Sabra Health Care REIT, Inc. Q2 FY2021 Earnings Call

Good day, ladies and gentlemen. And welcome to the Sabra Health Care REIT Second Quarter 2021 Earnings Conference Call. I would now like to turn the call over to Michael Costa, EVP Finance and Chief Accounting Officer. Please go ahead, Mr. Costa.

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including the expected impacts of the ongoing COVID-19 pandemic, our expectations regarding our Enlivant joint venture, 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-K for the year ended December 31, 2020, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished with 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 the 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 in the financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release, and supplement, can also be accessed in the Investor section of our website. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Mike, and thanks everybody for joining us today. First, let me start by once again thanking our operators and all the team members that work at the facilities. It's been a really tough 18 months, the worst is over. But there are still some challenges ahead. And for myself, as someone who spent most of my career as an operator, I still can't even imagine what it was like these last 18 months dealing with COVID in the facility. So they continue to have our thanks, our appreciation, and our admiration. As you saw in the separate press release, Harold Andrews, our CFO, is going to be retiring at year end. He'll stay on in a consultation role for the two years following his retirement, which essentially means that Harold is going to be available to us for whatever we need in an advisory capacity, and I'm sure Mike will be accessing him as well. And with that, we're really pleased that Mike Costa will be promoted to the CFO position. Mike's been with us since inception. In fact, our whole team has been together since inception. So it's a really smooth transition for us, keeps us culturally intact. And we'll have — we anticipate having Mike's position replaced. Our goal is early in the fourth quarter, so we've got a few months of overlap between Mike, Harold and the new individual. Next, moving on to the Enlivant exit. I know some of this was expected. A couple of comments that I want to make. One, our exit from Enlivant is specific to Enlivant. We're completely committed to continuing to grow in senior housing. I want to note and express my appreciation also to the management team at Enlivant and our desire with a wholly-owned portfolio to continue to work with them and to continue to grow with them after the sale of the joint venture. There were a couple of things that really happened. And just to go back a little bit in history prior to the pandemic, we were getting pretty close to wanting to exercise the option on the 51% that TPG owns. The pandemic really changed everything and two things specifically impacted our decision making. One is the leverage. While the leverage was high, as it is with most PE firms in companies prior to the pandemic at somewhere around nine times, it wasn't unreasonable and the size of the check that we'd have to write to bring leverage down to levels that were accessible wasn't an overwhelming amount. Because of the pandemic, the impact on occupancy and NOI, that leverage is now 20 times. The other issue is the operating company platform, which was really built to support a much larger and growing enterprise in order to accommodate that. And again, that was impacted by the pandemic as well. Current management fees no longer support that platform. The structure of the management agreement and the fee structure specifically would have to be increased pretty dramatically to a point that we think is not market. And so the combination of those two items just makes this something that would be extremely dilutive, probably over the next couple of years, at least. As much as we'd like the portfolio, we're better off moving forward; it's immediately de-levering and accretive, and it simplifies everything about our company and our reporting, which we'd like as well. And so it really comes down to those issues. So TPG, at some point, will start the process, and we'll tag along with that. And that'll be that. The other final point I would make is, when we exited 2018, we had finished all the restructuring early in 2019 that was related to CCP, along with the sales of Genesis as well, and senior care centers. And we were really focused and committed to our shareholder base on not having noise. And certainly, even though the merger accomplished a lot of what we wanted to have happen, there was a lot of noise over that 18-month period. Over the course of 2019, we stayed true to that. And I think people were rewarded as a result of that. We did our first two investment grade note offerings, which were really successful, then the pandemic hit, but our commitment doesn't change. We want to avoid noise. We just want to move forward and do deals that are more predictable and understandable, and just focus on growing the company. The result of our exiting Enlivant puts us in a position that we've actually never been in with lower leverage and the optionality that comes with lower leverage that we've never had before. Let me make some comments now about COVID and the current reimbursement environment. So at this point, we're not seeing breakout trends with the variant in the facilities. The vaccination rate, as we've been talking about the last couple quarters, is exceedingly high for patients and residents throughout the Sabra portfolio, well over 90%, many of our operators are over 95%. The workforce isn't where we would like it to be, but it's certainly much higher than the general population, north of 70% in the aggregate. Unlike residents and patients where there's much disparity between the uptake rate on patients and residents, there is disparity with employees. So 70 to 75%, in the aggregate, is pretty much where we are for employee vaccination status. You may have just seen that Massachusetts is now mandating vaccinations for all healthcare workers. We think that's a good thing. We have several operators that have mandated vaccinations for employees, but not very many. I think their primary concern with all the pressures on labor, which I'll get to in a minute as well, is that they'll lose employees. But I will tell you that for those of our operators that did mandate vaccinations, they did lose employees. And if they had to do it again, they would do the mandate. Again, from their perspective, it was completely worth it. It created a much more comfortable atmosphere in the facilities and in replacing the employees that they lost. Unfortunately, we've got other actions happening in other states; you may have seen in Texas that even if operators want to mandate vaccines they cannot. So that's really, I find that distressing and a real head scratcher. So it just puts operators in Texas in a little bit more difficult position. But I would say that one of the reasons we're not seeing breakout trends is the operators are enforcing human protocols. So people are wearing masks, and when they come into the facilities, both workforce and visitors, so that's helping quite a bit as well. So we feel pretty pleased with where we are with COVID in the facilities. Out of all of our buildings, we only had 10 facilities that are completely clear of COVID. We actually have one operator that is reopening a COVID unit, because one of their primary hospital partners is overrun with COVID. And so they're doing that to help out the hospital. So we may see a little bit more of that as well. In terms of the Provider Relief Fund, it's now at $43 to $47 billion. It's increased, as I noted, last quarter, because of monies that have been returned by the hospitals. The stay for distribution has been delayed. There were a couple of reasons it was delayed, but most recently it was delayed because of the debate around infrastructure and pay-fors. The PRF fund is now protected. And so now we fully expect that there will be an announcement on the amount, timing and methodology. But we don't know what it is at this point. The Public Health Emergency (PHE) was extended through December 31, 2021. The final rule from CMS, the market basket came in at 1.2%, so pretty much where it was expected. And there was no parity adjustment to PDPM this year. I would note that I've seen some commentary after CMS made the announcement that some analysts are expecting that there will be an adjustment next year, so October 2022, for fiscal year 2023. But we don't know about that either. CMS did note that this year, obviously, was a tough year to use anything as a database, because COVID really impacted all the numbers and really drove up acuity. So we don't even know if the 5% is a real number. Secondly, with the variant affecting operators to some extent, and we don't know how that's going to play out over the next few months, CMS is unsure how good the database is going to be in fiscal year 2022 either, so we'll see. However it turns out, one of the things that we do feel very good about in terms of our relationship with CMS is that they don't want to disrupt the industry. So anything that they feel they need to do, I think it'll be spread out over time in a way that doesn't impact our operators. And the fact of the matter is, increased Medicare revenue should come from the smart operators who will move in acuity on their own, and not be dependent on market basket and other things. Now we move on to our acquisition pipeline. Our acquisition pipeline is in excess of $2 billion; it's actually easier than it's ever been. So I'm talking pre-pandemic types. It's still primarily senior housing, but we're starting to see some skilled and some more behavioral opportunities. And just a reminder that when we discuss our pipeline, those are potential deals that we're actively reviewing. They're always continually coming in and out, and a lot of these will fall off as well. But when we talk about the amount that we have in the pipeline, it's not the amount that hits our desk; it's the amount that hits our desk and after review we decide to actually spend time on underwriting analysis, et cetera. In terms of our strategy going forward, we'll continue to be opportunistic within the asset classes that we're in. And while we would like to find some larger opportunities, we're only going to do larger deals if they don't require restructuring or any cleanup that will prolong noise around the company. We'd rather stretch a little bit for a portfolio that's real, that has quality and clear upside and is accretive, as opposed to paying something less for a troubled portfolio. Beyond that, we're laser-focused on the bread-and-butter deals, $30 to $80 million deals and even less than that, and, obviously, more than that, because those are the deals that are easily actionable. The team's really focused on it, and cumulatively it will provide some good growth for Sabra going forward. So, regardless of any time we may spend looking at larger opportunities, we never take our eye off the smaller opportunities. Turning to occupancy trends, our eight skilled operators, which are 71% of our NOI, since the end of December 2020 bottom, are up 601 basis points in the aggregate. Skill mix, while lower than the several high acuity continues to normalize and is 144 basis points higher than pre-pandemic levels. We're seeing similar trends in the remainder of our skilled portfolio. Talya will discuss our senior housing occupancy trends, with AL (assisted living) improving more quickly than anticipated. I noted earlier, I made a comment about labor challenges. That's really the biggest challenge right now, until the pandemic related benefits run off in September. And you see — I know you all are seeing this in all sectors — people just aren't coming back to work. And so that's put stress on operators in areas that we haven't seen stress before. So nursing and therapy are one thing because there's always a shortage there. But we're seeing labor stress in departments like dietary and housekeeping and laundry and we are using temporary agencies in some cases. We expect that to improve as we start moving into the fourth quarter, but that's still very tough right now and it's going to be tough for a while and it does have some potential impact on the trajectory and the rate of recovery for occupancy because depending on your staffing levels at any particular time, you may not be able to accommodate every admit. We all have operators that have had to close off admits. For example, if you've got seven admits that you'd like to do in the next week and a half, you may only be able to do five. So occupancy growth is continuing to happen, but here and there it could be impacted by some of the labor stress. The skilled portfolio EBITDA loan coverage is flat sequentially on an EBITDAR basis and remains above one time when excluding Provider Relief Funds. The triple net senior housing portfolio is down to 1.12 from 1.23 sequentially, and that was purely a function of a strong pre-pandemic quarter dropping off, which was replaced by a severely impacted quarter coming on with a difference in occupancy of 780 basis points. Our other acute and post-acute operators, representing 11.6% of NOI, continue to perform at a high level with coverage and occupancy higher. We continue to be strategically focused on growing the behavioral and addiction segments. And with that, I will turn the call over to Talya.

Thank you, Rick. Sabra's senior housing wholly-owned managed portfolio continued on the path of rebuilding occupancy and net operating income after the successful distribution and implementation of the COVID-19 vaccine late in the first quarter of this year. The headline numbers for the wholly-owned managed portfolio are as follows. Occupancy at the end of the second quarter of 2021 was 78.4%, up 322 basis points from 75.1% at the end of the prior quarter. Same-store RevCORE, excluding non-stabilized communities, was slightly higher than the prior quarter at $3,230, compared to $3,205, and in line with RevCORE in the second quarter of 2020. Same-store cash net operating income increased by 34% sequentially, and margin increased by 5.9% compared to the prior quarter, in large part because of the occupancy rebound in our wholly-owned Enlivant portfolio, as well as reduced pandemic-related operating costs such as additional labor, PPE and supplies, with a small boost of $519,000 of COVID grant income in the second quarter of 2021. When we look at sequential operating results on a more detailed basis, we see that the pandemic was not uniform in its impact on occupancy, with higher acuity assets experiencing greater declines and faster recovery. Vaccine clinics were pivotal to this turnaround. Sabra's wholly-owned managed assisted living portfolio, excluding acquisitions made during the quarter, has continued the occupancy recovery that began in the second half of March, driven primarily by our wholly-owned Enlivant assets, which comprise about half of the units. From March 2021 to April 2021 occupancy increased by 160 basis points to 69.5%. From April to May 2021, occupancy increased 214 basis points to 71.7%. From May to June 2021, occupancy increased 39 basis points to 72.1%. From the low in March through mid-July, occupancy increased 425 basis points to 71.8%. This trend was driven by our wholly-owned Enlivant portfolio, which had spot occupancy of 72.1% at the end of July, 200 basis points above June. We are seeing leads and tours consistently well above 2019 levels, indicating the pent-up demand for needs-based communities continues. With no current infection outbreaks in this portfolio, move-in volume has reverted to normal trends allowing occupancy to rebuild. For comparison, Sabra's net lease assisted living and memory care portfolio has shown continued occupancy recovery, increasing 246 basis points in the second quarter compared to the prior quarter. During the quarter the increases reset from March to April 2021: occupancy increased 84 basis points to 75.7%; from April to May 2021 occupancy increased 71 basis points to 76.5%; from May to June 2021 occupancy increased 63 basis points to 77.1%; and from the low in February through mid-July occupancy increased 505 basis points to 77.6%. Because we report EBITDA coverage one quarter in arrears, this portfolio's lower coverage reflects declining occupancy from the pandemic over 11 months, with only March reflecting the post-vaccine recovery. Sabra's managed Independent Living portfolio experienced less occupancy loss than our assisted living portfolio and its recovery has been more gradual. In addition, it has been impacted by deferred move-outs, lack of prioritization for vaccine distribution in the U.S., and delayed vaccine distribution in Canada. From March to April 2021 occupancy increased by 31 basis points to 77%. From April to May 2021 occupancy decreased 52 basis points to 76.5%. From May to June 2021 occupancy increased 166 basis points to 78.2%. From the low in May through the end of July occupancy increased 212 basis points to 78.6%. In higher acuity settings, initial vaccination clinics began in January and were completed in February; in independent living, vaccination clinics began in March and continued into April. In both cases, we see the timing of vaccination in the communities as pivotal to increasing occupancy. Unlike our higher-care portfolio of communities, Independent Living experienced a higher rate of move-outs in May. Residents in independent living requiring higher levels of care deferred moving during the pandemic, resulting in pent-up move-in volume, a trend that has reverted to normal levels by this quarter end. Together these factors delayed the occupancy recovery. Demand for Independent Living appears to be strong, as leads are tracking 10% higher than in 2019 and move-ins are tracking nearly 20% higher than 2019. Importantly, the rate of lead-to-lease conversion is higher than in 2019. While occupancy gains began to be felt in the second quarter across our wholly-owned managed portfolio, pandemic-related expenses also dropped 6% quarter over quarter. The decline would have been even greater but for ongoing workforce challenges being faced across the industry and a vaccine mandate at Enlivant as of June 1, resulting in temporary increased agency utilization until permanent staff is recruited. In our portfolio, we're seeing nearly all community residents and patients vaccinated; staff participation has been lower, at an industry rate of 67%. In communities where operators have mandated employee vaccinations, we are seeing participation at the same level as residents. There is a cost of this: staff refusing the vaccine must be replaced with temporary labor until permanent employees can be hired. Even in this challenging labor market, we expect vaccine mandates to become increasingly commonplace across all segments of the healthcare industry. Considering the current concerns over the Delta variant's spread, Enlivant among other operators has already mandated vaccinations and many operators are requiring it of new hires. Our operators continue to put resident safety first. And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

Thanks, Talya. And first, let me just say it's been a real pleasure working with all the investors and all the analysts these past 11 years. And it's been a blast and really a blessing working with Rick, Talya, Mike and the whole Sabra team. It's tough to leave the greatest gig of all time for me. But I do know that Mike will continue to do amazing things for Sabra as CFO and I'm thrilled for him to have this opportunity. So let me now get quickly into the quarter. I'll give a quick overview of the numbers for Q2 and then provide additional color on our 2021 guidance. But first I want to provide some additional color on the decision not to acquire TPG's 51% interest in the Enlivant joint venture without an exit the investment when the opportunity so arises. For clarification, the sales process will be handled by TPG. We expect to exercise our tag-along rights to sell our interest if and when that sale occurs. As Rick noted, the decision was not an indication of a lack of belief in the management team or recovery prospects for the portfolio. Rather, the pandemic has had not only a significant impact on the expected near-term financial performance of the portfolio, but it also impacted our cost of equity capital as compared to late 2019 when we contemplated exercising our option to purchase the portfolio. These two factors, along with a current debt-to-EBITDA of 20 times as of June 30, 2021 compared to the historical 9.5 times leverage, have significantly increased the cost to Sabra to buy TPG's 51% and rightsize leverage on the portfolio to match our balance sheet targets. Additionally, expectations of the need for a higher management fee on the portfolio will further reduce long-term earning prospects below our prior expectations. These factors would result in an extended period of earnings dilution for us if we were to acquire the 51% interest at what we believe to be the fair market value of the portfolio. This decision has resulted in our recognizing an impairment on the investment during the quarter of $164.1 million, reducing our carrying value to an estimated fair market value of $114 million. Finally, we currently have our net debt to adjusted EBITDA approaching the lowest level we have seen in our history at 4.75 times, excluding the Enlivant joint venture debt. I would like to point out that the calculation excludes our share of the Enlivant joint venture debt and only includes actual cash distributions from the joint venture to Sabra in that EBITDA calculation, since this is the proper measure of cash available for us to repay Sabra consolidated debt. This current 4.75 times leverage includes only $5.7 million of cash distributions from the joint venture in our adjusted EBITDA amount as the joint venture suspended distributions to preserve cash during the pandemic. As a result, our leverage will likely be positively impacted by the sale of the portfolio. As an example, if we receive proceeds equal to our new carrying value of $114 million, our net debt to adjusted EBITDA would decline on a pro forma basis by 0.9 times to 4.56 times. The benefit of the potential further deleveraging is significant to our strategy to maintain a strong balance sheet and provide us with significant optionality in how we think about funding future growth. And now for the numbers for the quarter. For the three months ended June 30, 2021, we recorded total revenues, rental revenues and NOI of $152.9 million, $110.8 million and $121.3 million, respectively, as compared to $152.4 million, $113.4 million and $121.3 million for the first quarter of 2021. This decrease in rental revenue of $2.6 million is primarily due to a decrease in collections related to leases accounted for on a cash basis. Note that rental revenues can fluctuate quarter over quarter due to the timing of collections and recording of cash-based rental income, as demonstrated by our first quarter rental revenue increasing by $2.7 million over the fourth quarter of 2020. Total revenues and NOI were also impacted by a $3.1 million increase in revenues from our wholly-owned senior housing managed portfolio compared to the first quarter. The increase is due to $0.5 million in government grant income, as well as two senior housing management contracts we acquired in 2021. NOI was further impacted by the result of the Enlivant joint venture, which generated $2.3 million of cash NOI during the quarter. This was lower compared to the first quarter due to a $2.5 million one-time support payment by the joint venture to the management company to support its cash flow needs. Excluding this one-time payment, cash NOI increased by $1.7 million over the first quarter of 2021. Finally, COVID-related costs in our senior housing managed portfolio, excluding the joint venture, totaled $0.4 million for the quarter, a $0.5 million decrease compared to the first quarter. FFO for the quarter was $85.7 million and on a normalized basis was $88.4 million or $0.41 per share. This compares to normalized FFO of $85.5 million or $0.40 per share in the first quarter of 2021. FFO excluding certain non-cash revenues and expenses was $83.9 million, and on a normalized basis was $86.6 million or $0.40 per share. This compares to normalized AFFO of $83.2 million or $0.39 per share in the first quarter of 2021. The primary normalizing items for FFO related to the elimination of the one-time support payment made by the Enlivant joint venture to the management company. The increases in normalized FFO and normalized AFFO are primarily related to increases in NOI previously discussed. For the quarter we recorded a net loss attributable to common stockholders of $132.6 million or $0.61 per share, driven by the impairment charge related to the Enlivant joint venture. G&A costs for the quarter totaled $8.8 million, compared to $8.9 million in the first quarter of 2021, and included $2.3 million of stock-based compensation expense in both quarters. Recurring cash G&A cost was $6.2 million or 5.1% of NOI, in line with our expectations. We continue to have a very strong liquidity position as of June 30, with approximately $1.1 billion of cash and availability on our revolver. During the quarter, we acquired one senior housing managed community and acquired land for one skilled nursing transitional care facility for an aggregate purchase price of $33.9 million, with a weighted average estimated stabilized cash yield of 7.78%. Additionally, the skilled nursing transitional care facility is currently under construction, with a budget of $19.6 million and estimated to be completed mid-2022. We also made an $11 million preferred equity commitment on a 150-unit senior housing development during the quarter. This preferred equity investment earns a preferred return of 10% per year. As of June 30, 2021, we had funded $3.0 million of this commitment. Our year-to-date investment activity totaled $75.5 million, with a weighted average estimated stabilized cash yield of 7.94%. We completed the sale of two skilled nursing transitional care facilities for aggregate net sales proceeds of $5.9 million. These sales resulted in an aggregate $3.8 million net loss on sale. We issued 4.9 million shares of common stock under our ATM program during the quarter at an average price of $17.76 per share, generating net proceeds of $85 million. As of June 30, 2021, we have $75.8 million available under the ATM program. With our decision to no longer consider the acquisition of TPG's 51% majority interest in the Enlivant joint venture, we believe we have positioned ourselves well to focus future equity issuance opportunistically in financing growth, rather than ensuring that our leverage does not exceed our target maximum ratio of 5.5 times. We were in compliance with all of our debt covenants, and continue to have strong credit metrics as of June 30, 2021, as follows: leverage 4.75 times, interest coverage 5.2 times, fixed charge coverage 5.03 times, total debt to asset value 33%, unencumbered asset-to-unsecured debt 300%, and secured debt to asset value just 1%. On August 4, 2021, the company's board of directors declared a quarterly cash dividend of $0.30 per share. This dividend will be paid on August 31 to common stockholders of record as of August 17. The dividend represents a payout of 75% of our normalized AFFO per share. And now a few quick comments about our 2021 guidance. We expect amounts per diluted common share for the full year 2021 as follows: net loss ($0.15) to ($0.13), FFO $1.53 to $1.55, normalized FFO $1.56 to $1.58, AFFO $1.51 to $1.53 and normalized AFFO $1.53 to $1.55. The above estimates are based on certain key assumptions spelled out in our supplemental; I'll bring attention to just a few of those. The estimated amounts above do not include any anticipated funds from the Provider Relief Fund for our senior housing managed communities. The Enlivant joint venture is expected to be held through the end of 2021 and contribute normalized FFO and normalized AFFO during the second half of 2021 of $24.4 million and $5.4 million, and $3.3 million and $4.5 million, respectively. The senior housing managed portfolio average quarterly occupancy, excluding the JV, is expected to fall within a range of 76.8% to 78.9%. During the second half of the year, we expect to close investments totaling $111 million with a weighted average initial cash yield of 8.2%. Dispositions and loan repayments for the second half of 2021 are expected to total $95.6 million, with associated annualized cash NOI of $6.4 million. We anticipate funding these identified investments with cash on hand and the revolver. Any incremental acquisitions not identified here would likely be funded with the revolver and with match funding the equity component using the ATM program. Finally, our expectations for the second half of 2021 imply an expected decline from the first half of 2021 at the high end of the normalized FFO and normalized AFFO ranges of $0.04 and $0.03 per share, respectively. The vast majority of this decline is due to higher weighted average shares outstanding during the second half of 2021, as compared to the first half, along with lower cash rental revenues, due to the transition of one operator's assets discussed on our first quarter earnings call, which represents approximately one penny of the decline. These declines are partially offset by higher earnings expectations for the managed portfolio in the second half of 2021, as compared to the first half. And with that, I'll open it up for Q&A.

Thank you. Our first question comes from Rich Anderson with SMBC. Your line is open.

Hey, thanks. Good morning. So, Harold, you talked about the new carry implies the previous carry on the JV was 278. I think I have my math, right. And, full value of 567, at 49%, I recall talking about the 51% being a kind of a $400 million type of nuts. Can you just sort of connect the dots to how the value of the Enlivant portfolio and the JV has changed over time, in particular now with the impairment, because that sounds a lot like distress. And I don't know how much meaningful distress that we've seen really in the transaction environment for the senior housing business overall. So I just wonder if you could just connect Enlivant's situation with kind of the broader observations about senior housing?

Sure. Well, I'll start by just giving you a little bit of insight into how that valuation is determined. We talked a little bit about it; you see some details in our 10-Q about the calculation, but it is based on a discounted cash flow model. Obviously, we don't have any offers to look at from a valuation perspective, and it takes into account not only the fact that there has been a decline in the performance of the portfolio, but also takes into account some assumptions around right-sizing the management fee for the portfolio. I think when you look at what's out there in the market today and some of the pricing, that was very informative for our valuation calculations. We utilized a professional firm to help us with that calculation, and certainly the recent deals provided data points which were helpful. I don't view it as a distressed valuation as much as it's highly levered, and therefore the equity value has some amount of risk associated with the discounting calculation. We built conservatism into it, but I don't view it as a distressed valuation at this point. I think it's a conservative valuation. When you factor in an adjustment to the management fee and factor in the amount of debt on the portfolio, it gives a fair number for consideration and puts us in a position where we're not likely to see much of a change one way or the other once the portfolio actually sells.

Okay. And then on the process of getting it sold, describe the sort of theme, the motivation of TPG to get it done. I mean, you could just sit there waiting. Now, what's the chance that this can sort of stay with you well through 2022?

Well, I think this is a vintage fund for TPG and they've done pretty well on it. I think they were willing to hang in there pre-pandemic. For a while the company was starting to really do well. As I stated in my opening remarks, we're really getting closer to wanting to do something with the 51%. But the pandemic changed everything, including changing timelines for the fund in terms of how long everybody wants to sit around and wait for things to recover. So in terms of timing, it is going to be with us, I would say through at least the first half of 2022, simply because if it takes a few months to find a buyer, it's going to take up to another six months to close the transaction. So yes, it's going to be there for a while. That's why we wanted to make the announcement now, cleanse the supplemental, take the write-down. From our perspective, it's behind us; we'll always be happy to answer questions or talk about what's happening with that component of the portfolio relative to occupancy and recovery, but the visibility for it is gone as far as we're concerned.

Okay. Well, thanks for that. And congrats to Harold and Mike.

Thank you.

Thank you. Our next question comes from Nick Yulico with Scotiabank. Your line is open.

Thank you. I just want to go back to Rick. You talked about getting out of the Enlivant JV being de-levering — that's clear and very clear — but maybe you could talk a little bit more about, you said, the assumption that you think it's also an accretive transaction for you.

Yes, I think the way to think about that is we can't stand pat with where we're at with the JV. TPG wants to sell the portfolio. So we've either got to buy it or we've got to exit at some point. For us to go and invest money to acquire it would be extremely dilutive for us. So selling it is accretive on a comparative basis. In other words, we either have to buy it and be diluted or sell it, which would be accretive on that comparative basis. Does that make sense?

Okay, got it. All right. The other question was in terms of the guidance, I know you did mention the cash-basis tenant last quarter and I thought the annual rent for that was less than $4 million. Yet the guidance now is a little bit higher than that in terms of the cash-basis tenant impacts. Is there another tenant creating an issue or am I missing something?

Well, to get a little more into the leap about it: that portfolio — you're right, it's just under $4 million in cash revenues, and they paid rent basically through the end of June. So that's $2 million in the first half of the year, and we're not expecting to get any rent in the guidance for the second half of the year. It's going to take months to get that portfolio transitioned and a new operator up and running. So that $2 million is the penny I referenced in my comments around the decline, as it relates to comparing the first half to the second half. We also had received 100% of the rents from Genesis, and in our previous guidance numbers, we assumed Genesis would, at some point, strike a deal with us to reduce rents on some level, even if just to the rents that are going to be going away in about 18 months. Now we're assuming those rents get paid fully through the end of 2021. So that's why the cash-basis rents are staying pretty solid, but we are saying that $2 million decline from one operator.

And Nick, this is also specific to New York. It's just a process that we have to go through there. There are other states where the transition would have been a lot smoother and we wouldn't have gone the number of months that we're contemplating without getting a new operator in and picked up or anything. So that's really just the New York issue, which is timing.

Okay, thanks.

Thank you. Our next question comes from Juan Sanabria with BMO Capital. Your line is open.

Hi, guys. Just hoping to ask another question on the Enlivant JV sales process. I guess when do you expect that to start? And how should we think about the OPCO issue here, in terms of would it be a lack of profitability because of the collapsing cash flows because of the Coronavirus? Or was there a feasibility issue kind of before all this happened just because it didn't expand maybe as an OPCO as was previously anticipated?

So we believe TPG is going to start talking to folks after Labor Day. I'm not sure that they have exactly formulated and settled on that, but that's our understanding. In terms of the OPCO issue, it really goes back to what I said earlier. The platform was built to support a company that was going to continue to get larger. TPG was continuing to make investments in the senior housing space and outside of the JV. The pandemic just put a halt to all of that. So if you've got the combination of the impact of the pandemic on occupancy and NOI, and the fact that that portfolio isn't going to be growing — their focus, as it should be, is on recovery. It's a really well-run company and so they've got to get back to where they were from a recovery perspective. Remember, these are smaller facilities, and smaller facilities are more dependent upon corporate support than larger facilities where you can have more infrastructure in place. Our wholly-owned portfolio, for example, are larger facilities; those are the original AL facilities and they have quite a bit more memory care as well. So it's really a combination of those things. Whether there'll be changes to the OPCO as a result of the process, we could speculate, but that's really what the issue is. Does that make sense?

Yes, it does. Thank you. And then just on Genesis, I'm assuming it sounds like they continue to be current. Have you had any discussions with them about their assets that they're running and about their ability to continue to pay rents and the coverage level there? And if you could, just remind us how much is under that kind of top-MOU type income and when does that come off again?

So I'll take the first part and Harold can take the last part. We haven't had any substantive discussions with them really since the new management team has been in place. They're aware of the fact that we have other operators that are prepared to take over those eight facilities if necessary, but they are paying the rent, and as Harold mentioned, they're paying base rent plus excess rent. The excess rent is similar amounts and that excess rent — about $10 million — burns off at the end of 2022.

Thank you.

Thank you. Our next question comes from Nick Joseph with Citi. Your line is open.

Thanks. First of all, congratulations to both Harold and Mike. Rick, you mentioned being committed to senior housing growth. Obviously you've seen a few large deals in the space. So I'm wondering how many opportunities you're seeing that really fit exactly what you're looking for?

Hi, it's Talya. We're still continuing to see opportunities that we're taking a run at where we have economic solutions that make sense to groups. Some of the large deals that you've probably heard about that have come to market have been a feeding frenzy, because there's still quite a bit of capital looking to put out sizable investments into the senior housing space. Those buyers are not going to do it by doing one-offs; they're going to do it by doing half a billion or more, three quarters of a billion at a time. So they're gunning for those deals. Frankly, where we're making sure we're in the mix is where we want to be. We're dutifully pursuing a lot of other transactions that are smaller scale and, as we show in our supplemental, we are getting things done. It's not splashy headlines, but that's okay. We're just trying to keep doing what we know how to do and do it well, and make those deals creative.

Thanks. And then as you think about kind of the overall portfolio post-COVID, there are geographic differences already, particularly on the skilled side. But when we come out of this, how should we think about positioning the portfolio from a geography perspective? Are there any markets that may be a little more active in trying to either exit or lessen exposure, given lessons learned over the past 18 months?

We're spread out pretty nicely geographically right now, and we haven't had tenant issues. We feel like we addressed the things that we needed to address through the merger with Genesis and related steps. So from a disposition perspective, anything that we do going forward is going to be more normal portfolio management, disposing of assets if circumstances call for it in a certain market. But we just don't have that much exposure to problematic markets at this point. I think we've set ourselves up pretty well going forward.

Thanks.

And there's no further questions in the queue. I'd like to turn it back to Rick Matros for closing remarks.

Thank you all for joining the call today. If you have any follow-up questions, as always, we're readily available. Take care and thanks again. Be safe.

This concludes today's conference call. Thank you for participating, you may now disconnect everyone. Have a great day.