Sabra Health Care REIT, Inc. (NASDAQ:SBRA)
Q4 2015 Earnings Conference Call
February 22, 2016, 14:00 ET
Talya Nevo-Hacohen - CIO
Rick Matros - Chairman & CEO
Harold Andrews - CFO
Smedes Rose - Citigroup
Juan Sanabria - Bank of America Merrill Lynch
Dan Altscher - FBR Capital Markets
Chad Vanacore - Stifel Nicolaus
Rich Anderson - Mizuho Securities
Joshua Raskin - Barclays Capital
Michael Carroll - RBC Capital Markets
Tayo Okusanya - Jefferies
Jonathan Hughes - Raymond James
Welcome to the Sabra Health Care REIT Fourth Quarter 2015 Earnings Conference Call. This call is being recorded. I would now like to turn the conference over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead.
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, our expectations regarding our Forest Park investments 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, 2015, to be filed with the SEC today, as well as in our earnings press release included as exhibit 99.1 to the form 8-K we furnished to the SEC earlier today. 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 earlier today. 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.
Thanks, Talya and thanks for joining us, everybody. Let me start off with a Forest Park update and the last two remaining assets. As we've noted before, we expect these assets to be sold some time in the latter part of the second quarter. They will each take a different path. We expect that the Fort Worth facility will be sold through the bankruptcy process. There is an offer but it hasn't yet been filed with the court. As we've mentioned, there is a lot of equity in that facility so there's more than ample room for us to be taken out whole which -- whole means our debt investment plus all of our default interest.
On the Dallas hospital, it's much more likely there that we will go into bankruptcy court and get a release from the State, get this facility back through foreclosure and then we'll turn around and sell it. The borrower there, we think it's just asking too much for the hospital and all we want is our debt paid off. So that should make it much simpler. Different paths for both but similar timing for both.
Now let me move on to our strategy going forward at this point. So our game plan is this, it's pretty simple. We're going to utilize the excess cash proceeds that we receive from both the Forest Park investments and in addition to that we're selling a few other facilities. With our development partnership with one of our memory care partners, we have two owned facilities which we will retain those. They're doing fine for us. We have two facilities that are just about to open and one that we have a note on that's open but not operational yet. Rather than wait for those to ramp up over the 18-plus months that it will take to ramp up, we're going to sell those so we'll have additional proceeds to use to invest in any assets that we may see over the coming months.
This will give us approximately $275 million in proceeds and $230 million of that $275 million can be invested and still keep our leverage no higher than 5.5 times debt to EBITDA. And we may not use that much. We're going to be very selective in looking at things and we'll see what's out there.
2015 saw us make $551 million in investments, 55% of those was senior housing with a blended cap rate of 7.7%. The investments that we completed in the fourth quarter were committed to early in the year and were completed at a different environment as it relates to the equity market and our cost of capital. The pipeline currently is about $200 million; it's all senior housing, there's nothing compelling. We have agreed to development agreements with three development partners that, as everything is exercised, we'll have a stabilized value the next several years out of $150 million.
But again, I want to make it clear, we don't feel the need to rush into doing any investments. By having all of these proceeds available to us, it just gives us the flexibility to do things if we find things that we do want to do and we will not have to tap the equity market. So we can run this cycle out that we're in right now.
In terms of guidance -- well, it's true, obviously, we did not give guidance today. We wanted to give the Forest Park investments a little bit more time to make sure that we were comfortable with the clear path. I would expect over the next few weeks that we will put guidance out. I think at this point, we will be putting it out on a run-rate basis; so, in other words, we will cleanse our financial statements of the Forest Park investment. So even though we'll be booking through the full interest on Fort Worth, for example, until that facility is sold, we'll back that out of the guidance, so everybody will have a clear run rate. We'll get that out, as I said, in the next few weeks.
Now I'll move on to skilled nursing. Let me start out by saying that HCR ManorCare's issues are that company's issues. We typically don't like to refer to other companies on our calls, but there was a comment made that HCR ManorCare's issues were industry issues and not company-specific issues and that's simply not the case. I'll provide some statistics to back that up. Before this market downturn, because HCR ManorCare has really had operational problems now for four and a half years, the market seemed to understand that it was a company-specific issue.
In the current environment, that doesn't seem to be the case, so let me move on and back that statement up. One, in terms of Genesis, Genesis is continuing to show respectable year-over-year growth, with 6% EBITDA growth and 13% or 14% EBITDA growth in 2015. And I expect the same thing in 2016. The fixed charge coverage improved from 1.26 to 1.29. We expect it to end the year, because we report a quarter in arrears, to slightly over 1.3. And 2016 could see it hit 1.35. Specifically, as it relates to the so-called headwinds with managed care, Genesis's skilled mix is about 21.4%, skilled mix being Medicare fee-for-service and Medicare Advantage. Two-thirds of that 21.4% is Medicare fee-for-service, 7.4% is Medicare Advantage. To put it in some perspective, so everybody gets a sense how slow this growth is in Medicare Advantage, at the point in time we did the Sabra split, some census on Medicare Advantage was 4%. So this is growing at less than a point a year. This isn't some tidal wave that's coming on.
Genesis also has some extremely credible and important initiatives to improve their organic growth. I would say, from an operator's perspective, when you're putting initiatives in place to grow the top line, it just takes longer to get there. But some of the initiatives they have that we think are critical to their growth are their power-back initiative, they're participating in Model 3 of the BPCI. They are the only SNF Company with its own physician services company and they've now expanded their rehab company services into home settings.
And in the meantime they're doing what any good operator would do, they're becoming more efficient below the revenue line. That's what you would expect from a good operator. While you're waiting for certain things to take hold, you have got other levers that you're pulling to improve your NOI growth on a year-over-year basis. And they're executing on that really nicely. Any company that's got a platform of size should have the ability to do that.
Moving beyond Genesis to the rest of our SNF portfolio, not one of our other SNF operators had rent coverage below one times over the past four quarters. And in fact, we keep trending up. Currently we're at 1.36 on an EBITDA basis. Medicare Advantage sets us across the rest of our SNF portfolio with 5.5%. So again, it's very light and experienced the same split with growth. One of the things that you have to be focused on when you look at managed care is, it's very market-specific. You can't approach it from a broad strokes perspective. I'd also point out that numerous skilled nursing companies throughout the sector, including Ensign and the tenants of our REIT peers, are strategically navigating through this gradual paradigm shift without experiencing the performance issues that appear to be dogging HCR ManorCare.
In terms of CMS, one of the things that's changed here -- and historically we get a proposed rule April 1, we get a final rule on August 1. And then, October 1 whatever's going to happen is going to happen, whether it's a cut or it's an increase or whatever it is. This is the first time that CMS has taken the time to roll things out to give operators the opportunity to participate in programs. So these headwinds I'll take any day. I'll take headwinds that we have time to prepare for over a period of years over an October 1 rate cut that you have no time to prepare for. So I think CMS is doing a really thoughtful job in helping the sectors -- the entire post-acute sector, not just the SNF sector -- navigate through the paradigm shift.
By the numbers, SNF beneficiary days are growing. Medicare enrollees in 2010 were 47.7 million. In 2015, the estimate is 55.8 million. In 2020 it's projected to go to 64.5 million. That's huge growth in the beneficiaries. So those numbers and that volume will help to offset some of the other issues.
Medicare Advantage was 25% of sector revenues in 2010. Five years later in 2015, 31%. It's projected to grow just 3%, from 31% to 34%, by 2020. As I mentioned, this slow growth is evident at Genesis and the rest of our operators as well. One of the reasons the growth is so slow is that Medicare Advantage does not market to those over 75.
Move on to ACOs, because ACOs have been another issue that have caused concern for those that follow the sector. The ACOs will lose momentum. 14% of sector revenues in 2015 were generated from ACOs. It will only grow to 16% in 2020. That said, the ACOs have not been a negative for SNFs that some have projected. Length of stays for ACOs are 90% of Medicare fee-for-service lengths of stays, where Medicare Advantage is more like half.
Now I'll move on to our operational results. Our skilled transitional care facilities had EBITDA coverage of 1.36 which was up sequentially and year over year. Our senior housing EBITDA coverage, at 1.26, was slightly down sequentially but up year over year. In addition to improvement in Genesis's fixed-charge coverage, tenant improved to 2.38 times and while Holiday was slightly down from 1.15, fourth quarter will move up to 1.18. One of the things I would point out on Holiday is, the guarantor at Holiday is a subsidiary where unencumbered assets are moved in and out. So those numbers shift not so much as a result of actual performance, but just as a function of what they're doing with that particular subsidiary and the assets that move in and out of it.
Our skilled transitional care facility occupancy was down 80 basis points to 87.6% year over year, but skilled mix was up strongly to 40.8% which was 250 basis points. One of the things that I would point out here -- and I know this creates more work for folks -- but when I read a lot of the notes I see primary focus on occupancy and skilled nursing facilities. If you really want to assess how operators are doing relative to the paradigm shift, it's critical that you focus on skilled mix, so Medicare and Medicare Advantage.
And I say skilled mix, not quality mix. When people refer to quality mix, it's all non-Medicaid revenue and it includes private pay. And private pay just isn't a factor in this business any longer. There actually isn't a big differential, on a nationwide basis, between private pay rates and Medicaid rates, so skilled mix is critical.
And as you move up on your skilled mix, you're going to have some decrease in occupancy because your front door is turning over a lot more quickly because you've got shorter length of stay. The primary reason that our skilled mix is growing so dramatically is because that has been a focus of our acquisition strategy with skilled nursing facilities. Over half of our skilled nursing facilities currently, including our last two acquisitions, are embracing this new paradigm, very strong skilled mix.
They're doing short-stay post-surge rehab patients. They are taking the kinds of patients that are taking care of an LTAC, so bed patients are the pulmonary patients, dialysis patients. So we see real nice movement here. That's the kind of selectivity that we look at when we look for SNF operators. And SNF operators that are that far ahead of the curve are few and far between, still. There will be more of those over time.
The other thing I'd point out -- and this complicates it, I think, a little bit for you guys, a little bit more -- is Medicaid rates aren't necessarily just Medicaid rates. There are numerous states that have specialized Medicaid rates for high-acuity patients. Maryland and Pennsylvania, for example, have specialized Medicaid rates for bed patients. Those Medicaid rates are at least as high as Medicare rates. So in some cases, even though there's Medicaid revenues, it's very good revenue.
Our senior housing occupancy was up 90 basis points to 90.8% year-over-year. And with that, I'll turn it over to Harold.
Thanks, Rick. Thanks, everybody, for joining today. I'll provide an overview of the results of the fourth quarter and our financial position as of December 31, 2015, as well as provide some insights into the impact from Forest Park. For the three months ended December 31, 2015, we recorded revenues of $66.8 million compared to $55.7 million for the fourth quarter of 2014, an increase of 19.9%. Interest and other income totaled $7.9 million for the quarter, up from $5.3 million in 2014. This $2.3 million increase is primarily related to a $3.9 million increase in interest income from the Forest Park Fort Worth construction loan which totaled $4.9 million for the quarter, of which $2.6 million related to a catch-up of default interest from prior periods.
In addition, interest on other loans and preferred equity investment revenues increased $0.9 million, related to increased investments over 2014. These increases being offset by a decrease in interest income from the Forest Park Dallas mortgage loan which was placed on non-accrual status at the start of the fourth quarter of 2015. We continued to accrue interest on the Forest Park Fort Worth construction loan through the fourth quarter at the default interest rate of 15%, as we expect to fully recover this accrued interest upon payoff of our loan.
FFO for the fourth quarter of 2015 was $38.7 million and on a normalized basis was $41.9 million or $0.64 per diluted common share, normalized to exclude a few items. First, the $2.6 million interest income catch-up from the Forest Park Fort Worth loan discussed earlier. Second, $5.3 million of the provision for doubtful accounts and loan losses recorded during the quarter, consisting of a provision for loan losses of $4.3 million and a $1 million provision for doubtful accounts in excess of revenues recorded in the current period.
And then, third, non-recurring or unusual acquisition pursuit costs of $0.5 million associated with an acquisition closed in the quarter. This normalized FFO compares to normalized FFO for the fourth quarter of 2014 of $32 million or $0.57 per diluted common share, normalized to exclude $1.7 million of non-recurring facility operating expenses associated with transitioning two assets to new operators. This is an increase of 12.3% on a per-share basis.
AFFO which excludes from FFO acquisition pursuit costs and certain non-cash revenues and expenses, was $38.2 million and on a normalized basis was $36.2 million or $0.55 per diluted common share, compared to $30.5 million or $0.54 per diluted common share for the fourth quarter of 2014. 2015 AFFO normalized to exclude the same $2.6 million interest income catch-up that was excluded from normalized FFO and a $0.6 million provision related to cash interest and rental income receivables in excess of revenues recorded in the current period. 2014 AFFO normalized to exclude the same $1.7 million of non-recurring facility operating expenses associated with transitioning two assets to new operators, excluded from normalized FFO in 2014.
Net income attributable to common stock holders was $22.5 million or $0.34 per diluted common share for the quarter, compared to $19.7 million or $0.35 per diluted common share for the fourth quarter of 2014.
During the quarter we acquired a senior housing asset and leased it to a wholly-owned subsidiary under a RIDEA-compliant structure. This asset is in Canada and is our second RIDEA-structured investment. In this structure, we own 100% of the property and the tenant entity and utilize a third-party manager to manage the asset. Effective this quarter we began presenting the revenues and operating expenses for our two RIDEA investments separately on the face of the income statement. For the fourth quarter of 2015 and 2014, these assets had revenues from resident fees and services of $1.6 million and $0.7 million, respectively and operating expenses of $1.1 million and $0.5 million respectively.
G&A costs for the fourth quarter of 2015 totaled $4.6 million and included stock-based compensation expense of $0.7 million, $1 million of acquisition pursuit costs. Excluding these costs, our recurring G&A costs were 4.2% of total revenues for the quarter, down from 4.5% in the fourth quarter of 2014.
Interest expense for the quarter totaled $16.1 million compared to $14.3 million in the fourth quarter of 2014 and included the amortization of deferred financing costs of $1.3 million in 2015 and $1.2 million in 2014. Based on debt outstanding as of December 31, 2014, our weighted-average interest rate, excluding our borrowings under the unsecured revolving credit facility, was 4.68%. Borrowings under the revolver bear interest at 3.03% which is up from 2.27% at December 31, 2014.
During the quarter we recorded a $6.2 million provision for doubtful accounts and loan losses compared to $0.6 million in the fourth quarter of 2014. Included in this current quarter provision are amounts related to loan investments, interest income receivables and both cash and straight-line rental income receivables. Certain amounts are excluded from normalized FFO and normalized AFFO based on the nature of the provision, as previously described.
In connection with certain acquisitions having earn-out and claw-back provisions that were completed in prior periods, we also recognized $1.9 million and $0.7 million in other income in the fourth quarters of 2015 and 2014, respectively, as a result of adjusting the fair value of our contingent consideration assets and liabilities related to these transactions. In addition, we recorded a $2 million gain on sale of one skilled nursing asset during the fourth quarter of 2015.
Switching now to the statements of cash flow and the balance sheet as of the end of 2015. Our cash flows from operations for the year ended December 31, 2015, totaled $121.1 million, compared to $106.2 million in 2014 which excluded the $20.9 million one-time payment related to the early extinguishment of debt. This is an increase of 14% year over year.
Investment activity for the fourth quarter of 2015 totaled $104.5 million and included one senior housing facility and one skilled nursing facility, bringing our total investment amount for the year to $550.9 million. The 2015 investments have a combined first-year cash yield of 7.7%. This activity was financed with our revolver, cash on hand, the proceeds from the sale of the skilled nursing asset and the assumption of a $10.8 million HUD loan having an interest rate of 5.6%.
As of December 31, 2015, we have total liquidity of $202.4 million consisting of currently available funds under our revolving credit agreement of $195 million, cash and cash equivalents of $7.4 million. On January 14, 2016, we amended our credit facility to increase our unsecured revolver to $500 million, our U.S. term loan to $245 million and our Canadian dollar term loan to CAD135 million. This amendment improved the pricing across the grid by 20 basis points and 25 basis points for our revolver and term loans, respectively. In addition, it improves our liquidity to $313.4 million on a pro forma basis as of the end of 2015. We also have $76.5 million under our ATM equity program as of December 31, 2015 and have suspended our ATM program for the near term, given the current trading levels of our stock. We will reactivate the program at the time we believe acquisition activity and our stock price warrants consideration of raising equity.
We were in compliance with all of our debt covenants under our senior notes indentures and our credit agreement as of December 31, 2015 and continue to have strong credit metrics as follows, Net debt to adjusted EBITDA, 5.85 times; interest coverage, 4.19 times; fixed charge coverage, 3.21 times; total debt to asset value, 47%; secured debt to asset value, 6%; and unencumbered asset value to unsecured debt, 220%.
On February 3, 2016, our Board of Directors declared a quarterly cash dividend of $0.41 per share of common stock and $0.44 per share of series A preferred stock. Both dividends will be paid on February 29, 2016 to stockholders of record as of the close of business on February 16, 2016. The common dividend represents 71% of our Q4 2015 AFFO per share which is below our target of 80%.
Before I wrap up my comments, I'd like to provide some additional details on the Forest Park investments, including their impact on our performance for the fourth quarter of 2015 and add a little bit to the impact of our expected resolution in 2016 and our liquidity and leverage that Rick talked a little bit about. In the fourth quarter of 2015, our normalized AFFO per share included $0.06 from all of our Forest Park investments. With the pending sale of the Frisco Hospital in Q1 2016 and our expectations of a resolution in Dallas and Fort Worth in the second quarter of 2016 which will likely take the form of a payoff of our loans, we expect to utilize the proceeds to repay outstanding borrowings under our revolver and then utilize any excess cash for future investment activity.
Redeploying this capital in this way is expected to offset approximately $0.04 of the $0.06 of normalized AFFO generated by these investments in the fourth quarter that will not continue into the future. This would result in a Q4 2015 pro forma run rate for normalized AFFO of $0.53 per share.
In addition, the exit from these investments, as described above, result in a pro forma liquidity in excess of $500 million and pro forma leverage of between 5 times and 5.25 times, setting us up to be able to continue investments in 2016 while maintaining our leverage below the high end of our long term target of 4.5 to 5.5 times. This is all without accessing the equity markets in the near term.
Finally, excluding the impact of Forest Park on the 2015 results and the expected 2016 results, we expect to have low double-digit normalized AFFO growth year over year, largely due to realizing a full year of AFFO from the $550.9 million of investments we completed during 2015. And the last comment I'd make is, as of this morning, we did get court approval of the Frisco sale from the bankruptcy court. So that is moving along as expected.
With that, I'll turn it back to Rick.
Thanks, Harold. One other comment before I turn it over to Q&A. As it relates to the dividend, I want to make sure everybody realizes that the fact that the yield is so high will have no impact on our decision making relative to April dividends. So everyone should expect us to raise the dividend as we normally would.
With that, I'll turn it over to Q&A now.
[Operator Instructions]. We will first go to Smedes Rose from Citi.
I just wanted to ask you a bigger-picture question on Genesis. It sounds like you feel pretty confident in their ability to operate in this environment. But if Genesis were to somehow undergo some kind of restructuring -- and clearly the market is saying there's not that much equity value in Genesis -- how are you guys protected on your rents? What would that involve?
First and foremost, as you know, all of our leases function as one master lease. So under some sort of restructuring, Genesis does not have the ability to cherry pick one asset or another asset and decide not to pay rent on one lease. You have to pay on all the leases since they function as one master lease.
And then on top of that, we have the corporate guarantee from Genesis which, as we put into our supplemental, discuss it being 1.29 times, basically brings into the picture all of their ancillary businesses to support our rents. While, obviously, the rent structure from each individual asset is important, the most important metric, the fact that we have the entire business and the guarantee that forces them to pay the full rent.
I think you're asking us to speculate on something around what might happen or could possibly happen in the future around restructuring. I think my only comment would be we're in good shape relative to the way we've structure these leases, that we feel very comfortable that we don't have any issues there.
There are a couple other things, Smedes that I'd say. One, this isn't -- nothing new is happening here. This environment has been moving in this direction for quite some time now. The conversation isn't there. Genesis has been discussing this for a long time, actually, before they went public per the skilled acquisition.
I think one of the things that benefits Genesis additionally is if you think about the fact that they basically acquired over 300 facilities over the last few years and have been very focused on integrating everything, that's a huge task. And the fact that they've performed the way they performed, despite the diversions that you typically see with huge integrations and I'm sure you all can think of other companies that have really had their earnings impacted for longer periods of time.
Now they go into 2016 really being able to focus on efficiencies and additional savings by having this expanded platform. So I think that provides additional comfort as well. The other thing I would say if you want to be as draconian as you can possibly believe that seems to be the mood of the day, I'd point out that when I was handling the Sun bankruptcy and that was way worse than anything you could achieve with Genesis because there were huge regulatory issues and facilities were bleeding red all over and there were licenses in jeopardy. I moved 125 facilities and new operators in 12 months and all the REIT were kept whole. There are plenty of operators out there, those kinds of moves are necessary.
So in regard to Harold's comments, if they wanted to work with us cooperatively on moving assets, we could do that as well. I've been in very worse situations and more than once. More than the first time I did that. Just don't have those concerns and we should see how good these guys are navigating through this and how well they've handled things.
And then my other question I wanted to ask you, you talked about some selective reinvesting of proceeds from, as you move out of the Forest Park. Are you seeing any changes in pricing or the quality of product coming to market or the amount of product coming to market as the overall acquisition activity has slowed across the board through the second half of 2015 and early into 2016?
I would say not at this point on a couple of things. One, pricing changes always lag when there are changes in the market so we haven't seen pricing changes yet. We're bidding things but we're bidding where we think prices should be, not where they've been.
And we're doing that really for two reasons. One, obviously to keep our name out there. And secondly, we want to influence pricing because the broker community is actually looking to us and to our peers to help them reestablish seller expectations. So providing that feedback to them is fine.
In terms of the quality of product, we haven't seen much. We've seen a couple nice things but it's also early in the year and usually the first quarter gets off to a slow start anyway. For us, we're -- and I know we have grown quickly over the first five years, but we're content to be patient here. We'll have, as I said, plenty of proceeds to put to use and maintain our balance sheet at a lower leverage than it currently is. We don't have to worry about the equity market, so we'll just kind of wait it out.
At some point sellers have to sell. If pricing goes back to where it was in early 2014 and 2013, that was still pretty good. It wasn't the sellers' market that you saw last year but it was still pretty good. Our guess is that it will be like this, really, for the first half of this year.
We'll now go to Juan Sanabria from Bank of America.
Just hoping you could talk a little bit about the development funding you referenced. What's left to spend over how long? If you could just start there.
Like all of our development projects, the amount of capital we invest is pretty small per project. It averages about $3 million because we just do preferred equity strips. So it has no material impact on how we deploy capital.
That's one of the reasons that we like this structure because we're not doing the construction financing on any of these. These are partners that we've actually known for awhile. The projects will get developed over the next few years and they will start ramping up and then we'll determine whether we want to exercise our purchase options or not.
Are you committed to any of that, I think you said it was $150 million? Or is that all at your option?
About half of it is at our -- actually it's all at our option. Some are in the form of forward purchase agreements but we could always choose to sell those to others. And the others were all our typical purchase option.
And I think you mentioned some other non-core asset sales that you guys were contemplating other than Forest Park. Could you give us a little bit more color on that and Quantum? Timing, etcetera?
Sure. One of the things we're doing, the focus is really on the skilled nursing portfolio. As I mentioned with our last couple of acquisitions, they've been pretty high-end operators. If you look at the NMS acquisition we did which is Maryland-based, they basically have an IRF model and an LTAC model under a SNF license. So they're doing all the short-stay rehab, they're doing FEDs and other high-acuity things.
Those are the kind of things that we're focused on. At the same time we're looking at facilities within the non-Genesis skill portfolio that we just don't think it can get there which is thinking it could be marginal. So we moved the facility in Florida, we had a $2 million gain on that. We have two facilities in Oklahoma that will be sold at some point this year, as well. And then the five Genesis facilities which is now more closer to the year-end than it is to the midway point.
And as I mentioned, the memory care facilities, those are just brand new facilities. So rather than wait for those to ramp up, we're going to retain the two assets that we own and the three that are new. We're just going to sell those so we can get some immediate proceeds to put to use. Just in case the market, from a pricing perspective, does get better for us, we still want to be able to get some things done and not have to cap equity.
What's the total proceeds potentially? And if you could spell it out to Genesis?
Excluding Genesis and the two Oklahomas, it's $275 million. Genesis would be an additional $20 million and the other two less than $10 million. So call it $300 million-ish. But remember, we wouldn't put the whole $300 million to use because we want to keep our leverage lower than it is now. Even if it's $300 million, we're not going to spend more than, call it, $225 million, $230 million-ish.
One way to think about it is we'll take those proceeds and the first thing we'll do is we'll pay off our revolver. When we pay off the revolver that immediately gives us over $500 million of liquidity. That saves us on the interest, obviously. And then we'll deploy that capital as we see deals that we like. And as Rick said, we can go up as high as that $230 million without raising equity and still have our leverage at 5.5 times or below.
And just one last one for me on Forest Park, could you walk us through again on the fourth quarter numbers. I think you said the pro forma off of that was $0.53. What adjustments, exactly, do we have to make to get that number? And is that $0.53 assuming you reinvest the proceeds or is that just ex Forest Park?
That assumes you reinvest the proceeds and save on interest plus a small amount of excess proceeds. Again, it's only Forest Park, a small amount of excess proceeds and our typical cap rates. So it is $0.53, it's two pennies below the $0.55 and it's pulling out all of the risk that we recorded for Frisco during the quarter which is about $2.7 million and it's pulling out all of the interest we recorded for Fort Worth. We're talking normalized basis is about $2.3 million.
And as you know, we booked no interest or income around Dallas. So as you pull those out and replace it with interest savings and a little bit of investment in assets and it's a two-penny impact on a pro forma basis compared to our actuals for the fourth quarter.
We'll now go to Dan Altscher from FBR.
Harold, I think at the end of your script you gave a little bit of color on guidance even though we're going to have to wait a couple weeks to get the official numbers. I just wanted to make sure I heard it correct, that low double-digit AFFO growth for year over year? And is that on a clean number as if Forest Park didn't exist? Or is that on a year-end 2015 number, with everything in there?
Take Wizard of Oz. So you woke up from a dream and Forest Park never existed.
And so the point of that is obviously this. It takes out a 2015 and 2016, to the point there you really can't extrapolate a guidance growth from that because basically what we're saying is the portfolio is very healthy and growing when you pull out Forest Park. So it's going to be low double-digit growth.
The Forest Park impact, we made some discussions in the third quarter around Forest Park and the impact that we thought it would be. It was a little bit different because in the fourth quarter we booked interest income that we didn't expect to book in the third quarter.
Some of the numbers that we talked about in the third quarter, I think we talked about a range of down 17 to up 15 on a go forward basis. We're probably going to be down overall with Forest Park included, but that's Forest Park specific. When you pull that out, we'll have low double-digit growth for the rest of the portfolio.
I'd also point out when you consider the rents received on Forest Park before all of this happened, in addition to the proceeds, in terms of looking at the total investments made here, we're going to come pretty close to coming at whole on all these investments and maybe slightly ahead.
So that a good leadway into the next question in terms of coming out whole. One of the things that's been referenced before when you referenced in the Frisco release was the $21 million of personal guarantees that are out there. Can you give us an update as to what has to happen from here to potentially recoup any of those?
Sure, it's going to be a decision we will make after we get the asset transaction closed. We have legally the right to go after that $21.3 million of guarantees. There's no question about that. The question will become what type of a discount, what might we give or how are we going to approach doing it in a way that makes the most sense for us. There's a lot of options around trying to get the money quickly and get it resolved quickly or it could take a long time. So we have to analyze that and come up with a game plan.
I think a couple of things. One the [Technical Difficulty] aware that something's going to happen here so it's not news to them. We don't want to do anything, obviously, to disrupt things now that the hospital's got some momentum. We want to get the deal closed. Even though $21.3 million sounds like a lot on an individual basis across there's so many dots involved here, it's not that terrible a number for each of them individually.
But in all likelihood, as Harold noted, we will be willing to provide some discount to try to expedite things. But the primary focus right now is to get this closed. We don't have a window that's closing on us to go to after those guarantees, so we'll get the deal closed and then we'll address it.
Okay. Maybe just one more since you talked about the potential sale for some Genesis properties. Given what's going on in the equity, do you think there is actually liquidity for those properties right now? Or are they too much in the penalty box, that no one wants to touch or just wait and see?
We'll find operators. These are going to be sold to small local operators. They're not affected by the market. They've got two or three facilities and they're going to buy a third or fourth facility. We have interested buyers already.
Similar with the Oklahoma facilities and those are two facilities that we don't want to retain. But for guys in those local markets who could be more hands-on, they're happy to take those. We've got several offers for those facilities now and all those offers are the high-ball from our perspective.
The kindness industry is so mom and pop, you can't think about it just in terms of how bad this market is now. Because these smaller local guys that just want to have an extra building or two in their portfolio, that's not how they think about things.
I would add a little clarifying comment as well, to make sure it's understood that the $20 million that's alluded to is not some estimate of proceeds from the sale. That is part of the agreement we have with Genesis to adjust their rents around these properties. So that number is a real number, it's not an estimate. S we're not counting on the market to be good to achieve that $20 million proceeds.
We'll now move to Chad Vanacore from Stifel.
Good afternoon, all. So, bearing in mind the subliminal message of your hold music, what makes you a Company that remaining Forest Park assets will be settling by second quarter? Well there's a couple things.
First let me make a comment about the hold [ph] music. So we actually contacted Warner Brothers legal department to find out how much it would cost to license it and they've never had anybody contact them and ask them to use any of their songs for an earnings call. So they gave it to us for free.
Well thought out.
A lot of us have been through these cycles before. Everything is awesome, come on guys. So specific to the two assets in Forest Park, as I mentioned on my comments early on, we now obviously have court approval for the sale of Frisco. It's really just a matter of HCA going through their internal process of getting licenses transferred and all of the regulatory requirements they have. So that is still very much on target for end of March, if not sooner, closing.
The Dallas hospital, as we know, the value of our collateral and the loan amount are pretty close. So what that means in the bankruptcy setting is that the judge isn't going to give them a whole lot of leeway to get a deal done round selling the asset, I'm talking about our borrower. They have basically 120 days to get it done.
We're going to be filing, by the end of this month, a motion to have the stay on the foreclosure sale lifted. Because obviously, as Rick alluded to, we're not sure they're going to be able to get a deal done. We want to force that issue sooner than later. So if we can get that stay lifted, it'll probably be heard by sometime in March.
And if that happens, then we'll be able to put the asset up for sale on a foreclosure sale either in May or June, meaning we'll get the asset back in May or June. And in the meantime we will start a process to look for buyers. And again, keeping in mind that we just need to get our investment out of that asset, we're not looking to hit a home run here and sell it for what it might be worth which the current borrower's trying to do, understandably. So if we get the asset back, we feel pretty confident that by the end of the second quarter, we should have a good handle on that sales process and hopefully get something closed around that time.
In Fort Worth it's a little bit different. Because of the excess collateral that we have the judge will give them quite a bit of leeway. That 120-day timeframe they have actually runs out at the end of March. So they are going to have at least until the end of March. The judge could give them an extension on that.
But more importantly, we've attended some meetings with our borrower and the tenant and they've gotten very focused on trying to get a deal done based on some offers that have come in. I feel pretty confident that they are starting to make some progress on that front. That's why we feel pretty good about the fact that it will get taken care of in the second quarter.
Having said that, as you know, our collateral is extremely over collateralized and therefore if it takes the amount of time it takes and just continues to accrue interest at 15% per annum. So we can be a little patient on that one and obviously, it's to our benefit. But we obviously are hoping that they will get that done sooner than later. Based on that conversation in that meeting, it seems like sometime in second quarter is very probable.
The other thing I want to point out is, we always assumed that we would foreclose on the Dallas hospital. And that's why we wanted to see the hospital close because once it's foreclosed and we get it back and we flip it to sell, we don't want to have to be in a position to fund any ongoing operations.
That was different -- our point of view was different on that than it was on Fort Worth which was ramping up nicely and Forest Park which was recovering. We saw potential buyers with both those facilities. Because of their better operational position, it would be easier to get a sale done on the other two by leaving those open.
Thinking about your pipeline commentary, you said your whole pipeline is almost all composed of senior housing. Does that mean you're full up on skilled nursing for now? Or are there just better opportunities in senior housing?
Well I think because of the NMS deal that we did last year, that was a large skilled deal for us. And so that popped our skilled exposure back into the high 50s so we would like to get that number back down. And NMS has acquired a fifth facility which they are in the middle of converting into their new model.
And so thinking that might be an opportunity for us later in the year, that would probably be enough on the skilled side for us anyway if we were to do another building with those guys. So it's really a function of wanting to get that skilled exposure back down a little bit to where it was and get the senior housing exposure up because taking the hospitals out obviously also pushed up our skilled nursing exposure.
And then within that pipeline should we expect anymore RIDEA deals?
The last we did in Canada was really a one-off. It's never been part of our strategy. That's something that we've never been really enamored with. Every once in awhile, in our case it's happened twice in five years on small deals, where it's worked out for both of us.
The facility in that market, it's in a great market. It's a new facility and completely full. It's a very, very wealthy area. So we just felt comfortable doing that with that one and those are the same partners we did the other deal with.
You shouldn't expect much of anything from us on RIDEA going forward. Also going back to the other comment I made, in terms of getting our skilled exposure down, I want to emphasize it's got nothing to do with our view of the asset class, as it never has. It's just a function of being more diversified and getting more private pay.
Our next question comes from Rich Anderson from Mizuho Securities.
So Rick, if you could -- and this might be stating the obvious but is the option of continuing to own the other two assets completely off the table now? Can you say that with certainty? Because I know that there was always optionality that you wanted to keep that you might, if the right operator came in you would continue to own. But is that now, just for the record, off the table completely?
Yes, it's off the table.
Okay. And then you mentioned Genesis and you talked about the skilled mix being in the 21% range or whatever it was. But then in another part of the dialogue, you alluded to a stronger and higher skilled mix. I'm curious which do you prefer?
Well, the 21.4% refers to their occupancy. If you convert that to revenue it's 38%, 39%. So it's the same thing. I was talking in terms of skilled at one point and revenues in another point.
Okay. Are you in the camp of seeing skilled mix come down, is that your--
No, it needs to go up. That's where the whole model is going. Part of the issue right now is you've got facilities that were long term care that are basically transforming to becoming more like step-down units for acute hospitals, taking care of FED patients, things like that.
If you look at the admission patterns of these facilities, over 80% of their admissions are skilled mix. They are hardly taking any Medicaid but those Medicaid patients are longer term so it's going to take some time for them to attrition out. Over time, you are going to see Medicaid patients which are -- Medicaid under-reimburses -- and you're going to see Medicaid patients being replaced by patients that have Medicare fee-for-service and Medicare Advantage.
And I would say that when you operate a skilled nursing facility, 90% of your costs are fixed. Going from a Medicaid patient to a Medicare Advantage patient, even though you've got those length-of-stay pressures, your revenue is so much higher and the costs associated with taking care of those patients is so incremental, you still have improvement on the margin. So I'll take that pressure if I can replace Medicaid patients with Medicare Advantage patients. And for what it's worth, that started when I was still operating and that was always our focus.
Now when you look at rural facilities, rural facilities that have a lot of Medicaid provides a lot of stability. There aren't very many options in those communities. And a lot of rural facilities will retain its long term care model for a longer period of time.
When you're talking about the urban markets and the ex-urban markets, they are very dynamic and you have to see those changes. And now a pretty high percentage, not high percentage but probably about one-third of our SNF portfolio was in rural markets. So we have some pretty nice balance there. I think that's why you see across our portfolio Medicare Advantage still light at about 5.5%. I think that balance is important because people have to transition through this.
But that's really -- when you look at the operations of the skilled facility, if they are going to be involved in this new world and be priority partnerships with the health care systems for the ACOs, where they still exist, be able to take care of bundled payments, you've got to move away from that long term Medicaid population. It's all about Medicare fee-for-service and eventually Medicare Advantage. But as I said, at this point, one of the reasons you see such slow growth on MA, is because they aren't marketing to people over 75 because their profitability is to those under 75. They don't have profitability for those over 75 and it's harder to push a shorter length of stay on an 85 year-old patient than it is on a 75 year-old patient.
Okay. With regard to -- because it leads to my other question -- rural asset, would you say that's out of the conversation with all of the bundling that is being proposed? Is that going to stay status quo in your mind? The more rural the asset is?
I just think it's going to take a lot longer to get there. Again, I know this makes it more difficult, but it's very market-specific. Because you have rural markets where there's a strong regional hospital system and they have their act together.
But then you've got rural markets where you've got a lot of these claw community-based non-profit hospitals that have a hard time getting with it. And maybe there's only two nursing homes in town and one senior housing facility. So those facilities are going to get whatever is there, it's just going to take a lot longer.
I think there are very few markets where the traditional nursing home long term care model will be around forever. I think it will take a lot longer in those markets which should help with the transition, particularly with these larger portfolio because most of the larger portfolios have that kind of balance in them.
Okay and last question. I know you have sounds like virtually no concern with Genesis. If you were to compare your level of concern between Genesis and Holiday which one is more on your radar screen.
Actually it's so apples and oranges. They both have good things, both doing the right things. It's such a different business. Holiday is all independent living, it's pretty much steady state. We've got some upside in our particular portfolio because one-third of the portfolio we're not Holiday. It's always been acquired facilities but they are still investing capital in those to ramp those up. But yes, it's just--
It's a wash?
We feel comfortable. And I think the other thing when you think about Genesis that I think has been helpful is, they've had a really willing working partner with Formation Capital. So they are navigating through these changing times, not just by doing a really good job in how they manage, but they are growing well, doing good acquisitions, balancing their portfolio and being able to get synergies. So I think it's really helped for George Hager and the team to have the partners they have in Formation that's willing to be flexible and nimble to help them grow as part of their strategy to deal with a changing environment.
We'll go to Joshua Raskin from Barclays Capital.
Just want to make sure I understand the $0.53, the pro forma as if Forest Park doesn't exist. You grow that, let's call it, low double-digits, so let's call that $0.59. Is that what a fourth quarter number is going to look like in guidance we're just waiting on because of the timing of the Forest Park dispositions? Is that really the only unknown at this point?
The timing of the dispositions, obviously the ultimate amount of proceeds we get is also another factor that's an open item. Keep in mind we will continue to book interest income on Fort Worth until we sell that asset. So yes, the big part of the unknown is the timing around those transactions occurring.
Okay, but the interest is a good guy if that keeps going on?
Okay. And then we haven't talked about it, but senior housing, I'm curious, any new supply coming in in your markets? I'd be curious to get your perspectives. Any areas of interest to highlight there?
No, in the market that we're in, as you see by our stats we don't expect to see much change in the next quarter, things are pretty stable. We may have one market with a new entry that's causing a problem for one facility but that's about it. No unusual wage pressures, pretty steady state with the facilities that we have.
And then lastly, as we get through the hospital experience here, I'm curious to get your longer term thoughts, Rick, on the hospital space. There seems to be a little bit of a dichotomy of thought in the industry now and how you juxtapose cap rates versus long term thoughts in the hospital space.
Yes, so I think a few pieces I'd break it down. One, on the a global basis, I think the hospitals are winners in HCA. Having said that, I think while I think surgery centers are going to do really well and one of the things we had liked about Forest Park was we saw the more upscale surgery centers with in-patient rooms. Maybe they were just a little bit too far ahead from a model perspective and obviously the management team didn't know how to execute appropriately.
But I think the hospital is generally going to be in a good place. I think there's a tranche of hospitals out there, those smaller community-based hospitals that are part of the larger systems that are really going to struggle through this transition that just don't have the wherewithal from a capital perspective to make the investments and changes that need to be made. By definition, a lot of the non-profits and most of the sector are very slow from a decision-making perspective anyway.
But I think the larger systems, the Methodists and the Presbyterians of the world, as well as the for-profit hospital chains should do well. The Mayos of the world, the teaching hospitals, I think they are in a good position as well.
I think with everything as we go through all of this, there are always going to be some losers. But as an asset class, as with skilled nursing, I think the asset class generally wins. As you know, I don't view LTACs the same way and I think IRFs struggle as well. And certainly we'll have much lower margins in a bundled system that have cultured the sick margins they have today.
Okay. I don't want to put words in your mouth but I assume -- we didn't hear anything about hospitals in terms of pipeline or anything like that, but it sounds like don't rule that out long term in terms of something you guys would potentially look at down the road?
We had no intention on doing hospitals right now. I think that we have to be sensitive to the fact that if HCA or Tenet came to us with a deal, maybe some time ago we would have loved to have done that.
But I think we have to have a heightened level of sensitivity to where the market is at, given the problem that we had. I think there are enough other opportunities there that we don't need to go down that path. So no one should expect to see us do hospital acquisitions.
Three years from now, if we have a change of heart, the industry has moved forward to a certain extent and maybe more visibility with certain kinds of assets. If we think differently then we will give everybody a heads up, but don't expect it.
The other thing I would add to that is if Tenet wanted to do something with our hospital in Dallas or Texas Regional Medical Center, some investment there, we would consider that. And that's something that's a possibility down the road.
Because that hospital we've had for a while, Tenet is doing a great job. It's in a joint venture with Baylor and the coverage keeps improving. So anything they want to do to continue to invest in that hospital, we'd be open to. But that's just the one asset.
We'll now go to Michael Carroll from RBC Capital Markets.
With regard to the Dallas hospital, are there any other creditors that would have claim on any expected sale proceeds that you could get from that?
No, we're the only significant creditor on that investment.
Okay. And then, Harold, can you remind us how you quote your skilled nursing facility coverage ratios? Do those include Genesis at the facility level? Or is those including Genesis at the corporate level?
The coverages that we disclose for skilled nursing excludes Genesis altogether and then Genesis as disclosed down below as a fixed charge coverage which again takes into account the guarantee, the corporate guarantee. So that's all EBITDA or EBITDAR, over all rents, interest payments, principal payments on their debt. So it is a corporate-level disclosure.
Okay. And have you disclosed what the facility-level coverage ratios were for the Genesis portfolio?
No, we did some time ago, a couple years ago. We were reporting both that actually seemed to cause some confusion based on the feedback we got. What's important to us is just the fixed charge coverage anyway, that's what our guarantee is. So we decided for the past couple years just to provide that coverage and that's what we're going to continue to do.
Okay. And lastly, I know that independent living has less construction activity going on right now. Have you guys done an analysis to see how your Holiday portfolio could potentially be impacted by simplify or are they pretty well insulated from that?
Yes, I think they're pretty well insulated from it. There is only one market that we're in with Holiday that has a new facility being built. I think one of the reasons that they are -- I think they're insulated from a series is one. For whatever reason, there doesn't seem to be as much of an interest in independent living development.
But the other thing is their whole focus was always on middle markets. I would tend to think that any development or the majority of development that may occur at some point in independent living, will be in higher-income areas. And larger NSAs than Holiday tends to be in.
We'll now go to Tayo Okusanya from Jefferies.
Along the lines of skilled nursing again, when we do take a look at your coverage for your other skilled operators and as well as for Genesis again, you guys have this positive trend going on that I think is very different from what we've heard from many of your peers and what we hear generally in the industry about what's going on with skilled nursing. Can you help us understand a little bit better what your operators may be doing differently versus everybody else?
Yes, sure, quite a few things. It's actually improving on a same-store basis, although not as much as it's improving with our full portfolio. Really it's a reflection of what I mentioned earlier. It's the kind of operators that we're buying. The NMS deal that we did last year, as I said these guys, they have SNF facilities but they are taking everybody that would normally go to an IRF and an LTAC. They have a much higher level of reimbursement.
The deal we did the prior year, the Vision Group in Oklahoma, they do no Medicaid, they do all short-stay post-surgical rehab in those facilities. We've got our operator in Pennsylvania, they do vents, almost all vents, they look just like an LTAC under a SNF license. Pennsylvania had specialized Medicaid rates for vents and they do some other tragic diseases as well. And they actually take care of the full spectrum of age ranges too, from kids to adults.
Cadia which was our first big acquisition back in 2011, they had the largest vent unit in Delaware. Really, from the beginning we've focused on operators that get it. Relatively early on we're making the kind of investments and changes strategically from a clinical product perspective to embrace what's going on. That's half of our non-Genesis skilled portfolio now.
And then on the acquisition outlook again, realizing more of the focus in senior housing. How do you reconcile doing more senior housing deals versus where cap rates are for senior housing, where your stock currently is? How do you think about those two things? You stated very clearly in your press release that you're very mindful of your leverage and your stock price as you're trying to do this but I'm hoping you can give this a little bit more color.
Well, one, we expect that cap rates are going to expand. If they don't, we're not going to do deals at last year's prices. We just won't do them.
I think we're going to be more patient than some people might expect us to be just because we've grown so quickly over the first five years. We're going to have nice growth this year off of the full-year effect of our $550 million in investments from last year, plus the organic growth we have from our lease escalators.
So at some point pricing is going to get better. It's just a matter of when and we don't know how long this cycle is going to last on the equity side, obviously, as well. We're in a little bit of a different position, Tayo, because of the Forest Park overhang. Then the hit we took following the Genesis announcement, we've had this double overhang that we've been alleviating some since the Forest Park investment.
But I think, at least on a relative basis, we can see improvement in our stock performance relative to how it's performing compared to the rest of the group. As you know, on a multiple basis we're trading at a huge discount right now. So we think two things for us. One, over time there will probably be some market improvement; we've all been through these cycles. But we should see improvement am as it relates to us with these overhangs going away.
But again, we're going to be patient here. We don't have -- in our internal projections -- we don't have us doing anything until the second half of the year on investments.
We'll now move to Jonathan Hughes from Raymond James.
Most of mine have been answered but I had one. Looking at the Holiday portfolio coverage ratio, it's trended down steadily over the past year. You mentioned earlier that new supply isn't impacting that portfolio, but could you give us any color on why the coverage has continued to trend down?
Yes, well it's going to trend back up again, so we'll report next it's going up to 1.18. But the guarantee there is related to a parent subsidiary. They move assets in and out, they can move unencumbered assets in and out. So it's more of a function of -- so the assets that are in it, in that subsidiary today that comprise the guarantee, are not necessarily the same assets that were in it three quarters ago.
It's not a same-store kind of thing you're looking at. I know that doesn't make it easy to digest. The point is that as it's drifted downward and now it's going to go upward, it's not a function of same-store performance. It's more a function of how they're choosing to use that particular subsidiary relative to their lenders.
Okay, so that's a corporate-level coverage ratio like Genesis, not facility?
It's corporate level but it's corporate level on a specific subsidiary, where the Genesis corporate level is the entire Company.
Okay and then one last one. Looking at dispositions, I know you guys just went north of the border into Canada last year but would you consider putting those up for sale to maybe remove another potential layer of risk from the portfolio?
I guess I'm not sure why?
Just in terms of currency exposure and simplifying the portfolio going back to all domestic.
Well, as far as the currency exposure, we're actually hedged on our currency exposure. So that's not an issue for us. From just the purely financial side of things, I think we're in pretty good shape there.
And from a portfolio perspective, I think we view Canada specific as we talk about senior housing which is the only type of investing we'll do up in Canada, we won't invest in skilled nursing up there. It's just not that different from the senior housing assets we see here south of the border. So we don't view it as a significantly different exposure from that perspective.
You don't see the kind offer development up there that you see down here. The markets are pretty stable. Almost all of the facilities are entirely independent living as well. So again, it's not something that we have a concern about right now.
And no reason to expect to be concerned.
It appears there are no further questions. I'll turn the conference back over to you, Rick, for any additional or closing remarks.
Well thanks, everybody, for their time. I appreciate it. As always, Harold and I are available for follow-up calls with all of you. Tomorrow we're heading out to the world conference and I will see a bunch of you folks out there. I look forward to that and the Citi conference following that. And in the meantime, everything is awesome. See you.
This concludes today's presentation. Thank you for participation.
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