Sabra Health Care REIT's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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

Operator

Good day ladies and gentlemen, and welcome the Sabra Health Care REIT Inc. Third Quarter 2013 Earnings Conference Call. Today’s call is being recorded. At this time I would like to turn the call over to Talya Nevo, our Co-Chief Investment Officer. Please go ahead Ms. Nevo.

Talya Nevo-Hacohen

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 at 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 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?

Rick Matros

Thanks, Talya. And welcome everybody to our call this morning. I will jump right into the Forest Park deal. This deal was attractive to us on a number of levels. These are purpose built high end acute hospitals that are state of the art. They are built to conform with the trends that we see on the ground with healthcare reform, with the focus really being primarily on outpatient surgery, with their internship unit [indiscernible]. So as a result we see in the Dallas and Frisco hospitals, 50% and 60% of their revenues coming from outpatient.

We see their average length of stay in their inpatient units at 1.8 days which is less than half of the industry average. So we think that bodes really will help the future. The physician billing hospitals, so all private pay. We obviously like that about it. As we have seen in countries that already have socialized medicine, private pay continues to exist and flourish, as long as those two [indiscernible] and they certainly are. The design of the hospital is hospitality hotel oriented. You really feel like you are in a five star hotel when you are in the room in these the hospitals, big destinations points, they contain banks and shops. They are cafeterias that are chef run, and in some cases open to the public, [indiscernible] was very interesting and unusual [indiscernible] by all parties.

The fixed bill [ph] physicians had material capital development as obviously it’s a development group. On a go forward basis in the operating companies, the development company stays in, all the docs participate in the profit of the company and so everybody’s interest is outlined with Sabra’s.

The pricing of the deal reflects really all of the comments that I just made. We realized that 8.75 cap rate is more expensive than traditional hospital deal, but number one we are either not traditional. Again they’re private pay, they constitute high end facilities. Secondly I pointed out that there were the larger traditional hospital deals done earlier this year in 8.6 cap, that at any rate they aren’t many good comps for this kind of deal. So we think that there is plenty of upside here. The escalators are strong and the current trend is strong in both the Frisco facility and in the Dallas hospital that we have, the mortgage. Additionally as far top management team is extremely experienced and skilled and opportunity to build out their platform and we hope to be a part into that growth, on a go forward basis.

Additionally the principal physicians have given us personal guarantees to grow on those material guarantees. In terms of test exposure, I would make a couple of comments. We don’t believe that you look at our [indiscernible], exposure, as sort of one entity, three different asset classes in Texas, in two hospitals and senior housing. Post this deal, our Medicaid exposure in the State of Texas 8.8%.

In terms of additional things, in terms of work related to this deal, we engage PWC to do [indiscernible] analysis of everything about how these facilities operate, whether their operating systems, accounting practices, revenue recognition, IT systems, managed care rates, and got exceedingly positive reports and PWC report reinforced with our independent diligence that this is a highly skilled well run organization for us to be partnered up with.

We have also to understand that this kind of deal took everybody by surprise but I will remind everybody that since we did our initial hospital deal we set all along, albeit quietly that we continue to look for acute care opportunities which you haven’t seen anything that’s really been of interest to us as we simply, last week we represented with another development deal for Trinity [ph] based hospitals that was going to be primarily Medicaid and we just simply weren’t interested.

So we will continue to be on the lookout. We have also noted on a continual basis that as we continue to build Sabra to be in a [indiscernible] what we see happening on the ground with healthcare reform, we always included acute hospitals and a number of asset classes that we felt were winners and of course if some of the asset classes that you all know that we aren’t capable towards.

In terms of the effects on our profile, the numbers of our balance sheet income statement, the best word I could use is kaboom. We take Genesis with 60.6% to 52%, assuming full funding of the Fort Worth loan, it’s 50.4%. Our skilled exposure grows from 82.1% to 70.4% assuming full funding of the Fort Worth loan at 68.2%. Medicare and Medicaid exposure drops from 68.4 to 58.3%, assuming the Fort Worth funding 56.7%. So we are clearly moving rapidly away from being a [indiscernible] which was our stated intention all along.

In terms of our strategy going forward, we are going to continue to focus on growing our relationships with Forest Park, Senior housing, [indiscernible] these projects will continue to be a primary focus for us with [indiscernible], Meridian and a third group that we’re working with. We will continue to do select skilled nursing acquisitions and I say select because we don’t want to move the numbers the other way. We have a commitment to our existing tenants, our SNF operators to grow with them, that we want to be a committed partner to them. So as a result we’re going to be selective about that what we do in terms of new SNF acquisitions. Obviously, we will continue to reduce our Genesis exposure. We will be talking with rating agencies and expect them to receive the news favorably as well.

In terms of capital markets, our ATM will be activated. At this point in time, we do not have to follow on our agenda and what we expect to happen is, in addition to activating a channel, what we realized at the ATM is it’s going to dribble out over several months and may not be sufficient, depending on our deal activity that have. When we initially announced the ATM earlier in the year, we got a lot of reverse inquires and we expect that to be the case once we activate the ATM.

So it may be that we’ll be able to raise enough equity through the ATM in our first enquiries and really put off any others thoughts in terms of additional equity going forward, but as usual we will be opportunistic. We will also see what market size, what our deal activity is. We will manage our leverage, but we have plenty of liquidity on the balance sheet right now, even post this deal. So nothing big pending in terms of equity.

The amount of equity that we probably raised with the ATM this year will have no material impact on our numbers for the year. As you saw we increased guidance for the year, but its real full impact of this deal will be in 2014, where it has a dramatic effect on our FSO growth.

So we’ve now done $217 million investments to date, which our top end assumption was $200 million. We have got a number of things that we’re actively working on. So it’s possible we’ll close more for full year right. We will see, we’re actually not in a real rush to do that. We will do whatever work best for us in our partners. The pipeline, well it was frustratingly slow through Labor Day for whatever reasons and for Labor Day it’s picked up dramatically, company expanded about $400 million with a lot of high quality stuff in there, primarily you will see in your housing, ALM memory care. On several larger deals we’re seeing pricing is a little bit aggressive but on most of the deals institutional capital is obviously still attractive to the senior housing sector.

I’ll now move on to our operating status. Genesis’ fixed charge coverage jumped from 1.19 to 1.29. We fully expect that, and again we reported a quarter in arrears but we fully expect that for the third quarter numbers their fixed card charge coverage will drop for a couple of reasons. One in the SNF world, the third quarter is the most seasonally wise weakest quarter. So that will be a contributing factor. Secondly, in terms of these synergies, they’re still on track and we’ll hit their 65 million but they’re not finished yet and they’re in the second stage of execution on those synergies. The third stage was back office overhead related.

The second phase is much more complex because it’s operationally oriented. So in other words confirming, it’s an operating platform in process through the Genesis platform processes which haven’t been operated for many years, that was a very disruptive process. So I would expect from an operating perspective that there will be temporary drop in performance in the quarter with a nice rebound the following quarter, and we have great detail about all Genesis plans. They do a phenomenal job. We’re onboard with everything they’re doing. We think the end results of this transition beside any interim growth is going to be more than worth it. So we’re fully supportive and appreciate everything the management team at Genesis is doing.

Our skilled rent coverage is stable at 1.27 and [indiscernible] this summer the July and August rent coverage numbers that we’ve seen are stabilize, of course some of tenants. Our [indiscernible] hospital was 2.71, up from 1.5. And occupancy was 88%, down 150 basis points from the comparable period. Our skilled nursing is down 90 basis points to 36.4%. So most of the drop was in Medicaid. I would expect for the months of July, August and September we’ll see what we normally see and that is a bigger drop in skilled mix, although the only numbers that we’re seeing show overall occupancy actually pretty stabilized, which is helping maintain stable rent coverage during the summer months as well.

And with that let me turn the call over to Harold and after Harold’s done we will go in Q&A. Harold?

Harold Andrews

Thanks Rick and thanks everybody for join the call today. I want to start today with an overview of our results for the third quarter of 2013 and then spend some time on the financial impact of the Forest Park investments, how we’re thinking about our capital sources to fund acquisitions moving forward.

For the three and nine month periods ended September 30, 2013, we recorded revenues of $32.9 million and $97.4 million respectively, compared to $26 million and $74.9 million for the same periods in 2012, increases of 26.5% and 29.8% respectively. AFFO for the third three and nine month periods ended September 30, 2013 was $17.5 million and $40 million or $0.46 and $1.06 per share respectively.

Normalized FFO for the same periods with excludes nonrecurring refinancing costs was $17.9 million and $50.9 million or $0.47 and $1.35 per share respectively, increases of 35.5% and 31.8% over the same periods in the prior year. AFFO for the three and nine month periods ended September 30, 2013 was $16.3 million and $38.5 million or $0.43 and $1.01 per share respectively. AFFO for the quarter increased 9.4% over the same period in 2012. Normalized AFFO for the nine month period ended September 30, 2013, which excludes nonrecurring refinancing costs as well was $48.5 million and $1.27 per share, an increase of 8.9% over the same period in the prior year.

For the second quarter of 2013, we had net income attributable to common stock holders of $9.2 million or $0.24 per diluted common share compared to $5.2 million for the third quarter of 2.12, which was $0.41 per diluted common share. Our net income attributable to common stock holders was $15.3 million or $0.41 per common share for the nine month period ended September 30, 2013. This compares to $15.6 million or $0.42 per share for the same period in 2012.

G&A cost for the quarter totaled $3.1 million and included stock-based compensation expense of $1.3 million and acquisition pursuit costs of $0.3 million. Excluding these non-cash transaction related costs, G&A costs were 4.6% of total revenues for the quarter, compared to 5.8% for the same period of 2012. Interest expense for the three and nine month periods ended September 30, 2013 totaled $9.7 million and $29.9 million respectively, compared to $9.1 million and $24.7 million for the same periods in 2012.

These increases are the results of incremental borrowings in 2012 and 2013, partially offset by lower overall borrowing costs. Our weighted average effective interest rate for our total borrowings as of September 30, 2013 was 6.04%, compared to 6.87% as of September 30, 2012.

During the three and nine months period ended September 30, 2013 we incurred a loss on extinguishment of debt of $0.4 million and $10.1 million respectively compared to $0.5 million and $0.7 million during the same periods in 2012. It came down in third quarter of 2013 relating to the right off of deferred financing fees in connection with the modifications to our revolving credit facility.

During the nine months ended September 30, 2013 we recorded adjustments to an asset purchase earn out liability resulting in a cumulative adjustment of $0.6 million and other expenses. An adjustment of $0.3 million was recorded in the third quarter in other income. This resulted in the final liability as of September 30, 2013 of $1.9 million. This liability is expected to be paid out in the fourth quarter will result in additional rental revenues based on an 8% per year cash yield on the earnout payment.

Cash flows from operations totaled $49.2 million for the nine months ended September 30, 2013 and $58.5 million when you exclude the $9.3 million onetime payment related to early extinguishment of debt in the second quarter. This compares to $47.9 million in the same period of 2012, a 22.1% increase.

During the third quarter we had very limited investment activity and no capital raising activity outside of the completion of our amendment of revolving line of credit discussed on our last earnings call. We completed the quarter with available liquidity of $383.1 million.

Quick update on our debt refinancing activity with HUD. In late September, we received HUD approval for one of the six properties that we took to HUD for the refinancing approximately $57 million of mortgage debt due in 2015. Unfortunately the government shutdown stopped the process before receiving final funding commitments. Those commitments are expected to be received into the next couple of weeks and we should expect to complete the financings at or near year end. Rates have backed up in recent months, but we do expect to obtain rates at around the 5% level. We continue to expect the remaining $30 million refinancing through HUD to be completed in 2014 so that the interest rates remaining attractive.

We were in compliance with all of our debt covenants under our senior notes and ventures and are secured revolving line of current agreement as of September 30, 2013. Those metrics include the following based on defined terms in those credit agreements. Consolidated leverage ratio of 4.43 times, consolidated fixed charge coverage ratio of 2.49 times, minimum interest coverage ratio of 4.1 times, total debt asset value of 47% and secured debt to asset value of 19%, unencumbered asset value to unsecured debt 188%.

Now, I’d like to highlight few things from the Forest Park acquisition we announced on Tuesday. We included pro forma information in our supplemental package to provide some details on the impact of these transactions on our financial performance. This pro forma data is based on the actual financing sources used for the transaction, which I’ll discuss little further in a moment. Assuming these transactions were completed at the beginning of the quarter ended September 30, 2013, our pro forma in normalized FFO for the quarter would be $22 million or $0.58 per share, a 25.4% increase over actual.

Our pro forma AFFO for quarter would be $20.1 million or $0.53 per share, a 23.8% increase over actual. While the accretive impact is enhanced by the use of existing cash and our line of credit borrowings to fund the acquisitions, the long term impact is expected to be stronger accretion, given our current cost of capital and growth in rents we expect from these investments over time.

While these are sizable investments for us, because of our capital market activities earlier in the year we are not suddenly compelled to rush to exit the capital markets for funding as Rick alluded to earlier. While we intend to activate the ATM program in the near term and begin refresh the revolver over time, we’re still in a position where we continue to grow the near term and exit the capital markets opportunistically. These transactions were funded with available cash and borrowings of $131 million under our line of credit, leaving the company with remaining liquidity of $158.5 million, including a $155.5 million currently available under the line of credit.

We have additional committed borrowing capacity of $88.5 million under the line, as well as the access to the capital markets through the $100 million through ATM program. Furthermore, we have an according feature in the line of credit which provides additional potential capital of $225 million. All told, we have capital access structures in place providing us with access to liquidity with the $550 million after taking into account these transactions. This gives us significant flexibility on our capital funding actions looking forward and allows us to move forward with acquisitions as we have historically.

Furthermore the company continues to be acutely focused on maintaining an appropriate level of leverage with an eye toward continued rating improvements by the rating agencies. Pro forma credit stats after giving effect of these transactions also continue to be very strong. Consolidated leverage ratio of 4.65 times, consolidated fixed charge ratio of 2.74 times, minimum interest coverage ratio of 3.73 times, total asset value of 47% and secured debt to asset value of 19% and then unencumbered asset value to unsecured debt of 188%.

One thing to note about our leverage calculation, we don’t include preferred equity as debt for our covenants but we do include the dividend in our fixed charge coverage calculations. However the rating agencies do take into account preferred stock into many of their analysis. So including the preferred equity of $143.7 million, our leverage would be 5.63 times. Those ratios keep us in line with rating agency expectations for future rating increases and we intend to fund future acquisitions as we have in the past with an appropriate mix of long term debt and equity capital, thus maintaining credit stats in line with our rating improvement objectives.

Following a quick comment on our guidance update, while the Forest Park transaction occurred in the fourth quarter, because of the size we do expect our full year 2013 performance to exceed our prior expectations. As such we have updated those expectations as follows; net income to attributable common stock holders ranging from $0.67 to $0.70 per share, up from a range of $0.65 to $0.69 per share; FFO ranging from $1.55 to $1.58 per share, up from a range of $1.53 to $1.57 per share; normalized FFO ranging from a $1.84 to $1.87 per share, up from a range of $1.79 to $1.83 per share; AFFO ranging from $1.49 to $1.52 per share, up from a range of $1.42 to $1.46 per share; normalized AFFO range from $1.75 to $1.78 per share, up from a range of $1.66 to $1.70 per share.

And with that I will turn it back to Rick.

Rick Matros

Thanks Harold, why don't we go to Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions). We'll hear first from Michael Bilerman from Citi.

Unidentified Analyst

This is Archana for Michael Bilerman from Citi. Could you shed some light on the coverage ratios for the vis-à-vis acquired Forest Park cost, and the mortgage loan and also moreover looking at future acquisition opportunities with the Neal Richards Group, would they be more concentrated in Texas as well? How do you balance out that geographic concentration going forward? Thank you.

Rick Matros

I will take the second part of the question and give the first part of the question over the Harold. In terms of their expansion activities they have additional projects in Texas but they also have now identified projects in two other states.

Harold Andrews

As it relates to coverages, so first the hospital that we acquired out right, their coverage is on the same basis as we issue coverages at portfolio which I am not going to [indiscernible] will be around two point times, for the trailing 3.8 times for the trailing 12. And then in Dallas, because that's a mortgage loan I think the relevant factor there is to think about what our coverages -- fixed charge coverage if you will for that entity, that's about 1.6 times. Keep in mind though that this is a special purpose entity to really they are collecting rents from their tenant and they are paying interests on our loans. So we wouldn't expect really any debt coverage.

Operator

Our next question is from Rob Mains from Stifel.

Rob Mains - Stifel

One question on the Genesis coverage. I paid the heads up on what we’ll likely see in third quarter. What happened in the second part of the fixed coverage could have moved up as much as it did, just because as I know it was not really a bang up quarter for the industry.

Rick Matros

Cost controls were really solid. The facility management was really kind of peaking at least through certain parts of the portfolio as it relates to all the changes. Those were really the main drivers, and the seasonality really just started hitting them in the last month of the quarter. And then, but the initial synergies kicking in obviously helped quite a bit as well, but again those are the synergies that didn't really effect operations, although it gets covered in our fixed coverage definition, because it was mostly back office and that's why I pointed out that and I’ll get a little bit more specific and you will appreciate it Rob.

In terms of the second phase of execution of synergies, when I talked about the impact, some [indiscernible] conformed to the Genesis clinical protocols, completely different food programs, brand new management system and some different therapy management. Any one of those would have a material impact on an operator. They are rolling it all out. And I think the decision there was, let's get through it, let's take the bump kind of all at once, so that we can recover. And the early returns, first three months is you’ve already seen some nice recovery. So I think everything is going is planned. I just wanted to give everybody a heads up to have more realistic expectation, but not to be concerned over the long run.

Rob Mains - Stifel

And then you said the pipeline predominantly senior housing, where do you think for cap rates, because as you know, some of your larger peers are noting that despite what's happened in the capital cost environment, cap rates, at least some of the big portfolio seem to be pretty sticky.

Talya Nevo-Hacohen

Rob it's Talya. I think that we concur with that last comment. That observation syncs up with what we're seeing on the larger portfolios where there is sufficient capital interested in the sector, and even pension funds and such institutional capital. But it definitely is driving fortune cap rates to remain pretty sticky on the larger transactions.

On the smaller transactions, it’s sort of $100 million in smaller that we're typically focused on where we're not seeing any downward pressure on cap rates and we're basically seeing them sticky. But I would say on seniors housing its 7.5% lease, going in lease rate plus minus is about what we're seeing. And we're still looking at deals slightly sub eight maybe.

Rob Mains - Stifel

And going back to some of Harold's comments about capital, the thing about capital going forward, that leaves you enough room to have an initial spread. You are pretty comfortable with that?

Harold Andrews

Yes, absolutely. When you are going to think about our cost of capital moving forward and thinking about doing acquisitions on a kind of a balanced debt to equity balance basis 50-50, we still get a lot of accretion, because when you think about, one thing the people, some of us don’t think about is when you calculate your cost of equity and you factor in the growth rate for your dividend, your growth rate for your AFFO over time, you also have to factor in a growth in rents through the escalators. So you can't really compare a cost of capital, thinking it might be around 1% to initial cash yield because the cost of capital inclusive growth over time where the initial cash yield is point in time and we'll see growth.

So you take the Forest Park transaction as an example, the cash yields 8.75 at first go, but the GAAP yield which includes 3% escalators is 11%. So when you start comparing 11% yield to 9% to cost of capital, you still get really nice growth. And on an actual accretion basis it’s very significant.

Rob Mains - Stifel

Okay, and then just one more and then I’ll let somebody else ask a question. Just kind of follow-up on the senior housing opportunities. Obviously where it not for this Forest Park transaction, things would be, you would have gone through kind of a long quiet period and Rick you said things sort of picked up after Labor Day. Just when you say picked up, are you saying, is it that there is more people interested in transactions or is it that maybe reality is setting in because I’ve heard a lot of and your peers complain that a lot of sellers still have kind of visions of super plums dancing and [indiscernible] have in terms of what they can get given where they’ve seen some other transactions get done?

Rick Matros

I think we have a little bit different point of view that at this point is anybody’s best guess. I think for the first eight-nine months of the year taxes went up, guys sort of stepped back and said do we really have to monetize now? The year goes by and maybe it just gets to the point where we really do need to monetize now when you start thinking about year ends, maybe you want to get something done before year end, or only better off from a capital gains perspective, and so the first quarter, which is why we’re going to be flexible with our potential new tenants on the deal that we’re currently working on.

So I am not really sure. It felt like nothing was changing anyway. The amounts will still sell but based on Talya’s comments also, we’re not seeing pricing at the $100 million level that says these guys have sugar plum berries dancing in their heads. And when I say that deal volume picked up after Labor Day, I’m talking about going to getting a couple of calls over several weeks to getting calls every single day. It was like someone just turned on the spigot. So again, it’s anyone’s best guess Rob, but we’ll take it.

Operator

(Operator Instructions). We’ll hear next from Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Hey Rick can you give us a little color on how the hospital campuses are laid out; in particular how many medical office building surround the two established hospitals and is there similar development around the Fort Worth project?

Rick Matros

The medical office buildings are part of the campus. There is no other medical office buildings that are closely within the vicinity of any of the projects. The medical office buildings are owned by another publicly held RIET. So they also have an ongoing relationship with the Neal Richards Group. And when you walk into these places, we’re going to set up an Investor Day. Probably sometime in the first quarter we will take you guys through maybe one or two of the hospitals as well as some of our other properties in the Dallas area. When you’re walking and you’re going to feel like you’re walking into a five star hotel.

So it’s really sort of consumer hospitality or enacted the way that it’s laid out, really high ceilings and wall to wall backdrops and sort of all the stuff. But everything sort of connected within the campus but the MOD, the hospital, parking garage which we -- the parking garages come with our deal. Talya, could you add anything else there?

Talya Nevo-Hacohen

Sure. I think one of the objectives in the design of these hospitals and hospital complexes is that they are efficient for consumers, i. e. patients, and they are efficient for physicians. So the distance, travel distance for docs to go from parking to their kind of staging room, break rooms, the ORs is all very short. And similarly for the consumer who comes to have a procedure, they have parking that’s very close to the entry, EV access directly into the facility itself, a very simple very short travel time to their pre ops and sort of go on and on, and also for visitors coming to see patients. So there’s the facility at south, when you’ll hopefully join us in the Investor Tour you will see that it appears as one complex as opposed to a [indiscernible] several building adjacent to each other. It’s very integrated and a few [indiscernible].

Rick Matros

And there is [indiscernible] then we took another step forward with the Frisco facility, the Southlake facility which is really opened takes another step forward, they keep on improving and I think one of the things I neglected to mention earlier is that these are all being certified, it’s a very high standard and there is an awful lot to contribute and having lower operating costs, and because it’s a physician owned hospitals, that reduction in operating cost is really put back into patient care.

Michael Carroll - RBC Capital Markets

Okay, and then the Fort Worth project, is the medical office buildings currently under construction? Are they already complete? I mean is the hospital ahead of the other development around the area?

Talya Nevo-Hacohen

The hospital, the structure parking and MOB are all being developed at the same time.

Michael Carroll - RBC Capital Markets

Okay, and then can you talk about the other three hospitals that this operator owns? Why weren’t they included in the transaction and is that something you would want to acquire in the future?

Rick Matros

Well, there is only one other hospital that’s open besides Dallas and Frisco and that’s Southlake and that was recently opened. And so as that hospital stabilizes, we’re certainly in dialog with Forest Park on that one. And so the others are all going to be constructed.

Michael Carroll - RBC Capital Markets

Okay. Would you do a construction loan on the other two also maybe in the future?

Rick Matros

We’re willing to talk to the Neal Richards Group about anything.

Michael Carroll - RBC Capital Markets

Okay, and then I guess last question. Can you talk about or explain the call and put option on the Dallas hospital? And do you expect to exercise those and if so when do you expect that to occur?

Harold Andrews

Sure. So the caller put options are in place. The call option that we have is in place based on basically a 2.5 times coverage, once the hospital reaches and stabilizes at 2.5 times. And the put option allows them to put it to us also at a 2.5 times coverage. But if it’s less than 2.5 times coverage, I think it’s if it’s more than 2 times they can still put in to us but there would be reduction in the price as well as right sizing the rents associated with the hospital. So the idea of being that fully stabilized the expectation is the building, the real estate will have a $168 million valuation. In the event that it takes longer to get to that or they don't achieve that, we'll still have some opportunity to buy it at a reduced price and if that's the case we'll reset the rents. I think later we'll step into if it provides us the appropriate level of coverages.

Rick Matros

And really the primary reason this is in place is to allow them to have time to stabilize. The first hospital is the largest of the three that are open. The first one that transitioned from outer network to in network but if you look at their 12 month target as you would expect when you go from outer network to in network, there's a lot of fluctuation. Current trends are very good but we just want them to give them and give ourselves more time for that to stabilize. The mortgage is frankly pretty easy because of real estate value, it easily supports that. So it really provides a great hedge for us.

And then similarly with the Frisco facilities, as well as its performing we think that there's more upside there. Harold talked about the coverages. We see those starting to improve as they complete their transition going from outer network to in network but the holdback provided hedge as well. So we felt like we conservatively structured the financing of these to give both ourselves and our new partners some additional time. We have already noted down progress there.

Michael Carroll - RBC Capital Markets

So this asset should stabilize sometime in 2014?

Rick Matros

Yes, that's our expectation.

Operator

(Operator Instructions). We'll hear next from David Seamus with Jefferies.

David Seamus - Jefferies

Just want to turn back to Genesis real quick. Just wondering once all the synergies are achieved, what's the coverage expected to settle out at and how long is that expected to take approximately?

Harold Andrews

The fixed charge coverage, it’s probably going to be the way we calculate it somewhere around 1.3 times would be my estimate. It may be a little bit north of that. They've gotten a lot of the synergies already reflected in the numbers and there are still some more to come, but exactly how much has been reflected and how much is still to come, I would then have a really good complete handle on that but where they're at right now, where they'll probably maybe a little bit north of where they are today.

Rick Matros

Yes, so once in a while you're going to have a dip in the next quarter, you'll have a rebound after that and as Harold says, [indiscernible] north of where it is.

David Seamus - Jefferies

Okay great. And then just turning to your investment pipeline I know you mentioned its $400 million. Just wondering if you can sort of elaborate how much of that is debt investments versus sale leasebacks and I guess as interest rates eventually do rise, do you expect to do more debt investments versus asset acquisitions?

Rick Matros

Most of them are leasebacks. We're actively working on 25% of what's in that pipeline right now and still doing some diligence on the rest of it. In terms of whether we do more or less debt instruments, we’ve been completely opportunistic about that and that's how we're going to be going forward. So it's just going to depend on what the situation requires. We’ve kind of got to the point where we sort of pride ourselves on how flexible and creative we've been with these guys. So we'll just continue to do that. So difficult to project whether it's going to up still by how much.

Talya Nevo-Hacohen

And let me just add, whenever you see us do a debt investment, it's really just kind of a first step in the deal to actually get to ownership of the asset. So it's a means to an end and the objective is always to own the property, either lease or have it in an ideal structure or something, but real estate ownership is the objective and a loan is just a means to an end.

Harold Andrews

Yes, we're not going to give it back.

David Seamus - Jefferies

That makes sense, and then just on capital, would you guys go back to the preferred equity markets?

Rick Matros

I don’t see us doing that right now. I think we have plenty of other opportunity, as I said earlier with once the ATM is activated and the volume that we think we're going to see in reverse increase and the existing liquidity that we still have even post this year, I don't think we need to go there.

Harold Andrews

And we like preferred equity markets and we definitely wanted to tap into it last year because -- one of the things we wanted to do is demonstrate that we have multiple sources of capital that we can access. But given how the rating agencies view preferred, that put a little bit of a damper on using preferred to some extent. But we do like the fact that we have that there and we have demonstrated we can access it in the future, but to Rick’s point, certainly it's on the radar screen right now.

David Seamus - Jefferies

That's helpful and then just last one. Harold I think you mentioned for the HUD refinancing that you're looking at rates at around 5%? And last call I think you mentioned 4%, given that the tenure is about the same as it was last quarter. I just want to make sure I’m understanding that properly.

Harold Andrews

Yes, so there is couple of things that have happened and treasuries have actually obviously improved here in the last couple of weeks. But one of the things that's happened in that market was with HUD. The investors in HUD are now revaluating how long this debt is going to be outstanding and revaluating their models for refinancing and it seems kind of funny to me but the model still assumed these loans will be refinanced in six years to eight years when people were doing HUD debt at 2.5%. I can tell you we’re not going to refinance our 2.5% HUD debt in 8 years. It's going to out there for 30 years.

So I think part of what's happening is they're reevaluating their models on refinancing assumptions, which is driving up spreads that’s in treasures a bit but we have seen even as recently as this week, rates seem to be improving. So we're hopeful we'll get inside 5% but I feel pretty good about that be in the high end of where we might end up.

David Seamus - Jefferies

And the current rate on that debt is 5.5%, is that right?

Harold Andrews

I believe it's 5% floating, but again I think the benefits, that’s obviously here for us. Even if it ends up being 5% as we're thinking certainly it's maturing in 2015 and amortizing it over 30 years.

Operator

This will conclude the question and answer session; I'd like to turn the call over to Rick Matros for closing comments.

Rick Matros

I appreciate everybody's time and attention this morning. As our plans going forward obviously will allow for additional calls with any of you guys with our responses. We'll be at NAREIT and then the week before Thanksgiving we’ll be doing a non-deal road-show and then the first week of December we'll be doing a non-deal road-show. So between now and the end of the year we'll be out there, very accessible and very visible and also working hopefully getting more deals closed this year.

With that have a great day and again appreciate your time and your investment in Sabra.

Operator

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

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