Sabra Health Care REIT Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 12 speakers on the call.

Operator

Good day, everyone. My name is Adam and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sabra Third Quarter 20 24 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'd like to now 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 earnings guidance for 2024 and 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, 2023, 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 are still valid. In addition, references will be made during this call to non GAAP financial results.

Speaker 1

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 page of the Investors section of our website at sabrahealth.com. Our Form 10 Q, earnings release and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, CEO, President and Sheriff's offer, Healthcare REIT.

Speaker 2

Thanks, Lucas, and thanks everybody for joining us. To start, I'd note that we've now had several quarters in a row of continuing improvement in all of our primary asset classes. We've really distanced ourselves from the pandemic. We're hitting highs in several statistical categories. So we really feel good about where we are right now.

Speaker 2

Occupancy for our SNF portfolio is up 130 basis points sequentially. Our skilled mix continues to increase at 110 basis points sequentially and higher now than it's been for quite some time. Occupancy for our same store shop portfolio is up 90 basis points sequentially and margins in both those portfolios continue to strengthen. Occupancy in our triple net senior housing portfolio has been hovering around 90% for 4 quarters running now. Our EBITDA and rent coverage for our skilled nursing and triple net senior housing portfolios at 1.94 and 1.37 respectively are at levels that are much higher than we've seen for years, certainly and well before the pandemic.

Speaker 2

As noted in the press release, only Avamere of our top 10 saw a decrease, but that was specifically due to the percentage rents that we've been receiving and was still a strong 1.87%. I think the fact that we've been getting percentage rents for a number of months now as anticipated and yet they still have rent coverage as high as it is, shows that this particular lease restructure worked out really exactly as anticipated. And our faith in the operator certainly has been rewarded. Coverage and occupancy in our behavioral and other category were essentially flat sequentially as these now include 4 quarters of a lower occupancy stabilized addiction treatment center that was added to the pool last year. Our leverage has continued to decrease.

Speaker 2

We increased guidance at the midpoint and have strong at the midpoint strong growth at something over 6% on a year over year basis, and we expect that to carry over into 2025 as well. Investments for the quarter, both new and previously announced totaled just under $100,000,000 We're now seeing more activity in our investment pipeline than in past months, primarily deals of 1 or 2 assets. We're starting to see some more portfolio opportunities as well as more off market opportunities as we've talked about really all year. We're really focused on doing high quality investments with good yields, operators that we really trust, we're not interested nor do we need to do larger portfolio deals. Usually at least some portion, if not most of the facilities in those larger portfolios do require a lot of work.

Speaker 2

And we just don't need that noise around us right now. And the way we've approached our investments to date and we'll continue to approach them, which helping fuel the year over year growth that we're seeing and expect to see going forward. There are older assets, primarily SHOP and much of what we're seeing in the pipeline. But as I said, we'll look at those, we'll continue to look at those, but we're just going to stay focused on what we've been doing that is high quality newer vintage assets. We're starting to see an uptick in field nursing opportunities, although not dramatically so and are committed to doing skilled investments as well.

Speaker 2

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

Speaker 3

Thank you, Rick. As Sabra's 84 property managed senior housing portfolio, including joint ventures at Cher, had a strong quarter. On a sequential quarter basis, the total managed portfolio, including non stabilized communities and the joint ventures assets at Cher, had a 140 basis point increase in occupancy along with 60 basis point growth in cash NOI margin. Sabra's managed portfolio continues to grow through the addition of high quality well performing properties while operations continue to improve within the existing portfolio. Sabra's same store managed senior housing portfolio, including joint ventures at Share had excellent results this quarter.

Speaker 3

Excluding non stabilized assets, the headline numbers are revenue for the quarter grew 7.6% year over year with our Canadian communities growing revenue by 10.8% in the same period. Occupancy in our assisted living and independent living portfolio was nearly even at 84.1% 84.9% respectively. Cash NOI for the quarter grew 17.8% year over year above last quarter's results. In our U. S.

Speaker 3

Communities, cash NOI grew 15.3% on a year over year basis, while in our Canadian communities, cash NOI for the quarter increased 24.8 percent over the same period, benefiting from the strong performance of our joint venture properties. RevPAR in the Q3 of 2024 had robust growth of 4.2% year over year, while EXPOR was nearly flat for the same period. The minimal increase in EXPOR is a function of occupancy growth and limited cost increases reflecting the impact of operating leverage across this portfolio. We continue to see strong revenue increases across our senior housing portfolio accompanied by very modest expense growth with operators skillfully balancing the levers of occupancy and rate to achieve to continue to achieve outsized cash NOI growth. We believe that the portfolio as a whole has reached the point where operating leverage will contribute materially to cash NOI growth.

Speaker 3

As Rick mentioned, our net leased stabilized senior housing portfolio continues to thrive with consistently rising rent coverage reflecting the underlying operational recovery. Sabra's total investment in behavioral health remains static this quarter. We see growing interest in this asset class among real estate investors as well as brokerage firms, which have staffed up to cover the sector. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Speaker 4

Thanks, Talia. For the Q3 of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.37 This represents a $0.01 increase to normalized AFFO per share from our 2nd quarter results and year over year growth of 9% on the back of steady improvement in our managed senior housing performance and continued stability in our triple net portfolio. In absolute dollars, our normalized AFFO totaled $86,900,000 for this quarter. I would like to highlight a few key components of this quarter's earnings. Cash rental income from our triple net portfolio totaled $91,800,000 for the quarter, which was better than the $90,000,000 quarterly run rate provided on our 2nd quarter call, driven primarily by percentage rents collected during the quarter.

Speaker 4

NOI from our managed senior housing portfolio totaled $22,900,000 for the quarter compared to $20,800,000 last quarter. This increase was driven by the addition of the 2 property portfolio we acquired for $75,800,000 at the beginning of the 3rd quarter and continued sequential same store growth. Recurring cash G and A was $9,500,000 this quarter and slightly better than the $10,400,000 per quarter run rate provided on our Q2 call. We expect 4th quarter recurring cash G and A to be closer to that previously provided run rate. As noted in our earnings release, we updated our full year 2024 guidance on a diluted per share basis as follows.

Speaker 4

Net income $0.48 to $0.49 FFO $1.35 to $1.36 normalized FFO $1.39 to $1.40 AFFO $1.41 to $1.42 and normalized AFFO of $1.43 to $1.44 This represents an increase at the midpoint of our normalized FFO per share and normalized AFFO per share guidance of $0.02 and $0.01 respectively. At the low end of our range, our triple net cash NOI for the Q4 is approximately $90,000,000 which is the same as the quarterly guidance we provided last quarter and conservatively assumes no percentage rents are collected. This triple net cash NOI assumption is in line with the actual results of the Q3 excluding percentage rents as noted earlier. Our guidance incorporates all announced investment and disposition activity as well as announced activity under our ATM program and does not assume additional investment, disposition or capital transactions beyond those already disclosed. Now briefly turning to the balance sheet.

Speaker 4

Our net debt to adjusted EBITDA ratio was 5.3 times as of September 30, 2024, a decrease of 0.15 times from June 30, 2024, which was driven primarily by the continued NOI growth in our managed senior housing portfolio. The steady and continued improvement in our balance sheet strength together with increasingly attractive industry operating dynamics was a key driver to Moody's recent upgrade of our outlook from stable to positive. As of September 30, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $947,800,000 consisting of unrestricted cash and cash equivalents of $63,000,000 available borrowings of $847,400,000 under our revolving credit facility and $37,400,000 related to outstanding forward sales agreements under our ATM program. This year through September 30, 2024, we utilized the forward feature under our ATM program to allow for the sale of up to 7,300,000 shares at an initial weighted average price of $15.41 per share net of commissions. As of September 30, 2024, we had $386,700,000 available under our ATM program.

Speaker 4

Finally, on October 31, 2024, Sovereign's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. Dividend will be paid on November 29, 2024 to common stockholders of record as of the close of business on November 15, 2024. The dividend is adequately covered and represents a payout of 81% of our 3rd quarter normalized AFFO per share. And with that, we'll open up the lines for Q and A.

Operator

Your first question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Speaker 5

Hi, this is Elmer Chang on with Nick. Thanks for the questions. So over the last year, you've had a few quarters of accelerating year over year occupancy growth at the SHOP segment. And it seems like labor cost inflation continues to improve. Does that give you more confidence in providing additional segment guidance items for 2025 as you evaluate your expectations there?

Speaker 4

Yes. I think as we it's a little too early for us to talk about 2025 guidance. That's something that we'll address when we release our Q4 earnings and evaluate what is meaningful to provide with a high degree of confidence.

Speaker 5

Okay. Okay. Makes sense. And then maybe just on the balance sheet, as you touched on there briefly, you're seeing leverage improvement driven by the SHOP portfolio. And it's a key driver of why you got the credit rating upgrade or sentiment upgrade.

Speaker 5

What do you credit rating agencies want to see in terms of your leverage target or operating metrics to maybe earn an upgrade in the future?

Speaker 4

Yes. I think all the rating agencies, they obviously have their different pain points or areas they're focused on in terms of leverage levels and debt service coverage levels. But those are probably the 2 main aspects that they're focused on, which is going to be where our leverage is at, what the trajectory of that leverage is and then our fixed charge coverage ratio, both of which are by themselves will be investment grade rated. And I think for Moody's what they want to see is that sustain and continue to improve as it has the last couple of quarters. Getting that positive outlook was a big step in that direction.

Speaker 4

And we're hopeful at some point in the near future, the next step with them, which will be investment grade is forthcoming.

Speaker 5

Okay, got it. Thank you. And that's it for me.

Speaker 6

Thank you.

Operator

Your next question comes from the line of John Kielczynski with Wells Fargo. Your line is open.

Speaker 7

Thank you. Maybe if we could just start on the SHOP guidance going back to that. It looks like another good quarter and at the beginning of the call you mentioned RevPOR up 4.2 and exPOR relatively flat. I guess could you talk about what was underlying your expectations coming into the quarter? What would this performance look like?

Speaker 7

I know your guidance is a little bit vague maybe. Does this number land a little bit higher than lower than the midpoint of your expectation? And is there a little bit of conservatism not updating your guidance here?

Speaker 4

Yes. I mean, so what we said last quarter when we put out our guidance on SHOP growth was mid to high teens growth. And I think this fell squarely within our expectations. And similarly for the Q4, we're still saying mid to high teens growth. And if we have another quarter that's close to what we had this quarter, it'd be in line with what we're expecting.

Speaker 4

We're hoping that it performs to the upside, but where we came in is very much in line with what we expected.

Speaker 7

Got it. And then maybe on the acquisition front, obviously, you pre announced the larger deal. You gave us another deal here. But maybe talk about Rick made some comments about seeing ample opportunities in the space. Could we talk about how yields have trended over the quarter, maybe what you're seeing here into 4Q?

Speaker 7

And then is there a larger opportunity set and maybe even the potential to accelerate into next year? I understand we're not giving guidance right now, but just any color on how the landscape is changing? I understand some competition is coming back, but just where can volumes go from here?

Speaker 3

This is Talia. I think the opportunity remains robust, particularly while cost of debt remains relatively high compared to what it had once been. That really pulls the leverage buyers out of the market or forces them to bid at prices like you've seen our initial yields. So I think that's the positive right now. So with our cost of capital, vintage assets and particularly in senior housing that are performing well either stabilized or close to stabilized so that we feel that we're getting a strong yield with a very low risk profile in place and going forward.

Speaker 3

Now I think the opportunity set is large. I think that the private equity funds are I'm sure they're salivating and wanting to execute, but it's the pricing is still tough. We're seeing them still be sellers into the market. And we'll see what happens. It's all about cost of debt.

Speaker 2

And the only other thing I'd mention is everything's connected, right, John? So our performance has been really solid these last several quarters. The cost of capital has improved and that's going to make it that much easier for us to compete and do more going forward. But even though we may be able even though we believe we'll be able to do more, and to Talia's comments, we're still very committed to being very selective to not doing anything that's going to create a lot of noise because of the work involved and because of the structures that you have to put together to make it happen. And I think that's a commitment that we've made to our investors, starting last year as we started exiting the pandemic.

Speaker 2

And we've gotten a lot of support and very positive feedback about that. And we're just not going to veer off course. And if staying on this course produces this kind of earnings growth even at the midpoint, which is at the higher end of REIT world, I think it's a good strategy.

Speaker 5

Got it. Thank you.

Operator

The next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open.

Speaker 8

Yes. Rick or Talia, I appreciate the comments first of all on kind of remaining disciplined. But last quarter, you had referenced kind of a pickup in opportunities, particularly skilled nursing, I think was 1. And to the point you just made, your cost of capital has only gotten better since then. I guess, what's held you back from buying more since this past quarter?

Speaker 8

I'm curious if you're losing out on deals or everything's just taking a little bit longer to materialize? And I also don't believe you referenced behavioral this quarter as a target. What are the latest thoughts there? Thanks.

Speaker 3

Yes. I think behavioral is not a target for acquisition for us right now. As you recall, I have spoken in the past about it began as a vehicle for us to reuse existing assets that were no longer viable as either skilled nursing or senior housing. That is a was a fixed amount of assets, so we've depleted that and that we've converted those. So right now, we're sitting tight on that.

Speaker 3

The opportunities in that arena are rarely of institutional quality these days in terms of acquisitions and the opportunity set is very much in senior housing and skilled nursing today. On the skilled nursing front, in terms of volume and what we're seeing and how come we haven't executed 1,000,000,000 of dollars versus what we the billions we've seen, it really goes to being selective, understanding the risk in some of the assets we've seen because they really tranche out into assets that are challenged, whether they're skilled or senior housing, Rick referenced that, which is not those have not been risks we've been willing to undertake. Most of the higher quality assets, we have been bidding on. Sometimes we don't win the bid, but we're generally right up there and it's been our choice whether to pursue or not pursue.

Speaker 2

Yes. I'd add a couple of other comments. On behavioral, we've been in that long enough to come to the conclusion that there's a very particular model that we like from a capital perspective. And that's what we've had with 2 of our partners, where the operating platform is owned by a private equity fund. We'd like that relationship because there's another there are deep pockets other than us that are in the deal.

Speaker 2

So if we can find more opportunities like that, we'll pursue them. Those are very, very few and far between. As everybody knows, most operators and the skilled in the senior housing business don't have much in the way of balance sheets, but you've got operators that are very good, been around a long time and that gives you a lot of confidence. But in the behavioral space, most folks are new and untried and there just isn't the history there. So if we can find more opportunities like we have with 2 of our partners, that's great, but we expect them to be few and far between.

Speaker 2

On the skilled side, I would just add to what Ty said. Most things are still off market. There was a big portfolio recently that everybody saw. We saw that too. We just chose not to do it.

Speaker 2

We just didn't think it was right for us. So we're starting to see some more skilled opportunities, but they just haven't been that great yet. So we're not really holding back. As we've been saying, we were being selective and most of the good opportunities that we're seeing are on the shop side. So as soon as we see better opportunities on the skill side, we expect to see more of those.

Speaker 2

As NOI continues to stabilize and folks that haven't had to sell feel comfortable putting their assets in the market, then you'll see us do more skilled deals.

Speaker 8

It's all really helpful. I mean, how should we take your comment about the fact that you stated we're seeing more portfolio opportunities, but then I think you said we're not as interested in those deals and all that comes with it. Can you just marry those two comments, please?

Speaker 2

Well, yes, the portfolio deals that we've seen have some hair on it. And at this point, where we are developmentally as a company, we've taken big swings in the past. We felt it was necessary because of other circumstances. And we were willing to take on the work to do that. But we don't need to do that now.

Speaker 2

We need to be focused on doing the kinds of deals that give us durable and sustained earnings growth, or high quality. And that's kind of it. And let others view the stuff that requires a lot of heavy lifting.

Speaker 8

And then just the last one for me. The asset you acquired subsequent quarter end senior housing manage, Is that sort of the profile you're speaking of last quarter, newer assets, well leased and that's really why you're able to acquire it at the yield that you did above 8%? And I guess how deep is that opportunity set at those types of yields?

Speaker 9

Thank you.

Speaker 3

I don't think every deal is going to be an 8.5 plus initial yield, but I think we can still do deals that will make all of us pleased with the spread to our cost of capital on the senior space. And yes, that is a pretty good example. We got that deal because we know the operator well and plan to keep them in place, which helped us out on a competitive basis.

Operator

Our next question comes from the line of Juan Sanabria with BMO Capital. Your line is open.

Speaker 6

Hi, good morning. Just on the shop business, curious if you have any early signs or thoughts on how RevPAR could trend, given I'm assuming you're already talking about or have sent January 1 rate increases here. So just curious on your thoughts whether pricing could actually accelerate or hold or how you guys are thinking about it?

Speaker 3

I think mid single digits is the right way to think about it. It's hard to I think that's whether it's 4%, 6%, it's in that zone. I haven't heard any operator talk about numbers higher than that unless they're taking, unless they're turning around a building that's been under leased and under managed.

Speaker 6

Okay, great. And then just on the seniors housing triple net side, it looked like occupancy dipped a little bit sequentially. Could you just give a little back story as to that? And then as part of that, what's the back story or the driver of percent rents just to think about that on a go forward basis?

Speaker 4

Yes. So your first question on the senior housing lease, I mean, it went from 90% last quarter to 89.6% this quarter. So not a real meaningful drop and pretty steady if you look over the last 3 or 5 quarters. 90% is a pretty healthy occupancy for that facility type. So nothing really to point to there and nothing of concern at all as far as that goes.

Speaker 2

It's a small pool of assets. So any movement by any facility affects the whole pool of water. And these also aren't big facilities. So all that kind of goes into it. But if we have a steady state around 90% going forward, I think we'll be pretty good with that.

Speaker 2

Right.

Speaker 4

And sorry, what was your second question, Juan?

Speaker 3

You said.

Speaker 4

Oh, percentage rent. Yes. So that was yes. So in terms of percentage rent, I mean, we've been collecting it now for several quarters this year, under that lease, which has obviously been helping our cash NOI from our triple net portfolio. In terms of expectations on that, I mean, we do expect there's going to be some amount we continue to collect going into the future.

Speaker 4

That lease also has the ability to reset terms. There's a window that opens in 2025 to reset the terms on that to a fixed lease. And we'll continue monitoring and seeing how that portfolio performs. It's performed really well, as Rick alluded to in his opening remarks. And when we think the time is right to flip it from having percentage rent, a base plus percentage rent to just a fixed amount, we'll explore that.

Speaker 4

But that portfolio continues to perform well. We're getting percentage rents. It's been additive to our earnings And we're really happy with that outcome.

Speaker 2

And we have a it's a long window we have on making that decision. It's at least a couple of years. So we'll have a lot of time to monitor that. Thank you, guys. Thank you.

Operator

Our next question comes from the line of Michael Griffin with Citi. Your line is open.

Speaker 4

Great, thanks. I'm wondering if

Speaker 10

you can give some additional color just on the occupancy gains in the Smith portfolio during the quarter. Is it a function of better staffing at the facilities, maybe greater referral numbers or just this kind of continued upward trajectory in occupancy recovery that we've seen over the past couple of quarters? And then maybe as you think ahead, obviously, we've seen a material uptick in occupancy this year. But is it fair to assume there's going to be more seasonality as kind of the industry normalizes over the next year or so?

Speaker 2

So, the increase in occupancy, there's never been a needs or referral issue. It's always been a function of labor and how much labor is available to admit as many patients as possible. So, yes, it's just that labor has gotten better. So that's allowed occupancy to continue to tick up. And it's improved over the last year a little bit more than we would have thought given labor issues.

Speaker 2

So, we expect it to keep ticking up. I mean, the industry, both skilled and senior housing are projected to be fully occupied in the next few years, given the dynamics with the demographic and no new supply on the senior housing side and declining supply on the skilled side. So we so and it's going to be interesting to see what happens with seasonality. And normally, once we got out of the pandemic, I would expect to see seasonality come back in. But on the skilled side, for example, with supply continuing to decline, I mean, you think about 800 to 900 buildings closing over the last 4 plus years, only 15 new facilities built last year, it's just going to continue that way.

Speaker 2

So it's possible that that could mask some of the seasonality that remains to be seen. But I think that's a real possibility that we're still not going to see sort of the normal seasonality that we've historically seen. So time will tell. But that's kind of what we see right now.

Speaker 10

Great. Appreciate the color there, Rick. And then maybe just one question on capital availability. Obviously, the demand, I think, we've seen for both seniors and skilled with the demographics sets up well over the next couple of years, but it seems like lenders are still relatively apprehensive to provide debt capital. In your conversations and kind of what you're seeing out there, has there been more appetite for lending?

Speaker 10

And maybe if you could give some color on kind of the availability of bridge

Speaker 2

to HUD debt that would

Speaker 11

be helpful as well. Thank you.

Speaker 3

Lenders, so we don't use mortgage financing as a matter of course. And so Mike can talk more about balance sheet debt. But what I hear in our times that Nick and ULI and speaking with other operators and owners and lenders is there's definitely an interest among the lenders to be back. I think there's an issue of price. Now Sannie Mae still has a substantial bad book of senior housing loans.

Speaker 3

It is overwhelmingly the majority of their bad debt right now. So and then they foreclosed on additional assets. So Fannie Mae is not really actively lending, but Freddie is. I have not spent a lot of time in the bridge to HUD world recently, but there is still definite activity in the bridge to HUD space and it's non bank lenders and it has been for a while. And they'll I think their risk appetite may have shifted down somewhat from where they were a few years ago, but also results on operating results on skilled nursing has improved and kind of normal gotten closer to kind of a normalized place.

Speaker 3

So they don't have to take as much. HUD is still extremely slow, extremely.

Speaker 4

Great. That's it for me. Thanks for the time.

Operator

Our next question comes from Rich Anderson with Wedbush. Your line is open.

Speaker 11

Hey, thanks. Good morning. So I hear you on complications, the CTR deal with JV and preferred equity is not your cup of tea. But I'm wondering if you run into any of your REIT peers and that makes it a little bit more difficult to find stuff given that they have your cost of capital has gotten better, but theirs and 1 or 2 others is better than yours as well. So are you finding that you're running into other REITs?

Speaker 11

Or is it just too big of a playing field and it's not an issue?

Speaker 6

I think a couple of things. It's one, it's a

Speaker 2

big playing field. But the other is when it comes to skilled nursing, we all value these assets the same way. It's going to be between a 9 and a 10 cap. So even if someone's cost of capital is a little bit better than ours, They're not going to come in at an 8 cap to beat us on it. So we can compete on any of the skilled stuff that's out there.

Speaker 2

And if we wanted to do bigger stuff that had a little bit more work required to it, if we chose to do that, we could do that. So when it comes to the skilled, the cost of capital piece just isn't an issue. It's not a barrier at all. On the shop side, in terms of our peers, not very many our other peers aren't really doing shop. We don't view Ventas and Welltower as the same, obviously, right?

Speaker 2

So we're the only ones right now that are out there doing it. Yes. In your size category, you mean?

Speaker 4

Right.

Speaker 11

What about is investing in debt incrementally from here also too much of a complication or are you willing to go down that path more?

Speaker 4

I mean, we did a loan earlier this year. It was a smaller loan on a skilled nursing facility that had a clear pathway to ultimate ownership of that. I mean, that is more within our wheelhouse than going out and doing very large mezzanine loans or something like that. But by and large, like Rick alluded to or Rick said earlier and he said on previous calls as well, the bigger and more complex those things become, the more complex our story, the more noisy our story becomes, which is precisely what we're trying to avoid. So there may be opportunities that present themselves with a trusted operator on an asset that we'd like to own eventually that could make sense like the one we did earlier this year.

Speaker 4

But you shouldn't expect that to be a large driver of our investment activity.

Speaker 2

Yes. And look, Rich, we get that. But we have a ton of excess cash. We understand why some of our peers want to find a place to park that and put that to work. Everybody's different.

Speaker 2

So I totally understand that. But that's just not a place that we're at. And if the strategy that we've been executing resulted in anemic year over year growth, that would be different. But that's not the case. This is working.

Speaker 2

So, and as you know really well, there are still folks out there waiting to see when we're going to take that next big swing or have that thing that's going to require a call to discuss. And don't believe that we're going to stay this focused and disciplined and all that kind of stuff, right, that we're ill equipped to be a little boring, right? So, we're just sticking with it as long as we continue to get the results that we're getting, which are pretty good.

Speaker 11

Okay. On the SHOP growth, it's a nice turnaround from the beginning. I think it was the beginning of the year where you did 9% and everyone was like, why is it so low? And then you said, yes, we got to work on it. What happened to flip the switch and to get requisite levels of double digit growth out of your SHOP portfolio?

Speaker 11

Was there something strategic or was there something one time ish back then that sort of muddied the story on a temporary basis? Apologies for not remembering exactly.

Speaker 4

No, it's all good. The 9% was really an outlier and we talked about whenever it was a couple of quarters ago, it's really a tough comp from the previous year because if you look at the other quarters this year, the growth has been squarely in that mid to high teens level. And it has been even going back to last year, if you look at year over year growth, the growth has been really strong in that portfolio. And it's really effectively what we expected in terms of the natural recovery in that portfolio as you start picking up occupancy, operating expenses start to moderate, operating leverage kicks in, all the stuff Talia talked about every quarter. That was what we expected and it's playing out that way.

Speaker 2

Yes. So it was an anomaly enough that it was a bad comp. That's all.

Speaker 11

Yes. So no strategic change or anything like that that changed the landscape. Last for me, we're kind of past the happy point of coverage, I mean, I should say of reimbursement perhaps for Medicare and Medicaid and maybe this time next year we'll be talking about a more typical number. Do you think we're sort of at the sweet spot of coverage gains and that we will by this time next year, the coverage improvements that you're seeing and perhaps the other the metrics, occupancy and so on, start to come sort of decelerate down to a more typical growth pattern? Or do you see that there's more than a year left in that thesis going forward?

Speaker 11

Thanks.

Speaker 2

Yes. So I've seen more than a year left for a couple of reasons. One, I think we probably have 1 more year from a Medicaid and Medicare perspective, because of the lag time in capturing inflation that will have some outsized rate increases. So I think, next summer, which is when we get about 70% of our Medicaid rate increases in October 1, 25, I think we'll still have pretty good rate increases. Not as good as this year.

Speaker 2

I don't think we're going to see over 7% again on Medicaid and not necessarily even 4% on Medicare. But I think we have at least 1 more year of somewhat outsized compared to years past on both Medicare and Medicaid. The other thing I'd note is that we expect occupancy to continue to increase. So even when the rate increases moderate, the operating leverage is so significant in both these asset classes that we would expect to continue to see margin growth and rent coverage. So I mean, I think it was you, Rich, 2 quarters ago that said, hey, is it possible that we're going to see 2 times coverage in the aggregate at some point?

Speaker 2

And we're almost there, right? So, and the other thing I would note, particularly on skilled more so than senior housing, is that operating leverage inflection point kicked in lower than it has historically because the revenue per patient day has grown at such a pace that it has outpaced what's happened with inflation. So, in other words, we were already at prepay we were already higher than pre pandemic margins when occupancy in the skilled portfolio was still 200 basis points off pre pandemic levels. Right. So I think it's for sure more than a year.

Speaker 6

Okay. Thank you.

Speaker 2

Yes.

Operator

Our next question is from Alex Fagan with Baird. Your line is open.

Speaker 10

Hi. Thank you for taking our questions. First one for me is, what are you seeing as the best risk adjusted returns currently in the pipeline?

Speaker 3

Think it's the kinds of assets you've seen us buy. Like we've said, newer, vintage, high quality, well performing senior housing assets. And I think there are going to be some sniffs that fall into that category as well. Newer vintage may be more loosely defined in the case of sniffs than senior housing, but nonetheless newer. I think that those would all make sense for us.

Speaker 10

Yes, helpful. And how much more upside is there from having your rent and do any other tenants have meaningful upside for percentage rent?

Speaker 4

Yes. To answer your second question, there's not any other tenants with meaningful percentage rents baked into their leases. The upside for Azimir, I mean, I don't think there's technically a cap on it. So, it's going to be just as they continue to improve on their operations, we're going to see that benefit. So it's hard to say how much that upside could be, but we still think there's a bit of upside to capture there.

Speaker 4

Yes. What's going to

Speaker 2

be most important is taking that window that we're going to have starting next year to reset to a fixed rent, and picking the right moment that works frankly, not just for Sabra, but works for Avamere as well. It's got to work for both of us. So that'll be an ongoing conversation over the next year plus. And then we won't have anything left really, with percentage rents.

Speaker 10

Got it. Thank you. That's it for me.

Speaker 2

Thanks.

Operator

Our next question comes from Michael Stryc with Green Street. Your line is open.

Speaker 4

Thanks and good morning. So I know you called out the operating leverage impact on NOI growth within the SHOP business. Can you just quantify the flow through of incremental occupancy to NOI that you're currently seeing today across the SHOP portfolio?

Speaker 3

Frankly, I have not done that and tried to back into that math. We're seeing the numbers I gave you on Rev on export can tell the story. So even though expenses increased somewhat, it's really variable costs that increase with occupancy, not fixed cost. The fact that export is essentially flat now kind of tells you where that spot is. And so at that point is just revenue minus the variable cost that's really going to the bottom line.

Speaker 3

And that's it's senior housing, that's going to be a substantial portion.

Speaker 4

Got it. That's helpful. Maybe moving going back to the SNF transaction environment conversation, what's driving the increase in SNF opportunities out there? And what type of sellers are you seeing start to become a bit more active?

Speaker 6

Well, I think because of

Speaker 2

the pandemic, you had a lot of the assets that were out there were sort of lender force distressed assets. And I think a lot of sellers who didn't have to sell, but ordinarily would sell, has simply been waiting for their NOI to become stable enough and predictable enough that they don't feel like they can get hosed on price. So and I think with we've got the Medicaid rates that are now baked in and Medicare just happened October 1. So with that with the reimbursement increases baked in, hopefully as we go into next year, we'll see more SNF opportunities that aren't off market.

Speaker 4

Great. Thanks for the time.

Operator

Our next question is from Omotayo Okusanya with Deutsche Bank. Your line is open.

Speaker 9

Hi, yes. Good afternoon, everyone. This conversation around acquisitions is very interesting. It's like damn, did you do, damn, did you don't. Anyway, first question around the senior housing triple net portfolio.

Speaker 9

I think one of your peers on their earnings call talks about increasing interest in trying to convert some of their triple net senior housing to RIDEA. The market seems to kind of respond positively to that. Just wondering whether that's crossed your mind, whether it makes sense within your portfolio?

Speaker 2

Well, we've been doing that all along. That's why the senior housing triple net portfolio is so small now. So we've already we've been active in doing that on a regular basis. So we're kind of out of those opportunities because right now the remainder of that triple net portfolio is legacy stuff with really good operators. The coverage is so 137.

Speaker 2

So they don't have an incentive at this point. They're doing really well. They don't have an incentive at this point to convert to shop. So, the others are mostly transitions to newer operators. So I think I don't think that number is going to change dramatically.

Speaker 2

You will though see you're going to see our mix of assets change because you're going to see more shop growth with the company, which will decrease the percentage that's triple net senior housing. It's also going to decrease the percentage of IL that's in our senior housing portfolio because most of the SHOP that we'll be doing doesn't have much or any IL in it. And because the behavioral opportunities that we would like are going to be so few and far between, that percentage of NOI is going to drop and kind of accrue to shop. So I think you'll see skilled sort of hover somewhere around where it is. We can do a lot really large scale deal tomorrow and it's not going to change the percentage that much.

Speaker 2

So I would expect to see that hover around where it is. SHOP will increase, IO will decrease, the triple net will decrease, and behavioral decrease.

Speaker 9

That's helpful color. And then one more from me. Just again, Rick, if you could talk a little bit about kind of from a regulatory perspective, what you're expecting going forward, whether that's election particularly related or again, you also have CMS out there talking a little bit tougher about 2025 and their viewpoint on they're going to keep moving ahead on minimum staffing unless something dramatically changes. They're going to get seem to be full steam ahead on like regulatory changes they want to implement and curious what your thoughts are on that?

Speaker 2

Well, they can say what they want and I respect that. But our point of view hasn't changed on what's on the fact that we believe minimum staffing is going to go away, because it's just a really, really bad idea. Beyond that though, I think the impact of Chevron is much broader than how it's going to impact the outcome to the staffing mandate, because it goes to the way regulators have arbitrarily and unilaterally made decisions. So I think it's going to be tougher for any of these regulatory bodies to just arbitrarily say we're going to do this to you now, we're going to do that to you now. And I would suggest that our trade association, which really represents the industry, when it comes to this kind of stuff, both legislatively, and as we've seen with the staffing mandate with lawsuits, I think they're going to be much more aggressive post Chevron and just not sort of sitting back and accepting things just being done to us without any real rationale or without any focus really on what's really going to improve quality of care to the patients and residents that we care for.

Speaker 5

That's helpful. Thank you.

Operator

There are no further questions at this time. I'll turn the call over to Rick Matros.

Speaker 2

Thanks everybody for your time today. As always, we're available for follow-up. We look forward to talking with you. And in a couple of weeks, we'll look forward to seeing a lot of you in Vegas for NAREIT. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Sabra Health Care REIT Q3 2024
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