NASDAQ:SBRA)

Q2 2013 Results - Earnings Call Transcript

August 1, 2013 01:00 PM ET

Executives

Rick Matros - Chairman & Chief Executive Officer

Harold Andrews - Chief Financial Officer

Talya Nevo-Hacohen - Chief Investment Officer

Analysts

Tayo Okusanya - Jefferies

Emmanuel Korchman - Citi

Rob Mains - Stifel

Michael Carroll - RBC Capital Markets

Operator

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

Talya Nevo

Thank you very much. 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 business strategies, expectations regarding our acquisitions and investment 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, 2012 that is on file with the SEC, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished with 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 explanations and reconciliations 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.

Rick Matros

Thanks, Talya. And thanks everybody for joining us this morning. We appreciate it. I'll be discussing really our strategically, then move on to operational metrics and then I'll kick it over to Harold, who will go through the numbers in detail and then we will move on to Q&A.

To start with, just talk about capital market strategy. As many you know, we've taken advantage in a very active and the capital markets, the first six months of the year but certainly second quarter of this year, having accessed the preferred equity early in the year. The high yield market earlier and in the middle of the second quarter and then as Friday closed our new revolver and this has really positioned us extremely well.

We now have, when you add up, everything we've done and include the ATM which we haven't had the need to activate yet because of all the capital we've raised, we have an excess of $550 million in available capital, which, if you look at the current rate of growth, that we had over the past couple of years, will easily take us over the next couple of years and the point here I think is, we've been opportunistic taking advantage of a market that's been extremely [troughy] say the least.

Many of us who have done a high yield, walk in $200 million (inaudible) and amazing opportunity for us. Now we will have the opportunity to grow the company and if you look at us doing 0.5 billion or so of acquisition at the current rate over the next two years will be much more diversified, much larger and we'll have ratings [results] and what we won't be depended upon the sloppy market to access good rates.

So if you are asking really positioned ourselves well. Harold will get in to more detail on the numbers, but we have very little exposure to interest rate fluctuation with all the moves that we've made and probably the next thing that we'll look to do barring, bigger deal that may provide other opportunities is taking up the remainder of our original (inaudible) who have that opportunities in the middle of fourth quarter 2014 and that will help us bring down our cost of capital and that much more dramatically at that point in times.

In terms of growth, we announced new pipeline agreement yesterday; we have a third pipeline agreement that is getting closed to done. And we have a fourth pipeline agreement that we're working on and these are critical for a number of reasons, we think as some of you've heard from us before, (inaudible) market has change dramatically in terms of product, in terms of nature of the resident and number of shares well being in relatively new business.

And so we're really focused on bringing new assets, purpose-built assets in and hope for these pipelines will be primarily assisted for being – and memory shares, there might be a little bit skilled nursing in that. And each of these pipelines will be approximately 10 facilities, total value per pipeline on stabilization will be $100 million to $150 million.

So if you project that on a go forward basis and if we assuming that we do no additional pipelines, is that we intend to do additional pipelines, but just with the ones that I just discussed that's 40 new assets covering in the company of the next four to five years.

And given the size of our company we'll have the highest percentage of new assets and certainly purpose-built assets for the senior housing market, our mini sector and what I realized that may be a little bit unfair to say because of our size on the other hand, it reflects how we view things strategically with our focuses and that focus will, we think reward shareholders greatly.

In addition to that we're starting to see more repeat business with our existing tenants, that bodes well for us as well and expect those well for as is well, and so if you look at the combination of what we've done with the capital markets and what we're doing with the development projects and that we're building on repeat business.

We really created a hedge for us for the next couple of years, both in terms of the capital markets and then from an acquisition pipeline perspective to the extent the pipeline continuous to stay healthy on those new assets that come into the portfolio as they stabilize, will just be accretive to our group, to the extent they are slow down for the pipeline activity than we can count on nice chunk of new assets coming in every year in addition to those new assets we have (inaudible) deal that we announced in the second quarter, another $15 million of assets are coming somewhere around the next 18 months.

So again if you allow me - position ourselves very well on a go forward basis, pipeline is (inaudible) today it's gotten a lot healthier as you all know when you look at the healthcare REIT sector across the board, it's been a slow year although I would point out that we have $33 million deal that we did in the fourth quarter, with some tax purposes that would have been done in the first quarter normally.

And it's actually would have been ahead we were last year, but that said it has been slow, pipelines have picked up nicely and we have about $300 million deals that we're looking at in the pipeline and about 65% growth deals are senior housing and the remainder are primarily skilled nursing, so we look forward to what still feel very comfortable that will hit the range that we identify at the beginning of the year for 2013.

In terms of the environment beyond just what we're seeing with our pipeline make a couple of notes, there has been a reaction obviously and a lot of questions raised about interest rate pull back and how is that affecting and any effects in terms of acquisition activity and cap rates and the answer is no and so stand on a couple of things.

The operators that we work with decide the deals that we focus on so call $20 to $50 million. These operators did not pay attention to what's happening to the interest rate environment, they never have, I doubt they ever will. They look at how their business is doing, they look at the Medicaid rate supplies, the Medicare rate supplies and the private rate supplies, the ability to increase this and how this is steering and then they look at their own personal situations, what's going sort of in their lives, at the time to monetize. So I had never, in all the years I've been in the business, I've never seen any alignment between the interest rate environment, good or bad and what's happened on the acquisition side.

In terms of cap rate, I'd make similar comments there and obviously there's a lot more history of the skilled nursing side, than the senior housing side but cap rates have removed with the interests environments historically and we'd like to think that there will be some relief on cap rates as interest rates move up slightly, just the way we expected of these stable cap rate environment. That's what we're seeing that's what we're hearing from potentials sellers out there and also with the developers that we're working with.

So really a pretty benign, (inaudible) relative to what's going on in the financial markets, (inaudible) relationship there maybe we are doing three or four (inaudible) deals then maybe it would impact but that's not the case with us. From a reimbursement perspective, let's say stable to positive for our skilled nursing facilities on the Medicaid side, we are looking at a consolidated dedicated rate increase of 1.44% and most of those rates come in July 1 and August 1. Six of our top eight states have increases.

Only a few of the states are down and barely down. So overall very positive on the Medicaid side and pretty much in line I think what we are expecting. We have a few states that have much larger increases than we were anticipating New Hampshire which is our largest state has also a 5% increase, New Mexico 13% increase, Idaho 7% increase, there's big ones in there.

The ones that are down 23% except for North Carolina and Delaware, they are down under 2%. So I'll give more detail on that if you guys would like to during Q&A. So Medicaid looks good, Medicare CMS announced a final rule last night so 0.3% net market basket increase which is pretty much in the range that we were thinking, its different from facility-to-facility, so it might be slightly different than that but not very much.

So all-in-all pretty benign significant buying that on the reimbursement side, I think it always has been to keep an eye out for the reimbursement side as it pertains to Medicare specifically and that's if they do permanent [topics]. And there's some optimism that they will do a permanent (inaudible) because the 10-year CVO score for doing one is somewhat a third of what it used to be because of cost coming down which makes it very doable and to the extent that all these various healthcare sectors are happy more than that the 10-year number is not bigger number and I think everybody would view that as a positive in terms of being takeoff for that. If you get them out of the way, fix it and not have to deal with that every year. So we will start with one thing that takes us out there sort of keep an eye on. So we will see what happens with that.

Moving on to Genesis, things are going very well with Genesis and a couple of things specifically. One of the things we talked about in the last call, that's got $65 million of synergies right on target, which is terrific but most unexpected is that Genesis is unable to mitigate sequestration completely. That's a huge number because our working assumption up to this point was that sequestration was essentially off October 2012 market basket and in Genesis's case, that makes that market basket accretive. You will offset sequestration with another market basket coming in October 2013. So that will obviously improve the coverage and gives them a lot of cush going forward. So that's something we're obviously very happy about. We do a previously issued guidance overall.

Moving on to operating statistics, our skilled nursing EBITDAR to EBITDARM coverage improved sequentially from 1.26 to 1.28 and 1.73 to 1.75 respectively. Coverage already also improved year-over-year for the quarter from 1.21 to 1.28 and 1.70 to 1.75 respectively. Results are slightly stronger than that on a same-store basis. This is the first quarter since mitigation was completed and we saw increases in rent coverage for sequential and year-over-year periods.

Normalized EBITDAR and EBITDARM for senior housing portfolio was slightly down but still comfortable for the three and 12 month period at 1.1, 1.35, 1.17, 1.41 respectively.

On a same-store basis, normalized coverage to the senior housing portfolio of both EBITDAR and EBITDARM improved 1.22 and 1.52. So 1.35 and 1.64 respectively for second quarter 2013 compared to second quarter 2012 and so very strong coverage there and for the 12 month period the results are almost identical.

Occupancy for our skilled portfolio was 88.5% for the quarter down 80 basis points, senior housing was up 320 basis points to 85% primarily driven by what particular facility that we want in turnaround note that's improved pretty dramatically, skilled nurse is down 50 basis points to 38.3%, that's the best actually year-over-year comparison that we've seen in the couple of years.

The better news really is that sequentially skilled nurse is up 180 basis points, a very good sign alone with the year-over-year comparison. So we believe, we've seen the worse, it's been weak two years, that weakness over the last two years, the combination of both the CMS rate pull back in 2011 and the observation days in the total hospital sector and so the skilled mix, sequential growth is again the most important stat that we discussed this morning, it's all about strategy, the flow back change in the model and skilled nursing industry needs to continue to move up to achieve this scale and that's really particularly this time.

We do expect to see skilled mix lighten up as we head to the end of the second quarter, third quarter that's very typical sounds seasonal you like, as we ended second quarter and go through the third quarter that's just normal stuff. So overall from our perspective we are by far in a strong position than we have never been with the current pipeline that looks good, activity coming down the road that was very good from the development perspective and again what we have done in capital markets. And with that, I will turn it over to Harold.

Harold Andrews

Thanks a lot, Rick. Before I get into the details of our numbers for the quarter, I want to bring you back at some of Rick's comments, it's been a couple of minutes highlighting the recent activities in the capital markets and some of the other steps we have taken to increase on liquidity, improve our cost to capital both of which should enhance our long-term prospects for AFFO growth.

At December 31, 2012; we had capacity to fund acquisitions about a $155 million from available cash and capacity under revolving of credit. We began 2013 expecting to finance our growth into the foreseeable future by utilizing this capacity and by putting into place a $100 million ATM program.

As 2013 is important, we put the ATM program in place but also took advantage of two significant opportunities to access long-term capital and unprecedented pricing. First, we issued 5.8 million shares of 7% and 8% perpetual preferred equity, net in proceeds of a $138.4 million. This permanent capital was priced to 21 basis points of the yield-to-maturity on the bond offering we completed in 2012, which is due in 2018.

Then in May we took advantage in extremely attractive bond market opportunity by issuing $200 million aggregate principal amount of 5.38% senior unsecured bonds to an indenture, to this pricing was the 154 basis points inside the yield to maturity for the 2011 bond offering I just referenced.

In addition perpetual deferred equity offering created the opportunity to call back 35% of our $325 million aggregate principal amount of outstanding bonds that were issued in 2010 and 2012 having a 7.75% effective interest cost, this call back was completed in June of 2013.

The $333.3 million of total net proceeds from these two transactions will utilize the number one we paid a full $92.5 million of outstanding on our revolving line of credit and number two execute the 35% call back of a $113.8 million of the senior unsecured bonds due in 2018. Plus one the $9.3 million earnings redemption fee associated with that call back. This left us with an excessive of $117.7 million. A portion of this excess cash has been utilized for recent investment activity to pay off of 9.43% mortgage note and other corporate purposes leaving us with cash of $92.8 million as of June 30, 2013.

Finally, the waited step that we took to improve our capital position occurred on July 29 enclosed on an amendment to our revolving line of credit which increased the commitment to $375 million and included both pricing and structural enhancements over the prior $230 million line.

The new line has an accordion feature which allows up to $225 million of additional availability. We currently have $286.5 million of available for borrowing, which we will spend of $375 million as determine appropriate over time. The pricing from this new revolver is 50 basis points higher than the prior revolver across the four level pricing grids ranging from LIBOR plus 2.50% to LIBOR plus 3.50%

Furthermore the revolver is no longer shared by mortgages but by the pledge of equity subsidiary that owns certain of the company's real estate assets. This gives us significantly higher flexibility and ease of increasing the borrowing capacity under the revolver. Furthermore it represents a significant step for the company toward a four year secured revolver and goal that we have for the future.

To bring all this into focus on the strategic benefits of these opportunistic capital structure moves we have made in 2013, let me highlight a couple of things. First, now we have the ability to finance over $450 million of investments with cash on hand and the revolver and that's before considering the accordion feature, plus another $100 million of investments through utilizing ATM program. By way of reference we have invested approximately $448 million since the inception of Sabra in November 2010, and through these acquisitions have diversified our portfolio from a 100% concentration in Genesis to just under 61% at June 30, 2013.

Having over $550 million of capitals deployed puts us in a position where we will not require another capital raise before we have significantly increased the size of the company and improved our tenant and asset class diversification dramatically. However, we will continue to be opportunistic in accessing the capital markets if necessary including the potential redemption of the remaining $211 million of bonds due in 2018. As Rick pointed out, this opportunity is likely to be in the fourth quarter of 2014.

Increasing our size and diversifying are the primary requirements to obtaining higher ratings from rating agencies. Having significant capital in place to execute on our growth and diversification strategy will allow us to achieve higher ratings and improve pricing before we need capital markets again. Second, these capital structure moves have lowered our cost of debt and significantly extended our maturities. Our weighted average effective rate on our long-term debt declined from 6.77% at the end of 2012 to just over 6% as of June 30, 2013, a 73 basis points improvement. In addition, the lower cost on the revolver was half the accretion of our acquisitions in the short-term.

Finally, after these steps, 43% of our long-term debt maturities after 2022, that's up from 8.4% at the end of 2012. We believe this puts us in an excellent position to execute our growth strategy while enhancing our earnings potential in the future and puts in a greater position for continued progress toward higher credit ratings and therefore continuing lowering of our cost of capital.

And now I'll spend a couple of minutes with the numbers. For the three and six months period ending June 30, 2013, we recorded revenues of $32.3 million and $64.3 million respectively compared to $25.1 million and $48.8 million for the same periods in 2012, increases of 28.5% and 31.6% respectively. As of June 30, 60.8% of our revenue was derived from our leases to subsidiaries in Genesis, which is down from 69.7% a year ago. FFO for the three and six months period ended June 30, 2013 was $5 million and $22.5 million respectively. FFO for the same period was $5.6 million and $22.2 million respectively.

During the three and six month period ending June 30, 2013, we incurred a loss on extinguishing of debt totaling $9.8 million and a one month interest overlap without $800,000 associated with the issuance of new bonds and redemption of the $113.8 million of outstanding bonds. Excluding these non-recurring items, normalized FFO was $15.6 million and $33.1 million for the three and six month periods ended June 30, 2013 respectively, or $0.41 and $0.87 per diluted common share compared to $13.7 million and $25.4 million or $0.37 and $0.69 for the same period of 2012.

Excluding the non-recurring items normalized AFFO was $15.7 million and $32.2 million for the three and six month periods ended June 30, 2013 respectively, or $0.41 and $0.84 per diluted common share compared to $15.7 million and $29.7 million or $0.42 and $0.79 per diluted common share for the same period in 2012. Normalized AFFO for the quarter was flat year-over-year due to the timing extend of the capital raise activities that began with $100 million higher bolt-on that we completed in Q3 of 2012 and include the 2013 capital markets activity described above.

For the second quarter of 2013, we include a net loss attributable to common stockholders of $3.2 million or $0.09 per diluted common share compared to $5.9 million net income for the second quarter of 2012 or $0.16 per diluted common share. Our net income attributable to common stockholders was $6.1 million or $0.16 per diluted common share for the six month period ended June 30, 2013 compared to $10.3 million or $0.28 for the same period 2012.

G&A cost for the quarter totaled $3.4 million and included stock-based compensation expense of $1.5 million in acquisition of pursuit costs of $200,000. Excluding these non-cash transaction related costs, G&A costs were 5.4% of total revenues for the quarter compared to 5.8% in the same period of 2012. Interest expense for the three and six month periods ended June 30, 2013 totaled $10.1 million and $20.1 million respectively compared to $7.9 million and $15.6 million in the same period in 2012. This increase was the result of the capital markets activity discussed previously including the $800,000 impact of overlapping interest from the recent bond offering.

During the quarter June 30, 2013 we recorded an adjustment to an asset purchased earn-out liability resulting in other expenses of $1.4 million. For further clarification on this item, this is one of those accounting rules that requires us to estimate our earn-out at the time of closing the acquisition and any adjustments to the ultimate payout runs to the P&L.

So actually this expense is a very positive sign and performance of that assets which will ultimately be put into our TRS, a Stoney River. So in this case, more expenses is exactly good thing for us economically. The estimated liability of $2.2 million is expected to be pay down in the third quarter and will result in additional rental revenues based on an 8% first year cash yield on the additional investment.

Our investment activity for the quarter consisted of acquisitions of one senior housing asset of $6.1 million and mezzanine loan of $12.4 million increasing our total gross real estate investment and loans and other investments on our balance sheet to $962.9 million and $43.1 million respectively. The weighted average one year yield on our investments during the first six months of 2013 is 10.9%. Cash flow from operations totaled $22.9 million for the six months ended June 30 and $32.2 million excluding the $9.3 million one-time payment related to the earlier extinguishment of debt. This compares to $24.1 million from the same period of 2012.

We were in compliance with all of our debt covenants under the senior notes indentures and our secured revolving line of credit agreement as of June 30, 2013. Those metrics include the following based on defined terms in the credit agreements, consolidated leverage ratio of 4.45 times, consolidated fixed charge coverage ratio of 2.51 times, minimum interest coverage ratio of 3.4 times, total debt to asset value of 43% and secured debt to asset value of 11%, unencumbered asset value to unsecured debt of a 152%.

Finally a quick comment on our HUD refinancing, we continue to work on refinancing our $87.7 million GE mortgage debt through HUD. We currently have approximately $57.3 million in process with HUD underwriters and expect to a lock in rate in the coming several weeks. Rates have backed up a little bit in the past few months, but we still expect to see solid investment savings as well as the benefit of pushing maturities out from 2015 to well behind 2033. Closing of the $57.3 million portion currently with HUD underwriters will likely be completed in the fourth quarter, while the remaining $3.4 million is likely to be at 2014 closing. Once we the complete GE debt refinancing, we'll have all of our mortgage debt termed out over 20 plus years and all of our borrowings will be at fixed rate excluding the future utilization of the revolver. This sets up nicely an environment where interest rates are expected to increase in the future.

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

Rick Matros

Thanks, Harold. We'll go to Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions)

We'll take our first question from Tayo Okusanya with Jefferies.

Tayo Okusanya - Jefferies

How is the HUD financing, I mean just how much in regards to rate they are expecting as to say, like and kind of what current rate on and where do you kind of think you may end up.

Harold Andrews

Yeah, so early on a couple of months ago rates were still hovering around 3% and when Bernake made his comments and investors kind of got concerned about rising interest rate environment rates backed up to as high as the mid to high 4s. But talking to our lender earlier this week it locks and deals this week in the high 3s so below 4%.

So our current GE debt all in to a little higher than 5% so when we get something locked in around 4 or a little bit lower than we're looking at a maybe 1% benefit and if things continue to settle in and improve maybe it will be a little better than that. But that's kind of the range we are looking at.

Rick Matros

Yeah, and Tayo if you think about all of our mortgage debt. You know as you know we refinanced a bunch last year. All of our mortgage debt, all in will have a blended rate of maybe 3.75% and you're talking 30-year money.

Tayo Okusanya - Jefferies

And then second thing again congrats on the pipeline deal. It sounds like you have two other big ones coming in line. So you have this very nice acquisition pipeline in front of you, I guess the question is how quickly do you actually expect some of the stuff to close and the reason I ask that is if I am just tracking the first one you announced, First Phoenix, that was announced about a year ago, you expect, there are about 10 of these things and I think if I am correct, it really don't make one or two so far a year later.

Rick Matros

Yes, because when we announced the pipeline, really, except for one or two, they were all just (inaudible). So by the time we built and stabilizing, we're looking about a two year period. So we're closer to stabilization on one particular facility now as well as nice (inaudible) show. We will see if we bring that in later this year but I think you will see a few next year. That's really the year after that they are going to be coming in sort of on a regular basis because by then you will had enough time. Given the size units or the five facilities that are being built, but these are 50 to 70 unit. So it's been that far. Assume 12 months to get it open and another 12 months to get it to 90% or so occupancy.

Operator

We'll take our next question from Emmanuel Korchman with Citi.

Emmanuel Korchman - Citi

So, Rick, as you kind of go in to more of these relationships especially with different partners, can you just talk about how you expect maybe terms and timelines and volumes and all kind of stuff to change as sort of it becomes maybe more of a core part of your business rather something new?

Rick Matros

The terms, we really all negotiated upfront, there are formulas for takeouts, stabilization. Those formulas really they're very much like what would happen if we just (inaudible) stabilize assets on a lease back basis, so it's trailing – performance with appropriate coverage that we are going to underwrite based on, so one, 2 or north of that on senior housing about 5 on SNFs those mix, 8% CapEx range for the senior housing stuff and something north of 9 for any skilled (inaudible), whole lot of that.

And because it's a few year's out with some of these projects in some cases, there is also a spread to treasury with the cap on that, that will look as well, I don't know exactly what interest rates are going to be so that we sort of get some protection there, there's a put in place, there is a put in place with all cases and there is also an end dates, because as we know you've seen project out there that are pretty stabilized, for 25 years, so generally speaking, going to two years sort of drop that (inaudible) where some events going to happen.

Emmanuel Korchman - Citi

No. That does. Do you see your, the preferred, returns you're getting sort of on just to preferred equity piece, do you see that changing with sort of the changes in the interest rate market, are you more of a needed financing provider I guess, is the right way to look at it?

Rick Matros

Yeah. I think we are more of needed finance provider and then we are just a piece of cash taxes, but we are actually are very little development capital with, so if you guys are getting traditional construction loan, we make it easier to somebody get it, because we are providing preferred equity in the banks and we are do, they are to take it out so they can see the light at the end of the tunnel, but it's $10 million to $15 million project, we are in it about $3 million, so even though our return is relatively high, its high on not a whole out of dollars sort of stuff but they need it anyway.

So the construction loan will take them to 65% to 75% rate of capital stack our preferred equity strip will take it to 90%, it may go a little bit higher and they are kicking the rest. And I guess our view on interest rate environment is yes it's going to go up but it's not going to jump up few 100 basis points a year over the next few years so they gradualize. And we expect the returns that we are currently getting which are called the 10% to 15% range kind of stay in that range.

Emmanuel Korchman - Citi

And then do you have any interest in moving, how everyone look up or down in capital stack and providing natural construction fencing or are you happy just to be the preferred partner and then what the bank deal with the rest?

Harold Andrews

It's a good question, I think earlier on we didn't what to the entire capital stack because what's still most important for us just to diversify away from Genesis as quickly as possible by doing stabilized deals. We got so much capital available right now in certain circumstances, I want to preclude actually doing that particularly with guys that we already have the history with on this pipelines.

And we may step up and do some different things. So for example on the New Dawn Sun City West memory care facility that we announced a few months ago, that facility just opened, so it wasn't stabilized yet, our operating marker had some very sensibility in there, and yes if we could take everybody out, even if facility wasn't stabilized. So we said yes, we got mortgage in place, that mortgage is a means to the end of kind of long-term instrument, we an option to purchase the facility upon stabilization.

So, we got the option secured, we got cheaper money in play than we had and. So the answer is we will look at doing some of those things in certain circumstances, but there have to be a relationship that's already grounded and have history to it, that we feel good about in order to do that.

And certainly as our cost of capital continues to improve and if interest rates go up, the spread between we're taking into construction loan and what we can do for them obviously narrows particularly, if you don't just look the rate on the loan, but you look at associated fees and deal with a bank and then just the general hospitals are dealing with one entity. So it is piece of the construction and then they deal with another and we've already had guys say to us denied at that some point just to deal with new construction not have to deal with anybody else. So that's long answer to your question. So the answer is yes in certain circumstances.

Emmanuel Korchman - Citi

And then maybe my last one it should be quick. And maybe I missed it, in the $300 million pipeline that you're talking about how much of that's going to be stabilized product versus sort of these take some time to stabilize that product?

Rick Matros

That's almost entirely stabilized. We're talking about the pipeline; we are not talking about any of our development, Scott. So we don't know how to stabilize assets?

Operator

We'll take our next question from Rob Mains with Stifel.

Rob Mains - Stifel

Just couple of questions, first Rick you talked about how cap rates really haven't moved. For you at least the cost of equity capital has gone up a little bit, what does that say about investment spreads? I know we are talking about issuing equity not this year in all likelihood.

Rick Matros

Yeah, I think for us you know hedge back or pull back obviously in case you don't completely understand it. But it doesn't really; it doesn't affect us right now because we can't look at the stuff on a day-to-day basis. One is it has got more expensive but it's still lot more reasonable than it was a year ago. So we are still in relatively good shape there and we just believe that as we continue to execute, we've been doing it particularly because we hedged ourselves against rates for quite some time and the point of attack about with the exception of revolver once the rest of the [GE] gets refinanced to HUD all of our debt will be fixed.

So we are really not that concerned about I mean, if we roll the clock forward because we have ATM to activate tool we need that and we look at when we might need to do an equity offering so when we want to take out the high yields in the fourth quarter of 2014, is that going to be an option?

Harold Andrews

We are going to be quite a big larger at that point. We are going to have Genesis well below 50% at that point all of which should be reflected in how we are trading. And it should equity a lot more reasonable and probably the only circumstance really that I could think of that would cause us to think about a follow-on sooner than later was if there was a big enough deal to justify it and it would have to be a pretty damn big deal because we've got so much capital available to do a big deal anyway. And the reality it's probably not all that realistic because we are not going to be subject scale deal because we don't want to go in that direction. And we see big senior housing deal, if it's too big, then the three bidders are going to be in there and they are just going to outbidding each other. So, probably not going to be able to competitive there. So it's unlikely. I think for us if we can think about a big senior housing deal, it's probably in the $100 million range and we certainly have plenty of capital to do that and everything else we're looking at without having to consider follow-on at this point in time.

Rob Mains - Stifel

You talked about competition for deals on one of the calls this morning kind of alluded to private REITs maybe being a less disciplined. I know you are seeing private equity anybody else other than the competitors that you talked about on prior calls for deals?

Harold Andrews

So, we're not seeing private equity yet. In terms of the private REITs being some are not disciplined, completely undisciplined. We see them once in a while. We don't see them that much. I mean, usually for us it's no different. Then what we've said in the past, senior housing stuff is usually see [LTT or an HI]. We actually haven't seen [S&H] at least not that we are aware of and then on the skilled stuff we see the same players may be Omega entity.

So, we don't see Griffin-American as much as we used to because they have been doing a lot of [MLB] stuff and we haven't seen some other nearer to C&L really. We may see new capital at some point but we haven't seen them yet. So, usually I would say generally speaking on any deal we look at, there is usually a couple of other guys we're competing with but it's not big group.

Talya Nevo-Hacohen

On the private equity I would characterize the two names that we do see occasionally, [assets AW and Pru] REIT has not to be looking at the same assets or while we look at the same assets, we are not on the same ballpark on pricing, though we are not able to, I would not characterize as competing with them.

Rob Mains - Stifel

Okay. By not the same ballpark, your job, I can't give you baseball now, they are doing a higher end deals.

Talya Nevo-Hacohen

They are paying six caps, I don't know why, doing manage back, so I am structurally and in terms of price point they are in just good place.

Rob Mains - Stifel

Got, it, okay. And then one numbers question, I want to sure I understand the $1.4 million contingent liability, so it's earn on a 2.2 million that gets capitalize, but you collect rent on it?

Harold Andrews

No, it doesn't recapitalize, so when we close on the transaction, we booked a $1.3 million estimated earn-out and again you just have to make it for GAAP. Any changes those estimates flow through the P&L statement. So if you look at our last quarter numbers, we actually had a $0.5 million gain because it looked like performance was lagging from what we expected. This quarter performance went up dramatically resulting in the $1.4 million charge.

So what will happen is when we write that check for the earn-out payments, the liability will obviously go in our balance sheet, but we'll also be recording rent of 8% on that additional investment, so we're paying rents associated with that. So on the books we've got $1.3 million associated with that earn-out and anything different from that was to the P&L and the actual cash out results in 8% return.

Rob Mains - Stifel

And then just clarification when you talk early about coverage and still makes everything that is for the quarter ended June 30?

Harold Andrews

Everything is quarter and no years.

Rob Mains - Stifel

Okay.

Harold Andrews

Yeah, everything is quarter and not year and skilled mix. It looks like it's a little bit wider as we sort of move into the second quarter and for the third quarter.

Rob Mains - Stifel

But that's then normal seasonality, right?

Harold Andrews

Yeah, occupancy actually has been moving. For our consolidated portfolio occupancy has been moving up since end of the quarter, so April and May occupancy is up over the first quarter and actually pretty significantly.

Operator

We will take our next question from Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Harold, so is $0.45 is good FFO run rate going into the third quarter adding back that earn out charge?

Harold Andrews

So if you look at our supplement we have a pro forma FFO number and that pro forma kind of takes into account everything that's happened pushing it back to the beginning of the year, so it's about $0.42 on pro forma AFFO.

Michael Carroll - RBC Capital Markets

But that includes the charge for the earn-out right, that you should add that back to your run rate going into the third quarter?

Harold Andrews

No, that's pulled out of there as well, that's pulled out.

Michael Carroll - RBC Capital Markets

Okay. And then I know we have been waiting for the second half of '13 for your investment activity to really start ramping up and should we be expecting that to start pretty meaningfully in the third quarter or is that going to be weighted more towards the fourth quarter?

Rick Matros

It is probably, it could be weighted more in the fourth quarter, the recent activity in the third quarter, but it's weighted more in the fourth quarter.

Michael Carroll - RBC Capital Markets

Okay. And then with the Meridian pipeline, can you give us a little bit more color on that, I think in the press release you have indicated that it could be one of the three product type, senior housing, memory care or skilled nursing facilities.

Rick Matros

Yeah. It's primarily assisted living, there will be some memory care and they are looking at expanding or the existing projects that we're working on which will include memory care. The skilled nursing piece, you're not going to see that much of that, it's one facility that opened and selling up that had the rehab unit care that's spinning distance within to a hospital specifically at for a short term rehab unit . And Talya and I were in that building about a month ago and the thing is gorgeous. And when you go from the assisted living section to the to the skilled rehab unit you cannot tell the difference.

And it's arguably the most non-institutional skilled rehab unit I have seen, but that was just specifically request the hospital, they're going to just fill it and it's not that big a unit, but I wouldn't expect to see much of that on a go forward basis in the first Phoenix pipeline and that meaning one of the thing (inaudible).

Michael Carroll - RBC Capital Markets

Okay. And then for each of these projects, how much preferred equity are you planning on putting it?

Rick Matros

Seriously it's going to be somewhere around $3 million give or take.

Talya Nevo-Hacohen

The way we think about it is that we think about the cap stack as a whole and we could be pretty willing to go what is it if the conventional lenders willing to lend from between 65% to 75% of cost, we are willing to go up to call it 90% of cost and it's a real fill in that gap with the third party equity, that gives you a sense, but sort of given that the scale of the projects that we are looking at, the actual (inaudible) that's a good proxy.

Michael Carroll - RBC Capital Markets

Okay, then how many projects are picked out currently?

Talya Nevo-Hacohen

Well on Phoenix there's shooters, there's at least, there are two that we talked about because we already are, we already invested in them in some former fashion and four beyond that and that's in the program that it had had. It's planned to have tax. So they are already fixed or already identified you know at a minimum the lands entitled and some of them are shovel ready, ready to close on conventional financing and move ahead.

Rick Matros

The new bill on which we have announced the pipeline yeah but we've announced two deals that will be a pipeline agreement as well. They have four additional projects besides the two where they -- it's not the land and they are in the process of working on with [Genstar] breaking ground. So there's four there and those are all memory care 48 units and then from already you know just announced they have just recently identified three or four parcels of land for primarily just willing to go on (inaudible) consumer right now.

Operator

I am showing that we have no further questions at this time. I would like to turn the call back over to Mr. Rick Matros for closing remarks.

Rick Matros

Thanks for your time today. As always, Harold, Talya, and I are available for a follow-up. And again we're pleased with how things are going for us and particularly pleased that we weren't opportunistic as we were to set ourselves up on a go forward basis and be able to be more competitive than we've been able to be historically on acquisitions, particular on senior housing side. And with that, have a great day and we look forward to talking to you soon. Take care.

Operator

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

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