Sabra Health Care REIT Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 12 speakers on the call.

Operator

Day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Health Care REIT First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Lucas Hartwich, SVP, Finance. Please go ahead, Mr. Hartwich.

Speaker 1

Thank you, and 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 future financial position and results of operations, including our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition and investment plans. 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 ks for the year ended December 31, 2022, as well as in our earnings press release included as Exhibit 99.1 to the Form 8 ks 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 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 on the Financials in the Investors section of our website.

Speaker 1

And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra HealthCare REIT.

Speaker 2

Thanks, Lucas, and good day, everybody. Thanks for joining us. We're continuing to see traction in operational recovery. Occupancy in our skilled nursing portfolio has now improved every month in Q4 and continued through January. Occupancy October through January, our skilled nursing portfolio improved 130 basis points.

Speaker 2

Our skilled mix Jumped up dramatically in the Q1 as well. Labor trends are improving, but it's still tough. And it's going to be A bit of a slog there I think for a while, but we're certainly off our highs in terms of inflationary increases and agency utilization. So we feel good about the progress that's being made there as well. EBITDA coverage without PRF and that's really the only way we think everyone should be looking at it at this point, has improved I want to comment on a couple of specific operators.

Speaker 2

Think everybody saw and noted, Signature Health coverage declined. Signature Health had a tough second half. They Sold 24 facilities, closed to and right sized their corporate infrastructure to accommodate a leaner company. And so that was quite However, their Q1 rebounded dramatically and I went back over a year and a half to find a quarter that was Strong as the Q1 is for Signature Health and wasn't able to find one. So we feel really good about where SigHealth is on a current basis.

Speaker 2

Similarly, Avamere, while their coverage was fine as reported, they also had a strong first quarter as well. Comment quickly on the transition from the old North American portfolio. That's going well for Avamere and it's going well for Ensign. As Ensign noted on their earnings call, they're ahead of schedule even though there's still a lot of upside to be had there. So in terms of our 3 largest operators, SigHealth and Avamere and Ensign, we feel like we're in a really good place with all three of those operators right now.

Speaker 2

We're pleased with the proposed 3.7% market basket, and we do expect better than historical Medicaid rate increases. Most of those rate increases for our portfolio will be effective on July 1. We'll have some more clarity probably over the next several weeks on what those rates will be. Our expectation though is that some states will be extending COVID rate add ons and some will update the cost report base year To reflect more current data and that's a reflection of the fact that many states do acknowledge the impact of COVID on the industry and The lack of viability of some of the Medicaid rate increases in certain states. So as we saw last summer, we're seeing some of the same things This summer, states are being more generous with their Medicaid rates.

Speaker 2

Investment activity is light and will remain so in the near term. Competitive landscape has changed with lender loans and liquidity needs driving sales. Pricing uncertainty exists and I'm sure Tali will talk More about that as well. On Inlight, as noted in the press release, we have terminated our position in the JV. There is no impact on earnings or any other to the company other than the fact that there are a number of folks out there rating agencies and others We still look at the debt, carried by the JV and so that obviously is gone.

Speaker 2

So from that perspective, for those that looked at the JV debt, delevering event for us. We're now focused on transitioning the 11 wholly owned facilities to a new operator. I would note on the 11 wholly owned facilities, they are different than the JV portfolio. The JV portfolio was part of the original ALC acquisition. The 11 facilities that we own came afterwards and these are larger facilities in larger markets that are primarily a combination of AL and memory care patients or residents.

Speaker 2

And with that, I will turn the call over to Talia.

Speaker 3

Thank you, Rick. I'll first turn to the results of our managed senior housing portfolio and then provide a brief update on our investment activity in behavioral health. Our wholly owned managed senior housing portfolio continued its recovery throughout 2022, but it was essentially flat in the Q1 of 2023. Having worked to manage and overcome labor and wage challenges for nearly 2 years, operators are now focused on building occupancy by bringing in new residents in numbers that materially exceed departing residents who for the most part are not leaving by choice. Expenses are continuing to moderate, which is a positive, and the continued evolution of an investment in Our operations first became attuned to this when the pandemic began and they were forced Pivot to virtual sales and they have embraced this change.

Speaker 3

The headline numbers for the wholly owned managed portfolio on a same store basis Excluding non stabilized assets and government stimulus are as follows. Occupancy for the Q1 of 2023 was 80.7%, a 140 basis point increase over Q1 of 2022 and a 100 basis point decrease over the prior quarter. RaVcor in the Q1 of 2023 increased by 7.3% over the Q1 of 2022, driven by nearly 10% annual rate increases achieved in our Holiday and Enlivant wholly owned Enlivant portfolios. RevPAR for the Q1 was $6,484 in our assisted living portfolio, flat to the prior quarter and $2,771 in our independent living portfolio, 110 basis points higher than the prior quarter. Excluding government stimulus funds, cash NOI for the quarter was slightly off the particularly in our wholly owned Enlivant portfolio demonstrating the benefit and challenges of operating leverage.

Speaker 3

We continue to see Strong rate growth and continued those seasonal occupancy gains across our senior housing portfolio. Our net leased Stabilized senior housing portfolio has seen consistent occupancy increases since the low in February of 2021. As of February of 2023 occupancy recovered to 88.2%, which is equal to the occupancy level immediately before the pandemic and 11.5 percentage points above the pandemic low. Our leased portfolio skews to assisted living and memory care, which have had a more robust occupancy recoveries and independent living as they are needs based. In addition, we have transitioned some poor performing leased communities to the managed portfolio, allowing us to participate in their financial recovery.

Speaker 3

Move out rates driven mostly by higher care needs and deaths seem to be stabilizing, But at an elevated rate relative to pre pandemic averages, this may be a temporary phenomenon as we are seeing average length of stay Reverting to pre pandemic levels after spiking in early 2021. We speculate that residents Moved in during the first rounds of COVID vaccine clinics at communities, what we then characterize as pent up demand are driving higher move outs now 18 months later. As mentioned in prior calls, high yielding, time efficient and cost effective Customer acquisition strategies have become critical to filling communities. Larger operators who have the benefit of scale and Capital are successfully using digital marketing to generate qualified leads that have a high rate of conversion to leases. Although the conversion rate from personal referral sources is higher, the absolute number of move ins that are sourced Through operators' digital presence far exceeds those from other lead sources.

Speaker 3

We are still in the early stages of The evolution of customer acquisition in senior housing and expect to see further changes as the target customer also evolves. Comparing the Q1 of 2023 results of our wholly owned managed portfolio by country, Excluding government stimulus, we see that our Canadian assets have slightly outperformed our U. S. Communities compared with the prior quarter. In Canada, we see a similar phenomenon as we described in the U.

Speaker 3

S. Of higher move out rates offsetting occupancy gains likely for the same reason. The labor costs and availability in Canada that we noted in last quarter's earnings call also seems to be resolving. As an example, in the Q1 of 2023, our Canadian joint venture reduced agency costs by 85% compared to the prior Turning briefly to our behavioral health portfolio. At the end of the Q1, Sabra's investment in behavioral health included 17 properties and 2 mortgages with a total investment of $793,000,000 at the end of the first quarter, which is expected to total $837,000,000 once the balance of cap committed capital is deployed.

Speaker 3

We have identified additional Properties within our owned portfolio is candidates for conversion and are in active discussions with potential operators regarding those locations. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Speaker 4

Thanks, Talia. For the Q1 of 2023, We recognized normalized FFO per share of $0.33 and normalized AFFO per share of $0.34 These results are consistent with the normalized FFO and normalized AFFO run rates we articulated on our Q4 earnings call and are in line with our expectations. As of March 31, 2023, approximately 5% of our NOI was below 1 times EBITDARM coverage, which is consistent with previous quarters. Also as of March 31, 2023, our annualized cash NOI was $451,400,000 And our SNF exposure represented 56.7 percent of our annualized cash NOI, down 140 basis points from the Q4 of 2022 and down 500 basis points from a year ago. We expect this percentage to continue moving lower throughout 2023 as a result of further earnings recovery in our senior housing managed portfolio and through any future SNF dispositions.

Speaker 4

G and A costs for the quarter totaled $10,500,000 compared to $10,900,000 in the Q4 of 2022. Excluding stock based compensation expense, cash G and A for the quarter was $8,300,000 compared to $8,800,000 for the Q4 of 2022. Now turning to the balance sheet. Our balance sheet continues to be a source of strength for Sabra, allowing us to confidently withstand the market headwinds of tightening credit and high interest rates. As of March 31, 2023, we are in compliance with all of our debt covenants and have ample liquidity of nearly $1,000,000,000 consisting of unrestricted cash and cash equivalents of $34,000,000 and available borrowings of $920,000,000 under our revolving credit facility.

Speaker 4

We have no material near term debt maturities. Our next material debt maturity is in 2026 and our weighted average debt maturity is currently at 6.3 years. Our net debt to adjusted EBITDA ratio was 5.52 times as of March 31, 2023 and in line with our expectations. We expect our leverage to decrease in future periods as our portfolio continues its operational recovery and through proceeds from any future disposition activity. Excluding our revolving credit facility, which makes up just 3.3% of our total debt, we have no floating rate debt exposure And our cost of permanent debt is 3.93 percent as of March 31, 2023.

Speaker 4

The combination of a low leverage, Fixed rate balance sheet with meaningful liquidity and no near term maturities affords us the luxury of not needing to access the capital markets in the foreseeable future. On May 3, 2023, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on May 31, 2023 to common stockholders of record as of the close of business on May 16, 2023. The dividend represents a payout of 88% of our normalized AFFO per share. Lastly, we did not issue earnings guidance this quarter, but we are hopeful to be in that position to do so sometime in 2023.

Speaker 4

Until then, we still believe that the $0.33 to $0.34 quarterly run rate Of normalized FFO per share and normalized AFFO per share that we provided on our Q4 call is still appropriate. And with that, we'll open up the lines for Q and A.

Operator

Thank you. Your first question comes from the line of Michael Griffin with Citi. Please go ahead.

Speaker 5

Great, thanks. Maybe we can go back The fundamentals around SNFs. And Rick, I'm curious, in your assumptions for the rest of the year, I mean, how are you thinking about You kind of gave a high level of agency and labor costs kind of decreasing. But if we were to quantify that, let's say, at the beginning of the year, Maybe you're thinking flat agency utilization or something. Where might that be at the end of the year?

Speaker 5

And has your thoughts around it changed?

Speaker 2

So, no, my thoughts haven't changed around it. I think, occupancy, we still think 34 to base 40 basis point improvement a month is doable. We'd like to see more obviously, but we think that that's doable and it's still hampered by labor issues. But we've seen so Signature Health, for example, In the Q1, sequentially had a drop of 5% net labor costs. So And I don't want to suggest that it's going to continue at that rate, but that was a relatively nice drop with occupancy improving pretty dramatically in that portfolio.

Speaker 2

Their occupancy was up Almost 300 basis points in sequential quarters. So I just think it's going to still be sort of a slow Kind of improvement. I think there'll be a greater shift continuing greater shift from agency 2 in house staff with increased wages, but the rate of inflation on those wages has also slowed down and I would expect That to continue as well, because last year, especially the second half of the year, there were significant wage increases that were passed on To staff in the facilities, to the extent that there needs to be more of that, I think there's nothing but good news really on the reimbursement Both in terms of Medicaid this summer and the Medicare market basket. So that's going to help going to help with margins, obviously, but it's also going to help provide more cash for people to use incentives to hire staff as well.

Speaker 5

And then just one clarification on the coverage. I think you said ex PRF, which is probably the right way to think about it. It was about $155,000,000 this quarter versus $148,000,000 last quarter. If we go back to December of 2021, like you have laid out in your deck, would that number be lower than the $155,000,000 this quarter? Or should we We'd be thinking about it on a year over year improvement basis.

Speaker 2

We could yes, we have to dig that one up, Because I don't have that at my fingertips, but certainly it's higher on a year over year basis, but we'd have to go back and look at that quarter Specifically, if we can find it while we're still on the call, we'll let everybody know. Great.

Speaker 5

That's it for me. Appreciate the time.

Operator

Our next question comes from Tayo Okusanya with Credit Suisse.

Speaker 6

Hi, yes. Good morning over there. Two questions from me. First of all, Senior Housing on the lease side, again EBITDA coverage of 114,000,000 I believe. Again, that kind of suggests EBITDA is still probably less than 1%.

Speaker 6

So just kind of wondering, how do we kind of think about that For you, again, what's happening fundamentally that suggests coverage ultimately improves over time? Is there Some risk of tenants within that pool possibly needing some assistance going forward?

Speaker 3

Tayo, I can give you some color there. So first of all, Really what so first of all, it's a kind of a stale number, right? It's trailing 12, 1 quarter in a rear. So We kind of know that you still have the impact of the agency costs and labor issues in that number. And we're expecting that that's going to roll off.

Speaker 3

We've also seen occupancy increases, As I mentioned in my remarks, in that portfolio and even into this past even into this coming quarter. So we're optimistic that coverage is going to turn, Especially once as the labor issues are embedded in that number and the expense part of that number and the EBITDARM are going to start to roll off.

Speaker 6

Got you. Okay. That's helpful. And then

Speaker 2

We also talked let me just add Tayo. What is growth in all of our asset classes, almost all of our inflation is in the labor category. We're not Seeing much inflation in the non labor category. So that actually helps quite a bit as the operators get better on recruiting and retaining staff That we're not worried about other sort of inflationary levers.

Speaker 6

Got you. Okay, that's helpful. And then from the Enlivant perspective, Again, okay, withdrawn from this thing, you guys have no economic interest, no impact, nothing at all going forward. Could you just help us understand what exactly a withdrawal entailed? Does that mean you just kind of gave up your ownership in the JV For free or you didn't get any economic Benefit from giving it up, just kind of just if you just kind of give us like details of just exactly what this entails to be able to kind of walk away from this clean and Kind of clean and fair.

Speaker 2

There's a provision in the JV documents, a JV agreement rather that allows either side to give notice and just walk. So there's no compensation. It's not like a management agreement or anything like that. We're once you claim Term fee or something like that. You just sort of walk.

Speaker 2

And look, the lenders have the assets. They're transitioning assets to other operators. There's nothing there anyway?

Speaker 3

Those loans are non recourse anyhow. So there was no obligation, no recourse to Sabra.

Speaker 2

Yes. Unfortunately, Kyle, the downturn in the debt markets really took away all the obvious potential buyers to the portfolio. So you sort of had the double whammy of the pandemic impact on the business and then the debt markets turned down And so you sort of wiped out a whole potential audience of buyers.

Speaker 6

Appreciate the color. Thank you.

Operator

We'll take our next question from Josh Dennerlein with Bank of America.

Speaker 7

Yes. Hey, guys. Thanks for the time. I just wanted to follow-up on the Enlivant JV. I get that you can walk away from it, but I would have thought you would get a Benefit because there was debt on the portfolio and now that won't be flowing through your income statement.

Speaker 7

Is that a correct assumption

Speaker 4

Yes. Hey, Josh, it's Mike. Yes, so it's not a correct assumption. Here's why. So that joint venture was accounted for And when we wrote that thing down to 0 last quarter, as you recall, We no longer recognize any revenues, any expenses, any FFO, any AFFO from that joint venture period.

Speaker 4

It's 0. Not that it was much before we did that, but going forward because of the way the accounting rules work, it's 0. So there's nothing flowing through our Financials as a result of our writing it down to 0, there's nothing flowing through our financials as a result of Exiting that joint venture. The debt, since it was an unconsolidated joint venture, was not appearing on our balance sheet anyways. So literally there is no impact to our financial statements as a result of this.

Speaker 7

Okay. So the impact was already In the 1Q results and there was nothing on the go forward. Okay.

Speaker 4

There was nothing in the 1Q results. There was 0 FFO, 0 earnings, 0 everything, 0 balance sheet value, 0. There's nothing in our Q1 results for the Enlivant joint venture.

Speaker 7

Okay. Okay. That makes sense. I appreciate you clarifying that. And then Rick, in your opening remarks, you mentioned you expect Better or you expect Medicare Medicaid increases to come in kind of on the better side.

Speaker 7

What are you seeing or hearing that kind of gives you confidence that the boost Or it's going to be on the better side?

Speaker 2

Well, it's the actual dialogue that's happening with the trade associations in the various states And the state legislatures and the folks that are in charge of the budgets there. So that's really where it's coming from. Look, it's not going to be all 50 states. Last year, when we had more clarity on those states that were giving outsized rate increases, we published that. I think that was our 2nd quarter 2022 earnings release.

Speaker 2

So we'll do the same. We'll do a business update if we No sooner than later on that as well, but it's coming from direct discussions. And I think the biggest question mark On the states that we're in is Texas. So I think everybody's got a comfort level now that Texas legislature will make permanent the 1962 that was part of the FMAP add on And some additional amount above that. The issue is with PHE going away May 11, The states, in this case, Texas has the option of extending that $19.62 until the full rate increase goes into effect In September, but we just don't know yet if they're going to do that.

Speaker 2

So I think worst case scenario for Texas is you have a 4 month kind of hole Where they lose the FMAP add on, they'll get it back in September, but they're going to have that 4 month period Where there isn't anything. So that's what we know about Texas. But again, on all the other states, Our assumptions are based on actual dialogues and things being put in budgets and stuff like that.

Speaker 8

Thank you.

Speaker 2

The other thing I should point out too is some of this is just organic. So the cost report process itself starts to capture inflation. There's a lag time between when states When the state cost reports are filed and when reimbursement rates actually occur, but those core supports do Capture inflation, it's one of the reasons that we expect next summer's, so 2024 next summer's Medicaid rate increases To be even better because they'll really be capturing a lot of the worst period of inflation that we had during COVID. So the fact that there may be a couple of states That are willing to accelerate the base period for the core support now and not wait another year is a positive for those particular states.

Operator

All right. And we'll take our next Question from Austin Wurschmidt with KeyBanc Capital Markets.

Speaker 9

Great. Good morning. I have a question On the $0.33 to $0.34 run rate, when you layer in sort of the 25 transition assets you guys highlighted last year, I think they were Generating cash rent around the $5,000,000 to $6,000,000 range on an annualized basis with upwards of $15,000,000 Upon that ultimately commencing, how much of that has commenced and is captured in that run rate? And then also does the 33% to 34% assume any acceleration And NOI from the senior housing managed portfolio.

Speaker 4

So the run rate is based on what We reported this quarter, right, or even based on what we reported in Q4. So it doesn't assume any acceleration in The senior housing managed, so that would be incremental to that number. Obviously, we didn't want to bake that into the run rate because I don't have a crystal ball. But But yes, so if there is improved performance there, which we expect there to be, then I would expect that number to improve as well. In terms of the transitions, those are ongoing as we've talked about for the last several quarters.

Speaker 4

We expect those to be fully transitioned And that NOI pickup that you alluded to, to be realized by the end of 2024. Again, It's going to vary by situation. It's going to vary by project in terms of when those things roll in. But they're incrementally getting picked up in our earnings and we expect it to still be fully in there by the end of 'twenty four.

Speaker 8

Do you have a sense on the top of your head?

Speaker 5

Nothing was

Speaker 2

impactful in the current run rate.

Speaker 5

I'm sorry?

Speaker 2

Nothing was impactful in the current run rate.

Speaker 9

Understood. Do you have a sense what those 25 assets are generated in the Q1 on an annualized basis relative to the 5% to 6% in the Q2 of last year?

Speaker 4

It's higher than that 5% to 6%, but it's less than the 15%. I mean, it's Again, like I said before, there's 25 projects, there's probably 20 different stories there. So it's hard to pin down exactly what that run rate is going to be on an overall basis. It's going to be dependent on timing and a whole lot of other factors, but it has increased since that $5,000,000 we disclosed back in Q2.

Speaker 9

Got it. Understood. And then just as far as the 11 assets, wholly owned assets leased to Enlivant, were those kept in the same store pool this quarter? Just curious how they performed? And then can you shed some light on the timing of a transition, whether you have any operators lined up or sort of a short list?

Speaker 9

Just any detail around that would be helpful. Thanks.

Speaker 3

So they are in the same store pool, And they actually have been one of the drivers of performance of the assisted living component of the pool because they've had A strong recovery over the last 12 months. If you recall, they were kind of call it breakeven a year ago or So and they actually have they have a real margin now between recovery And strong RevPAR growth.

Speaker 2

Yes. In terms of the transition, We're just trying to work cooperatively with Enlivant and TPG on that. So it should happen in the coming months, but I can't give a specific timeframe. We know of a number of operators that have an issue in the portfolio. So identifying the right operator in and of itself is not going to be a concern or an issue for us.

Speaker 9

Great. Appreciate all the detail. Thank you.

Operator

Our next question comes from Steven Valiquette with Barclays.

Speaker 10

All right, thanks. Couple of really more just kind of housekeeping questions around the supplement. I guess on pages 4, 56, I guess first on Page 5, normally, I think that page is normally delineated as like the same store data, but this quarter it was not. I don't know if that is Still same store data on Page 5 as far as the EBITDARM coverage ratios that are there, not can we see or exactly which properties are included on That betas. That was kind of housekeeping question number 1.

Speaker 10

And then number 2, I guess sorry, go ahead. Maybe that would be a follow-up.

Speaker 4

Yes. I'll answer it as we go through. So the answer to your question is that is not same store. That is for our entire stabilized portfolio and the majority of our portfolio is included in that stabilized pool. We took out the same store triple net Information this quarter as you've noted, just periodically we review our disclosures, we review our peers' disclosures, we Taking evaluation of what is helpful disclosure for the market and for investors and we noticed that not many people present triple net same store Information.

Speaker 4

So we're kind of an outlier in that regard and we thought the overall portfolio was more indicative and more useful for investors.

Speaker 2

And we did seek out some feedback from investors about that as we typically do before we change disclosures.

Speaker 10

Okay. That's helpful. And then just to triangulate that then, like the footnotes on pages 56 are the same around the sort of stabilized portfolio. Looks like the property count in the stabilized portfolio might be that 356 number that's on Page 6. And then on Page 4, you show 396 total properties in consolidated.

Speaker 10

So are there basically roughly 40 properties give or take that are Not in the stabilized set of properties. Am I doing that math right? And if we need to do it offline or follow-up offline, happy to do it too, if it's kind of hard to do this on the fly, but Hope that question makes sense.

Speaker 4

Yes. Let's follow-up offline on that one, so I could do that math softly.

Speaker 10

Okay. All right. Fair enough. Okay. Thanks.

Operator

Our next question comes from Vikram Malhotra with Mizuho.

Speaker 8

Thanks so much for taking the question. So I just wanted to follow-up on the just ins and outs of the FAD run rate. You talked about the transition In 2022 benefiting through the year into 2024, but then you also alluded to additional transitions, Potentially, I think in Canada, you said or maybe there was also some senior additional senior housing conversions. Can you just walk us through that again? Are there Is there an additional bucket of assets that you will start to transition leaving Enlivant aside that Sort of may impact the fad going into the end of 2023, early 2024?

Speaker 4

I mean, I'd say that We're no different than any other company. We're always looking at our portfolio and evaluating the best outcomes for our portfolio. We did that to a Significant degree last year, which led us to our conversations around dispositions and transitions, but that doesn't mean it stopped. We're still looking at our portfolio and there may be opportunities to transition assets to new operators, there may be opportunities to underperforming assets Operator, there may be opportunities to transition or convert properties to behavioral health. That's always going to be something that's in our portfolio and quite frankly anybody else's portfolio.

Speaker 4

The material stuff that is impacting our portfolio or that will impact our portfolio is what we've talked about since Q2 of last year. So incrementally nothing material.

Speaker 8

Okay. So it's not like a similar sized bucket as last year. It's a much, much smaller bucket that you would look to tackle Through the year, over and above alignment. Okay. And then just looking at sort of investment opportunities, I know that you mentioned things are slow and Evolving, but can you sort of walk through maybe the broader capital structure in terms of assets, but also potentially additional, Say, preferred equity investments or additional loans that you may decide to make as investments given all the All that's going on in the debt markets around skilled nursing, but even broadly senior housing?

Speaker 3

Sure. I'll try to answer that. We are seeing reasonable flow of assets and opportunities coming to us. Few of them are Interesting. We look at our cost of capital and we think about ways to invest and that leads us to focus More on preferred equity or higher yield or mezzanine debt or something that has higher yield or a greater opportunity In the longer term, right now what we are seeing are remains Under remains to be underperforming assets that want full pricing.

Speaker 3

It is unclear What exactly is full pricing today? I think that's A bit of the challenge and why we are continuing to look at things because we're interested in price discovery, with debt being at the levels In terms of interest rate and significantly reduced proceeds level in terms of availability, There is we are seeing both a liquidity as well as a credit issue for borrowers, Developers, etcetera. And that we would hope would create opportunities for us. So far, we haven't found them, but we continue to look And we continue to try to be creative there. There are a lot of assets that are recovering at this point, particularly in senior housing that are Covering well, but their cost structure and their capital stack is so upside down.

Speaker 3

And frankly, values are probably Not where they used to be. So there's a lot of readjustment that's going on and a lot of recalculating of Capital and the outcome of those, the tensions between borrowers, Lenders, and other investors is going to play out over the next period of time.

Speaker 8

Okay. That's helpful. And just one thing I wanted to clarify, remember maybe it was last quarter, You had alluded to the fact that there was a lot of talk in the healthcare space about PLRs. And I believe you had In 2018 or 2019, received one yourself and correct me if I'm wrong. I'm just wondering What the goal or objective of obtaining that TLR was?

Speaker 4

Yes. So we did receive that. We were the 1st in our space to get that as we And the reason why we got that PLR was to enable us to have Independent living facilities in a non lease structure. That was it. Absent That PLR, we could not have the only way we could own independent living facilities was through a triple net lease.

Speaker 4

And as you're aware, we have that holiday portfolio, which is all independent living and it is not under lease structure. So that was the whole reason and the rationale behind doing that

Speaker 2

It also provides optionality for us, which is something that we always strive to maintain And as many aspects of the company as possible, so that if at some point in time, we choose to approach things differently from an operational perspective, we have the ability to do that. It's not our intent at this point in time, because of the quality of the operators that we have in our independent living facilities At this time.

Speaker 8

Great. Thank

Speaker 11

you.

Operator

Our next question comes from Michael Stryiak with Green Street.

Speaker 9

Good morning. One Follow-up on the wholly owned Enlivant portfolio and operator transition. I know you mentioned, they're performing well, but could you take us through just A reasonable base case in terms of potential degradation, we could see the NOI as a result of the transition?

Speaker 2

Yes, I'll take that. So we don't have a degradation base case. There may be some frictional costs as there always are when you transition to Operator, but given the distraction, the understandable distractions that the Enlivant management team has had With the sale process working with lenders, transitioning an entire portfolio of facilities to a variety of different operators, Bringing in an operator that is that has none of those distractions that is known to us, we think any frictional costs will be temporary. We actually think that there is upside in the operational results of that portfolio.

Speaker 9

Okay. That makes sense. And then one quick one on SHOP expense growth. I know you called out it's been moderating over the past few quarters. How much of that is agency labor just coming back to earth Versus a normalization in other expense line items?

Speaker 3

It's largely exactly what you said. It's largely The agency costs.

Speaker 2

Yes. As I noted a little bit earlier on the call, we're just not seeing Significant inflation in the non labor category. So as the operators get a better handle on their labor costs, Then the top line improvements will just flow through better without anything else getting in the way.

Speaker 8

Great. Thank you. Appreciate the time.

Speaker 2

Yes.

Operator

We'll take our next question from Michael Griffin with Citi.

Speaker 11

Great. I appreciate the follow-up. Just wanted to touch

Speaker 5

on Bridge TO HUD in terms of like external growth stuff. I don't think it's been mentioned so far. But if we think back to the low interest rate regime, maybe that Financing was in, call it, the mid-3s. It's probably moved up since then. Do you have a sense, Talia, maybe when you're underwriting transactions, where that might be after that sort of longer Permanent financing.

Speaker 5

Thank you.

Speaker 3

Yes. I don't have it post Fed rate hike Yesterday, so, but figure it's probably in the 7s. I mean, I will tell you that We are seeing other debt quotes non HUD, non bridge to HUD, but just like construction debt and stuff Being quoted as a floor of 7.25 percent currently at about 8.5 percent, and that's at Around 50% loan to cost, just to give you scale.

Speaker 5

That's great. I appreciate the color.

Speaker 4

Hey, Michael, just a follow-up to your question earlier on where coverage was XPRF a year ago, It was basically flat to where it was today. So one exactly flat, 1.55 times on a trailing 12 month basis. And when you consider what happened In that intervening time frame with labor expenses spiking, you have annual rent increases and the like, the fact that it Has stayed flat and is increasing is pretty encouraging.

Speaker 9

Thanks,

Operator

We'll take our next question from Juan Sanabria with BMO Capital Markets.

Speaker 11

Hi. Thanks for the time. A couple of questions. I guess on the coverage, you talked about how it's improving. And Would you be able to give the T3 coverage ex PRF for the SNF and seniors housing portfolio?

Speaker 4

What we'll say, Juan, is that because yes, we did not disclose it, it is higher than our trailing 12 month number.

Speaker 11

Would that be the case for Signature and Avamere as well?

Speaker 2

In the case of Avamere, It might be slightly up. I don't have that at my fingertips. In the case of Signature, they had a tough second and third quarter. So once they got all those sales and closures behind them and got corporate right sized sort of leaner company that they are today, They really refocused and bounced back super dramatically in the Q1. I'm talking about current Q1, not quarter in arrears.

Speaker 2

Okay.

Speaker 4

Yes. And the trailing 3 month numbers we're talking about again are Trailing 3 months ended December 31st. There's been 4 months since then. And as Rick alluded to earlier, The preliminary numbers we've seen come in for the actual Q1 of calendar year 'twenty three are encouraging and headed in the right direction.

Speaker 11

Okay. And then on the dispositions you guys completed, curious if you could share the yields or cap rates or the NOI that was booked For modeling purposes in the Q1, just to help us on a run rate basis?

Speaker 4

Yes. So in terms of the dispositions, We disclosed our the vast majority of our disposition activity for the quarter, we disclosed like in February. And as we said back then, the yield on that was, call it, mid single digits. So whatever incremental Sales we had between that point and end of the quarter, 1, were small and 2, really didn't change that overall metric. So I think that's still a good number to go with.

Speaker 11

Okay. Thanks. And then like the investments you did make in the quarter were at 8%. Is that kind of the new Obi, you think for where assets are trading today or are those deals, one of them was from the development pipeline, Are those is that indicative of today's pricing or those are unique situations and not necessarily?

Speaker 3

Those are unique 1 as you just said, the bulk of it was from a development pipeline and the other one so that was a Pre negotiated yield, if you will, or cap rate. And then the other one was a small property that is allowing us to create a campus with an operator of ours who's in a substantially larger building near across the way. So it was an unusual piece. There weren't we didn't have a lot of folks rushing to buy a small building on the campus of another building.

Speaker 11

Okay. And one last one, if you don't mind. The loan book, anything that we should be aware of in terms of potential risk? We've had Some news in the broader healthcare REIT space of some loans going, payership. Just curious how you feel about your current loan book?

Speaker 3

I don't think there's any change or and the bulk of it is not really is not at risk. It's not a large it's nothing like the Ventas loan that They had to foreclose.

Speaker 4

Yes, these aren't they're not mezz loans that we have, Juan.

Speaker 11

Thank you.

Operator

We'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets.

Speaker 9

Yes. Just one quick follow-up for me. Can you guys remind us what percent of your operators are on a cash basis and what the plan is for those tenants over time, Whether you're maybe looking to sell some of those assets or enter into long term contractual leases with either the current operator or Potentially a new operator.

Speaker 4

Yes. So in terms of our cash basis tenant pool, like I've said in the previous quarters, the part that we really focus on are the Portion of our cash basis tenant pool that pays us various amounts and they'll pay us a different amount this month versus next month, right? And that pool has come down. It was before like 5%, 6% to some of the sales and some of the transitions we've done. It's now somewhere, call it, 3% of our NOI.

Speaker 4

So it is coming down and like we've talked about before through The activities we're doing on the portfolio, whether it be sales or transitions, that's going to address a large component of that.

Speaker 9

Great. Thanks, Michael.

Operator

And there are no further questions at this time. I'd like to turn the call back over to Rick Matros.

Speaker 2

Thanks everybody for joining us. It feels good to at least believe that we've gotten the worst behind us and really do feel pretty good about things going forward. So again, thanks for the support. Thanks for joining us today

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Earnings Conference Call
Sabra Health Care REIT Q1 2023
00:00 / 00:00
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