Earnings Call Transcript - SBRA Q2 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Second Quarter 2020 Earnings Conference Call. I would now like to turn the call over to Michael Costa, EVP, Finance. Please, go ahead, Mr. Costa.

Michael Costa, EVP, Finance

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 impact of the ongoing COVID-19 pandemic, 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, 2019 and in our Form 10-Q for the quarter ended March 31, 2020, 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 on 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 www.sabrahealth.com. Our Form 10-Q, earnings release and supplement, can also be accessed in the Investor section of our website. Lastly, in addition to Sabra’s management, Lilly Donohue, Chief Executive Officer of Holiday Retirement is joining our call to provide her perspective on operating a senior housing community during the pandemic. Lilly's statements are her own and do not necessarily reflect the views of Sabra. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Rick Matros, Chairman & CEO

Thanks, Mike. Good morning and good afternoon, everybody. Thanks for joining the call. After I go through my remarks, I'll turn it over to Lilly and then Lilly will turn it over to Talya. Harold will follow her and do the CFO thing and then we'll go to Q&A. So first, let me comment on the pandemic generally. So, unfortunately, in our country, we never saw a flattening and a decrease in the wave. So it looks like a continuation of the first wave, and one of the things I just want to note is, and talked about this a little bit on the last call, the staff in our operating facilities have been just amazing. And as long as this has been going on, it just creates further morale issues and further stress on the staff and yet they continue to show up. If any of you know anybody that's in the business that works in facilities, doesn't matter what asset class, obviously in skilled nursing, assisted living, independent living, and you had the opportunity to pass a kind word on, please do. We are seeing a little bit better media coverage now and hopefully that will continue. We're also seeing better media coverage, just in terms of folks in leadership having a better understanding that the industry really didn't get the support that it needed and certain segments of the industry still aren't. So all that's been good to see and I think it's also reflective of a pretty massive public relations effort that a lot of us are involved with. So appreciate all your support and also appreciate, in the notes that we've seen, not just this time, but last time, the empathy and understanding for what everybody's going through. So appreciate that. Let me start with occupancy trends from the end of February, which is sort of the demarcation period. Through the end of July, we will talk about the quarter. The quarter, as everybody noted, is relatively irrelevant. So we'll spend some time on more recent trends. Our skilled nursing portfolio was down 811 basis points, but it's been essentially flat since the end of May across the portfolio. The latter part of July started seeing increases amongst their mobile operators. It's very market specific. We actually had a little bit more momentum the middle of July. And then, as everybody knows, there have been a lot of breakouts in the Sunbelt and now other states are getting hit as well. But, we are seeing some improvements in occupancy. What's really been great for us is our skilled mix is 176 basis points higher than pre-COVID levels. And as it pertains to the 811 basis points, that's pretty much I think where the industry is. The NIC data was as of May I believe, and at that point that's two months old, older than our data. Nursing homes are down about 650 basis points. There's an internal industry report that I had access to, which showed it down about 700 basis points for the same time period. So, looks like we're pretty much in line there in the aggregate amongst all of our operators, but we haven't seen anywhere is skilled mix actually up this significantly. We've seen flat in various reports, but we haven't seen it up too significantly. And that's critical, because the Medicare rate, as many of you know, is 2.5 to 3 times higher than the Medicaid rate in the majority of facilities. So it does help to mitigate the occupancy drop. On specialty hospitals, even though occupancy was down sequentially in the quarter, it is now up. It is 180 basis points higher as of the end of July than it was at the end of February. Our triple net senior housing portfolio is only down 136 basis points, which is pretty remarkable. It was down a little bit more than that, close to around 200, and then picked up close to 80 basis points at the end of July. And that's really a function of where our facility is located. Talya will talk a lot more about that when she gets to her remarks. The managed portfolio was down 393 basis points over that same time period, also affected by the geographic areas and most of the spikes, as you know, that we've all seen, really started after Memorial Day weekend. Both those numbers are much better than we're seeing amongst our peers, and so that's been really helpful, particularly for the triple net senior housing portfolio. It has a lot to do with why we haven't had to do anything on the rent side for our tenants at this point. For the quarter, our senior housing triple net occupancy was slightly impacted by the flu in Q4 2019 and Q1 2020, but relatively stable. Our rent coverage was flat sequentially. Specialty hospitals' occupancy and coverage was down sequentially. But occupancy, as I noted, has rebounded quite a bit since then. We don't get too concerned about occupancy and coverage at specialty hospitals. One, it's exceedingly healthy over three times, but beyond that it's got a much more dynamic patient population than we have in our skilled nursing or senior housing assets. So we typically see that go up and down quite a bit. But again they're doing well, very strong occupancy and very strong rent coverage across our specialty hospitals. Our skilled nursing coverage picked up slightly on a sequential basis from Q1 due to the continuing execution of PDPM. Five of our top seven skilled operators showed improved coverage and are clearly positioned Sabra’s operators more strongly going into the pandemic. One of the things I want to point out is Sabra’s operators are post-acute operators. We don't have traditional long-term care operators. And that doesn't mean that we don't have a few Medicaid shops here and there, but our operators are post-acute operators. It was one of the things that attracted us to do the PPP merger, despite all the work that we knew we would have ahead of us. Once the operators fit the profile that we looked for when we try to acquire skilled nursing facilities—and for what it's worth it reflects my own operating orientation in my career prior to Sabra. And that's why you see the improvement in skilled mix. And I think that's going to bode well going forward because we believe we'll continue to see acuity increases. We've got more and more of our operators that are specializing in taking care of COVID patients. So we think all of that will accrue to our benefit over the longer term once we get through the pandemic. And obviously other things like health sequestrations still being in effect and the two-day hospital stay waiver that has helped everybody. And those two items, plus all the other assistance that we've received through the CARES Act, has actually resulted in coverage that's higher than what has been reported here. Subsequent to the quarter, we've actually seen improved coverage and given a lack of a base—the first wave—it's improved coverage will be invaluable going forward, given the continued impact of COVID-related costs and low occupancy. Supplies and labor continue to run higher than historical norms with labor driven by the impact of having primarily one-on-one activities and really everything from feeding to therapy. This has improved in certain markets and will continue to improve, but it does still exist. Supplies are still an issue although operators are beginning to build up some inventory in PPE, which will be invaluable going forward. That said, we do have a concern that we may see supplies get tighter in the fall because the supply chain is still not stabilized. Pricing is better than it was; we are not seeing as much gouging as we were, but it is still higher than pre-COVID levels. In terms of supplies, the biggest issue is getting gloves. The second biggest issue is getting gowns—on our prior quarterly call, gas was mentioned as the biggest issue. So gas is still an issue, but gloves are a bigger issue right now. Masks are fine. On a relative basis, costs in our senior housing operators were impacted in much the same way as our skilled operators, obviously not at the same level as the skilled operators. Now moving onto some other COVID-related updates, through the end of July, we had a total of 202 facilities that at some point in time had positive COVID tests for patients, residents, or our employees. Of that total number of 202, 113 facilities have completely recovered. Facilities that are new to the list and as you're seeing with occupancy are specifically related to the geographic spikes in the U.S. and to a lesser extent increased testing. I'd say to a lesser extent, we're not seeing big breakouts in the facilities. Even the facilities that are testing positive for the first time, the operators have adhered to CDC and local health department protocols and then treated patients and residents as if they were COVID positive all along. Even prior to the CDC guidelines, restricting access and screening essential visitors has helped tremendously. The bigger issue now is in those areas that are experiencing more employees testing positive putting additional stress on staffing. The universal workers program still exists. And that does help. But there is more stress on staffing. And as I think most people know who are on the call, the average age of those testing positive for COVID has dropped dramatically. The last time I saw it was about 35 years old. So it's getting younger and younger. As of the general population, we know we have scores of individuals who have had it and have recovered. In the absence of widespread and effective antibody testing, I don't know whether we'll ever know the true number. We still don't have as much testing as necessary. We appreciate the point-of-care testing that CMS has started rolling out to nursing homes. Testing is the key to getting a handle on the pandemic, in addition to wearing masks and social distancing. Now moving on to acquisitions, we did get a couple of things done, as you all saw this quarter. So we'll continue to look at things. Acquisition volume has picked up some; it's primarily senior housing that we're seeing—more skilled nursing deals. Our acquisition pipeline is pretty dynamic. Right now it's ranging from $250 million to $600 million on any given day. Sellers are still expecting the impact of COVID to be disregarded by buyers. So that's clearly an issue. Nevertheless, we continue to do the work. But we don't expect to do anything material, anything big in the foreseeable future. We have factors that we view very strictly in terms of our behavior, and that's looking at our cost of equity, maintaining leverage within our target, and maintaining our current ratings with the rating agencies. So we're not going to do anything to disrupt that. But—as you saw with one of the one-off deals that we did in the quarter—we are starting to see more of those deals and we'll continue to execute where we can, so we can start laying the groundwork for getting some growth going again. On the regulatory front, CMS proposed the 2.2% increase in the Medicare market basket, and no changes to PDPM. So both of those are really good news. The public health emergency, as you probably all know, is extended through the end of October; an additional $5 billion was granted to skilled nursing homes by HHS, but the methodology isn't clear yet. There's still tens of billions of dollars available for assistance, and we remain optimistic on stimulus four. And with that, I'll turn the call over to Lilly Donohue. Lilly?

Lilly Donohue, CEO, Holiday Retirement

Thanks, Rick, and thank you for inviting me to join your earnings call. While this pandemic has tested all of us, it's also strengthened the core of our mission at Holiday, which is to help older people live better. We are very fortunate to have partners like you who share the same core beliefs and are committed to transparency. We're living through the biggest challenge we have faced, and yet we're experiencing the strongest collaboration I've ever seen. Let me share how Holiday has managed. First, for anyone on the call who is not fully familiar with our company, we manage and operate 261 communities in 43 states. We have over 8,000 employees helping 28,000 residents live better in what are predominantly independent living communities. So 254 of the 261 communities we operate are independent living. Our center team members at Holiday—their actions in response to COVID-19 from the onset of the pandemic to current day—have been characterized by a relentless pursuit of solutions. We've been zealous in expanding our use of data and using the data to measure ourselves on a broad range of outcomes. Data is particularly important in times of extended distress like this pandemic, because we're really not a highly emotional business and in these kinds of urgent situations, we really need to drive decisions based on facts, not just emotions. Early on, we set goals on three main priorities and this really has driven our behavior. The first is keeping our residents and employees safe, which means keeping our infection rates as low as possible. Second is ensuring our employees felt safe to come to work every day. We need them; we rely on them. Third, we make sure our residents feel safe and are happy. The results have proven to this point that we've set the right priorities. So, if you look at our infection rate across all of our communities for residents, it's 0.71%, so less than 1%. This is about 60% below the U.S. average for the 75-plus population. For employees, the infection rate is 1.2%. These rates really reflect how we are adhering to our protocols in the 43 states where we have communities. Throughout the pandemic, our employees have continued to show up to work. This is crucial as low absenteeism and high resident satisfaction go hand-in-hand. Of our 8,100 employees, 99.3% are continuing to work in our communities. This percentage speaks volumes to their commitment to our residents, their families, and to each other. On average, we see probably 70-ish employees on a leave of absence in any given week and our peak temp labor has accounted for no more than 0.7%, again, less than 1% of our staffing. When you think about that at our scale, that's incredible. Having extensive protocols correlates with high employee retention and engagement. To that point, when asked in our most recent Great Place to Work survey, nine out of ten employees told us they feel safe coming to work. That's reassuring data. On the third goal, it's challenging to really manage the competing needs of isolation, safety and socialization. So, how are we doing on this goal? More than 93% of our residents tell us that our COVID-19 measures are meeting or exceeding their expectations. So, this data too is reassuring, and frankly, highly motivating. It's not easy to stay vigilant and disciplined on safety while finding new ways to be creative and innovative on resident engagement. And just as we expected, when you focus on the right things, your financial performance usually follows. Making difficult decisions to close communities early on—we were frankly challenged by some of our owners—have proven to be the right decisive actions. While we are a private company, I do want to share some topline performance metrics. At Holiday, our second quarter year-over-year NOI is down just under 5%. Our same-store NOI includes 258 communities out of our 261 communities that I just mentioned. Revenues were down about 3%. Given that softness, we were quite diligent managing our expenses. As a mid-market expert and staying ahead of our needs, we've been able to efficiently procure PPE and other COVID-related items. The pandemic has impacted all classes of housing, but ours has not been impacted as drastically. That speaks to our value proposition. And we have seen it play out firsthand as residents move in and their lives are actually changed for the good. We have no reason to panic and we're already seeing our leases tick back up. The fundamentals of our business are intact. In fact, I believe they're stronger than ever. One note on the moderate decline in NOI that we achieved: our performance does not include any government support. Mainly as an independent living operator, we are unlicensed, so there has not been much help or assistance for us. On one hand, while I'm disappointed that we've not gotten any assistance, this may be a blessing in disguise. I believe the key reason is success in managing through a pandemic or COVID-19 situation like ours requires speed and scale. We were able to take decisive actions focusing back on the three priorities: low infection rate, employees coming to work every day, and happy residents. So early on, we moved quickly to source PPE and transition every element of our community operations, from dining to housekeeping and cleaning, additional cleaning. Thinking back to that, how you shift the hundred thousand daily meals from dining in to room service, mobilized procurement, inventory management, and associate training on PPE, and established real-time data capture on infectious disease symptoms and testing across all of our communities. Our pursuit looked like this in the early days in February. First, we quickly established multistage protocols for different levels of inspection and testing. These protocols standardized our actions across communities, set up our decision criteria, and created a playbook for each functional area within Holiday—from dining services, daily resident activities, to sales to community leadership. Nothing could have prepared us in advance for COVID-19. But we actually had a head start in the form of pre-existing infectious disease protocols. We rapidly built from that head start. Second, we quickly mobilized a communications infrastructure, accounting for document management. There are lots of documents around this, data sharing status trackers, and expanded communication channels. This infrastructure was key for rapid and frequent communication, for example, supplies and PPE status. It has been critical for us to over-communicate. Culture plays a significant role in our communications. Whether it's communicating to our current residents, potential residents or our colleagues, our culture of transparency and accountability underlies our public disclosure of active positive cases, a disclosure we began in April. And finally, our culture of collaboration is also important. This is a behavior that shows up early and stays late. From early on, our employees have stepped out of their normal job descriptions, shared ideas, proposed solutions and really supported each other. As we progress from the early phase of COVID-19 to the phase of managing state-by-state reopenings, we were very focused on balancing the competing needs of safety and socialization. So our pursuit evolved to cover, first, maintaining strict control through our protocols. We were strict, but we were also very agile with them. We adapted based on CDC updated guidelines and changing state reopening criteria. We also implemented creative ways to engage residents and implemented safe activities. We have found new ways to communicate internally and externally. Through our internal platform, we have visibility into the day-to-day life at our community; resident experience coordinators share and motivate each other with their positive postings on the platform. This also gave us the intended benefit of visibility into compliance with social distancing and PPE requirements in our communities. While some may focus on the challenges and headlines, we think these times force necessary and balanced advancement that will benefit our company and the industry as we come out of this. We also implemented poll surveys during this time to gain insight into satisfaction of our residents and our employees and see comparables across our communities—that is, which communities are doing well and which ones may not be doing as well. We've been quick to collect and act on the findings and have been open and honest in our teams' action plans to improve. Turning to the current phase of our COVID-19 response management, we're really aligning all the learnings from the past five months into four areas. One, leveraging more data—we continue to make greater use of both internal and external data to reinforce our protocols. Real-time data at the local Holiday community level and at the appropriate public municipality level informs our protocols. You really need both; you need that from the community level and what's happening outside of our broader community. Second, benefiting from centralization while our support center functional resources continue scaling COVID solutions. So just on this point, we've developed some technology solutions for screening, sanitation and disinfecting. Third, we are balancing again this idea of safety and isolation and socialization. So data plays another key role as we manage the individual preferences of our residents against the need to standardize safety measures across all of our communities. And finally, continue to increase engagement with our employees. We have benefited from such a high number who continue to choose to serve in these challenging circumstances. On that point, I would conclude by sharing that I have never been more encouraged by our industry and our business than I am now. I see the commitment of our employees, the gratitude we hear from our residents and their family members, and the close partnering with owners such as Sabra. This view that I'm so lucky to have is cause for confidence. The data backs that up and the data also points us forward. I'm seeing resiliency in Holiday and in independent living that does not just indicate we are here to stay as a business and a sector. It also says we have a larger mission now. Seniors have always told us that they want the socialization and sense of belonging found in our communities; now they can also have a sense of safety and peace of mind. That's a great story for us to have. On a final note, before I turn this back to Sabra, I want you all to hear why a company like Holiday and why employees in the senior living business view it as a privilege to serve our elders every day. This voice message is from a Holiday resident and sums up why we do what we do. So thank you for letting me share that message. I will turn it over to Talya.

Talya Nevo-Hacohen, President & Chief Operating Officer

Thank you, Lilly. That was very moving. In my remarks, I will provide you with second quarter operating results of our managed portfolio. The second quarter reflects operations in the context of the spreading pandemic. The severity has varied geographically. I will also provide you with some performance statistics for July. As of the end of the second quarter of 2020, approximately 16% of Sabra’s annualized cash net operating income was generated by our managed senior housing portfolio. Approximately 53% of that relates to communities that are managed by Enlivant, and 34% relates to our Holiday-managed communities. The balance includes our Canadian portfolio and five assisted living and memory care communities in the U.S. The managed portfolio operating results for the second quarter reflect residents' desire to stay in their community and operators' incurred expenses to keep residents and employees safe during this period. I will provide highlights of the operating results of our managed portfolio on a same-store quarter-over-quarter basis, excluding two recent acquisitions and one transition community in our wholly owned portfolio, consistent with the presentation in our supplemental information package. While revenue decreased by 3.7% in the second quarter compared with the first quarter of 2020, revenue per occupied room, or RevPOR, excluding the non-stabilized assets barely moved, declining by 0.6%, while occupancy, also excluding the non-stabilized assets, declined to 82% from 84.5% in the first quarter. Cash net operating income decreased by 19.2% to $16.3 million from $20.1 million—about 69% of this decline is due to lower revenue and the balance due to additional expenses incurred by our operators managing the pandemic. Cash NOI margins declined to 23.1% from 27.6% in the preceding quarter. We see no apparent differences in the pandemic's impact on the financial results of our independent living communities compared with our assisted living communities. The only variable that clearly impacted operators is geographic location. Sabra’s managed senior housing portfolio—77% of the second quarter cash net operating income came from the Enlivant joint venture and Holiday portfolios, both of which have national footprints. The Enlivant joint venture portfolio, of which Sabra owns 49%, consists of 159 properties after the strategic sale of nine properties during the second quarter, and showed a small decrease in revenue driven by occupancy loss in the second quarter of 2020 on a same-store quarter-over-quarter basis, those were impacted by costs related to the pandemic throughout the quarter. Average occupancy for the quarter was 78.9%, 2.6% lower on a stabilized same-store quarter-over-quarter basis. RevPOR was $4,302, slightly lower on a stabilized same-store quarter-over-quarter basis, but slightly higher on a stabilized same-store year-over-year basis. Taken together, revenue was 3.9% lower on a same-store quarter-over-quarter basis. However, same-store cash NOI margin was 18.7% for the quarter, 4.5% lower on a same-store quarter-over-quarter basis. If we add back $2.2 million of COVID-19 expenses incurred in the second quarter, the cash NOI margin would have been 24.8%, only 1.6% lower than the cash NOI margin for these assets in the second quarter of 2019 before COVID-19. Subsequent to the quarter, July occupancy was 77.3%, as 440 basis points lower than February occupancy before the impact of COVID-19. Rates have held and collections have continued to be normal. Enlivant estimates that Sabra’s share of continued expenditures on PPE, labor and employee programs in the third quarter will be about $533,000 per month. Since the pandemic began until the start of this week, 60 of our Enlivant JV communities have had a resident or staff member test positive for COVID-19. As of the beginning of this week, 27 communities had a resident or staff member with a positive test, and 16 of those communities are located in Texas, Indiana and Arizona. While the portfolio has recently seen a modest increase in move-outs, there has been a rebound in move-ins, 56% higher than in April. This is the trend that we will see throughout the managed portfolio. The second quarter operating results for Sabra’s wholly owned Enlivant portfolio of 11 communities have similar themes. Second quarter occupancy was 83.3%, a 2.8% decline compared to the prior quarter. The occupancy decline occurred largely in April, with May and June occupancy flat at 83.1%. RevPOR in the second quarter was $5,776, flat to the prior quarter and 6.4% higher than the prior year. Revenue was 3% lower on a quarter-over-quarter basis but only 1.9% lower on a year-over-year basis. Again, the decline in revenue was a function of occupancy and not of rate. Cash NOI margin was 21.7%, 4.5% lower on a quarter-over-quarter basis. And if we add back $562,000 of COVID-19 expenses incurred in the second quarter, the cash NOI margin would have been 27.9%, which is higher than the cash NOI margin of 26.7% for the same properties in the second quarter of 2019. More recently, July occupancy was at 83%, 300 basis points below February occupancy and only 10 basis points below May and June occupancy. As in the joint venture, rates have held and collections have continued to be normal. Enlivant estimates that Sabra’s continued expenditures on PPE, labor and employee programs will be about $125,000 per month. In total, seven of our wholly owned Enlivant communities have had a resident or staff member test positive for COVID-19. As of earlier this week, only two communities had not yet recovered. We transitioned our Holiday communities from net lease to managed portfolio five quarters ago. In addition, we transitioned an independent living community in Frankenmuth, Michigan to Holiday in the fourth quarter of 2019. All the operating results that follow are presented on a same-store basis and exclude the recently transitioned property. The Holiday portfolio occupancy was 85% in the quarter, 2.2% lower on a sequential basis. RevPOR was $2,499, virtually unchanged from $2,496 in the prior quarter and slightly higher than $2,459 on a year-over-year basis. On a quarter-over-quarter basis, the Holiday portfolio experienced a 2.4% decline in revenue. Cash net operating income margin was 35.1% compared with 35.6% in the prior quarter. If we add back $273,000 of COVID-19 expenses incurred in the second quarter, the cash NOI margin would have been 36.2%, close to the 36.9% cash NOI margin for the same portfolio in the second quarter of 2019. Subsequent to the end of the quarter, excluding the one transitioned community, July occupancy was at 83.1% compared to 86.8% in February, a 370 basis point decline. Holiday estimates that pandemic-related expenses will total $250,000 for the third quarter. Of the 22 properties that Holiday manages for Sabra, 12 have had a resident or staff member test positive for COVID-19 and about one community has recovered. Of those 22 properties, 19 are in various stages of lifting restrictions such as dining room use at reduced capacity, limited visitors and reopening of the beauty salon. Holiday has seen an increase in voluntary move-outs in July, which appear to be a catch-up of the delayed move-outs seen in the second quarter. At the same time, the number of new leases is trending up, and the number of move-ins is increasing on a month-over-month basis. Sienna Senior Living manages eight retirement homes in Ontario and British Columbia for Sabra. In the second quarter of 2020, the eight properties managed by Sienna delivered 82.7% occupancy, 2.6% lower on a sequential basis, while RevPOR was $2,403 slightly higher than the prior quarter and 2.9% higher on a year-over-year basis. Second quarter revenue was 2.3% lower than the prior quarter; here again, driven by occupancy decline. Cash net operating income margin was 27.3%, significantly lower than 39% in the prior quarter and 39.2% in the second quarter of 2019. If we add back $318,000 of COVID-19 related costs incurred, cash NOI margin would have been 34.4%. Sabra elected to match a pandemic wage premium being paid in Ontario to support single-site employment. This item represents just over half of the $318,000 of COVID-19 related costs in the quarter. More recently, July occupancy was 80.2%, 400 basis points below February occupancy. There have been no confirmed cases of COVID-19 in our Sienna portfolio. The number of cases is very low in the Interior of British Columbia, where four of our retirement homes are located, with a total of 377 cases. And there are fewer than 40,000 cases in the entire province of Ontario. Sienna began reopening its communities in British Columbia in mid-May, and in Ontario in mid-June. Visiting stations were built to allow for clean, protected and safe outdoor visits with family members and residents were permitted limited leaves of absence that allowed them to go off campus. In July, all restrictions on visitors were lifted, but indoor and outdoor visiting stations continue to be used. We are seeing move-outs that have been delayed or increasing as capacity in long-term care, which is government funded, becomes available. There are three themes that run through the financial results we've discussed. First, RevPOR has remained largely flat year to date. Second, occupancy decline began in April and particularly in our higher acuity properties but have decelerated subsequently. Third, costs related to the pandemic continue. On RevPOR, our communities had a fairly stable resident base in terms of rent and acuity and my team still intends to increase rent and level-of-care rates in October as it has historically done. While the increases in the past have been 5% to 5.5%, this year the plan is for a more modest 4% to 4.5% rate increase. The communications regarding those increases are already well underway and have been met with little resistance. This illustrates the perception of value offered by senior housing and the lack of price sensitivity for offering safety and care in the current environment. On occupancy, between February and July, our total senior housing managed portfolio inclusive of non-stabilized assets lost 393 basis points in occupancy. The month-over-month change was as follows: 9 basis points in March compared to February; 147 basis points in April; 107 basis points in May; 58 basis points in June; and 73 basis points in July. What is notable is the slowing of the occupancy decline over the course of the second quarter. July occupancy was negatively impacted in regions that have had significant outbreaks, and by the catch-up of voluntary move-outs, particularly in those areas where infection rates have subsided. However, our operators are seeing material upswing in tours, leases and move-ins, which are offsetting the catch-up of move-outs. Pandemic expenses are impossible to predict in duration; infections have spread unevenly and somewhat unpredictably across the country. When we look forward, we expect to see testing and hopefully rapid testing become a key component of these costs, and PPE expenses settling at a steadier level as availability becomes consistent. Our managed portfolio is located mostly in secondary and tertiary markets and targets a middle-market price point; these markets have continued to be more shielded from the pandemic and its impact. The initial spread of coronavirus was worst in densely populated areas with 70% of cases in primary markets where 46% of the population lives. At the end of July that 70% has declined to 56% of all cases. Since the beginning of May, the virus has spread across the country and penetrated less densely populated regions. So that 20% of cases are in secondary markets with 20% of the population and 24% of cases are in tertiary markets with 33% of the population. Even in late July, cases per capita in primary markets are 26% higher than in secondary markets, and 64% higher than in tertiary markets. We all read about the broader effect of the pandemic and its longer-term implications: people working from home, migration away from gateway cities and dense urban areas to suburban and ex-urban locations for safety, space and lower cost of living, and the large-scale, permanent loss of jobs with fundamental changes, particularly in the retail and lodging industries. We believe that these forces will create the setting for our operators to recruit talent with relevant skills in locations where cost of living is more reasonable for those interested in the career and an industry with long-term tailwinds. I will now turn the call over to Harold Andrews, Sabra’s Chief Financial Officer.

Harold Andrews, Chief Financial Officer

Thank you, Talya. We are pleased to announce that we have not needed to provide COVID-19-related rent relief to any of our tenants to date. We collected all of our forecast rent, without the use of deposits or other credit enhancements, through the end of July. We're on track for normal collections into the first few days of August. As Talya shared in detail, our managed portfolio experienced declines in occupancy and increased costs related to COVID-19, which negatively impacted the financial results for our managed portfolio. We provided normalized FFO and normalized AFFO numbers; we excluded just under $4 million of COVID-19-related expenses in the managed portfolio. As Talya noted, we expect these incremental costs to continue for the near term but do not currently have insight into the ultimate length of time or magnitude of such costs for the long term. Nor do we have enough information to assess future occupancy expectations in the managed portfolio or the potential need for rent relief in the triple-net portfolio in the coming quarters. As such, we are not providing an outlook for future performance at this time. Now getting into the numbers. In the three months ended June 30, 2020, we recorded revenues and NOI of $153.9 million and $126.9 million respectively, as compared to $149.3 million and $125.6 million for the first quarter of 2020, representing increases of $4.6 million and $1.3 million respectively. Increases in revenue and NOI were primarily due to prior quarter write-offs of straight-line rent receivables and above-market lease intangibles totaling $6.1 million associated with four operators who removed the cash-basis accounting in the first quarter, partially offset by a $1.4 million decrease in residency income during the current quarter due to the decrease in occupancy in our wholly owned managed portfolio. NOI was further impacted by the $3.1 million increase in COVID-19-related costs over the first quarter of the year. FFO for the quarter was $88.1 million, and on a normalized basis was $93.3 million or $0.45 per share. FFO is normalized primarily to exclude the $3.9 million of incremental costs associated with COVID-19 mentioned a moment ago and a $24 million write-off of straight-line receivables. This compares to normalized FFO of $92.1 million or $0.45 per share in the first quarter of 2020. AFFO excluded merger and acquisition costs and certain non-cash revenues and expenses was $87.3 million and on a normalized basis $91.5 million or $0.44 per share. AFFO was normalized to primarily exclude the same $3.9 million of pandemic-related expense from normalized FFO. This compares to normalized AFFO of $90.5 million or $0.44 per share in the first quarter of 2020. For the quarter, we recorded net income attributable to common stockholders of $29.6 million or $0.14 per share. G&A cost for the quarter totaled $8.7 million, in line with the first quarter of 2020. G&A costs included $2.4 million of stock-based compensation expense for each of the second and first quarter of 2020. The current cash G&A cost of $6 million was in line with our expectations for the quarter. Our interest expense for the quarter totaled $25.3 million compared to $25.7 million in the first quarter of 2020. Our cost of permanent debt declined 16 basis points from the end of the first quarter into the second quarter to 3.51%. Our revolver borrowing costs declined 83 basis points from the end of the first quarter to the end of the second quarter to 1.26%. Interest expense includes $2.2 million of non-cash interest each of the second and first quarter of 2020. Loss from our unconsolidated joint venture of $12.1 million includes a loss on sale of $9.1 million from the strategic disposition of nine facilities Talya referenced earlier. During the quarter we completed the acquisition of one senior housing triple-net community from our proprietary pipeline with a purchase price of $30.3 million with estimated initial cash yield of 7.28%. We also completed the sale of three skilled nursing transitional care facilities, two of which were sold to Genesis with aggregate sales proceeds of $17.9 million, inclusive of the assumption by the buyer of an aggregate $14.2 million of HUD-insured mortgage debt encumbering two of those facilities. These sales resulted in an aggregate $0.3 million net gain on sale. Subsequent to quarter end, we funded $20 million in new preferred equity investments in a 186 senior housing community with an initial cash yield of 10%. And we completed the sale of an additional skilled nursing transitional care facility sold to Genesis with gross proceeds of $18.4 million, inclusive of the assumption by the buyer of $17.6 million of HUD-insured mortgage debt encumbering the facility. This sale marks the completion of the dispositions identified in our 2017 Memorandum of Understanding with Genesis. New annual rental obligation to us is approximately $21.8 million. Annual interest expense increased by approximately $1.1 million. Total rents recorded during the second quarter to these four sold facilities totaled $0.5 million. As COVID has impacted our equity value and our acquisition opportunities, we did not issue any shares of common stock under the ATM program during the quarter. Leverage metrics moved up slightly to 5.4 times, including our share of the Enlivant joint venture debt, and 5 times excluding the joint venture debt. We have $336 million available under the ATM program; we'll continue to monitor the equity markets and utilize the ATM to match fund investment activity and manage leverage as opportunities present. We were in compliance with all of our debt covenants as of June 30, 2020. We continue to have strong and improving credit metrics as follows: interest coverage 5.36 times, fixed charge coverage 5.17 times, total debt to asset value 36%, unencumbered asset value to unsecured debt 272%. On August 5, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.30 per share. The dividend will be paid on August 31 to common stockholders of record as of August 17. The dividend represents the payout of 68% on normalized AFFO per share and 71% of AFFO per share. We will continue to evaluate the dividend payout going forward. We continue to have a very strong liquidity position as of June 30, 2020 with over $950 million of cash and availability on our credit facilities. Principal payment obligations to the end of 2021 totaled only $20.2 million, and we have significant cushion in our debt covenants. Accordingly, we continue to be very positive about our current financial position, and our ability to appropriately address these challenges we may face as we work with our operators going forward. And with that, I will open the lines up for Q&A.

Operator, Operator

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

Nick Joseph, Analyst

Thanks. Rick, I appreciate the color on all the government support. How much of that government support or loans need to be repaid versus how much is forgivable? I'm just trying to get a better understanding of what operators' balance sheets may look like at the end of the year once the government support diminishes.

Rick Matros, Chairman & CEO

Very little, Nick. The big loan was for those that took advantage of the advanced Medicare payment. We only had a handful of operators that took advantage of that. And for a couple of reasons, one, a number of ABL lenders for those that took advantage of that just used that money to pay down their AR lines. But I would also note that there are some ABL lenders who, because they're so well secured, chose not to do that. So most of our operators chose not to take advantage of that and that would have been the biggest source for repayment. There's really not much else. You've got sequestration, the three-day hospital stay waiver, you've got the deferred payroll tax piece. So we don't see much there that is going to have an impact on our operators' balance sheets that would require repayment beyond what we've discussed.

Michael Costa, EVP, Finance

Nick, to add, if you look on page seven of our supplemental, we do a breakdown of those and we identify them. It may require payback, and as Rick pointed out, it's about $120 million on the advanced Medicare payment and about $40 million from the employee payroll tax delay. And then certainly, the PPP from the CARES Act may be forgivable, but that was about $50 million. These are some details and descriptions on page seven.

Nick Joseph, Analyst

Thanks. That's helpful. And then just on the acquisition pipeline, I think you called it dynamic and completely understand the liquidity desire and the balance sheet and Michael also stated you've worked hard to achieve and then also the cost of capital. So when you think about the pipeline today, if your cost of capital changes, it sounds like you're ready to execute and there'll be plenty of opportunities. So it's solely, right now, based on the cost of capital, not from a lack of opportunities. Is that a fair way to think about it?

Michael Costa, EVP, Finance

I think that's correct. Where I'm looking at everything, from a pricing perspective, we definitely see ourselves getting some skilled nursing done even at current stock prices. We can do accretive skilled nursing deals. Whether we want to use the ATM to raise money at those prices is a different issue so that we can maintain leverage. So that's really the primary consideration. On the senior housing side, we're just not seeing real pricing out there for the most part at this point. So, that's a nice skilled nursing pipeline that's really going to depend on our cost of capital improving and also expectations becoming a little bit more realistic. Talya, is there anything you want to add?

Talya Nevo-Hacohen, President & Chief Operating Officer

Hopefully one thing: we are seeing some decent quality assets on the senior housing side. And they tend to fall in the basket that Rick just described. Then we continue to see what I call the retreads and the deals that seem to never get done, which we saw in the last year and the year before, assets being sold by other owners because they're cleaning out their bottom drawer. Many of those are not of interest; sometimes there could be an opportunity. So we look at them, but often not.

Nick Joseph, Analyst

Thank you.

Operator, Operator

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

Michael Costa, EVP, Finance

Hi Rich.

Rich Anderson, Analyst

Hi, good morning. I want to go back to a comment—you said 70% of cases in primary markets. What was the timeframe of that comment?

Lilly Donohue, CEO, Holiday Retirement

I believe that was as of July. The earlier number referencing 70% in primary markets was the initial spread; my current numbers were as of the end of July.

Rich Anderson, Analyst

Okay. So the 20% in secondary and 24% in tertiary—those are end of July numbers, correct?

Lilly Donohue, CEO, Holiday Retirement

End of July. Yes.

Rich Anderson, Analyst

Okay. That's what I needed to know to ask the question. So, you've had some pretty good success from an occupancy standpoint on your senior housing portfolio, as you described up to this point, but it seems as though you're seeing a spread now to some of the markets that you operate in. What level of risk—or what concerns do you have that you could start to see a second wave of occupancy loss in your senior housing, which to this point has been a relative success?

Michael Costa, EVP, Finance

I'll take that, Rich. We don't have a high level of concern and the reason is that people have been treated as if they have had COVID in the facilities. So really, all the comments you heard from Lilly are happening across our operator base. So, for example, increased testing—Kentucky mandated increased testing, and Signature Health is a big operator for us in Kentucky. They had a number of buildings that tested positive because of all the increased testing but very few residents in the buildings have tested positive because they'd already received care. As Rick stated earlier, probably a lot of folks have had it and gotten through it, but we just don't know because there hasn't been enough antibody testing. So, I think certainly there's some risk that we'll see more facilities test positive, but we're not concerned with facilities having big breakouts to the point where you'd have to shut down admissions. The facilities that have had breakouts have generally had small numbers and have been able to isolate people and still admit new residents. So I think Lilly's comments mirror what we're seeing across the portfolio: protocols and quick responses have kept outbreaks manageable. That combination gives us comfort, Rich.

Rich Anderson, Analyst

Do you know to what degree you get no-symptom positive cases in a skilled nursing or senior housing facility? Does it usually come with symptoms? I'm just curious.

Michael Costa, EVP, Finance

I don't have good stats on that. We know that a lot of positive tests we've had in facilities have been among people who are asymptomatic, including employees as well as residents and patients. But I haven't seen reliable statistics that allow us to say X percent are symptomatic and X percent aren't, or quantify the degree to which people show symptoms.

Rich Anderson, Analyst

Right. Last question for me: COVID care—how much of it falls into Medicare coverage versus private insurance and Medicaid or other payers?

Rick Matros, Chairman & CEO

In skilled nursing, the COVID-related post-acute care generally falls under Medicare. One of the benefits, including the hospital stay waiver, is that if a person's condition changes—whether it's COVID or not—under normal circumstances they would have to be shifted back to the hospital in order to qualify for that Medicare benefit. Now you can skip that discharge and re-admit process in place. So for example, if someone's been in a facility and the initial Medicare-covered days have run and they converted to the secondary payer, typically Medicaid, and then on day 90 they present with other kinds of symptoms, maybe COVID, as long as the facility is able to provide the care there, then they're able to reclassify that patient back to Medicare without discharging them. So that's actually been one of the benefits of COVID-related waivers in the skilled nursing setting.

Rich Anderson, Analyst

Yes. Just thinking more broadly about the portfolio—how do you break down skills and senior housing?

Rick Matros, Chairman & CEO

On the housing side, the care is typically out of pocket for residents; testing and related medical treatments are billed through insurance where applicable, but most residents pay for independent living out of pocket. Skilled nursing tends to have a larger Medicare component for post-acute care as I described.

Rich Anderson, Analyst

Okay. All right. That's all I have. Thanks.

Operator, Operator

Thank you. Our next question comes from John Kim with BMO Capital Markets. Your line is open.

John Kim, Analyst

Good morning. So I'm going to ask this slowly. I was wondering if the pandemic had changed your views at all on how you think senior care should look—whether you're looking at micro-homes or active adult or maybe doing home health? Are you exploring these?

Rick Matros, Chairman & CEO

Home health is not a physical asset, so we're not going to get into the home health business from an asset perspective. Home health has already been a service provider in independent living; most independent living facilities have arrangements for residents to access home health. Micro-homes—I have mixed feelings about how the pandemic could affect that; I don't have a firm opinion right now. What was your other question?

John Kim, Analyst

The active adult outlook—if that's something you're looking at as well?

Rick Matros, Chairman & CEO

We've never seen active adult as a particularly high-margin business. I don't see that changing. Talya, do you want to add?

Talya Nevo-Hacohen, President & Chief Operating Officer

We have looked at active adult a little bit, trying to figure out if there is a way to play that sector in a manner that makes economic sense for Sabra. The reality is we couldn't get it to work. It trades pretty close to multifamily in valuation; there's no clear way for us to create something creative there at the moment.

Rick Matros, Chairman & CEO

The adult daycare business, aside from valuation issues, has historically been a tough business to make work from a profitability perspective. That might be dated thinking a bit, but generally it's not been that attractive.

John Kim, Analyst

That's interesting. Okay. And then the 73 basis points you lost in July in your senior housing—do you view that as a runway for monthly net attrition for the third quarter or the year?

Talya Nevo-Hacohen, President & Chief Operating Officer

I'm not a prognosticator. It's really hard to know. There's been some flattening out but depending on what happens with breakouts, you might see more deterioration. We feel like we've been through the worst of it in many markets, but there could be more and it's hard to say whether it's material.

Michael Costa, EVP, Finance

Yeah, I mean, there's really no way to know. It feels like we've kind of been through the worst of it. But there could be a little bit more—it's hard to prognosticate precisely.

John Kim, Analyst

Thanks.

Operator, Operator

Thank you. Our next question comes from Daniel Bernstein with Capital One. Your line is now open.

Daniel Bernstein, Analyst

Hi. With flu season coming, the symptoms overlap with COVID. How are operators preparing for flu season? Do you think there will be additional expenses or worse-than-normal seasonality? It seems like it could be difficult.

Michael Costa, EVP, Finance

Good question. I'll let Lilly address how Holiday is preparing and then I'll add a couple of comments.

Lilly Donohue, CEO, Holiday Retirement

So on the independent living side, I don't think it will complicate things too much for Holiday. We're tracking all infectious disease symptoms now on a real-time basis. In our experience, our COVID-positive residents tend to be more symptomatic—over 60%—while our employee base has about 30% symptomatic; employees tend to be more asymptomatic than residents. We have protocols in place for this. If symptoms are similar, physicians will often recommend COVID testing, and my guess is testing will increase. That's okay—we have a great process to manage someone being tested, what happens in a community, and what happens when they test positive. So for us, it's largely the same approach and we are tracking it day to day in all of our residents through a portal.

Rick Matros, Chairman & CEO

The other thing I would say is I read an analysis that suggested a potentially milder flu season because of adherence to COVID protocols—wearing masks, social distancing, and so forth. Intuitively that made sense to me. We'll see what happens, but it's an interesting hypothesis.

Daniel Bernstein, Analyst

I was going to ask: infection-control protocols for COVID are much more robust than a typical flu season, right?

Rick Matros, Chairman & CEO

Yes, much more. All of the additional activities and one-on-one care are driving higher expenses that we don't normally see in a flu season.

Daniel Bernstein, Analyst

Okay. And then one more question on acquisitions—has distress started to materialize in senior housing such that you're seeing opportunities, or is most of it still avoidance and forbearance?

Michael Costa, EVP, Finance

Talya, do you want to take that?

Talya Nevo-Hacohen, President & Chief Operating Officer

I think we'll eventually see distress. So far, the amount of forbearance and denial of market-to-market declines is still prevalent. We haven't seen widespread distress yet. What we are seeing and think will be a good opportunity is refinancing risk—whether there will be enough capital to pay off existing debt at maturity. We see an opportunity to structure deals around refinancing challenges. It's not so much a wave of distressed sales yet; it's more about financing challenges.

Daniel Bernstein, Analyst

Okay. That's all I have. Thank you.

Operator, Operator

Thank you. Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is now open.

Michael Costa, EVP, Finance

Good morning, Lukas.

Talya Nevo-Hacohen, President & Chief Operating Officer

Good morning.

Lukas Hartwich, Analyst

Good morning. It must be really challenging underwriting acquisitions today. How are you factoring COVID into the underwriting and NOI forecasts?

Talya Nevo-Hacohen, President & Chief Operating Officer

It's a good question. On senior housing, we're looking at how groups are doing right now. There are definitely buildings that have performed well and have not been deeply affected. We're not looking at large portfolios that mix severely affected assets with unaffected ones; that isolation helps. Many opportunities have no stimulus, so there's noise in the revenue side. In skilled nursing it's much harder: you have to peel out stimulus money so you can see the underlying economics rather than offsetting effects from occupancy, and you have to assess fundamentals of the location and the particular building to project normalization. It's definitely more challenging on the skilled side.

Rick Matros, Chairman & CEO

Part of the diligence is how well you know the operator. Looking at other facilities and how operators handled COVID is an important data point. Everyone projects a hockey-stick recovery, so you need diligence to understand operator capability.

Lukas Hartwich, Analyst

That's helpful. And has this experience changed your view on the relative attractiveness of independent living versus assisted living versus memory care on the senior housing side?

Rick Matros, Chairman & CEO

It doesn't change the long-term benefits. The space we are in has been neglected by broader healthcare systems and government; I think recognition is increasing that the industry lacked support. There's more conversation now about Medicaid inadequacy and system shortcomings. I think the value equation gets better as a result of this. Demographics don't change. How operators and companies handled the pandemic affects reputation at the local community level where decisions are made. Assisted living has seen acuity creep; independent living operators like Holiday have been expanding access to healthcare through telehealth, which helps entice residents to move in. Lilly, anything to add?

Lilly Donohue, CEO, Holiday Retirement

I agree. We are thinking about the business in a new-normal sense. Telehealth and prevention are key. We'll be able to provide flu vaccines, and we're having all employees get flu vaccines at company expense. Prevention and better access to care will help us manage this season.

Lukas Hartwich, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from Steve Valiquette with Barclays. Your line is now open. (Morgan McCarthy on for Steve Valiquette.)

Morgan McCarthy, Analyst

Hi. This is Morgan McCarthy on for Steve. Sorry if I missed this earlier. Could you talk a little more about the impact of the resurgence of COVID cases in states like California or Florida on your operators? Are you actually seeing those facilities be forced to shut their doors to new admissions, or delay lifting admission bans or other stricter regulations that might prevent tours or move-ins?

Rick Matros, Chairman & CEO

The impact on senior housing has been pretty minimal. Some of the reasons we've discussed earlier apply: operators have protocols, screening, and restrictions in place. Even when buildings test positive, breakouts are generally minor and operators have been able to isolate positive individuals and continue admissions. The main impact is that visitation and social components may be delayed in some markets, which affects residents' socialization, but we haven't seen material impacts on occupancy and the bottom line from those localized increases.

Morgan McCarthy, Analyst

Okay. And one more on move-in trends going into the second half—are you seeing any pent-up demand, deposits from new residents who are choosing to delay moves, or is the improvement primarily driven by increased tours and leads?

Talya Nevo-Hacohen, President & Chief Operating Officer

Move-ins are trending up; the whole sequence from leads to leases to move-ins is trending up and we're seeing that uniformly in the senior housing portfolio. It's not yet at year-ago levels—it isn't 'normal'—but the trajectory is headed the right way. A big factor is that operators and communities now know the protocols, processes are in place, and leadership has months of experience managing in this environment. To the extent a municipality disallows admissions, operators comply, but where admissions are allowed, many operators have protocols like pre-move-in testing and isolation options to allow safe move-ins.

Morgan McCarthy, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question comes from Tayo Okusanya with Mizuho. Your line is open.

Tayo Okusanya, Analyst

Hi. Can you comment specifically on what you're seeing at the state level—states are setting budgets now, how are Medicaid rates being impacted given state budget pressures from COVID?

Rick Matros, Chairman & CEO

We're not seeing much change at the state level right now. The states that provided temporary increases during COVID have largely left them in place for now. I think states are trying to manage budget pressures, but the federal Medicaid match is important and helps stabilize state actions. Historically, even through the Great Recession, Medicaid rates for nursing homes in aggregate were largely held steady. So I don't see an immediate worsening of rates because of the federal support and the extraordinary circumstances.

Tayo Okusanya, Analyst

Great. One other question—regarding stimulus four, are there specific industry asks, for example limited liability protections for COVID-related claims? What is the industry lobbying for?

Rick Matros, Chairman & CEO

Yes, liability is the big issue. It's not asking for blanket immunity for negligence—obviously wrongful acts should be actionable—but we are asking that mere presence of COVID in a facility shouldn't automatically be grounds for lawsuits. Many states have already enacted some limitations; I think around 29 states have some form of liability limitation. We're seeking federal clarity as well. Other than liability protections, there are other supports being discussed, but liability is the main ask right now.

Operator, Operator

I'm not showing any further questions at this time. I would like to turn the call back over to Rick Matros for closing remarks.

Rick Matros, Chairman & CEO

Thank you all for calling in. We appreciate it. As always, we're available for any additional questions. Thank you again for being on the call. I think it really provided some valuable input to our investors and everyone. Be safe out there.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.