Talya Nevo-Hacohen - Chief Investment Officer Rick Matros - Chairman and Chief Executive Officer Harold Andrews - Chief Financial Officer.

Chad Vanacore - Stifel Rich Anderson - Mizuho Securities Smedes Rose - Citi Eric Fleming - SunTrust Todd Stender - Wells Fargo Jonathan Hughes - Raymond James Tayo Okusanya - Jefferies Paul Morgan - Canaccord.

Good day, ladies and gentlemen. Welcome to the Sabra Health Care REIT Second Quarter 2017 Earnings Conference Call. This call is being recorded. And now I would like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead..

Thank you. Good morning.

Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our pending merger with CCP, 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, 2016 and in our Form 10-Q that was filed with the SEC yesterday as well as our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results.

Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and the supplemental information materials included as Exhibits 99.1 and 99.2 respectively to the Form 8-K we furnished to the SEC earlier yesterday.

These materials can also be accessed in the Investor Relations section of our website at 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 good day to everybody. I will start off by discussing some of the salient points of the CCP acquisition and then I will move on into our earnings for the quarter. And after that, I will kick it over to Harold Andrews, our CFO, who will talk about balance sheet and other items related to the quarter, and then we’ll go to Q&A.

So again, I appreciate your time today. So in terms of the CCP acquisition, from our perspective, this creates a much more balanced portfolio that we currently have with one tenant that’s oversized, given our size and even on the CCP side, with the couple of tenants that give them tremendous overexposure as well.

It diverts by that tenant base and decreases concentration from our top 5 tenants, specifically. The deal has delivered significant value creation and cash flow accretion that provides the potential for a near-term dividend increase. It provides $20 million of synergies.

It improves the cost of capital within our anticipated ratings improvement to investment grade, and it increases the scale of the company with the anticipated credit agreement, which we’ll talk about in a little bit more detail as well.

We have a solid track record, both in the skilled space and in the senior housing space, both from a REIT perspective and then for 30 years prior to that on the operating space.

Both our management team and our board have experience in this space, the skilled space, as well as other spaces within the health care sector, both from a REIT perspective and on the operating side of the business as well.

Sabra has increased our skilled nursing EBITDAR coverage over the last few years and coverage is again up this quarter, and we’ll talk about the specifics of that. This is all about the operators. You can’t paint a broad brush across this space. There will be winners and losers. As there are in any business, and there are paradigm shifts in the space.

We have proven when you look at our statistics, that we know how to assess and choose operators that understand and know how to execute. We apply that same level of scrutiny to the CCP operators and assessing those operators, many of whom we actually personally know. Skilled nursing is a core part of the healthcare delivery system.

It’s not going anywhere. And as we have seen with all the quarterly results that have been coming in, including ours, the results have been very solid on the skilled nursing side with real stability from a coverage perspective.

And as we’ve been saying all along, we believe this space has, if not bottomed out, it’s pretty close to it, and the recent rash of earnings substantiates that. And that’s actually in strong contrast to senior housing, where the results have been coming in with a lot more downside.

Unlike skilled nursing, the senior housing space is dealing with supply and demand and absorption issues, and we’ve seen declines across the board in occupancies and everybody that’s reported to date, in some cases, more than expected, although not in our case. The transaction in the amended credit facility offer new opportunities to us.

We have 31 banks that have done diligence on this deal, 18 brand-new banks that have done diligence on this deal that have been committed to this space historically and have committed their balance sheets to Sabra, because they believe in this transaction.

They committed a total of $3.5 billion obviously more than we needed, but it was tremendously oversubscribed. That credit facility is going to put us in a position to be a lot more competitive on senior housing as well as skilled nursing portfolios on a go-forward basis because, as you know, being on REIT, we can never have financing contingencies.

And so that completely repositions us in that regard. In terms of CCP, CCP’s tenants are good operators with quality assets. We have got strong relationships, as I noted with many of the CCP operators. We have been having face-to-face meetings with them.

And following the close of this deal, we will be releasing a plan that – a repositioning that shows how our portfolio could be affected with limited restructuring to the CCP leases. This is a one-time thing that we are going to be doing. We are not going to be making changes every quarter, despite comments to the contrary.

These operators had thinly covered rent for too long. It’s put them in a really tough position. They know what to do. They know how to execute. And so the repositioning that we’re going to be announcing will provide rent relief to some. It may include asset sales. It may include re-tenanting.

We have demonstrated that we have done that in the past and will continue to do that in the future. This is proactive in our part. When you take a look at the way those REITs that have significant exposure trade, there were two predominant factors that differentiate how those REITs trade against each other.

One is rent coverage and the other is leverage. This transaction will allow us to maintain lower leverage than we’ve historically maintained. And with the rent coverage that we will be having with the CCP portfolio and continue to have with the Sabra portfolio, we will have very healthy rent coverage.

On a pro forma basis, we expect the skilled nursing component of the combined portfolio to be at 1.51x EBITDAR. That’s extremely healthy. And as any business has its ups and downs, gives our tenants plenty of room to go through those ups and downs and navigate through them successfully.

Since the announcement, both companies have been working very hard in integration. It’s been a transparent process. We have weekly hands-on calls. It’s coming along very smoothly. We’re continuing to meet, as I noted, with CCP tenants. And again, shortly after the close of the deal, we will be announcing that repositioning plan.

We expect to go into 2018 with the kind of rent coverage I just noted. So again, very healthy rent coverage and we will have that behind us.

The one tenant of CCP that may take longer to resolve and I know that’s been on everybody’s mind, is Signature, but there is cooperative discussions going on there between the primary constituents and the Signature portfolio, that we expect a positive resolution there as well although the timing on that may be slightly different than the timing on the rest of the portfolio where we have total control over the repositioning of that portfolio.

And so we think about the deal and you have got a management team and a board that’s got tremendous experience in the space, both on the operational side and the REIT side, and for me personally, as many of you know, I built my career on bankruptcies and turnaround opportunities and making the kind of assessments that we made in this situation as well.

And unfortunately, it’s been a really great and fun ride with that career. As I mentioned, we have got all these banks. These are blue-chip organizations that have diligenced this deal and are completely supportive of the deal.

And you contrast that, frankly, with a couple of intimate shareholders who do not have the requisite experience to address the fundamentals of this space. And with all due respect to ISS nor do they have the requisite experience to address the fundamentals of this space either.

So with that, I’ll go into the results of the quarter, and I’ll start off by talking about our acquisition pipeline. Our acquisition pipeline stands at about $1 billion, about 50% skilled nursing and 50% senior housing. We’re still noting price dislocation from the public equity fund’s involvement in the senior housing space.

And as I talked about for numerous quarter on these calls, that’s been a challenge for us because the pricing for senior housing have gotten so expensive. It’s been very, very difficult to complete on deals. And as we’ve noted for several quarters now, we’ve continued to see very interesting opportunities on the skilled nursing side.

And we have the mandate to grow this company. And we have a couple of long-stated goals that we’re focused on achieving and that is to get to investment grade. And the way to do that for us is to grow the company and to decrease our exposure on Genesis. We know that. We’ve gotten that feedback very specifically from the 3 rating agencies.

And as we’ve stated on our previous calls, we’re not going to sort of be stubborn about it and say we can’t get some senior – more senior housing done than we’d like, we’re just not going to do any skilled nursing because we don’t want to increase that exposure, and therefore, the company doesn’t grow. We’re opportunistic.

And so we’ve said all along that we’ll continue to do skilled nursing deals and we have been, apart and aside from the CCP acquisition. We see continued interest from Asian buyers. We continue to see a strong appetite on the private side to skilled deals as well.

And again, as I’ve noted, there is a huge disconnect between the public markets and private markets when it comes to the skilled nursing asset class because the guys in the private side are operators, they’re finance sources who have been in the business.

They align themselves with the operators who do understand it, and that’s why you don’t see alignment with some of the small mom-and-pop operators because they clearly will be the losers in this space and actually provide some really nice buying opportunities for the guys that understand it.

And on the PE side, even though we are starting to see some vintage pressure, so they are selling before stabilization at this point that has not resulted in any cap rate expansion, hopefully, we will see that in the months to come. Additionally, we have our proprietary development pipeline, which, as you know, is all senior housing.

We have about $100 million-plus coming in that we will be exercising options on into the portfolio over the next several months. And we have about $400 million behind that. So fortunately, because of the strategy that we’ve put in place, we’re not entirely dependent upon the external acquisition market to get senior housing deals done.

We have our own proprietary development pipeline, so we have a guaranteed flow of brand-new purpose-built senior housing assets coming into our portfolio at a much higher cap rate, about 7.5% lease cap rate than you can get close to in the market today, where 25-year-old senior housing assets are going for 6% caps.

That said, this deal puts us in a better position to compete for those assets because we now can look at larger portfolios, and we’re actually being shown larger portfolios. And the approved cost of debt and the fact that we’ll be taking out our 2021 bonds as well and reduce our cost of debt there as well help us to compete.

On the operational side, our skilled transitional care portfolio EBITDAR coverage, again, improved sequentially to 1.56 from 1.54, accentuating our ability to identify and assess good operators as demonstrated by these results. Our occupancy is slightly down from 88.6% to 88.4% but extremely healthy nonetheless.

And our mix remains the strongest in this space, our skilled mix at 43.1%. Our senior housing EBITDAR coverage was slightly down from 1.1 – to 1.16 from 1.18. And I would remind everybody that we have a number of IL facilities within that number and IL facilities are underwritten at 1.1.

Occupancy on the senior housing side dropped 60 basis points to 88.3%, a smaller drop than we’ve seen from others that have reported earnings on a sequential basis. And that drop was not across the portfolio. It’s really just a small number of buildings that are bringing that down. The Genesis fixed charge coverage was essentially flat at 1.18.

With holiday, it’s actually flat at 1.13. From the reimbursement perspective, CMS announced a 1% increase in Medicare rates for the skilled nursing sector.

And it’s kind of interesting when you look across health care generally because in addition to the 1% Medicare rate increase, there is a proposal from CMS on payment system reform, that not only are we in favor of, but the industry’s trade association has partnered with CMS and is in favor of as well.

You contrast that with home health, which is taking a reimbursement cut that they didn’t anticipate, has system payment reform that has them up in arms and you see different things happening across different spaces. LTACs, again, took another cut. There is some system changes on the acute hospital side that haven’t been well received by the hospitals.

We are in the health care space. And as in skilled nursing and it’s the same with home health and senior housing and hospitals and I’ve run almost every kind of service asset class in the health care space, it’s all about the operator.

And we received tremendous support over the years relative to our ability to identify who those good operators are and make the changes that need to be changed when operators don’t do well because that does happen. It’s just part of the business.

And so it’s interesting to me that the skilled nursing space, which has been such a large focus of this transaction, is the one space that actually received an increase as expected and has payment reform system potential changes coming over the next couple of years that the industry is actually in favor of.

So – and you add to that some of the demographic changes that we’ll be seeing coming in over the next couple of years. And I don’t just focus on the 85 plus demographic.

I focus on the 75 plus demographic because our good operators who focus on taking patients out of the acute hospital post surgery are taking the younger elderly, not just the traditionally aged elderly that you see in skilled nursing facilities. So we will benefit from a much broader demographic than just the 85-plus demographic.

And these were individuals who may only be in the facilities for a few weeks, and then they will get discharged either to home with home health or to some other lighter care type of setting such as independent living or assisted living. So again, not to sort of belabor the whole thing, but this industry has been here, it will continue to be here.

I’ve been through every single up and down in the space and navigated through much, much tougher situations than this and feel really good about where we’re going with this and know that this transaction will allow us to compete even further and will make it easier for us to diversify and continue that diversification strategy so we have a broader-based portfolio.

And with that, I’ll turn it over to Harold for his remarks..

net debt-to-adjusted EBITDA, 5.35x; interest coverage, 3.91x; fixed charge coverage, 3.16x; total debt to asset value, 43%; secured debt to asset value, 6%; and unencumbered asset value to unsecured debt, 247%.

On August 2, 2017, our Board of Directors declared a prorated quarterly cash dividend of approximately $0.36 per share of common stock, which is based on a full quarter dividend of $0.43 per share and prorated based on the period from June 1, 2017 through August 16, 2017, which is the last day prior to the anticipated merger closing date.

Dividend will be paid on or promptly following August 18, 2017, to common stockholders of record as of the close of business on August 16.

If the closing of the merger occurs later than August 17, the record date will be revised to the last business day prior to the closing date and the prorated dividend amount will be adjusted to reflect the additional days.

Difference between a prorated dividend and a full quarter dividend of $0.43 per share will be added to our next quarterly dividend. The full $0.43 per share represents 81% of our second quarter 2017 normalized FFO per share.

Also on August 2, our Board of Directors declared a quarterly cash dividend of approximately $0.45 per share of Series A Preferred Stock. The dividend will be paid on August 31, 2017, to preferred stockholders of record as of the close of business on August 16, 2017.

As Rick mentioned, on July 28, we closed into escrow an amendment to our unsecured credit agreement conditioned on and expected to become effective concurrent with the closing of the CCP merger. This amended credit agreement addresses all of the refinancing requirements associated with the merger with CCP.

We continue to pursue other financings that we expect to secure at the closing of the merger totaling approximately $300 million. However, closing the merger is in no way dependent upon completing those financings. The amended credit agreement includes a revolving credit facility as well as U.S. dollar and Canadian dollar term loans.

The revolving credit facility provides for a borrowing capacity of $1 billion. This compares with $500 million under our current revolver and increases our U.S. dollar term loan to $900 million from $245 million currently. The Canadian dollar term loan remains at CAD 125 million.

The revolving credit facility matures in 4 years and has two 6-month extension options and the U.S. dollar and Canadian dollar term loans are 5-year borrowings.

The credit agreement includes a new $200 million 3-year term loan and finally contains an accordion feature that can increase the total available borrowings to $2.5 billion, subject to standard accordion provisions.

The credit facility provides for improved pricing of between 10 and 15 basis points under the leverage base pricing grid based on our current leverage levels. In addition, upon receiving investment grade ratings, we expect our pricing to improve by approximately 50 to 75 basis points compared to the rates we currently pay.

We saw a significant demand for the credit facility, as Rick mentioned, and strong support for the CCP merger from our bank group, adding 18 new banking relationships to our facility with total commitments from the 31 banks in this syndication of over $3.5 billion. I’ll give you a quick update now on the Genesis asset sales.

On July 10, we sold 1 of the 34 remaining assets previously targeted for sale for an aggregate sales price of $5.4 million. The sales process on the remaining 33 assets remains on track and we expect 21 of the remaining assets to close by the end of the third quarter, with the remaining 12 assets selling by year-end.

Remaining gross proceeds are estimated at between $170 million and $180 million. We also reaffirmed our previously issued 2017 full year guidance, which excludes the impact of closing the CCP merger and any merger cost we have concurred to date or that we may occur in the future.

Lastly, I’d like to make a couple of quick comments and more details on the CCP portfolio coverage and the repositioning we have discussed and summarized in various presentations and releases.

CCP did not issue a supplemental this quarter because of the confusion that we saw with the first quarter supplemental, specifically around the different methodologies used for calculating coverages.

We have included, therefore, in our supplemental a summary of lease coverages for the CCP portfolio on a stand-alone basis and on a pro forma combined with Sabra basis using the Sabra methodology of a 5% management fee for SNF and senior housing assets and a 2.5% management fee for hospitals.

This is in comparison to 4% used by CCP in its prior disclosures. We also separately disclosed coverage for tenants with significant corporate guarantees and applied that methodology to the pro forma coverage disclosures. In addition, we have provided the pro forma lease coverage for what will be the top 10 tenants of the combined company.

As shown on these analyses, CCP stand-alone SNF coverage amounts are stable at 1.19x compared to 1.20x last quarter and 1.10x compared to 1.12x for tenants with significant corporate guarantees. On a combined basis, the SNF coverage was flat at 1.31x for both quarters, excluding tenants with significant corporate guarantees.

Coverage for the CCP senior housing portfolio was 0.92x for this quarter, up from the prior quarter of 0.68x under our methodology, but clearly immaterial to the overall portfolio at only 1.4% of the combined company NOI.

I’d also like to comment on our CCP repositioning plan that was summarized in our recent investor presentations, which show how our portfolio could be affected with limited restructuring of certain low covering leases.

This repositioning will achieve what we understand our shareholders want, specifically a quick and effective solution to low covering assets, avoiding an ongoing quarter-after-quarter cycle of continued incremental lease adjustment.

Our strategy is a onetime repositioning that enables our core tenants to thrive in the prospective reimbursement environment. We have a lot of flexibility in this repositioning, which is not simply cutting risk. There are multiple paths that we will pursue. As you’ve seen with Genesis, we can sell assets that we do not view as core to our portfolio.

We can retenant assets. And where we reduced rents to improve coverage, we will create mechanisms to enhance our upside while maintaining incentives for those tenants to increase the performance of the assets. Mechanisms such as temporary relief or additional payment provisions tied to revenue growth.

Tenants with low coverage, in many cases, don’t have adequate resources to invest to optimize assets on a discrete basis. Our goal is to give our core tenants exactly that.

With the full repositioning of the CCP portfolio estimated at a reduction of rents of $33.5 million, as described in our prior presentation, we believe there will be no core tenants that will be unable to invest in and operate their portfolios in the right way.

Additionally, the pro forma coverage for SNFs without a corporate guarantee would increase to 1.51x based on our current quarter stats. This is in line with where Sabra portfolio is at today and among the best in the industry.

The lease coverage for CCP tenants with a significant corporate guarantee, which represents 26% of the combined portfolio NOI, would increase to 1.23x. This is a level we are comfortable with today and would expect to improve over time. And with that, I will kick it back to Rick..

Yes. So just one other point I want to accentuate on the repositioning, and that is, it isn’t just about improving the rent coverage, which we know has a positive effect on how the stock is traded. But when operators are struggling on a month in and month out basis to make the rent, they’re not reinvesting in their business the way they need to.

And because we know a lot of these operators and we’ve spent some real quality time with them since the deal has been announced, this increased room that they’re going to have, from a rent coverage perspective, is going to allow them to run their business and reinvest their business with a lot more mobility than they have had previously.

So that’s a critical component that shouldn’t be overlooked.

And with that, why don’t I turn it over to Q&A?.

Thank you. [Operator Instructions] At this time, we will take our first question. This will be from Juan Sanabria with Bank of America. Please go ahead..

Hi, this is Kevin here with Juan..

Hey, how are you?.

I just had a question, looking at Holiday. So we know that your tenant coverage was flat for Holiday for the quarter, but we have also seen kind of your peers show, I guess, declining RIDEA NOI. In particular, New Senior Investment Group had a decline in RIDEA and Holiday is a major tenant for them.

So, I just wanted to see if you guys have seen any underperformance or operational kind of mishaps with Holiday, especially given their position and management teams?.

Yes. So the answer is no, we haven’t seen it. I am not familiar with the portfolio that you are referring to. And obviously, we have a triple net portfolio, not a RIDEA portfolio with Holiday, but the EBITDAR margins of the Holiday portfolio have been pretty steady at 39% to 40% since we have acquired the portfolio.

So, those are extremely healthy margins.

And what’s really admirable about Holiday is, as you probably know, if you are covering that other company that they have gone through a major change in the model going from their sort of live-in manager model, to more of a traditional EB model at the local level, which we think is important for them to get to.

And so that’s been – it’s a pretty tough transition to change your model that’s been in place for years and years and that transition’s occurred over the last year. And the fact that they’ve been able to go through that kind of major shift in their operating model and have actually maintained their margins has been pretty admirable, as I said.

So we think the management team is great there. We talk to them on a regular basis. We have our guys out in the field taking a look at what they’re doing and interacting with their operators on the ground.

And so yes, whatever is happening in that portfolio is specific to that portfolio and not reflective of all portfolio nor do I think it’s reflective of Holiday across the board..

Alright, thank you..

At this time, we will take a question from Chad Vanacore with Stifel..

Thanks for taking the question..

Hi, Chad..

Hey, just catching up on the Genesis dispositions expected in 3Q, what was the cap rate and the expected dollar amount there, is 9%ish still the right assumption?.

Yes, that’s right. So, in terms of the credits – the rent credits that we are going to give them were negotiated. And so it’s not necessarily indicative of the rent credits they are going to get. The rent credit is somewhere around $14 million, but what we are seeing, as buyers underwrite the portfolio, it’s right around 9% cap rate..

Alright.

And then the expectation is the balance of the portfolio goes in, in 4Q at about the same rate?.

The balance of the 33 – this is the 21, yes, we have actually – we have made a lot of progress on – we have got the 21 that we are under contract to sell. And then the other 12 or 13 properties, several of them are under contract. A couple of them just got into the market.

We are seeing very consistent pricing across that portfolio from a cap rate perspective..

Alright. Good. So then shifting gears to the CCP merger, there has been some, let’s say, shareholder objections.

If you had to tell investors why it’s a good deal and mitigate some of the objections, what would you say?.

Well, I think we have put a couple of PRs out in our investment presentation and addressed some of those points earlier. But I would say a couple of things briefly. We know the space. We know the CCP operators. We know what it’s going to take to reposition them, so that they’re healthier and they have the room to invest in their business the right way.

We love the scale and diversity that this gives us. As you know, every time Genesis blinks, we take a hit. Genesis’ misguidance last year that wasn’t even material, and their year-over-year earnings were actually flat or slightly up, but we took a 20% hit.

And so we’ve worked really hard to expand the size of the company and get the exposure down so that we can get to investment-grade. This gets us there very quickly. And last year, I think we showed some real discipline.

We did only – we did $165 million in investments last year, which is the lowest level that we’ve done since inception, and that was because the price dislocation was so great on the senior housing side. We wanted to demonstrate to the market that we were disciplined enough not to do deals just to get deals done to get the Genesis exposure down.

So, just as we didn’t do that then, we’re doing this now because we know that this is the right thing to do for our shareholders, and this will create long-term value. Getting the credit facility just reinforces that, as I’ve said and as Harold said. And so the size of the credit facility is going to allow us to compete better for deals.

And we are being shown deals since the announcement of the CCP deal that we hadn’t seen before and we wouldn’t have been shown before. And I’m not going to predict how much more we’re going to get done and not get done, but you want to be in the game.

And we’re in the game now in a different way than we were before, and I think that’s really critical for our growth going forward.

And you always are – in any space, not just the skilled space, in any space, you’re always going to have operators that struggle now and again, and we’re going to be in a position where any one operator that may have issues is no longer going to drive the narrative. And I think from a shareholder perspective, I think that’s a critical point to make.

And when we hear things about, oh, look at the cap rates you guys are paying. When you can buy skilled nursing facilities for 9% cap, that’s just silly, and everybody knows how silly that is. You can’t compare a merger or an acquisition of this size where you’re using stock as currency to a one-off skilled nursing facility that you can buy for 9%.

That’s just a silly argument.

And you can look back – you can go back to the mid-90s, I don’t care how far you go back because I have lived through all of it, there isn’t one example that you can come up with of any transaction, anything like this where a large portfolio transaction goes for the same kind of cap rate or EBITDAR multiple that a one-off or a two-off transaction does.

And we’ve had a number in this space, whether you look at the Omega deal, whether you look at the HCN, Mainstreet deal, whether you go back to the Ventas, NHP deal. Pick a deal. I don’t care. Pick a deal. And so it’s just a silly analogy to make, and it reflects the lack of knowledge and experience on those that are coming out against the deal..

And Juan, I would just add a little bit to that around the rent repositioning and all the noise around the quality of the portfolio. We’ve now spent a lot of time with a lot of the operators, looking at the portfolio – looking at their operations.

And I think Care Capital said this a lot in their prior earnings calls that their coverages in some – in many cases are low, but these business, in many cases, have ancillary businesses that supports their – that overall provide profitability.

So even though their rent is low, their coverage is low, those operations in those facilities provide a lot of profitability to their ancillary businesses. And so they are not at risk for not paying their rent, in many cases.

It’s really just a matter of the optics and rent coverage is such an important measure that we understand the optics need to be there but it’s not a repositioning that we have to do. Otherwise, they are not going to pay rent in many cases.

In many cases, it is improving the OpEx and creating a portfolio that we feel very comfortable with that they can reinvest in, but not necessarily something that we’re sitting here saying we’ve got to hurry up and cut rents or they’re not going to be able to make their rent payments..

And the beauty of this deal is that it’s so accretive and the synergies are so much more significant than you typically see in a REIT-on-REIT deal, is that we have the ability to reposition these guys so we can report healthier coverage and they have a lot more breathing room to reinvest in their businesses, for those operators that actually truly have tight-reined coverage and don’t have those other sources of income that Harold refers to.

And if we had negotiated a deal that didn’t allow us that level of flexibility, we wouldn’t have done it.

So we feel really good that we’re going to have a really nice story to tell shortly after this deal closes, with a roadmap and probably a conference call that delineates specifically how much healthier the CCP portfolio is on a go-forward basis under Sabra management..

That’s pretty comprehensive answer. Thanks..

You got it, Chad..

We will now move to Rich Anderson with Mizuho Securities..

Thanks. Good morning..

[indiscernible] often have to get knocked down..

I think maybe you can answer that question for me. So the CCP Q showed a $26 million termination income from transition to operators.

What do you know about that and is it relevant to you and the merger?.

Well, it’s not relevant to us and the merger. It’s a non-cash pickup. Basically, when they transitioned assets, when they went through the spin-out from Ventas and they booked everything at fair value, they created some lease liabilities on their books.

And through GAAP, when you transition to those new operators, you wipe out those and it created a non-cash gain on their financial statements..

Okay, so not relevant. Okay. So, I don’t think if it’s nothing, it’s not relevant, then it’s not relevant, but I just wanted to make sure it wasn’t anything significant relative to what you are going to have when you come in.

Second question, besides buying or not buying CCP, I am curious if there is like an intermediate or kind of a third option, maybe a partial purchase, somebody else comes in and gets involved in buying some of the – is there anything like that, that’s on the table at all or is it really we are buying it or we are not buying it period end of story?.

This is a yes or no answer. So, the answer is no, there is no other alternative. We are buying it..

Okay, good. That’s all I need. I am trying to get a handle on how this process might go once you have CCP. You talked about rent relief and asset sales and transitions.

If there are 100 CCP operators, how many of them do you think need to go away? You don’t need to name names, but is there 4, 10, like how many are going to be non-rent resets and more something else that you do to fix it?.

There is only one operator in the CCP portfolio that we have no interest in doing business with going forward and they are a really small operator. It’s not even rounding, Rich. And the other operator that CCP wants to transition, which is Golden Living, is being transitioned – or has been transitioned, so no other operators.

That said, there are operators that we believe need to take a deeper look at their portfolios and consider selling assets within their portfolios, which would relieve some of the pressure they have on them.

And in our discussions, we have come to an agreement with a number of those tenants and have given the okay with CCP’s approval for them to enter into LOIs to sell some of those assets. So that process is actually already happening with some of the tenants..

Okay.

To transition away from the merger, how is it that triple-net senior housing has a decline in same-store NOI growth? Do you have some situations where your leases are structured with some sort of revenue sharing component? It’s a net lease, so why did it go down?.

Because, Rich, that’s where we transitioned those properties up in Canada from a triple-net lease structure to the other structure. So, that’s the managed – so if you look at the managed properties, that’s what that is..

Okay.

What’s the update on NMS? Anything you can add there to that collection of assets in Maryland?.

Sure. NMS, we are transitioning NMS to one of our other longstanding operators and that’s going really smoothly. They have got a lot of cooperation with the NMS operator and with the state of Maryland, so that’s been going as we expected it to go.

And actually, it’s really the principal in NMS that’s going away, that sort of got into it with the state and the AG that I know some of you are aware of. The management team at NMS underneath that individual is quite good, and the CEO and the COO are staying on with our other operators.

So there is going to be a ton of continuity there from a management perspective and no impact to our rent stream at all..

Okay. Last question for me, you mentioned at the outset Asian interest, can you kind of give us a little bit more on that? Is it senior housing also? You have Brookdale out there. Everyone is talking about them going away.

Just curious if you can give a little bit more color on this Asian interest in your business, a little bit more color on that?.

The interest is in skilled nursing and senior housing. It was initially primarily in skilled nursing, but it’s in senior housing as well. In our case, they seem to be happy to just talk about doing transactions in the skilled nursing space. They certainly indicated interest in doing things with us on the senior housing space going forward.

And I think from our perspective, we don’t necessarily want to dilute any ownership in anything we do in the senior housing space going forward because we’re going to continue to expand the senior housing space.

But doing deals with them in the skilled nursing space and potentially with some existing assets that we have is certainly something that we are open to because it obviously decreases our exposure, but a high level of interest in the skilled nursing space..

And do you have any theory on Brookdale that you want to share or is that not something you want to go on record on?.

Yes, but one thing since we are talking about some of these different asset classes, I don’t want to neglect to mention, because it gets short shrift kind of in this whole transaction that everybody’s focused on, and that is the behavioral health acquisition that CCP did.

That’s a solid acquisition in maybe the only other space that got a rate increase from CMS and actually had some tailwind behind it. So we remain excited about the behavioral health piece and that operator has some really interesting growth opportunities that we have already indicated to them that we would be happy to be a capital partner on..

Okay, good enough. Thanks very much..

Okay, Rich..

We will now take a question from Smedes Rose with Citi..

Hi, thanks. I wanted to ask on the proposed rent cuts that you talked about maybe implementing the $33.5 million.

Do you have a sense over time of how much you would be able to potentially recoup of that? You talked about various methods of resetting leases and re-tenanting that maybe you could get back over a multiyear period?.

Yes. We really don’t know. I mean certainly you need a crystal ball for that. And so from our perspective we know all this works despite restructuring as we have said. So anything we get down the road and certainly, there will be some demographic benefits in 2019.

Anything we get down the road is just going to be gravy to us, but it’s pretty difficult to quantify, which is why we haven’t taken kind of a shot at doing that, so that everybody can understand that the situation they’re seeing, as we currently presented it, is already a good position to be in. Anything else just makes it even better..

Okay. The other thing is you talked a little bit about the interest from Asian investors.

Have you heard any changes in their ability to get money out of the country, I guess, specifically China, in light of some of the recent media reports that’s been going on? I mean, have you seen anything on that?.

It’s actually interesting to say that, because one of our homes is for – one of my personal homes is for sale and it fell through because she couldn’t get her money out of China, but [indiscernible], so the current buyer has her money in Hong Kong, which apparently is the safer bet.

But in terms of the industry, we haven’t heard that there is any issues there.

Harold, have you heard it?.

No, I haven’t..

Alright. Thank you..

We will now move to Eric Fleming with SunTrust..

Harold, just quick question, I missed it when you said in the prepared comments. There is additional deal financing that you are looking into, but it’s not required.

Can you go through that again?.

Yes, sure. We talked about it early on. Care Capital had a $100 million term loan with Prudential. And so we are still in the process of securing that refinancing basically an amendment to assume that debt. We feel confident we will get there, but we don’t have it finalized like we have the credit facility.

And then Care Capital also had a roughly $100 million bridge to HUD and we expect to get that closed as well. It’s just not finalized yet..

Okay, great. That’s all. Thanks..

We will now move to Todd Stender with Wells Fargo..

Hi, fellas. I had a question back to the NMS transition, just from memory, I remember you guys paying a pretty good premium for those facilities.

I just wanted to hear maybe more about the credit quality of the tenant and any rent coverage or write-down issues you might face?.

Yes, no write-down issues. We will have a full payment of rent as we’ve had, so there is no issues there. We have one of our best operators that are taking over the 5 NMS facilities, but again, they are retaining most of the management of NMS. So, no degradation in valuation or anything like that. 1 of the 5 facilities is going to be in lease-up mode.

So you will see the four other facilities paying what would have been the full rent on the 5. So, it will provide impact obviously our coverage a little, but still be quite healthy as the fifth facility leases up, then that portion of the rent will get moved over to that facility. So really nothing negative here on that transition..

Okay, thanks.

And then Harold, you talked about the timing of the 20 Genesis assets being sold as a Q3 event, but what was the – what are the expected proceeds you are expecting?.

Yes. And it’s actually 21 assets and it will be around $103 million for that tranche..

Okay..

That’s a $170 million to $180 million net for everything when everything gets done..

But for timing, for modeling purposes, $103 million for Q3?.

Yes. It’s going to be right near the end of the third quarter is what we are expecting..

Okay. And then finally, just to clarify, the new credit agreement its contingent upon the merger going through.

Is there any chance that the shareholder vote gets postponed for any reason, just with the noise around activists and the ISS statement? Is there any risk to the date being moved at all?.

At this point, we are full steam ahead with our focus on the 15th and that’s it..

Okay, thank you..

We will now go to Jonathan Hughes with Raymond James..

Hey, guys. Thanks for taking my questions.

If you can, could you just talk about the discussion with the board following the activism campaigns and the ISS suggestion yesterday and how that’s progressed since the announcement of the deal on May?.

Well, I can’t talk about – no, I will talk about any discussions or dialogue I am having with our board, but nothing has changed in terms of our view of the deal regardless of ISS’s position. So everything is the same. As far as we are concerned, we think we are doing the right deal for all the right reasons.

And as I’ve said, I’ve got board members that have experience in the operating side as well. Our lead director was involved with the discussions at ISS, and he has been in the skilled space as well as other spaces in health care with his private equity fund for decades, literally.

So I was fortunate in that, as we started, even early on, assessing this opportunity, to have a board that really understood the business and was able to provide some really good feedback, some good guidance – and asks the hard question and all that kind of stuff.

But nothing in terms of the ISS positioning has changed our point on this, as I said earlier. And again, with all due respect to ISS, for them to focus on the fundamentals of the business without having the requisite experience to do that is something that I think is a little odd. And frankly, I don’t believe they do have the experience to do that.

Certainly, they have got plenty of experience on governance and things like that, but not on the fundamentals of the business. And so nothing changes for us..

Okay, fair enough. And then kind of switching back to NMS, you mentioned the transition there is ongoing and proceeding as expected. I think I saw that they lost their Medicare and Medicaid license in June.

Can you just talk about what’s the reason for that and the impact to coverage there obviously, nothing to your rent stream, but just on the coverage metric basis?.

Yes. So that’s what I mentioned earlier. They have one facility that have been recertified and that is now being recertified under our other operator and will be in lease-up.

And so as that facility leases up, there will be some rent attributed to it anyway, but if that facility leases up, it will pull the rent away from the other four that in the meantime, will cover all five.

So they will be – their rent coverage has been exceedingly high as you know and it’s because their rent coverage is so strong, they are going to be – the four facilities that are stabilized will be able to cover the rent for the fifth, albeit at somewhat lower coverage, but it’s still going to be healthy coverage.

So there is just no issue there as far as we are concerned..

Okay.

So that loss of the license was kind of expected as part of the transition?.

Yes..

Okay. Alright. Thanks, guys..

At this time, we will move to Tayo Okusanya with Jefferies. Please go ahead..

Yes, good afternoon or good morning over there in Cali. From a CMS perspective, I know they have kind of extended the deadline for comments on the switch of methodology to RCS.

Could you just talk a little bit about what you’re hearing from the industry feedback they are giving CMS and how you think things may go? And then could you also talk a little bit about Medicaid rates across the different states you are in. I am sure most of those rates have come in by now for next fiscal year..

Yes. So, let me – I will take the Medicaid piece first. I think, on an aggregate basis, it’s somewhere around 1.5% or something. It basically is what it’s been, and we didn’t expect anything different. So, if you view that as stable, it’s been stable. It’s a little bit different from state to state, but on an aggregate basis, it’s stable.

On the payment reform recommendations, yes, the – so the comment here was delayed at the request of the space. But one of the more important things here to note is that the American Health Care Association has been providing input and working with CMS on this proposal.

And I think a lot of what it’s about is to – if you go back to 2006 with RUG score, there was an attempt then to, on a revenue-neutral basis, provide incentives to skilled nursing operators to go after complex nursing patients and not have the entire focus be on short-term rehab, which was really driving up rates on the rehab side, and it’s real low by now.

It wasn’t designed well. There was some overpayment. There was a claw back in 2011. So this is, I think, a much more thoughtful attempt to create a system that has incentives for both nursing patients and for rehab patients.

We see these notes that come out and they talk about a rate drop, a rate decrease on the rehab side, but they really don’t spend a lot of time talking about everything else. And everything else is just as important because even though it’s revenue neutral, there are real benefits to this space by the existing design.

Where we have operators currently that are in states that have specialized Medicaid rates that create an incentive for operators to take complex patients, like dialysis, like bed patients, while those patients are on Medicare, it’s a much longer length of stay than the traditional short-term rehab patient when you’re getting someone with a hip surgery or knee surgery out of the hospital and they’re with you for 15 to 27 days, depending on whether it’s Medicare Advantage or Medicare fee for service and then they go home or to a senior housing facility.

And so we don’t see the length of stay pressures with those operators that we do with most – the other operators that – because of the Medicare system design, as it currently stands, are focused just on short-term rehab. So that’s a real benefit there and will help really to mitigate some of the length-of-stay headwinds that impact occupancy.

Secondly, they are bringing back concurrent therapy, at least that’s what’s being proposed, for up to 25% of the rehab revenues. So even though there’s going to be a reduction in the rehab rates, the impact to the margin is going to be mitigated by the fact that once again the state is going to be able to engage in concurrent therapy.

And as the states always said – always tried to make the case that concurrent therapy as well as group therapy, for that matter, allows the skilled nursing space to provide rehab services to individuals at a much lower rate than, say, rehab hospitals because it was efficient. And that argument wasn’t brought into back then.

And now the government is seeing that, that actually is the case. So you actually have a margin mitigant there despite some of the – whatever rate decrease is going to be on the rehab side. Then the final point, and this is a really critical point, if you look at all the DOJ activity in this space, it’s all focused on rehab minutes.

These providers have the majority of their minutes in the ultrahigh and the very high categories, there must be some gamesmanship going on here. That’s all going away. It’s going to be a characterization or a per diem model. Patient is going to come in with a diagnosis. The docs can sign off on it. That’s what you get paid for.

And having that taken away from a liability perspective, that’s a huge positive for the states as we see these DOJ investigations get announced. That’s a huge positive for the space. That really hasn’t received appropriate attention, I don’t believe..

Got it, okay. Alright. That’s very helpful. Just a quick one.

On the Medicaid side that there were no – any states that had any big cutbacks that would have you worried?.

No..

Okay, great. Thank you..

At this time, we will move to Paul Morgan with Canaccord..

Hey, Paul..

Hi, good morning. Just a quick follow-up on NMS. So, I mean if I just try to ballpark, because you had 1.9x coverage in your tenant listing for them.

And if one of the assets is closed now and kind of going to be in lease up for the next couple of quarters, I mean, should I just – I mean is there a reason that we wouldn’t think kind of on a pro rata basis that might go down to like a 1.5% or something like that until it’s stabilized again?.

Yes, you nailed it. 1.5% is the number we are looking at, so really healthy coverage still because of the nature of that particular operator’s business..

Okay. And then I sort of understood – I thought maybe that there was some dislocation to the other assets as well just because of what was going on with the state.

Is that kind of normalized now and things are smoother and the other ones – the audits and things like that?.

So, there wasn’t any dislocation..

Okay..

So I am not sure what you heard, but there wasn’t any dislocation. There were audits, for example, by the OIG, but those were traditional Medicaid audits that got done every couple or 3 years. So there was no dislocation in the other facilities. And look, the state wanted to see the principal gone, and that’s in the process of happening.

And our other operator who comes from a contiguous date is highly thought of, and has been with us almost since the first big skilled deal that we did back in 2011.

And they are one of those operators – I always talk about some operators just are more progressive and more skilled at taking care of very high acuity patients, and this particular operator does bed care, does dialysis and actually operates the largest bed unit in the state that they currently exist in and are the go-to operator in that state for when the state has other issues and they need help from an operator.

So we feel really good about that..

Okay, great. And then just my other question on Genesis and you sort of addressed it, but there was comments from the last quarter about the dilution associated with the sales in the second half, and I think it was like $0.07 to FFO and $0.04 to AFFO.

And that – I didn’t lease to see that in the current release and I am just wondering whether basically all pool in terms of any shifts in timing. It sounds like not much has changed really since then.

Is the dilution number really about the same, of course, excluding CCP?.

Yes. It’s going to be about the same. It all comes down to timing and when that hits and you can’t predict exactly when the sales are going to occur nor can you predict exactly the reinvestment of the proceeds, but it’s no change from our original estimates on kind of the ballpark of where this dilution could be..

And we also want to point out, even though we have talked about it on other calls, that even post the CCP deal closing, with Genesis down to 11% pro forma for those sales, we are in discussions to continue to move forward on selling additional Genesis assets..

In ‘18?.

In ‘18. In all likelihood, yes, at this point, it would be in 2018.

And it provides us an opportunity to not only grow on the senior housing side, but we are – but to the extent that we see some really interesting skilled opportunities out there apart and aside from CCP with operators that we think are really first class, it gives us the opportunity to pursue those opportunities because we know we’re going to continue to divest Genesis.

So we’re essentially bringing in new operators to effectively replace Genesis. So from an exposure to the asset class perspective, there may be some timing issues, but it allows us to navigate that and not bypass some opportunities that we think are really good.

And as I’ve always said, when you look at our non-Genesis skilled nursing portfolio, these are really good operators with – despite the headwinds, right. We have had our skilled nursing coverage continue to go up, and that’s been happening for a long time. And then, obviously, we’ve got strong occupancy and skilled mix.

So the ability to replace Genesis with more of those kinds of operators is appealing. And so having that room to move by selling Genesis assets is something that we will be focused on..

Right. Thanks..

At this time, there are no further questions in the queue. I will now turn it back over to Rick Matros for any additional or closing remarks..

Thank you all for your time today. I know it’s been a long call. Harold and I as always are available to take additional calls. And to the extent you guys need some input on modeling we are always available for that as well. So we look forward to talking with you.

And we have got conference season coming up in September, so we look forward to hearing from you guys in person there. And if we don’t talk to you in the short run, have a great remainder of the summer and have a great day. Thanks..

And again, that does conclude today’s conference call. Thank you all for your participation..