Sabra Health Care REIT, Inc. Q1 FY2024 Earnings Call

Good day, everyone. My name is Katherine, and I will be your conference operator today. I would like to welcome everyone to the Sabra Health Care REIT First Quarter Earnings Call. Now I would like to turn the call over to Lukas Hartwich, SVP Finance. Please go ahead, Mr. Hartwich.

Thank you. Good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments, and in response to your questions concerning our expectations regarding our future financial position and results of operations, including reiterating our earnings guidance for 2024, 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, 2023, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included 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.

Thanks, Lukas. Thanks, everybody, for joining us. I hope you all have a good day. So this quarter is really just a continuation of the last couple of quarters. Our operating performance continues to improve. Our balance sheet strength has us in a position to grow. Our skilled nursing EBITDA and coverage continues to exceed pre-pandemic coverage. Our senior housing triple net lease coverage continues to improve and is near pre-pandemic levels. Our top 10 is stronger than it's ever been. Our skilled occupancy is up 110 basis points sequentially, and our skilled mix is higher than it's been in several quarters. Our senior housing triple net occupancy is higher than pre-pandemic occupancy. Our SHOP growth continues with occupancy higher than it's been since the early months of the pandemic. Contract labor continues to improve, dropping to where we were three years ago, well below peak levels, although still higher than we want to see. Our deal flow is improving, particularly in SHOP, and we are finally starting to see some skilled nursing opportunities. In both Skilled and SHOP, sales pricing has moved towards buyers. While we don't have new investments to announce this quarter, based on current activity, we expect to be in a position to announce new deals on our second-quarter earnings call. We are running better than anticipated on our forecast, including our SHOP performance. But since it's still very early in the year, we're going to wait until Q2 to reassess our guidance.

Thank you, Rick. Sabra's managed senior housing portfolio, including joint ventures at share continues to perform well. The portfolio grew by 5 communities during the quarter and 7 communities year-over-year, which were all properties previously leased to other operators, and I underscore leased. While the added community has had a limited contribution to the total, Sabra's managed portfolio saw a 16.5% quarterly revenue growth and just over 26% quarterly cash net operating income growth on a year-over-year basis. This was driven by the trends that we've been noting for the past several quarters. Growing demand is driving occupancy and REVPOR gains and moderating expenses. Wage growth has decelerated as open positions are filling, reducing overtime needs and even eliminating agency usage. Sabra's same store managed senior housing portfolio, including joint ventures at share, includes 64 properties, 43 of which are in the U.S. and the balance in Canada. Excluding non-stabilized assets and government stimulus, the headline numbers are same-store portfolio revenue for the quarter grew 5.8% year-over-year, with our Canadian communities growing revenue by 9.2%. Cash NOI for the quarter grew 9.5% over the first quarter of 2023, skewed down by a lower-than-usual expense item in the first quarter of 2023. Cash NOI for the quarter increased 16.7% in our Canadian communities. REVPOR's first quarter of 2024 increased by 3.4% year-over-year with REVPOR in our Canadian portfolio growing by 5.1% in the period. The senior housing recovery in Canada has been lacking in the U.S. and is now catching up. Drivers of revenue growth in our Canadian community outpaced our U.S. communities this past quarter on a year-over-year basis, while expense growth has come into line with our U.S. community, particularly on a sequential quarter basis. Our net lease stabilized senior housing portfolio continues to thrive with occupancy for the past quarter at about 90%, as Rick said, above pre-pandemic levels and steadily improving rent coverage. Sabra's total investment in behavioral health remained approximately $800 million as we provide time for our assets to complete conversion and lease up and reach stabilization. You will note that we have combined specialty hospitals and behavioral health in our coverage disclosure in our supplemental because combined, these categories represent 21 stabilized properties contributing about 10.5% of Sabra's NOI, with only 6 behavioral properties in there.

Thanks, Talya. For the first quarter of 2024, we recognized normalized FFO per share of $0.34 and a normalized AFFO per share of $0.35, both up $0.02 from our fourth quarter 2023 results. Year-over-year, both normalized FFO per share and normalized AFFO per share increased 3%, representing the first year-over-year increase in both since before the pandemic. This sequential increase was driven by the following: a $1.8 million sequential increase in cash rents received with the majority coming from stronger collections from cash basis tenants compared to the fourth quarter. A $1.3 million reduction in normalized cash G&A expense, primarily related to performance-based compensation true-ups that occurred in the fourth quarter, $900,000 of business interruption insurance income related to a property that suffered fire damage last year, and a $600,000 improvement in NOI from our managed senior housing portfolio, due to improved performance as well as the transition of 5 facilities to our managed portfolio that were previously leased on a triple-net basis. This was partially offset by a $500,000 increase in cash interest expense due to higher outstanding borrowings under our revolving credit facility. As Rick noted earlier, our first quarter performance came in slightly better than what we had forecast in our 2024 guidance estimate. While we are pleased with this outperformance, given that it's early in the year, we feel it's most prudent to reaffirm our full year 2024 guidance ranges at this time, and we will revisit these ranges for our second-quarter earnings call. Our full year 2024 guidance ranges on a diluted per share basis are as follows: net income $0.53 to $0.57, FFO $1.33 to $1.37, normalized FFO $1.34 to $1.38, adjusted FFO $1.38 to $1.42, normalized adjusted FFO of $1.39 to $1.43. As a reminder, our guidance does not assume any acquisition or disposition activity. Now briefly turning to our balance sheet. Our net debt to adjusted EBITDA ratio was 5.55x as of March 31, 2024. As our portfolio continues its recovery from the pandemic, we expect this to result in improvement to both our earnings as well as our leverage. As of March 31, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $914 million, consisting of unrestricted cash and cash equivalents of $60 million, and available borrowings of $854 million under our revolving credit facility. Finally, on May 8, 2024, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on May 31, 2024, to common stockholders of record as of the close of business on May 20, 2024. The dividend is adequately covered and represents a payout of 86% of our first quarter normalized AFFO per share, and this payout percentage is expected to improve over the course of 2024.

We will open up the lines for Q&A.

Just wanted to hit on the SHOP and just with respect to that, I wanted to clarify, the low to mid-teens that you said kind of felt right last quarter, I know you didn't provide explicit guidance, but kind of pointed towards that low to mid-teens growth, does that include the contribution from the unconsolidated joint venture portfolio? And is that a same-store figure?

It does include the contribution from the joint ventures, and it's not a same-store number. It's a year-over-year number on a comparative basis.

Got it. So this includes the benefit from the transition of these 5 facilities that are now moved from a triple-net lease to the RIDEA structure?

That's right. And if you also think about it, these were triple net assets before that we transitioned. They weren't performing triple net assets. They weren't contributing anything to our NOI in 2023.

Got it. That's helpful. And then just another one for me, clarification. So has there been any change to the cash NOI contribution from Signature Healthcare? It looked like the quarterly cash NOI number came down a bit. So just curious if there's anything there.

Yes. It was simply a timing issue in the first quarter. Since we operate on a cash basis, we recognized revenues when the cash is received. Part of the payment for March came in shortly after March 31st.

So there'll be a catch-up payment that gets them on par with the prior kind of quarterly run rate in the second quarter that we should expect?

Yes, we would expect, on balance second quarter to be a little bit higher because of the fact that you have that catch-up payment plus the regular payments during the quarter.

Rick, I wanted to hear your thoughts on the recent minimum staffing ruling from CMS. How do you see this developing moving forward? Also, I'm interested in how we should consider the potential effects on your portfolio, especially since this phase is a few years away.

I believe what we've consistently said is that the rule is unreasonable because the labor is simply not available. As I've mentioned before, and as has been publicly stated by the industry and the trade association, you can expect to see both legal and legislative efforts to challenge this.

Okay. And if it doesn't get overturned or stays as is, is there any thought on how it might impact your portfolio or your operators? Or are you just saying they won't even be able to find the labor?

It depends on the market. Most of our buildings are in good shape compared to that, and I believe we're above the national average in terms of staffing. However, even if this remains unchanged, it's a phased process that won't begin for another two years. Labor has been improving, especially contract labor, which has seen significant enhancement. Therefore, we can reasonably expect further improvements. It’s difficult to predict precisely, but it’s not simply about providing a number; many operators in certain markets are struggling to fill positions. This issue is not related to the quality of care but rather seems to penalize nursing homes. Additionally, the approach taken is universal, and even in the final rule, they failed to address concerns regarding the exclusion of LPNs, who are essential for every operator in the industry. Although they suggested that LPNs could fill a specific role, that isn’t equivalent to having adequate staffing. Operators determine staffing levels based on care needs, both in total hours and the mix of hours among RNs, LPNs, and nursing assistants, with some facilities even utilizing NPs. Any analysis will show that a one-size-fits-all approach is ineffective and does not result in improved quality outcomes. Furthermore, enforcing an arbitrary staffing number has no correlation with quality or results. That’s probably more than you needed, but I wanted to ensure I covered all aspects.

I wanted to touch a bit on the acquisition pipeline and sort of what you're seeing out there. Obviously, you're not giving any speculative acquisitions in guidance. But if you annualize the midpoint of earnings this quarter, it gets you to kind of that low end. So how are you thinking about acquisitions, whether from a yield perspective? And how much do you think they contribute to earnings on a stabilized basis this year?

Well, I'll elaborate on what Rick said earlier. Deal flow is improving, and we're observing a lot. We have previously mentioned that the best deals are those coming to us off-market, and I believe this is also true for our competitors. We are primarily focused on acquiring assets, although we are open to doing some loans, but that isn't our main priority. We're seeing a considerable number of opportunities, particularly from operators with whom we hope to engage in repeat business. The extent of our progress remains uncertain, but we will keep everyone updated. The contribution for 2024 will largely depend on when we finalize any additional deals. Rick pointed out that the pricing expectations of buyers and sellers have aligned more closely, which is generally accurate. Thus, there are viable opportunities available, and while we're managing our balance sheet prudently, we recognize worthwhile prospects.

The only other point of emphasis I make is that our guidance, as you know, doesn't include any assumptions about acquisitions. My statement in my opening remarks, about revisiting guidance in the second quarter because we're ahead of where we thought we'd be already, has nothing to do with any assumptions about acquisitions this year. So that would just be great on top of that. But to Talya's point, the reality is if you're closing most of your stuff over the last 5 or 6 months of the year, it's going to have more of a muted impact and just serves more to fuel growth going into 2025.

Great. That's helpful. And then just a quick follow-up on that, Talya. Are you seeing any more appetite in the financing environment for skilled nursing facilities? Is there any bridge-to-HUD financing available at favorable terms?

We are seeing non-bank lenders interested in lending on a bridge-to-HUD basis in theory. We've not been targeting that segment. We've looked at it quite a bit in the past. Yes, and it's not cheap. The challenge that was different now than it was, call it, 1.5 years ago, is that 1.5 years ago, people were doing bridge-to-HUD lending based on forward valuation, and that's pretty much gone now from cost of capital, and we will work on cost of capital to the expense to do that.

Yes. And also to reiterate, our philosophy of loans have to change. That is we do loans really specifically in relation to the relationships we have with operators. So how is it helpful in the current relationship when an operator is trying to grow? Is there a load-to-own opportunity here? So we really don't have interest even though we know there are opportunities; our peers are doing it and building a portfolio of loans.

Got you. That's helpful, Rick. And then one last one, if I may. I know you touched on the implications of the minimum staffing mandate in a question earlier. But can you give any maybe concrete initiatives that the industry is looking at, whether it's lobbying certain committees, trying to take litigation into different courts. I mean, just kind of hard things that you're seeing on the ground as the industry gears up to fight this thing.

Yes. I cannot provide too many details, but everything is set. There is a bill being considered, although it does not have bipartisan support for legal action. Much of the groundwork has already been laid. Beyond that, I really cannot share much else. The primary focus of our industry will be on the legislative strategy.

Just maybe going back to the first just the quarter results. I just want to understand kind of how the sharp growth cadence trended. I think last call, you mentioned January, you saw 20-plus percent year-over-year growth and ended up at 9%. So I'm just wondering like what happened in February and March? And if you could, could you just give us a sense of how April has trended?

I have some occupancy data for April, and the spot occupancies through the end of April are approximately 1% to 1.5% higher. This indicates that occupancy is still on the rise. While I don’t have specific figures for REVPOR, we have seen consistent growth in that area as well. A significant development is that expenses, particularly labor costs, are slowing in their growth. We are mainly filling vacancies rather than experiencing wage increases. Therefore, I do not have a cash NOI figure for April to provide at this moment.

And the other thing I'd say is, as we mentioned earlier and noted in the press release, there wasn't as if there was a big drop off in the quarter. It was simply a comp issue to the prior year quarter, where repairs and maintenance were exceedingly low, and they're running at a normal run rate right now. And so normalizing for that comp and those lower expenses, we would have been in mid-teens for our growth number for the quarter.

Yes. I also want to underscore another thing to just clarify, the same-store managed portfolio that I spoke about a few minutes ago had 64 assets in it, okay, because it also includes the joint ventures at share. The portfolio we talked about last quarter had 51 assets. So we're also talking about different pools here. So just to add here.

Would it be fair to say that given your team's comment about adjusted team's comments, like for the balance of the year, I'm not asking for a specific number, but that team's comment like should hold through as we go through the year, whether it's 12 or 18, I don't know, but like do you see an accelerating trajectory decelerating? How should we just think about the cadence of growth for the balance of the year?

Yes. I mean, it's going to be dependent on occupancy recovery, but I think what we have to continue to pivot back to Vikram is we reaffirm guidance. And what we reported for the first quarter is in line with what we had forecast for guidance. So I think that should provide all the information you need.

We don't see any trends that growth that are going to get in the way of either meeting or exceeding guidance.

Yes, it seems you mentioned earlier that you exceeded your expectations, but you are being cautious early on. The SHOP comp should become easier as the year progresses, especially considering what you said about expenses. It appears that if you take those factors into account, the numbers could potentially increase, but that's just my thought process. To clarify regarding the acquisitions, if you find more appealing real estate portfolios rather than loans in the U.S., could you explain your thoughts on how you plan to fund these moving forward?

Sure. I think it's going to be dependent on a couple of things. I think first off, if we're looking at SNF deals, given where our stock is trading currently, relative to our NAV and just on a yield basis, that is a source of capital we could use to fund SNF deals, use that to match fund with our line of credit. To the extent there's any sales proceeds that come in, there's not a ton out there still, but there's always some sales proceeds in the normal course of business; that will also be capital available for us to redeploy into other assets. And if we see SHOP deals or we see senior housing deals that we could pair up with skilled nursing deals, when we look at that on a blended basis, it would have to make sense on a blended yield basis for us to use the ATM. But we think there's opportunity there as well when you look at the totality of our investment pipeline.

Got it. Okay. And then just, sorry, one last, just to clarify. Any sense of the final, the Medicare ruling that I think comes out when, in June or July from the initial proposal? Any sense if the comments how the kind of push together number higher, or how that plays out?

We're still in the comment period, and it won't come out until August, usually in the first week of August. So we'll see, but I would anticipate it to be where it is now. I don't anticipate it being lower, but I think the odds are greater that it stays where it is as opposed to going higher, but not lower.

Regarding the minimum staffing, you received 46,000 comments, and CMS acknowledged them but proceeded anyway. Many of your peers in the REITs and operators are expressing hope that CMS will reconsider, as the requests and mandates seem unreasonable. What could potentially influence CMS to change its course now with another 1,000 comments? I'm curious about what more the industry could do to shift this direction. Is it more tied to politics, where a change in administration could trigger a shift? Beyond that, how is it possible for this not to proceed as it currently stands?

We believe we can successfully address the issue legislatively. You're right, they essentially ignored all the comments, and they rushed to get this out because there's no way even 40,000 to 50,000 comments that they could have thoughtfully reviewed all of those and not ruled out what they did. So it's left the industry with no option rather than to take legislative action and potentially legal action as well.

Okay. Regarding your portfolio, have you assessed the percentages related to the 3-year phase, the 5-year phase, and any percentages that might be exempt from the current legislation? Have you completed that analysis? Do you have any insight on this from a geographic perspective?

No, I think it's premature to do that work, Rich, not just because people are still recovering. But the impact of this, if it doesn't go away, it's 2 to 5 years out. So we've got some time right now to see if the remedies, if you will, that the industry is going to undertake to get rid of this mandate takes hold. I think there'll be plenty of time. If we succeed in that, great. If we don't succeed in that effort, we'll still have plenty of time to do as you suggest.

Okay. And then last for me, switching to SHOP same-store. I understand comps in February and March and all that. But you said off to a good start in the first quarter, going to take a look at guidance next quarter. The SHOP figure into that as well? Is that outperforming? And I think you said in the line.

Our SHOP is somewhat ahead of our internal forecast guidelines.

Okay. And your internal forecast guidance is for what, on a same store, if you can remind me, I just don't remember.

Sorry, you're asking what our same-store NOI growth assumption in our guidance is?

Yes, for SHOP.

Yes. I mean like I answered it earlier on the call, Rich, what we have talked about on previous calls, was we didn't put that number out, right? But what other folks are saying is mid-teens growth on an NOI basis year-over-year, and that feels reasonable given our portfolio.

Your next question comes from the line of Alex Veygiv of Baird.

Can you provide some details on the NOI growth between IL and AL and its current trends?

We are not going to provide specific numbers, but as we have discussed before, these are fundamentally different businesses. The assisted living growth is expected to be stronger than independent living growth because there are more tools available to influence revenue in assisted living, which isn't really classified as a health care facility in the same way. Even though there has been an increase in acuity, which led to the PLR letter we received in 2020, the independent living portfolio was not as severely impacted by the pandemic as assisted living, resulting in less potential for recovery there.

Got it. And we noticed you combined the two and that occupancy was down quarter-over-quarter. Was that driven by any one of them more or less?

No, I think that was really just a result of our periodic review of all disclosures, particularly in our supplement. We realized we were an outlier due to the level of detail provided. Therefore, we adjusted our disclosures to align with what our peers present.

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

Thank you all for joining us. We're always available for additional conversations if you want to talk offline. And in the meantime, hope you'll have a good day. Thank you.

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