Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Sabra Health Care REIT, Inc (NASDAQ:SBRA)

Q2 2014 Earnings Conference Call

July 31, 2014 1:00 PM ET

Executives

Talya Nevo-Hacohen - Chief Investment Officer

Rick Matros - Chairman, Chief Executive Officer

Harold Andrews - Chief Financial Officer

Analysts

Emmanuel Korchman - Citi

Juan Sanabria - Bank of America

Josh Raskin - Barclays

Paul Morgan - MLV Investment Bank

Tayo Okusanya - Jefferies

Rob Mains - Stiefel

Michael Carroll - RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to the Sabra Healthcare REIT Inc Second Quarter 2014 Earnings conference call. This call is being recorded. I would now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead.

Talya Nevo-Hacohen

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our acquisition and investment plans, our expectations regarding our financing plans and our expectations regarding our future results of operations.

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

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid. In addition references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as Exhibits 99.1 and 99.2 respectively to the Form 8-K refurnished to the SEC yesterday.

These materials can be accessed in the Investor Relations section of our website at www.sabrahealth.com. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Healthcare REIT.

Rick Matros

Thanks Talya. Thanks everybody for joining us this morning. We appreciate it. So for the quarter we recorded 33% revenue growth quarter-over-quarter, 39% normalized FFO growth, 29% normalized AFFO growth. We’ve closed on 184 million in investments to date. Our pipeline currently stands where it has, which is approximately 400 million, of that 400 million 65% of that is senior housing.

I’ll try to be a little bit more specific. So, that’s where we are on a go forward basis, about 400 in the pipeline we are actively working on 260 million, of that 260 million, 235 million in traditional sale leasebacks.

So the year is shaping up actually to be quite a bit different than last year where a lot of the investments were focused on development opportunities this year and now the majority of our investments in more traditional sale leasebacks and more of our bread and butter.

In terms of cap rates and competition, there has been some compression on cap rates and really we think for at least one specific reason. Historically, we saw the non-traded REITs bid up properties, but they got big enough and at least for us and I think some of the peers that we compete with, they weren’t playing sort of in the same circle that we were, so there was really no price dislocation.

Now we’re seeing financial buyers come in who seem to think that it’s a great time to enter senior housing and in all likelihood they will be a little bit surprise when they have to exit those properties five to seven years out. But they’re clearly bidding up for properties and they’re bidding up smaller portfolios, so we do see some of those guys.

Now they usually are competitive only in circumstances where the entire business is being sold. In those circumstances where the operator wants to stay in place then they tend to be focused on doing things with REITs like Sabra because it’s a long term relationship and that’s what they’re focused on.

So when we get involved in bidding on properties where the business is being sold if there is a financial buyer in place that’s bidding, they’re typically going to bid 15% to 20% higher just to get into the second round and we won’t plan there. Fortunately there is so much product out there and so much sale leaseback, potential out there and opportunities out there that we feel that we’ve been able to hit our numbers and actually this is the best year that we’ve had so far to date.

And once again we will reiterate that we expect to meet our numbers this year both in terms of the volume in acquisitions that we’ve previously stated and in terms of reaffirming our guidance as well.

We also announced with our earnings release that we have new revolver commitments that provide us for the first time with an unsecured revolver as well as expanded liquidity with lower pricing and Harold will provide the details of that in his talking points.

I also want to note because we’ve talked about this a lot over the last year or so the problem that the skilled sector has had with observation date used by hospitals and how that’s negatively impacted skill mix. Congress is currently working on a bipartisan bill to fix the observation day issue so those patients having hospital stays classified as observation days will still qualify for Medicare benefits in skilled nursing facilities.

We can’t predict obviously with where Congress is whether it’s going to get done or not. The only reason I’m even cautiously optimistic is two reasons. One is bipartisan, secondly it’s a beneficiary issue in an election year. So hopefully that’ll gain some momentum so we’ll see.

In terms of coverage Genesis’ fixed charge coverage was essentially flat at 1.24. In terms of coverage to the portfolio trailing total EBITDA coverage to the portfolio is 1.24 versus 1.34 driven by the skilled portion at 1.18 versus 1.28. The driver for the first quarter was severe weather issues which we talked about on our last call and that primarily impacted the scheduling of therapy services which had the direct relationship to skill mix and revenue mix generated on that skill mix.

One of the things that will change in terms of our reporting going forward and how we’ll give a little bit more detail on it is Genesis which - because of the size of Genesis in our portfolio - still dominates our red coverage on the skill facility side. They book a lot of facility based benefits top side and so it’s not reflected in coverage. Genesis will be providing that information to us on a regular basis going forward so that we will have a better sense of the facility coverage’s if in fact they allocated all those costs to the facility level and that will result in improved coverage on a go forward basis.

And what they do is really typical of what a lot of the larger corporations do where they keep a lot of things topside when they true up things and the like. So Harold will talk about that in a little bit more detail, but it’s also one of the reasons that we focused on the fixed charge coverage because that’s really the more important coverage for us when it comes to Genesis since we have the corporate guarantee.

Trailing EBITDARM coverage to the portfolio is 1.63 versus 1.77. The other comment I want to make on coverage on the acute hospitals - one comment is - we only have two. So any change in coverage is going to have a pretty dramatic effect because it’s only two hospitals. And I’ll give you a breakout and we won’t normally report a breakout at the individual acute hospitals, but I think in this case it’s warranted.

For Texas Regional Medical Center our coverage for the trailing 12 was over two times and that does not reflect the new lease with Tenet. And again just to reiterate on that situation, that was an opportunity for us to align ourselves moving from an independent operator with a one off hospital to obviously a large well-respected national hospital operator and improves our credit, improves our escalators and the concession that we took on rent as a result of that was really our choice to do, so we think beneficial to the portfolio overall because of the quality of the credit, so that one was over two times.

Frisco Medical Center which is the Forest Park Hospital was a little bit over 1-1/2 times and that’s really a function of them going in network and so coverage had been well over two times the previous two quarters on a trailing 12 basis. And as they continue to go in network, that coverage will decline until volumes start to improve. We’re already seeing volume improve on those - on those contracts that they currently have in place. They won’t have all the network contracts in place until part way through the third quarter though it’ll be a little while before we see those volumes improve.

But it’s as expected and still decent coverage and again purely a function of them going in network and then again volumes will improve as time passes on that. Portfolio occupancy for the trailing 12 was 88.2%, down from 88.8% with decreases in the skills portfolio and increases in the senior housing portfolio. Total portfolio and the skilled occupancy were flat sequentially. Our skill mix dropped to 35.6% from 36.9% also down sequentially from 36.4% which we don’t normally see from the fourth quarter to the first quarter on a sequential basis but was attributable to the weather issues.

And with that, I’ll turn the call over to Harold to address the rest of the issues.

Harold Andrews

Thanks Rick and thanks everybody for joining the call today. I’m going to provide an overview of the results of operations for the second quarter and then our financial position at the end of the quarter and then I’ll talk a little bit about our revolving credit agreement.

For the three month ended June 30, 2014, we recorded revenues of $43 million compared to $32.3 million for the same period of 2013, an increase of 33.1%. Interests and other income totaled $5.5 million for the quarter and included $4.1 million of interest income and $0.4 million of preferred returns on our total investments in loans receivable and other investments of $225.8 million.

As of June 30, 2014, 46.8% of our revenues were derived from our leases to subsidiaries of Genesis down from 60.8% a year ago. FFO for the quarter was $22 million and on a normalized basis was $25.1 million or $0.57 per diluted common share, normalized to exclude a $2.9 million write-off of straight line or rental income primarily associated with the lease amendment we entered into with Tenet Healthcare for our Texas Regional Medical Center investment that we had announced earlier this quarter.

In addition a $0.2 million loss on extinguishment of debt was normalized out of FFO related to debt refinancing activities that occurred during the year. This normalized FFO compares to $15.6 million or $0.41 per diluted common share for the second quarter of 2013, an increase of 39% on a per share basis.

AFFO which again excludes from FFO acquisition pursuit costs and certain noncash revenues and expenses was $23.5 million and on a normalized basis was $23.6 million or $0.53 per diluted common share compared to $15.7 million or $0.41 per diluted common share for the second quarter of 2013, a 29.3% increase on a per share basis.

2014 AFFO was normalized to exclude $0.1 million of the cash portion of the loss on extinguishment of debt. For the second quarter of 2014, we reported net income attributable to common stockholders of $12.2 million or $0.28 per diluted common share compared to a net loss of $3.2 million for the second quarter of 2013 or $0.09 per diluted common share.

G&A for the quarter totaled $7.9 million and included stock based compensation expense of $2.3 million, the $2.9 million write-off of straight line rental income discussed previously and $0.5 million of operating costs for the RIDEA joint venture investment as well as acquisition pursuit cost of $0.2 million.

Our ongoing corporate level cash G&A cost were $2 million compared to $1.7 million in the second quarter of 2013. These corporate level cash G&A cost totaled 4.7% of total revenues for the quarter compared to 5.4% in the same period of 2013 demonstrating our continued leveraging of our infrastructure as we grow the top line.

The interest expense for the second quarter totaled $11 million compared to $10.1 million for the same period in 2013 and included the amortization of deferred financing costs of $0.9 million in 2014 and $0.8 million in 2013. Based on debt outstanding as of June 30th 2014 our weighted average interest rate was 5.17%. This weighted average rate includes only permanent long term debt with maturities not starting until 2021 as we have no borrowings outstanding on our revolver at quarter end.

During the quarter we recorded an adjustment to the fair value of a contingent consideration liability associated with an asset acquisition resulting in noncash other income of $0.7million.

Switching gears to the statement of cash flows and to the balance sheet, our investment activity for the quarter consisted of the acquisition of one senior housing asset for $23.8 million which included the assumption of a 4.84% HUD insured mortgage loan of $14.1 million. In addition we made three preferred equity investments totaling $6.4 million, one new debt investment and additional funding of existing loan commitments totaling $18.1 million.

The weighted average year one yield on our new investments during the first six months of 2014 was 8.3%. Cash flows from operations totaled $28.9 million for the six months ended June 30th 2014 and $49.8 million excluding the $20.9 million onetime payment primarily related to the early extinguishment of debt in the first quarter. This compares to $32.2 million during the same period of 2013 excluding the $9.2 million payment related to early extinguishment of debt in 2013. This is a 54.6% year-over-year increase in our cash flow from operations.

Net cash provided by financing activities of $145.9 million during the six months ended June 30th 2014 included our public offering of 8.1 million shares of common stock at a price to the public of $28.35 resulting in net proceeds before expenses of $219.1 million. These proceeds from the offering were used to pay down the revolver and for general corporate purposes.

In addition, we repaid $29.8 million of variable rate mortgage indebtedness during the quarter, having an interest rate of 5% per annum. This left the company with a total of $125.4 million of secured debt all of which had a fixed rate and is insured by HUD also having a weighted average effective interest rate of 3.96% and maturities starting not until 2031. We do expect to pursue an additional $28.7 million of HUD insured debt over the balance of 2014.

During the second quarter of 2014, we had limited activity on our ATM program selling 69,900 shares of common stock in an average price of $27.77, which raised proceeds of approximately $1.9 million.

As of June 30th, we had $55.2 million available for future issuance under the program. We paid quarterly preferred and common dividends totaling $20.9 million during the second quarter and maintained an adequate level of cash and cash equivalents of $15.1 million as of June 30, 2014.

Also as of June 30, 2014 we had total liquidity of $304.5 million consisting of currently available funds under our revolving credit facility of $289.5 million and available cash and cash equivalents of $15 million.

We were in compliance with all of our debt covenants under our senior notes indentures and our secured revolving line of credit agreement as of June 30, 2014. Some of those metrics include the following based on defined terms in the credit agreements, consolidated leverage 4.12 times, consolidated fixed charge coverage ratio 3.23 times, minimum interest coverage ratio 4.17 times, total debt to asset value 39%, secured debt to asset value 7%, unencumbered asset value to unsecured debt 206%.

Just a couple of details as Rick alluded to on the new revolver that we’re working on. As of July 30th, we had received commitments totaling over 500 million for a new unsecured revolving credit facility, which will replace our existing $375 million secured revolver. This new $500 million revolver will provide us liquidity of approximately $515 million and lower our borrowing costs under the revolver significantly.

We’ll be working over the next few weeks to close a new facility and expect to have the following terms, a four-year term with a one year extension option, a $250 million accordion feature, a leverage based pricing grid with improved pricing across the Board including a 90 basis point improvement over our current rate based on our leverage metrics as of June 30, 2014. Then our ratings based pricing grid tied to our debt ratings once we achieve investment grade with two of the three rating agencies.

Overall the recent capital markets activity along with this $500 million unsecured revolving credit facility has created a capital structure that provides us a strong liquidity position to fund future growth and has lowered our cost of capital, so we can continue to compete for quality accretive investment opportunities, that will continue our diversification from our largest tenant and into more private pay senior housing. It also continues to move us toward our goal of achieving an investment grade rating by the rating agencies.

Finally, I’ll just add on a little bit to the comments Rick made on how we will change our reporting of our SNF EBITDAR and EBITDARM coverage amounts. As Rick mentioned, Genesis records various facility level costs on a budgeted basis and once those costs are attributed to actual, those adjustments are not always recorded at the facility level financial statements rather they’re recorded up at the corporate level.

In addition certain services such as rehab therapy provided to the facilities by Genesis Therapy Company include an intercompany profit component. As such, costs at the facility level are not reflective of actual costs incurred in certain circumstances. The impact of capturing these amounts in the facility level financial statements on our SNF portfolio EBITDAR and EBITDARM coverage levels for the second quarter, which we reported at 1.18 times and 1.63 times respectively, would have been increased to 1.26 times and 1.72 times respectively, based on estimates provided by Genesis.

As Rick alluded to, going forward we will work with Genesis to determine the impact of such items on our portfolios financial statements in the future and report EBITDAR and EBITDARM coverage on our portfolio inclusive of those items.

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

Rick Matros

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll hear first from Emmanuel Korchman from Citi.

Emmanuel Korchman - Citi

Can you provide an update on the Forest Park Dallas deal, the one that had the put option in light of sort of what’s happening with Frisco with the change from that network to network and the volume shift there?

Rick Matros

Yes, no different than what we’ve talked about earlier. They’re just working on getting their volumes up. They’re almost completely in network now, but not all the way there. So we’ve got plenty of time on that mortgage. So we’ll exercise the option whenever, we see coverage get to probably something in excess of two times. There’s no rush on our part to do it. That mortgage is in place for a few years.

Obviously, we expect to exercise it before that and the purchase price as you recall of 168 of which we -- the mortgage is 110 -- the maximum purchase price. And so that could -- if they get to coverage level that of 2-1/2 times and we still feel comfortable enough to exercise the purchase option. We in fact may wind up paying less than the 168. So if we’re getting a good return on our mortgage, we’re happy to live with that for the time being and when it’s appropriate, we’ll exercise it.

Emmanuel Korchman - Citi

Great and then going back to your commentary on sale leasebacks or sort of more traditional investing making up the remainder of the process for this year rather than development pipelines, a couple of questions there. Are these going to be sort of structured the same way they’ve been able to structure things with pipelines and their slow development component? And the second question is, is there anything sort of changing your view that you want to do more sale leasebacks rather than developments or is that just sort of the opportunity set and you’re taking advantage?

Rick Matros

Yes, it’s not a matter of doing anything really by design this year. Last year it was because last year we were really focused on getting as many development partners lined up as possible. And so we have six now with formal and informal pipelines, and so a lot of projects are sort of breaking ground within relatively short periods of time and so there was a lot of investment activity related to that.

Now, it’s going to take time for those things to mature for us to exercise options. And you’ll see these properties come on more sort of one at a time and space out. So that’s really why there’s less development investment if you will and there’s actually, we’ve actually seen more sale leaseback opportunity this year than last year so. We’re just taking advantage of that and it’s pretty much our bread and butter, the fact that those opportunities are more towards the senior housing side and the SNF side, plays to where we want to go anyway.

Operator

We’ll take our next question from Juan Sanabria from Bank of America.

Juan Sanabria - Bank of America

Hi, good morning guys.

Rick Matros

Good morning.

Juan Sanabria - Bank of America

I was just wondering for some clarification in terms of what is or isn’t included in guidance with regards to the future acquisition in that pipeline you’ve noted and within that pipeline if you could just give us a sense of clarity as to what may be related to options for future take outs that you currently have in place versus sort of new incremental acquisitions.

Rick Matros

Well the guidance as we stated after we reaffirmed the equity offering only assumes a small amount of investment regardless of whether that investment is development related or sale leaseback related. So, our expectation is that if we hit our numbers which we expect to hit relative to the amount of volume this year, we could exceed guidance. That’s going to depend on sort of the timing of those acquisitions.

It’s really just a function of that. So I think the opportunity is there for us to exceed guidance, a function of how much and timing. But however you cut it as well as we hit our numbers, we expect to in terms of total investments for the year, it’s really going to bode well for 2014 because our year-over-year growth 2014 over 2013 is going to be really strong, as a hazard obviously with almost 40% normalized FFO growth as you saw in the current quarter. Does that answer your question Juan?

Juan Sanabria - Bank of America

Yes, and does the pipeline include any I guess options, many sort of asked about the Forest Park, is there anything else? That doesn’t sound like it -- that pipeline.

Rick Matros

No, the pipeline is almost entirely sale leaseback.

Juan Sanabria - Bank of America

Okay.

Rick Matros

And of the 260 that we’re working on, 235 of that is sale leaseback, but there is no assumption on the Dallas Hospital being exercised this year in that pipeline.

Juan Sanabria - Bank of America

Okay. And can you talk at all about any cost pressures some of your operators may be seeing on the senior housing side either on the labor or the food cost or maybe insurance as well, is that an issue that has come up at all with your discussions with the operators?

Rick Matros

No, not at all. Their coverage has been really steady, occupancies improved really nicely as our senior housing portfolios maturing some show - we haven’t seen any issues on the cost side and haven’t gotten that feedback either.

Juan Sanabria - Bank of America

Okay. And I guess just...

Rick Matros

Let me just clarify one thing there. I think they would expect some labor cost increases but that’s just in line with acuity going up and they should be capturing that on service charges. So that’s just sort of the natural evolution of the model, but nothing apart aside from that.

Juan Sanabria - Bank of America

Okay. And then just going back to one of the previous questions on sort of development versus sale leaseback, do you have sort of a target that you feel comfortable with that you’re willing to have as a percentage of total investment dollars or what have you as sort of a ceiling for development type investments whether it’s preferred equity investments or construction loans or anything like that just as a way to help us frame your exposure there?

Rick Matros

We really don’t have a target, the exposures never going to be very much even with all the development that we’re doing and, obviously we have a lot going on and the reason it’s never going to be very much is really two fold, one sale leaseback is always a primary focus because our most important goal here still is to diversify a way for Genesis to keep getting that number down and to diversify asset class.

Secondly, the amount of investment on every preferred equity strip, which is how we typically provide financing to these development projects is minimal.

So, if you look at any individual project that may be $10 million to $15 million, you’re looking at $2 million to $4 million in preferred equity on any one of those projects. We can be doing three dozen of those projects and it’s still going to be dwarfed by our other investment activity and traditional sale leasebacks.

Juan Sanabria - Bank of America

Okay, great. Thank you very much.

Rick Matros

Yes.

Operator

We’ll take our next question from Josh Raskin from Barclays.

Josh Raskin - Barclays

Hi, thanks.

Rick Matros

Hi Josh.

Josh Raskin - Barclays

Hi Rick. We’re here with Jack as well. So, I appreciate all the commentary on the pipeline and the current investments but I guess on your current operators, we’re seeing better trends from the hospitals in terms of admissions and I’m wondering is it too early to see some of that downstream effect on some of the SNFs I don’t know if you want to break out Genesis separately, but are you seeing any additional volumes at your operator level?

Rick Matros

No, we really haven’t seen it yet I would expect that to be the case, but there is a real problem here with the observation date and I know I keep talking about that on every call and I don’t mean to harp on it but it’s a real issue. It’s a real problem and that’s why we’re sort of cautiously optimistic about this latest potential legislation from congress, because as long as there is a three day qualifying space in order for people to qualify for Medicare in a skilled nursing facility then the observation date just killed that.

And facilities don’t want to take patients from hospitals that are too high acuity if all they’re going to get a Medicaid for it.

Josh Raskin - Barclays

I mean because of anniversary in another quarter here in the next quarter. So I assume, it seems like there’s just a little bit of a lag, right. The hospital admins comment and then it flows downstream so, are you guys optimistic more around the fourth quarter then?

Rick Matros

I’m not going to be completely optimistic until the observation date issue is -- I mean if you look back two years ago to where skill mix is going in our sector generally, it was going up on a regular basis. So, there might be some trickle down in the fourth quarter, which we would then report in the first quarter, but I don’t think there’s going to be a real improvement in the top line until the observation date issue is resolved.

I do think that it’s just a matter of when and not if only because it is a beneficiary issue. It’s not a provider issue. If it’s a provider issue then congress is going to be less sensitive to it, but as a beneficiary issue, as these numbers continue to grow in terms of people that are being denied benefits that are theirs the, the public outcry is going to start to become greater and the actions being taken now with lobbying group and congress simply because there’s no better time than an election year to try to take advantage of the beneficiary issue.

Unidentified Analyst

Got it and hey guys. This is Jack. I had one more question on the operations on the SNF side. One of the things we’ve been tracking is managed long term care and one of the states that switched earlier this year was Florida. I was wondering if your operators in that state have seen something. Do you usually see some sort of step function or is that just a longer term trend we’re seeing where that population’s getting more managed?

Rick Matros

Yes, that’s a longer term trend. We’re not seeing anything yet at this point. It’s still a pretty small percentage of the overall occupancy in the facilities, and yes so it’s going to take some time I think.

And it’s -- the operators are going to always prefer to take those residents or those patients over Medicaid and that by the way is unaffected by observation date, so there’s an advantage there. Now, the managed care rates are going to be at something of a discount to Medicare rates, but they’re still going to be pretty good. But it’s going to take a while for it to filter down I think.

Operator

We’ll take our next question from Paul Morgan with MLV Investment Bank.

Paul Morgan - MLV Investment Bank

Just on the Genesis EBITDAR coverage change that you mentioned is that just -- I think of just that being a step up or is there, would the trend look any different once you, once you report it the new way?

Rick Matros

I mean directionally this still would have been a lighter quarter before trailing 12 months in the previous quarter, but it sort of had a higher base to begin with. Is that what you’re asking?

Paul Morgan - MLV Investment Bank

Yes, I’m just wondering if the fact that the costs were being allocated differently, if that component in the business would have meant that, the directionality of the coverage would be slightly different or rather just you’re just going to start reporting slightly higher numbers really?

Rick Matros

Yes, I don’t think, it would be different directionally, but the numbers will be higher on a go forward basis.

Paul Morgan - MLV Investment Bank

Okay, great. And then, you’ve talked a lot about diversifying into private pay and lowering the Genesis share. I mean, how do you think about, when you think about assisted living and memory care, the supply picture when you’re underwriting some of the new investments you’ve been doing like in Texas and Colorado kind of managing, kind of the risks of that side of the equation versus your efforts to boost the private pay share?

Rick Matros

So, our focus all along has been to -- one we keep an eye on the development that’s happening in the areas that we go into knowing that that’s never going to be a complete picture because in certain states there are lower barriers to entry than other states, Texas being a prime example. But we have tended to focus our development opportunities in secondary and tertiary areas and that’s where we do think we have a little bit of a hedge there because we are sticking with local or regional operators that really know those markets.

They’re smaller MSA’s and so the big guys tend not to go there and land’s cheaper. Construction costs are cheaper. You can build a 60 unit facility and fill it more easily with private pay. You don’t have to build 150 or 200 unit facility. So, we’re trying to hedge our bets a little bit by just being cautious about where we’re building and trying to pick our spots where our operators really are known in those communities. And so they have a little bit of a leg up and again the big guys are -- it’s not going to be as desirable for them to go in there.

Paul Morgan - MLV Investment Bank

Okay, thanks and then just lastly -- just kind of setting expectations for the hospital coverage. I mean I know that there’s moving pieces in terms of how the in-network contracts get negotiated and volumes start to increase. But if I think of the back half of the year, I mean is it right to think of a boost in coverage coming out of the rent change at Texas Regional and then maybe starting in Q4 maybe not until early of next year kind of improvements coming out of Frisco?

Rick Matros

Yes, I think that’s exactly right. You’ll see the more immediate change in coverage at TRMC because of Tenet and not really just because of the rent change, but because of the contract rates that they’ll bring in with them. And the cost advantages that they’ll bring in with them. So it’s really a combination of like those three components.

So even in the event that likely the same, you would still see the rent coverage improvement in the tenant facility. In terms of Frisco, that’s exactly right I think its earlier next year before we start to see improvement, because the last in network contract doesn’t come in place until, the third quarter is about halfway done. So, it’s going to take a while to build volume off of that.

Paul Morgan - MLV Investment Bank

Okay. Thanks.

Operator

We’ll move onto our next question from Tayo Okusanya from Jefferies.

Tayo Okusanya - Jefferies

Hi, good afternoon. Just a couple of quick ones. First of all G&A for the quarter just seemed a little bit higher than the usual run rate I was just wondering if we could get some backdrop on that?

Harold Andrews

Tayo, we hired a few people here it’s the company, we’ve added 20% or 30% to our workforce, which is like two people. So it is up a little bit from that perspective, but if you look at the, what I would call our run rate on the cash corporate level G&A cost, last year was around 1.7 million. This year it’s around 2 million. So, again accounting for some hires and things like that, but I think that area of around 2 million in cash, that should be kind of where we are kind of given where we’re at from a size perspective for the foreseeable few quarters.

So it looks like there is a lot of moving parts there I tried to walk through a lot of that, but on a cash corporate level basis somewhere around 2 million is where we’re at and I think where we’ll be.

And as a percent of revenue obviously that drops quite a bit because we’re still even adding, best in house and going from eight people to ten people in the last couple of years. It’s still a great leveraging, it’s still leveraging, because our pre tax EBITDA is so strong relative to our infrastructure does.

Tayo Okusanya - Jefferies

And what are these new employees, which areas do they go into, are they more financial reporting guys, operations guys?

Rick Matros

Acquisition support and accounting support.

Tayo Okusanya - Jefferies

Okay, that’s helpful. And then second question, I’m just wondering if you guys have touched base with the rating agencies recently and kind of, the overall viewpoint in regards to you guys getting credit grading upgrades if that’s changed materially or how good you’re kind of feeling about hitting some of their metrics that kind of get you the investment grade rating that you want.

Harold Andrews

Yes, we haven’t yet Tayo. We’ve got meetings scheduled with them in September, so we’ll have an update in our next earnings call, but we stay in contact with them periodically throughout the year.

The last meeting we had with them they obviously laid out some bogies for us for getting to the next level. I think what we’ve done this quarter moves us in that direction. It still continues to be very much driven by getting Genesis down and to some extent getting skilled nursing down as a percentage of our portfolio.

So we still have some work to do to get to investment grade, but I think we’ve made good steps here and like I said we’ll have some more color on that next time next quarter and you should also expect us to bring - in at some point as well so we’ll have

Tayo Okusanya - Jefferies

Okay, great. That’s helpful. Then just one more from me, thanks for indulging me. And Rick, just again this idea of cap rate compressing, could you kind of talk for the more competitive deals kind of what you’re seeing regards to cap rates in the skilled nursing side as well as the senior housing side?

Rick Matros

On the senior housing side where last year we could get a lot of things done at an eight cap, now we’re looking at, seven in a quarter, seven and half caps for facility memory care. For skilled nursing we’re seeing, we used to see sort of the best sort of class facility in the skilled nursing asset class at about 9%, but still a lot of the more traditional stuff closer to 10. Now we’re seeing pressure pushing it into the eights.

Tayo Okusanya – Jefferies

Got it.

Talya Nevo-Hacohen

And that just to be clear, that’s lease particularly on the SNFs it’s relevant, that’s a lease rate and we use about a 1.5 times coverage typically to underwrite. So that’ll give you a gauge of where things are headed.

Tayo Okusanya - Jefferies

That’s very helpful. Thank you very much.

Rick Matros

Yes, sure.

Operator

We’ll hear next from Rob Mains from Stiefel.

Rob Mains – Stiefel

Yes, thanks. Good morning out there.

Rick Matros

Hi Rob.

Rob Mains - Stiefel

Rick, you talked about seeing financial buyers in the market, is that for senior housing or is that across asset classes?

Rick Matros

It’s senior housing.

Talya Nevo-Hacohen

Yes, I haven’t really seen them show up in the skilled nursing segment for material at least materially, but then again we’re not looking at a lot of skilled nursing facilities these days.

We know that have some of the PEs are in the hospital sector not that we haven’t come across them on our deals. It’s really that they’re driving very much into I’d say private pay senior housing across the care spectrum there or across acuity spectrum there.

Rob Mains - Stiefel

Okay. And then in terms of competition from other REITs, has that changed at all?

Rick Matros

No, that hasn’t changed. It’s still sort of the same group of us that are focused on the smaller portfolio deals versus the larger deals. And then with the larger deals, I would say that some of us are also now looking at larger deals as well.

And certainly for us, I think as I’ve mentioned on previous calls, our cost of capital’s decreased so dramatically. And now that we’ve deleveraged the quality that we are really have the opportunity to look at large deals and to at least be competitive. Whether we win or not today is one thing because there may always be someone especially the three bigs or a North Star that are willing to pay whatever it’s going to take to grab some earnings. But we’ll at least be able to be competitive and that’s a place that we wouldn’t have a year ago.

Rob Mains – Stiefel

Okay. Then kind of a two part question because we’ve heard a lot about the competition in senior housing. What do you think is driving down cap rates for skilled nursing and why not do more in that sector in your view?

Rick Matros

Well I’m not sure exactly what’s driving it down and clearly Omega’s done some big deals where they’ve paid up. And it’s a little bit different than what we saw in senior housing when in 2003 when the three big REIT’s were really competing for volume deals. The prices that they were paying up weren’t really translating down to our level. But the pricing that’s been paid for some of these bigger SNF deals does seem to be getting pushed down to the smaller portfolio level.

We’ll see if it lasts but for us I would say that we’re always going to buy skilled nursing facilities. We just want to buy more senior housing facilities. And if we find a good skilled asset that a year ago was not in the quarter and now it’s going to be 875. It doesn’t mean that we won’t do that deal frankly because our cost of capital has come down enough that our spread’s still going to be really good. And we’re still going to be willing to pull the trigger on this.

Rob Mains – Stiefel

Okay, thanks and last question. I just wanted to clarify the answer you gave Josh about the observation state. Is the issue that an entire state is being coded observation or there’s being split in patient observation and not getting the 72 hours inpatient?

Rick Matros

Wait, say that one more time Rob.

Rob Mains – Stiefel

The observation stay issue, do you have like a patient presents for like joint replacement that their entire stay is being coded as outpatient or as observation/outpatient or are they just not getting the 72 hours inpatient?

Rick Matros

They’re just not getting the 72 hours inpatient.

Rob Mains – Stiefel

So, some of it is inpatient, some of it’s out?

Rick Matros

It may be. I mean I don’t know specifically. So it may be, it may or may not be but enough of it isn’t that they don’t qualify for the 72.

Rob Mains – Stiefel

Got it. Okay, that’s all I needed. Thanks a lot

Operator

We’ll take our next question from Michael Carroll of RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Thanks. Can you guys remind us how the price is decided on the senior housing development projects? Is that pre-negotiated?

Talya Nevo-Hacohen

Yes. What we do is when we in the context of a pipeline or in the context of any agreement, we pre-negotiate a formula that is based on an annualization of actual EBITDA at the time of the exercise. And we have a set coverage ratio and a formula for cap rate, so with typically a floor for the cap rate as well so it’s not less than.

Michael Carroll - RBC Capital Markets

So are you going to be able to buy these assets at better cap rates than I guess where some of these are trading at currently in the market?

Talya Nevo-Hacohen

Yes. Now whether that’s, I can answer the same with the same answer in 24 months, I don’t know, but today I would say yes.

Michael Carroll - RBC Capital Markets

And has that formula changed? I guess do you only have that predetermined with the two pipelines you have officially under contract? What about the ones that are not I guess official?

Talya Nevo-Hacohen

Even the non-pipeline deals whenever we have a forward purchase that is more than a few months out - we create a formula like that.

Rick Matros

The only difference between the formal pipeline deals that we have and the informal is that the formal pipeline deals have their formal agreement in place, if you will for say ten projects where the other ones just don’t have that in place, but how we approach those projects are exactly the same. We just do them as they come as opposed to having a document that says we’re going to do ten with you.

Michael Carroll - RBC Capital Markets

Okay. Is there a reason why the Forest Park construction loan, there’s only about 50 million drawn on that? It seems like that the draw’s not coming as quickly as it should be.

Rick Matros

To answer your question, I don’t think there’s any delay. In other words I think that the project is set to be completed in the next month or two. And so probably like any other project that I’ve seen, you’ve always got a hold back in your system delay in time for the final draws to come in. So I think that’s really what we’re seeing.

Talya Nevo-Hacohen

You pay, actually, you pay in ways after the work is completed and there’s always a timeline plus as Harold says, retainage until the very end to make sure that there’s succinct over the contractors.

Rick Matros

No issue there Mike.

Michael Carroll - RBC Capital Markets

Okay and then my last question is related to the street line rent write-off. It seems like it was, I know it’s kind of modest, but it seems like it’s about 500,000 higher than what was previously reported, is there something different there?

Rick Matros

Yes, we’ve got the two assets that we’re working through bringing in new operators and those straight line rents were also written off.

Michael Carroll - RBC Capital Markets

Okay. So it’s in addition to the hospital.

Rick Matros

Yes, we have two SNFs that we’re bringing in new operators on and SNF material, but we have an opportunity to bring operators that we wanted to work with.

Michael Carroll - RBC Capital Markets

Okay, great. Thanks.

Operator

(Operator Instructions) And I’m showing we have no further questions.

Rick Matros

Thanks everybody for your time today and Harold and Talya and I are available for any follow up that anyone may have and have a great day. Talk to you soon.

Operator

This does conclude today’s conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sabra Health Care REIT's (SBRA) CEO Rick Matros on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts