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Executives

Talya Nevo-Hacohen - Chief Investment Officer

Rick Matros - President and Chief Executive Officer

Harold Andrews - Chief Financial Officer

Analysts

Emmanuel Korchman - CitiBank

Michael Carroll - RBC Capital Markets

David Seamus - Jefferies

Rob Mains - Stifel

Collin Mings - Raymond James

Sabra Health Care REIT, Inc. (SBRA) Q4 2013 Earnings Conference Call February 27, 2014 1:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Inc. Fourth Quarter 2013 Earnings Conference Call. This call is being recorded.

I'd now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead, Ms. Nevo.

Talya Nevo-Hacohen

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 our acquisition and investment plans, our expectations regarding our financing plans, and our expectations regarding our future results of operations.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2013 to be filed with the SEC in the next couple of days, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as Exhibits 99.1 and 99.2 respectively to the Form 8-K we furnished to the SEC yesterday. These materials can also be accessed in the Investor Relations section of our website at www.sabrahealth.com.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Rick Matros

Thanks, Talya, good morning everybody or good afternoon for those of you not in California. Welcome to the call, I appreciate your time today.

We'll start out with a recap of where we've been. We had a very strong fourth quarter. As you know we didn't have a whole of activities in the first half of the year. We had a very strong fourth quarter driven by the Forest Park acquisitions and the additional investments we did on the development side with our senior housing operated development partners, and we've gone through a very good start in the first quarter. We had robust capital markets activity with the high-yield offerings. We got that done at 5.5%. You all know we replaced (8.8) million with 5.5% money. So, our cost of capital today which Harold will talk about in more details is much more competitive than it's ever been. So, we feel great about that.

Our ATM is active; Harold will give you an update on that as well. We also announced last week the acquisition of Nye Portfolio in Nebraska, that's a combination of senior housing and skilled nursing, some very, very nice properties. Nebraska is a new state for us. We love the team. They have expansion plans in place for most of the fixed assets, and would like to grow beyond that, and so we look forward to having another new operator in the portfolio that we can go-forward with.

In terms of our strategy going forward, it really remains the same, senior housing is a priority both in terms of stabilized assets and again, it will be primarily AL/memory care, but also on the development side. Development will continue to be a key focus for us. We've got as you know several development pipelines in place. We are continually working on trying to develop more, and our goal really is to have the highest percentage of new assets in our portfolio in many of the healthcare REITs, and we think we're well on the way to getting there.

We'll also still do skilled nursing facilities. That's the secondary priority for us, and we will continue to look at opportunities to do two hospital deals. We don't expect a whole lot there, but we would like to think that we will grow with Forest Park platform. We do have a couple of things that we're looking forward through with them this year, including the full funding of the Fort Worth project and the exercise of the purchase option on the Dallas facility. They are also breaking grounds in two other areas in Texas and have now identified a couple of other stage to expansion as well.

So, diversity and growth is really what we are about, obviously, continuing to reduce Genesis exposure, which on a pro-forma basis is now down to 48.5% and ultimate goal obviously is to get to investment grade ratings. And along with the growth factors that I talked about, one of the things that we're now talking a hard look at is our leverage. Harold will give you specifics on the leverage, but as you know we've been very comfortable and the rating agencies have been comfortable with us maintaining leverage in the 4.5 to 5.5 range. But we see a very high correlation from a multiple perspective between those REITs with lower leverage and those REITs with higher leverage. And so, our focus on a go-forward basis will be to try get down to the 4-ish range.

In terms of our pipeline, we currently stand at about 400 million. So pretty stable, compared to the last quarter, different assets in the portfolio -- in the pipeline, now that we have been about 65% senior housing. We're very pleased with the quality of assets in the portfolio. We don't see any pressure from a cap rate perspective, nor do we see any relief from a cap rate perspective, and in terms of competition in the market, it's pretty much where it's always been for us, and that is, we get our share I think is off-market deals, and those deals that are competitive, we tend to compete with two to three others. So, that really hasn't changed as well.

In terms of the impact, if any, of the recently announced merger with Emeritus and Brookdale, we really don't see it obviously as a huge company at this point. At the deal size that we focus on, and even as we start to focus on larger deals as they come available, we believe -- and based on all the things that we're looking at in our pipeline today that cap rates will pretty much be in ranges that are reasonable from our perspective -- so, on the AL/memory care side, 7.5% to 8%, closer to 7% for IO, and for skilled nursing 9% to 10%. So we still see those numbers as numbers that we can count on a go-forward basis.

We also are reaffirming guidance, and I want to make a couple of comments just to clarify what that guidance is. When we announced guidance early in January, that guidance did not assume any investments. It still doesn't. So, the Nye acquisition that we made and announced last week, that is not included in the guidance. We don't want to raise guidance in every quarter. Obviously, we have a lot of deal activity going on.

In our guidance, we said that we expect to do 350 million to 400 million in investments this year. We still feel good about that. At some point this year we may raise guidance once we have better clarity on the flow of those deals, but in our original guidance we do try to give you all some better direction relative to timing of the investments that we've seen for the quarter. So, it makes it easier for you all to do some modeling.

So, again, the Nye acquisition is not included in the guidance. So everything that we do obviously will be accretive to guidance even to the extend that we have capital market activity at some point later this year as we said that that might be a little bit dilutive. At the end of the day, the acquisitions that we do will be net accretive to the guidance that we put out.

In terms of Genesis, I want to talk about Genesis a literature bit specifically. Genesis is a fixed charge coverage as we gave everybody a heads-up on in the last call, dropped 1.12, and dropped 1.12 really for a couple of reasons. The third quarter is a seasonally light quarter. All of our skilled nursing operators in the case of Genesis, they were also impacted by the fact that they are sort of towards the tail-end of their synergies and the favorite synergies here with the Sun portfolio.

If they were in Sun portfolio in the third quarter, it was moving all of the Sun platforms to Genesis platforms. That's policies and procedures, menus, IT platforms; it's extremely disruptive for the operators. They started seeing some bounce back in the fourth quarter and continued to see bounce back in January. So, all that should lead to really better results for Genesis because it's difficult obviously when you do big acquisition and the company you're acquiring is on completely different systems, has different budgets.

So, as of 2014, everybody is in safe platform, everybody has got Genesis budgets. So, it's going to make a lot easier for Genesis to manage on a go-forward basis, and Genesis is no longer diverted by the integration of Sun into Genesis. So, we expect the fixed charge coverage for the fourth quarter to rebound from 1.12 to 1.21 and then to improve continually from there. As you know, it was at 1.29. So, nice rebound in the fourth quarter, we expect it to get better after that. They also renegotiated the covenants with their banks and got an additional 25% cushion on their EBITDA off their 2014 projection. So they've got plenty of room there, and to the extent that there is a permanent (inaudible) which looks less and less likely, and to the extent that there is a pay-forth by all the various sectors that push gives Genesis that much more breathing room. So, we have no concerns about where they are going.

In terms of operating stats, generally our EBITDARM coverage for entire portfolio was 1.8 for the 12 months ended 2013, pretty much flat with 1.79 for 2012. Three months ended 2013 was 1.73 versus 1.90.

Our EBITDAR portfolio coverage was 1.40 for 2013, slightly up from 1.37 for 2012. For the three months ended 2013, it was 1.33 versus 1.49. And again, that's really all due to seasonality and then very much driven by Genesis and the integration issues. And for the skilled portfolio, specifically on an EBITDARM basis, almost flat for 2013 versus 2012 at 1.72 versus 1.75 for the three months ending 1.66 versus 1.77, and EBITDAR basis for the year relatively flat at 1.25 versus 1.27. And we saw the drop as we've been talking about in the third quarter, the 1.20 from 1.29.

We don't expect much change in the fourth quarter. October got off to a very good start to our operators. December was pretty harsh due to the holidays, but all of our operators are recording a very strong rebound in January since speculations -- it looks like it maybe the best rebound we've had in the couple of years and we normally expected a big rebound in January, but because of the use of observation days over the past couple of years coupled with the CMS cuts, skilled nurse really never strong in January as we historically saw. So, whether there is some reduction in this observation date, speculating at this point, it's a little bit too hard to tell. CMS would have taken some action along those lines, some of which has being delayed. So it's a little bit hard to tell why the rebound occurred as strong as it did in January. We will need two more months to determine exactly what that is. We will take it. It's good news for us. And again, so for the fourth quarter relatively flat rent coverage through the third quarter, but a nice pop in this fixed charge coverage for Genesis.

For occupancy stats -- I'm sorry, let me go back to our senior housing portfolio. Our senior housing portfolio both on an EBITDARM and an EBITDAR basis was essentially flat for the quarter and to the year on comparable period reporting.

Turning to occupancy stats, our skilled mix declined to 36.6% in 2013, down from 38.1% for 2012, again, due to the 2011 Medicare cuts and the observation day issue. The third quarter came in 34.9%, and as noted, January 2014 we are seeing increase in skilled mix, naturally in the fourth quarter, we will see an increase in skilled mix as well.

For the fourth quarter portfolio, occupancy was 88.1% versus 88.9% for the fourth quarter of 2012. Our skilled portfolio was at 88.1% for the quarter versus 89.1% for the fourth quarter 2012. Our senior housing portfolio came in at 87.9% versus 87.4% for the fourth quarter 2012.

One of the comments that I want to give everybody heads-up on -- we'll get something formal out, but we're going to have an Analyst Day on -- we'll have a dinner on May 19 and tours on May 20, that will be in Dallas. So, we'll be touring everybody for the Forest Park assets. And we have got skilled nursing assets in that community as well, so we'll give at least one skilled nursing facility in addition to that. So I just want to give you all a heads-up. (Inaudible) out to everybody.

And with that I'll turn it over to Harold.

Harold Andrews

Thanks, Rick. I'll begin this morning with a quick overview of the results for the fourth quarter and then discuss the pro-forma impact of certain activities subsequent to year end. Finally, I'll discuss our liquidity position, how we're thinking about the funding of our expected investments activity in 2014. For details of the 2013 annual results, I'd point you to our Q4 earnings press release and our Q4 supplemental.

For the three months ended December 31, 2013 we recorded revenues of $37.6 million compared to $28.3 million for the fourth quarter of 2012, an increase of 32.8%. As of December 31, 2013, 51% of our revenues were derived from our leases to subsidiaries of Genesis, and 69.5% were derived from skilled nursing related assets. These are down from 64.5% and 83.1% respectively as of the end of 2012.

FFO for the three months ended December 31, 2013 was $19 million or $0.49 per diluted common share, compared to a normalized $16.3 million or $0.43 per diluted common share for the fourth quarter of 2012, an increase of 14% on a per share basis.

AFFO, which excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses was $19.5 million or $0.50 per diluted common share compared to a normalized $15.6 million or $0.41 per diluted common share for the fourth quarter of 2012, a 22% increase on a per share basis.

Net income attributable to common stockholders was $10.4 million or $0.27 per diluted common share for the quarter, compared to $4 million or $0.11 per diluted common share for the fourth quarter of 2012.

G&A cost for the quarter totaled $5.2 million and included stock-based compensation expense of $2.6 million and acquisition pursuit costs of $0.7 million. Excluding these non-cash and transaction-related costs, G&A costs were 5% of total revenues for the quarter, down from 5.6% for the fourth quarter of 2012.

Interest expense for the quarter totaled $10.6 million, compared to $9.7 million for the fourth quarter of 2012, and included the amortization of deferred financing costs of $0.9 million in the fourth quarter of 2013 and $0.8 million in the fourth quarter of 2012.

Based on debt outstanding as of December 31, 2013, our weighted average interest rate was 5.41%. This compares to 6.28% as of December 31, 2012. This reduction is a result of our continued efforts to take advantage of the low interest rate environment and our improving credit rating.

Year-over-year, our effective interest rate on unsecured senior notes declined from 7.75% to 6.6%. On mortgage debt, effective interest rate declined from 4.65% to 4.08%. And our revolver effective interest rate declined from 3.71% to 3.17%.

During the quarter ended December 31, 2013, we also recorded amortization of a discount associated with an asset purchased earn out liability, which resulted in non-cash other expenses of $0.2 million.

Looking at statement of cash flows and balance sheet, our cash flows from operations totaled $12.9 million for the fourth quarter in 2013, compared to $8.4 million for the fourth quarter 2012, an increase of 54.3%.

Our investment activity during the quarter consisted of the Forest Park Frisco real estate investment of $119.8 million and four mortgage loan investments, totaling $126.5 million. These transactions were funded with available cash and borrowings under our revolving credit agreement of $135.5 million.

During the fourth quarter of 2013, we sold 1.4 million shares of our common stock at an average price of $27.01 per share through our ATM program, raising net proceeds of approximately $37.6 million. As of year end, we had $61.7 million available for future issuance under the program. Once fully utilized, we expect to put up a new similar ATM program to allow us to continue to match fund our acquisition activity.

Cash and cash equivalents decreased by $92.3 million during the quarter to $4.3 million as of December 31, 2013. This decrease was primarily due to the investment activity during the quarter offset by cash flows from operations and proceeds from the equity issued under the ATM program. In addition, we paid quarterly preferred common dividends totaling $15.5 million during the fourth quarter.

As of December 31, 2013, we had total liquidity of $139.4 million consisting of currently available funds under our revolving credit agreement of $135.1 million in cash and cash equivalents of $4.3 million.

We were in compliance with all of our debt covenants under our senior notes indenture and our secured revolving line of credit agreement as of December 31, 2013. The key covenant metrics are as follows based on defined trends in our credit agreements. Consolidated leverage ratio, 4.6 times, consolidated fixed charge coverage ratio, 2.76 times, and minimum interest coverage, 3.85 times. Total debt to asset value, 52% and secured debt to asset value, 17%. Our encumbered asset value to unsecured debts, 163%.

Subsequent to year end, we have been very active in both managing our balance sheet and continuing our investment activity closing on the $90 million investment to acquire the Nye senior housing portfolio Rick discussed earlier.

Our balance sheet management activities consistent of the following, number one, we issued $350 million of 5.5% unsecured bonds that are due February 20, 21. We also retired all the remaining $211.3 million, 2018 bonds having an effective interest rate of 7.75%. We refinanced ($40.4) million of variable rate mortgage notes that were due to mature in 2015 with mortgages guaranteed by HUD at a fixed rate of 4.25% fully amortizing between 2039 and 2044. And we pay it off with another 12 million of variable rate mortgage notes that would come due in 2015 using our revolving credit agreement.

We received HUD commitment for new mortgage on the properties in a fixed rate of 4.1%, which will be fully amortizing through 2044. This new HUD loans is expected to close at the early second quarter of 2014. This investment and financing activity in early 2014 results and quarterly ended December 31, 2013 pro-forma normalized FFO and normalized AFFO of $0.56 each has increases of $0.07 and $0.06 respectively over the actual results for the fourth quarter of 2013.

After completing the various financing transactions, our pro-forma weighted average cost of debt declined to 4.85%, a drop of 56 basis points from the actual at December 31, 2013.

In addition, our Genesis revenue concentration and skilled nursing positive concentration declined at 48.5% and 68.8% respectively on a pro-forma basis.

Our pro-forma liquidity increases to $143.9 and the two debt covenants that most significantly influenced our borrowing capacity to fund our growth are impacted as follows. First, our pro-forma consolidated leverage increases to 5.17 times, compared to a maximum under our revolving credit agreement of 5.5 times. Our pro-forma unencumbered assets to unsecured debt remains at 163%, compared to a minimum allowed under our unsecured note indentures of 150%.

With respect to how our debt covenant levels and liquidity relate to our expected investment activity of up to the high-end of our 2014 guidance rated $400 million, we will make a few comments. First, given the typical lease rate range for our acquisition targets, we believe we have ample room under the leverage covenant to fund our expected 2014 acquisitions using availability under our revolving credit facility along with the expected 2014 activity under our ATM programs.

Regarding our liquidity, it needs to fund an additional $310 million of investments in 2014; our capacity under the unencumbered asset to unsecured debt ratio will increase and provide us with opportunities to add assets to a revolver borrowing dates as we make investments to unencumbered assets. Currently, we have 279.6 million of total capacity on the revolver. We expect to increase that capacity to the full $375 million commitment during 2014 and more and more challenges over time. This will provide an additional liquidity of $104.4 million.

This increased revolver capacity in the ATM program will provide us with liquidity to fund our expected 2014 acquisition activity. As an example, current pro-forma liquidity of sufficient revolver capacity of $104.4 million and an estimated $100 million of capital raised through the ATM program will provide us with just under $350 million of liquidity for investment activities.

Based on this, we do not have an immediate need to seek additional capital through a follow-on equity offering. However, we will be opportunistic during 2014 in determining the appropriate time and size for such an offering, definitive part on the timing and sizable investments we were able to complete.

Furthermore, we do not expect to raise capital and amounts and we create significant excess cash through our balance sheet for any significant amount of time.

Our capital structure objectives continue to be to maintain adequate liquidity and proper leverage to support making strategic accretive investment with the light toward improving our credit ratings over time.

And finally, just a quick comment on our improved debt maturities, with the recent capital market to the refinancing activity, our debt maturities have improved such that after the final HUD refinancing we expect to complete in 2014 of approximately $29.9 million or mortgage debt is coming due in 2015. We will have no debt obligations maturing before the revolver matures in 2016 after taking into account the one-year extension option we have one the revolver.

After that, our mortgage debt will be full amortizing with weighted average remaining term of 28 years and our next bond maturity will be until 2021. This puts us in a great position relative to our capital structure allowing us to focus our capital raising activities in next several quarters on funding acquisitions.

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

Rick Matros

Thanks, Harold. Why don't we open it up for any questions now?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll hear first from Emmanuel Korchman from CitiBank.

Emmanuel Korchman – CitiBank

Hi, guys. Good afternoon. Maybe Rick, you provided some clarification on sort of how you think about acquisitions and guidance, and maybe I just got confused a little bit. So, you said previously 350 million to 400 million of acquisitions in guidance, that's included in FFO or that's not included in FFO? And then, I just kind of got lost in how you are treating Nye, so does that mean that you are now effectively 440 to --

Rick Matros

Okay. So, our guidance excluded all acquisitions. We wanted to guide you guys for modeling purposes what we expect to do in acquisitions. But we don't include acquisitions in guidance, simply because you can't control the timing, so --

Emmanuel Korchman – CitiBank

(But when you closed) Nye, you still excluded it?

Rick Matros

That's right. We're not going to update guidance every quarter or every time we do a deal. Part of the difficulty with it is you can't take it in isolation or look at one acquisition and update guidance when you don't know kind of the rest of the year, the timing of acquisition, the timing of capital raising activities. You're constantly chasing after something that is very, very hard to catch up to if you don't have crystal ball about your capital raising activity later in the year.

Harold Andrews

Yes. I mean in the past, Emmanuel, we have updated guidance. Once we were further into the year, we had a better sense of all that timing. And so, as I stated earlier, we may do the same thing this year. To answer your other question -- yes, go ahead.

Emmanuel Korchman – CitiBank

But for the time being, there is going to be a disconnect between sort of where The Street will be in your guidance?

Rick Matros

Yes, I think that's pretty much in line with all the other healthcare REITs, and none of it included acquisition exceptions in our guidance. So, I mean typically people are -- based on what we tell them about, what we think is going to happen from an acquisition perspective that we were more specific than most of this year. We said 350 to 400 or about 170 in the first half of year. That should allow some direction from a modeling perspective.

In terms of Nye, so Nye was included in our assumption that we'd do 350 to 400 in deal activity this year. So, subtract the 90 from the 350 to 4, and that's our expectation for the rest of the year.

Emmanuel Korchman – CitiBank

So, effectively if you don't close anything else in the first quarter, you're at your half of your first quarter -- half of your first half guidance?

Rick Matros

That's right.

Emmanuel Korchman – CitiBank

And then, the other questions we are following up on Nye in general. Is this –- do you expect to see structure similar to New Dawn or one of your other sort of long-term pipeline partnerships, or is this just the (six) assets that were transacted upon?

Rick Matros

It was just the six assets, so New Dawn, Meridian, First Phoenix and then to some extent Forest Park, those have sure development components to that. In the case of Nye, they're existing stabilized assets, they were to retain the number of beds they have in most of those assets. So, we will finance that for them. But that's -- it's not being obviously our Greenfield development. And then they will be looking to grow the portfolio beyond that with other stabilized assets, and we'll be their capital partner on that.

Emmanuel Korchman – CitiBank

And right now, it's just the successes they operate?

Rick Matros

Yes, correct.

Emmanuel Korchman – CitiBank

Thank you, guys.

Rick Matros

Thanks.

Operator

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

Michael Carroll - RBC Capital Markets

Thanks. Rick, with the Genesis fixed charge coverage ratio, I know you have been pretty optimistic that this will improve meaningfully over time, where do you think this ratio could stabilize and how long will it take to get there?

Rick Matros

Well, prior to this platform migration, they have two quarters in a row of 1.29 and they are getting closer back to fourth quarter. So we expect them to spend right around 1.3. I don't want to say at this point that they will do better than 1.3, we are comfortable at 1.3. We have some level of optimism, primarily because once you do a deal like this and you finally have everybody on the same platforms, it's a hell of a lot easier to manage. So, whether that yields better results or not? We will see. I'd like to think, yes, but at this point I'm just not comfortable in saying that 1.3 should be a comfortable number for them and certainly a comfortable number for us.

Michael Carroll - RBC Capital Markets

Okay. And then, can you give us some color on the potential new investments you mentioned with Forest Park? What are some of the hurdles that you indicated to get through to complete these deals? And they have what, how many assets that are currently in operations that you don't own yet?

Talya Nevo-Hacohen

Hi, Mike. It's Talya. We have one property that is open that we do not own or have an investment in, and that's their hospital in Southlake. The group that – (NYSE:NRG) who is the developer, it does not control that asset. There are other investors in there alongside them. So we will wait to see how that plays out. Otherwise, they have one asset in addition to Fort Worth that what we're financing, but they have an additional asset under construction and one that they're planning to begin construction on. So, there is nothing other than Southlake that's operational today that would be up for grabs (eminently).

Rick Matros

Correct. So, in terms of what we have on our plate with them right now, we've got the mortgage with the purchase option on the Dallas facility that we'd look forward to exercising at some point this year. And that mortgage is 110 and the purchase price 168 for the additional 58 million there. And then, we have only partially funded the Fort Worth construction loan and they will be finished building that in the spring. So that will be fully funded some time in the spring. So those are the two that are actually pending. And again, since the NRG the developers control the two new projects they started on, hopefully we will be able to work on that at some point, that's a little bit further down the lines.

Michael Carroll - RBC Capital Markets

Okay. And then, can you guys quantify the senior housing development deliveries that are going to start coming online in 2014? How much can we expect to move into your portfolio in 2014? I know 2015 will be a much bigger number.

Rick Matros

There is not a whole lot in 2014; 2015 is really when everything starts maturing, then, obviously 2016 as well. But there will be some continued development this year. Talya, do you have anything on --

Talya Nevo-Hacohen

I think that's exactly right. I think what you're going to see is construction completions in mid to late 2014, which means -- I'll call it a 12-month lease up just for sake of round numbers will get you to 2015 stabilizations, some a little thinner in 2014, some a little later, some into 2016 depending on the size of the asset and the property type. But I think that's when you're going to start seeing senior housing in the latter half of 2015 where you're going to start to really see things start to come online into our portfolio as stabilized properties that came in through development pipeline.

Rick Matros

The only other comment I'd make, Mike, is that in terms of the pace of developments, everybody is on target. With First Phoenix, we funded four projects with a couple of more that we'll be doing some additional funding on. We're at four projects on New Dawn. We expect to be funding a couple more with them as well. So, everybody is on target with the pace that they would be at when we first entered into these agreements. Meridian also is actively looking at additional projects right now.

Talya Nevo-Hacohen

Right.

Rick Matros

So we expect to have some nice deal activity with Meridian, but as Talya said, it's also the construction development stuff primarily in 2014.

Michael Carroll - RBC Capital Markets

Okay, great. Thanks.

Rick Matros

Okay.

Operator

(Operator Instructions) We will hear next from David Seamus from Jefferies.

David Seamus - Jefferies

Thanks, good morning out there.

Rick Matros

Hi.

Talya Nevo-Hacohen

Hi.

David Seamus - Jefferies

Just going back to Genesis, I'm hoping you can elaborate a little bit on the disruption you were talking about from migrating to one operating platform? And what was it exactly in that that caused EBITDAR to drop so much?

Rick Matros

Well, I don't know how people can really visualize it. But when you're an operator, and you get acquired and the operating -- the IT clinical platform that you've been working on gets changed completely. The amount of training and education, that goes into that still encoding all that. It's a huge use of everybody's time that diverts them away from kind of the daily activities. When you go into their dietary department and you give them all the menus, you tend to see spikes in food costs until they get a handle on it as well as just acclimating to all that new activities, they are going to have new vendors as well. And so, you look at that sort of all across the lines, but I think Genesis's focus was -- earlier in the year with the synergies, the things that they were doing didn't really affect the field. It was overhead integration stuff and reductions of overhead and things like that. And I think they chose to act smartly even though it's more disruptive to sort of migrate all that platforms over at essentially the same time just to get it over and done with, rather than drag it out over few quarters which might have been easier for the operations, but just what have seemed to drag on for long time.

So, it might be hard for you guys to visualize, but I've been in operating -- when you are out in the field, and all of a sudden everything you can use to and you've got a whole new -- you've got whole new (cost) accounting, your GLs change completely. Everybody is just focused on change and they are not as focused on day-to-day. So, it affects everything in terms of operational process including an increase in expenses and they saw an increase in expenses. That should come out?

David Seamus - Jefferies

That makes sense.

Rick Matros

I'm not sure how helpful that is, but it's brutal.

David Seamus - Jefferies

No, that's helpful. And then, I guess one for Harold, I'm trying to understand the borrowing capacity under the revolver a little bit. I know your maximum commitment is 375 million, but as I'm looking at this correctly, you have borrowing capacity of about 270 million. So, can you just help us understand the borrowing-based calculation that you are using, what would need to happen for you to get the full 375 million available?

Harold Andrews

Sure. It's a good question. So, the 270 million is tied into specific assets that we put into a borrowing base, and that borrowing base is basically calculation on the mortgage ability amount that they go through. And so, based on the rents that we are receiving, how much assumed debt could be supported by that rent, dictates how much that asset gives us credits toward our availability. So, because we are always in this mode of managing both the unencumbered asset to unsecured debt test, which has to stay above 150%, we haven't been able to fully put assets into the borrowing base as we've been opportunistic in taking advantage to the high-yield debt market.

And so, we've managed that level of capacity, as you pointed out, $270.6 million today. So, what's happened is all of the assets that are required to support that are set aside, so whenever we go out and buy an encumbered assets, it creates more capacity under that unsecured asset -- excuse me, unencumbered asset, unsecured debt test. So, as an example with the Nye portfolio, we have now increased our availability. And so, we can take assets and encumber them, put them into the borrowing base and create more availability.

So, we are in the process of putting some additional assets in right now, which should take it up closer to $300 million and $320 million over the next several months. And then, as we make more acquisitions through the course of the year that will free up more assets to put into the borrowing base, encumber them into the borrowing base. And by the time we get to call it late third quarter, we expect to have the full 375 available.

David Seamus - Jefferies

Great. That's very helpful. And then, just last one, I just want to talk a little bit liquidity -- sorry, if I missed this earlier. You mentioned you have 140 million of liquidity and then given your expected acquisition volume, 350 million to 400 million. You had mentioned earlier that you're targeting about four times leverage. I guess how should we be thinking about capital raising for the rest of the year? Is it primarily just going to be ATM? I know you mentioned that you don't really expect to do a bulk equity offering, but how should we think about sources and uses overall as you complete these, it's preferred part of the mix as well?

Rick Matros

It's preferred, not part of the mix, we're going to say when it can get to the rest of the year because you do and get the leverage down. We may in fact look at the equity market. We're going to be opportunistic. The advantage that we have right now is that we're not beholden to doing anything. But we do want to be opportunistic, we do and get all leveraged down and the way to do that is to address the equity market. And if the markets arise and we've seen it to be opportunistic really over the past couple of years, and going out to raise money, even though it's primarily on the debt side. Well, we didn't really need it, but it's really engraved us to reduce our cost of capital. So, it's possible that we will do something. Certainly not ending it, we're just going to sort of plan it by year and jump out at once if it seems appropriate to jump on it.

David Seamus - Jefferies

Okay, thanks a lot guys.

Operator

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

Rob Mains - Stifel

Yes. Thanks, everybody. I've got a follow-up to that question. You did tell -- you said like 35 million on the revolver in the fourth quarter. Do you have a census to sort of how much you could do on that in any given quarter or the target that you have internally?

Rick Matros

Well, over the course of the year, we can do max 775. I'm sorry, in the ATM.

Rob Mains - Stifel

Yes.

Rick Matros

Is that what you meant, Rob, the ATM?

Rob Mains - Stifel

I'm sorry, yeah, I'm sorry, that's ATM.

Rick Matros

That's it, okay.

Rob Mains - Stifel

Yes.

Harold Andrews

Yeah, I mean we did $38 million in the fourth quarter. I think that was on the high-end of probably what we can do. We had a couple of reversing cards with larger blocks. So, I would -- I think we kind of in our own revolving model between 20 million and 25 million a quarter or it should be a month. And you can really only utilize an ATM program seven months out of the 12 months because of the blackout periods that occur. So, based on that, yes, you're looking at around a $150 million $175 million (inaudible).

Rob Mains - Stifel

And in addition to the --

Rick Matros

Yes, periods. We're looking at by our volume, our daily volume, here.

Rob Mains - Stifel

Right. And then with the Nye portfolio, could you kind of describe those combination buildings for the most part, conceptually what it consist of?

Talya Nevo-Hacohen

It's Talya here. Yes, it is the short answer. Some of the buildings -- revolving are all set. But most of these in the balance are kind of a mix. So, I'm building this time is predominantly IL, but has but AL in it. Another building has mostly is mixed IL/Al and has have an expansion on it. So that has a true continuum of care and play. It's really a mix, individually.

Rick Matros

From a dollars perspective, Rob, is that start from the top-line perspective about 50% is mixed and 40% is senior housing. From an EBITDAR perspective, it splits about 60% of senior housing with 40% of mix.

Rob Mains - Stifel

Okay. And are you seeing a lot of those sorts of combination buildings for the portfolio, what we've been asking is the -- when you've got that sort of mix, does that change the cap rate, and that is this can be a blend of those figures that you gave us earlier, Rick, like 7% for IL, 7.5% for AL, the send out date for AL? Or does that move the cap rates one way or another?

Rick Matros

We really -- in the Nye area, we really tried to broaden, we just increased the number of beds in units and most of its sort of traditional cap rate ranges that are different asset classes and blended it, came out to sort of just under 8% kind of all-in because the majority of beds are not (NYSE:SNF) beds.

Talya Nevo-Hacohen

And we also looked at -- we looked at cap rate component, we often looked at it on a coverage component as well.

Rick Matros

Right.

Rob Mains - Stifel

Right. Okay, that's all I have. Thank you.

Rick Matros

Thanks.

Talya Nevo-Hacohen

Thanks.

Operator

(Operator Instructions) We'll hear next from Collin Mings with Raymond James.

Collin Mings - Raymond James

Hi, good morning out there, everyone. Just a couple of quick follow-up questions just on the -- can you talk about just the earn out that's related to the Nye portfolio and just kind of the targets related to that and then maybe just kind of a little bit more color around just the expansion projects and different opportunities you see going forward as part of portfolio?

Talya Nevo-Hacohen

Sure. So, there is a time window in which we're giving them our opportunity. And it really has to do with value. We'll fund these sorts of projects that they have slated, and value creation kind of similar type of underwriting is what we did at acquisition, but escalated for time value, if you will, after a 3% escalation on the lease rates.

Any value created above them beyond cost is sort of they got -- they are paid for as capital investment. And that's in our rentals reset. That is and we're doing at a portfolio wise. So, it's a one, one time event not for projects, not individually. So, it's really a -- it's almost, if you characterize it as promote for them. So, what happens is we -- yes, to the extent that they, you have major improvements in operations and want facilities, they have to put a lot of capital there, and that kind of ups the credit, the credit if you will, the credit enhances (every now). So, they benefit for that. So, really that is worth like promote. What was the second piece you asked, what kind of project?

Collin Mings - Raymond James

Right.

Talya Nevo-Hacohen

One of their buildings which is -- it sounds they are like flagship building as in Lincoln, Nebraska. They just did a new -- it's a mid-rise building that was they bought and converted as in IL/AL. They had a small number of net set figures. They completed an addition, sort of a mid-rise addition that is next there is one or two patio homes, one or two.

Collin Mings - Raymond James

Yes.

Talya Nevo-Hacohen

One or two.

Collin Mings - Raymond James

Got that.

Talya Nevo-Hacohen

They want to -- they have a master plan for that facility to add patio homes, to add more IL/AL. They have a beta brand scheme for that. So, that's a scale of that one. Others, they have much more modest. It's an opportunity to add that in allocation into putting out our view, where as -- and also it -- I think -- they have an opportunity to ask that and put them into service and it's very simple. Not brand new master plan construction.

Collin Mings - Raymond James

That's it, okay.

Talya Nevo-Hacohen

They continually vary.

Collin Mings - Raymond James

Okay, great. Thanks for the extra color and good luck during the quarter.

Rick Matros

And then, they were really just the main operator in Nebraska. They've been there for a really long time. They had great regulatory asset, and just as an aside, for those -- anybody that's seen the Nebraska movie, which was directed by Alexander Payne who is from Omaha. He was a resident in the facility -- in the movie. And one of the administrators is in the bar scene in the movie. And they had the red carpet premiere like days after we were out there visiting the asset.

Talya Nevo-Hacohen

The evening we were there.

Rick Matros

The evening we were there. So everybody was really excited about kind of getting self on the mat. So, that was pretty cool.

Talya Nevo-Hacohen

So, you can place Norfolk and Nebraska, on your -- were some places you go and visit.

Operator

And at this time, this concludes our question-and-answer session. I'd like to turn the call over to Rick Matros for closing remarks.

Rick Matros

All right, cool. That was probably a bit of closing as I can do. So, thanks for your time. We're all available to take calls with you guys. And for those that are going to be at the Citi conference, we look forward to seeing you there next week. And we're just looking forward to having our best year yet.

So, thanks again to your support. Take care.

Operator

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

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