Earnings Call Transcript - SBRA Q1 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT First 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.

Michael Costa, EVP Finance & Chief Accounting Officer

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 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.

Rick Matros, Chairman & CEO

Thanks, Mike, and thanks for joining us everyone. I appreciate it. Just a quick note that this is the first reporting period where we got all four quarters of the pandemic included in our statistics and our financials. Let me start with an update on Live Edge. On the last call, which obviously was not long ago, we talked about that as something that would be pending in terms of a decision in the near term, given the impact of the pandemic, particularly the latest surge on the managed portfolio. Both we and, importantly, TPG have decided that we really need to give the portfolio some time to recover. And so, there's not really a timeframe on it, but I would expect that at this point, we just want to see some recovery and some trajectory over the next few months. At this point, any offer that we would be able to make is really not much of an offer. And if we were to acquire the remaining 51%, it would certainly be at levels well below the strike price under the old option; they'd like to do a little bit better. So, we're still in the same position that we've been in all along. That is, if we could strike the right price, then we'll have some nice runway to grow with the portfolio. And if not, then we'll have plenty of proceeds to pursue other investments, and it will have a minimal impact on the balance of our senior housing versus our skilled nursing. So either way, we feel like we're in a good position, but do fully agree that this just isn't the right time to put something like this on the market. So, that's it for now and we will move now to give you an update on COVID and the impact on the business. For the first time our operators are speaking with an upbeat tone, which has been really fantastic to hear. Well over 90% of our facilities have no positive cases. Since the first week of March, the number of new positive cases in our facilities has ranged from zero to two facilities a week, and many more have been cleared. Over 90% of our tenants have reported over 90% uptake for patients and residents and over 60% for staff, so 90% vaccinations for our patients and residents, and over 60% for staff. Virtually all of our tenants have completed the three clinics. The CDC has released national guidelines for cohort restrictions, so those restrictions are now being relaxed with more visitations and group activities increasing, which does a number of things. One, it's become a leading indicator of census growth and, second, and very importantly, it helps to get our expenses back on the path to becoming normalized to pre-pandemic levels, which will have a direct impact on margin and our NOI. I just want to point out, though, that the CDC guidelines are a mandate and so there are different things happening in different markets. Some markets are still more restrictive than others. So hopefully people will come to the same conclusions. Also, don't forget to note that you can never fully express or appreciate what the staff, patients and residents endured; nonetheless, it will never be forgotten. It's still not over, obviously, but we just want to express our appreciation as often as we can, even though it may not be enough. There's $24.5 billion in the HHS fund left, there is another $8.5 billion for rural providers; we still think that number will grow as healthcare businesses who didn't need the assistance start returning some of that money. We do believe that we all have access to some level of monies in that fund. The decisions haven't been made yet, but we expect that we will have access to some of that in the rural provider piece. Senior housing is being included in that dialogue. So, we feel much more optimistic that there will be some funds available for senior living and senior housing as well. Now, let me move on to reimbursement. There's been a lot of talk and speculation about the CMS proposal in the proposed rule. We now have data to better understand the impact of the pandemic on Medicare revenues. Surprisingly, only 15% of the industry increase is still in place — a surprisingly small number that reflects the fact the industry did not fully take advantage of the three-day waiver suspension. This may help the industry position that the waiver suspension should be extended for a prolonged period of time. You better understand the implications of making that suspension permanent. I would also note that for Sabra's operators, all the operators discounted in place to get to one extent or another; there's a wide variance in what everybody is given to some extent and a lot of that has to do with the fact that our long-term care providers with high-acuity businesses have a greater tendency to scale in place. The other number that was a little bit surprising in some of the analysis is that the percent of COVID patients was just under 9%. I think that's misleading only because, as everybody on the call knows, we didn't have testing available for months. So we're pretty confident that we had a lot more patients and residents that had COVID and were not actually diagnosed with COVID. Despite those two metrics, admissions to new facilities rose dramatically, driven by limited capacity in the hospitals, which were only able to admit the very sickest patients, and then those folks were transferred and increased our skilled mix. This is clearly evident in the impact on skilled mix in our portfolio. As acuity has come down, we've seen our skilled mix come down from its high in December and get closer to pre-pandemic levels, although it's still higher than pre-pandemic levels. As it relates to the proposed rule, the 5% increase in Medicare revenues above budget neutrality seems clear that much of the increase is driven by this pandemic-related phenomenon and the prolonged spike in acuity. CMS will be taking comments on the proposed rule, will look at all the underlying data and be sensitive to industry recovery. To the extent that some calibration is necessary, I believe it will be phased in over different fiscal years to allow the industry to recover. That was a pretty strong message I think CMS delivered; it was very conciliatory and they really do want to see the industry recover. A couple of other notes relative to pandemic-related assistance: PHA was extended for another quarter, FMAP funding was increased and the FMAP funding increase was extended through September 30, 2021, and sequestration suspension continued through the end of 2021 as well. Now moving on to investments and operations, with $1.5 billion in our investment pipeline being reviewed, we believe we're on a path towards a great global company. Most of the pipeline continues to be senior housing with behavioral health and addiction activity, although there's not much skilled activity at this point, given that federal assistance has provided time for the operators to recover. For those that want to sell their assets, they want to get closer to pre-pandemic pricing in terms of getting credit for that kind of NOI. Our top seven skilled operators, which now comprise 66% of the NOI, hit their low point in occupancy in late December. They have increased occupancy approximately 431 basis points, leading the way for the portfolio. The rest of the skilled portfolio has an increase to that extent. Remaining operators outside of those top seven tend to be operators that we only have a few facilities with and are impacted by local market conditions. Overall we are seeing increases in census, but not to the extent of our top seven with the exception of Genesis, who happen to be our most progressive operators in terms of the level of acuity as they take a nice variety of clinical programs that they provide, and they also comprise some of our top operators relative to having taken COVID patients during the course of the pandemic. I noted that skilled mix has been declining since that same point in time, and acuity will ultimately level out closer to pre-pandemic levels. What we don't know is, prior to the pandemic we did see acuity increasing and length of stay increasing because of PDPM, and obviously PDPM was interrupted pretty early on after implementation. So we'll see how that goes going forward, but I would still expect one of the impacts of PDPM will be a positive impact on length of stay. Our senior housing bottomed out well after the leased portfolio, but it's since started recovery as well with our leased portfolio bottoming out in February, and the leased portfolio has now seen 365 basis points of occupancy increase since. Talya will discuss the managed portfolio. I'd note that the remainder of our portfolio — our specialty hospitals, behavioral and addiction facilities — fared exceptionally well during the pandemic, with occupancy increases of approximately 550 basis points over the course of the pandemic. Again, they weren't impacted by the pandemic in the same way, so there wasn't a low point to hit, and rent coverage has increased over that period of time as well. This portfolio, as most of you know, comprises an important growth area of 11% of our NOI, and it's a strong focus for investments for us going forward. And with that, I'll turn it over to Talya.

Talya Nevo-Hacohen, Chief Operating Officer

Thank you, Rick. Sabra's senior housing managed portfolio continued to experience operating pressures in the first quarter of 2021 due to the global pandemic. However, when we look at the quarterly operating results on a more detailed basis, as well as April results, we see an inflection point in occupancy. We have stressed over the past quarters that the challenge facing senior housing is occupancy and that improving occupancy is the vector that will drive the sector's economic recovery. Simultaneous trends of higher move-ins, fewer move-outs, and increasing interest in senior housing driving tours and leads underlie the start of the occupancy recovery with normalizing expenses further enhancing margin. As we expected, the successful distribution of vaccine has been the linchpin for the turnaround in senior housing in the United States. The headline numbers on a quarter-over-quarter basis are as follows. Occupancy in the first quarter of 2021, excluding two non-stabilized communities, was 73.1% compared to 76.4% in the prior quarter. REVPOR, also excluding two non-stabilized communities, declined sequentially by 1.7% to $3,718 from $3,783, but was slightly higher than in the first quarter of 2020. Cash net operating income declined 33.4% sequentially and margin declined by 6% compared to the prior quarter in part because of continued costs related to COVID and lack of grant income in the first quarter of 2021. The details indicate a more settled story. The rate of occupancy declines slowed over the course of the quarter in our total wholly owned portfolio, and occupancy improved in April. From December 2020 to January 2021, occupancy declined 1.7% to 75.9%. From January 2021 to February 2021, occupancy declined 0.9% to 75.1%. From February 2021 to March 2021, occupancy was flat at 75.1% and from March 2021 to April 2021, occupancy increased by 0.6% to 75.7%. From the low in mid-March until the latter part of April, occupancy increased 0.9% to 75.9%. Similarly, in our Enlivant JV portfolio from December 2020 to January 2021, occupancy declined 1.4% to 68.9%. From January 2021 to February 2021, occupancy declined 1.2% to 67.7% and from February to March 2021, occupancy declined 0.3% to 67.4%. From March to April 2021 occupancy grew by 1.5% to 68.9%. From the low in mid-March until the end of April occupancy increased 2.5% to 69.7%. While occupancy losses decelerated over the first quarter, pandemic-related expenses dropped sharply in our wholly owned portfolio. From December 2020 to January 2021 COVID costs decreased 10.1% to $396,000 and from January to February 2021 COVID costs declined 27.7% to $286,000 and from February to March 2021 COVID costs declined 31.9% to $195,000. Similarly, in our Enlivant JV portfolio from December 2020 to January 2021 COVID costs increased 26% to $764,000, but from January to February 2021 COVID costs declined 14.3% and from February 2021 to March 2021 COVID costs declined 36.5% to $416,000. Over the past few quarters, we've all speculated about the extent of pent-up demand for senior housing. Now we have some statistics that suggest the immediate demand is deep. Enlivant joint venture gross move-ins during March were at the highest level in 18 months, and close to the historical peak of 2.3 move-ins per facility per month. At the same time move-outs in March continued their significant decline from January and were at pre-pandemic normalized levels. In April net movement significantly outpaced March results. Leads and tour volumes in March were up 35% compared to March 2019 and April 2021 is tracking at a similar pace. Together these statistics point to a backlog of interest in senior housing, which should support higher lease conversions and result in increased occupancy. Metrics in our Holiday Independent Living portfolio reflect a similar trend with a timing lag compared to our assisted living communities. Recall that Enlivant had completed 100% of vaccine clinics by April, but Holiday, as an independent living operator, was not prioritized by the government and had to create its own vaccine program. By the end of April Holiday had already completed two clinics in each of 18 of our 22 communities. While the pace of move-ins has started to increase sequentially, we expect move-outs to normalize to pre-pandemic levels as vaccine clinics are completed. Both move-ins and move-outs are starting to trend; March move-ins were nearly 50% higher than February move-ins and occupancy at the end of April was 78.8%, 0.6% higher than the low in mid-March. Leads and tours have accelerated in every month since December. The other component driving revenue is rate. As discussed earlier, we have seen rate hold up across our managed portfolio over the course of the pandemic. But we recognize it's not certain that operators feel urgency to increase occupancy and they may choose to use rate as a tool. While we haven't seen material discounting within our portfolio, we are seeing greater use of incentives, particularly in our lower-acuity communities where lifestyle rather than care drives the decision to move in. In our higher-acuity communities, safety is now a key element in the sales pitch. And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

Harold Andrews, Chief Financial Officer

Thank you, Talya. I'll give a quick overview of the numbers for Q1 and then provide additional color on our guidance for the second quarter of 2021. But first, I want to note that we collected 99.9% of our forecasted rents from the start of the pandemic in February 2020 through April 2021. I would like to point out that we have one operator in New York State with at least three skilled nursing transitional care facilities who has decided to exit the business. These operations generate approximately $3.8 million of annual cash rents, and we expect deposits to continue to pay the rents through June 2021. We're in the process of transitioning those three facilities to one of our top operators. He has significant operations in the state of New York. We expect this transition to take some time due to the extended approval process in New York, which could result in a period of time when we are collecting no rents from these operations. Recovery from the impact of the pandemic will also take time, reducing the rents generated after the transition is complete, when the stabilization period ends; the timing of that is unknown. We expect rents to return to current levels in the future, but not likely to occur in 2021. Given that this portfolio represents less than 1% of our total NOI, the impact from the loss of rents during this transition and stabilization period is not expected to be material. For the three months ended March 31, 2021, we recorded total revenues, rental revenues and NOI of $152.4 million, $113.4 million and $121.3 million, respectively, as compared to $152.1 million, $110.7 million and $124 million for the fourth quarter of 2020. The increase in total revenues and rental revenues of $0.3 million and $2.7 million respectively was primarily due to increases in collections and the leased assets accounted for on a cash basis. Total revenues and NOI were also impacted by a $2.1 million reduction in revenues from our wholly-owned senior housing managed portfolio compared to the fourth quarter, including a $0.6 million reduction in government grants income. NOI was further impacted by the results of the Enlivant joint venture, which were lower compared to the fourth quarter by $2 million, including a reduction in government grants income of $0.5 million. We did not recognize any government grant income during the first quarter. Finally, COVID-19 related costs in our senior housing managed portfolio totaled $2.7 million for the quarter, a $0.3 million decrease compared to the fourth quarter. $1.8 million of this related to Live Edge, while $0.9 million was incurred in our wholly-owned portfolio. FFO for the quarter was $82.4 million and on a normalized basis was $85.5 million or $0.40 per share. This compares to normalized FFO of $88.4 million or $0.42 per share in the fourth quarter of 2020, and was at the high end of our guidance we gave for the quarter in February. AFFO, which excludes from FFO certain non-cash revenues and expenses, was $82.8 million and on a normalized basis was $83.2 million or $0.39 per share. This compares to normalized AFFO of $86.9 million or $0.41 per share in the fourth quarter of 2020, and was at the high end of our guidance for the quarter in February. These declines in normalized FFO and normalized AFFO are primarily related to the reduction in NOI of $2.7 million previously discussed. For the quarter, we recorded net income attributable to common stockholders of $33.4 million or $0.16 per share. G&A costs for the quarter totaled $8.9 million, compared to $8.1 million for the fourth quarter of 2020. G&A costs included $2.3 million of stock-based compensation expense in both quarters. Recurring cash was $6.6 million, or 5.4% of NOI and in line with our expectations. During the quarter, we recorded a $2 million provision for loan losses and other reserves, primarily related to the loan to the New York operator exiting the business we noted previously. We continue to have a very strong liquidity position as of March 31, 2021 with over $1 billion of cash and availability on our line and the ability to take advantage of acquisition opportunities. During the first quarter, we acquired one addiction treatment center and one senior housing managed community at an aggregate purchase price of $28.5 million with a weighted-average cash yield of 7.7%. In addition, subsequent to quarter end, we acquired one additional senior housing managed community for $32.5 million. We issued 5.2 million shares of common stock under our ATM program during the quarter at an average price of $17.75 per share, generating net proceeds of $90.2 million. Additionally, we utilized the forward feature of our new ATM program in preparation for certain upcoming investments; 1.3 million shares at an initial weighted average price of $17.94 net of commissions remained outstanding under the forward sale agreement. As of March 31, 2021 we had $139.8 million available under the ATM program. We were in compliance with all of our debt covenants as of March 31, 2021, and continue to have very strong credit metrics as follows. Our leverage is at 4.84x and 5.48x including our share of the Enlivant Joint Venture debt. Interest coverage is at 5.23x and fixed charge coverage at 5.05x. Total debt to asset value stands at 33%, unencumbered asset value to unsecured debt at 295% and secured debt to asset value at only 1%. On May 5, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.30 per share. This dividend will be paid on May 28 to common stockholders of record as of May 17. It represents a payout of approximately 77% on AFFO and normalized AFFO per share. Now, a couple of comments on our Q2 2021 guidance: we are linking our guidance again to the second quarter of 2021 due to continued uncertainty around the timing of the recovery from the effects of COVID-19. We expect the following amounts per diluted share for the quarter ending June 30, 2021: net income $0.13 to $0.14, FFO $0.38 to $0.39 per share, and AFFO $0.37 to $0.38 per share. These estimates are based on certain key assumptions spelled out in our supplemental, which I will highlight just a couple. As many of them note, we do not include any anticipated funds from the Provider Relief Fund for our senior housing managed communities. As we begin to see signs of improvement in the early part of the second quarter, we expect our senior housing managed portfolio average quarterly occupancy to fall within the following ranges: wholly owned portfolio 77% to 79% and consolidated joint venture portfolio 68% to 70%. We expect to close investments totaling $86 million with a weighted average initial cash yield of 9%. We anticipate funding investments using our revolver with match funding the equity component using the ATM program. Finally, we expect to maintain leverage below 5.5x including our unconsolidated joint venture debt based on expected annualized adjusted EBITDA between $470 million and $472 million as of June 30, 2021. And with that, I will open it up to Q&A.

Operator, Operator

Thank you. I will now open the lines for questions. Our first question comes from the line of Juan Sanabria of BMO Capital Markets. Your line is open.

Juan Sanabria, Analyst - BMO Capital Markets

Maybe just to start with a question for Harold. Apologies if I missed this as you read through the numbers. Is there any one-time items of note? I heard you mentioned a provision for loan losses in the first quarter relative to the second quarter guide given you're expecting performance to improve?

Harold Andrews, Chief Financial Officer

No, Juan. There was nothing in there that I would classify as a one-time true operating result in the second quarter. So there was nothing that I would classify as one-time. Like I said, we didn't actually get any government funds; maybe we get some government funds in the quarter but that did not happen. So it was purely their operations.

Michael Costa, EVP Finance & Chief Accounting Officer

And Juan, if I may add something: we see the commentary and we're really upbeat about recovering based on what we've seen so far. Although we also don't know how much is pent-up demand and what the actual trajectory will be over a longer period of time. The commentary goes to the underlying EBITDA and some of the trends we're seeing, but our Q2 guidance is slightly down from Q1 actuals. It really comes down to, like everybody else, we've been really cautious the last year, and we don't see any reason to put out something that we say is optimistic. We're not trying to be optimistic; we're just more comfortable putting out guidance that's conservative given how early these trends are. So it's really as simple as that: there's just no upside we want to presuppose. We're not putting ourselves out there any more than we did for Q1.

Juan Sanabria, Analyst - BMO Capital Markets

I think I get it. But no kind of product of cash rent accruals or cash rent paying from previous periods in the first quarter that would drop away or fall off in the second quarter, just to double check?

Harold Andrews, Chief Financial Officer

You're going to see some level of variability in cash collections on a cash basis. If you go back to the prior few quarters, you'll see this kind of little up and down quarter-over-quarter, but nothing significant that we're expecting to be called back.

Juan Sanabria, Analyst - BMO Capital Markets

Great. And then I guess maybe one for Rick on the SNF occupancy: I take your point on the largest operators being the bulk. Could you give the change year-to-date for the total SNF portfolio occupancy and/or what the change has been from the trough to today in occupancy?

Rick Matros, Chairman & CEO

We don't have a consolidated number for the total portfolio that's fully reconciled yet; that's still being compiled and many operators report in different methodologies. Over the course of the pandemic, our managed portfolio and our top operators have gotten really good at giving us accurate data that we've required. We've asked more of them because they have the infrastructure. The smaller operators we have, we haven't pushed as hard because they have much more limited resources and they've had their hands full. So the trend is positive; it's just not as uniformly positive across the smaller operators and we don't have an actual consolidated number today.

Juan Sanabria, Analyst - BMO Capital Markets

And just one last thing from me. Anybody on the watch list? We've had some hiccups with some of your triple-net peers that have come to light. You mentioned the SIP operators in New York. Anything else to flag for those that you guys are watching or that we should know about?

Rick Matros, Chairman & CEO

I'll make one comment and then Harold can jump in. The answer is no: we've had remarkable consistency in our watch list that was in place pre-pandemic and through the pandemic. On the one operator we mentioned, this has less to do with operational performance. This particular operator's CEO, who I've known for a long time and has been in the business for decades, chose to exit. The pandemic just finished him off; he called me and said he was too stressed and couldn't handle it anymore. That's what precipitated the move, as opposed to operational concerns. If he hadn't made that phone call, I'm not sure this would be happening. Harold, do you have anything else?

Harold Andrews, Chief Financial Officer

No, I don't have anything to add. As Rick said, the watch list has been very stable and there are no material concerns that we have with our operators.

Operator, Operator

Our next question comes from the line of Rich Anderson of SMBC. Your line is open.

Rich Anderson, Analyst - SMBC

I appreciate the comments from the front end on CMS and the 5% upside on revenue. But what do you gauge as being the rationale? It's hard enough to pinpoint things in normal times with all the noise on both revenue and expense sides. How are they able to come up with an informed conclusion and do you expect there to be a concrete change by October 1st of this year? Or do you think it gets pushed a year out because of all the confusion out there?

Rick Matros, Chairman & CEO

To your original point, I think some of us reacted the same way: why not just let this year pass and then start looking at the data. The 5% caught some by surprise, maybe that was the case. But we all saw acuity rising almost from day one, so we knew that number was going to grow over the course of the pandemic. If you actually read the full track of the proposed rule, they're pretty tempered in their comments. I know some headlines haven't been, but they're pretty tempered and very conciliatory in the proposed rule — more so than I've seen historically. So, is it possible something happens this October? Maybe. I don't think it's going to be major. They really have made a point of indicating that they don't want to do anything to disrupt the recovery of the industry.

Rich Anderson, Analyst - SMBC

Okay. You mentioned the top seven operators making a big chunk of the business and that you have a bunch that are owners or operators of one or two facilities. Is there an opportunity to sell more and consolidate your portfolio a bit, perhaps to avoid some of those one-off situations and maybe finance Live Edge if that comes to fruition?

Rick Matros, Chairman & CEO

From a timing perspective, I don't think we would get much done in the short term to raise significant money by sales. More importantly, we like our operators and we haven't had surprises with them during the pandemic. When we identified strategic operators — that goes back several years — we've kept a consistent approach. We have about 32 small operators out of which 16 are showing occupancy increases; the others are flat or slightly down and those are very market-specific. Much of that depends on local department of health decisions and cohort restrictions. There's nothing inherently wrong with those operators; these conditions should pass and environments will normalize, and they will likely benefit as restrictions are relaxed and pent-up demand is realized.

Rich Anderson, Analyst - SMBC

Okay, last quick question. You mentioned group activities. Are you seeing any amount of concurrent therapy starting to take shape in your facilities?

Rick Matros, Chairman & CEO

We are seeing some, and it's really varied by state and local restrictions as you'd expect, but it is happening. That will be helpful with labor costs and overall expenses within the facility. We are hopeful that as states and municipalities ease restrictions and the CDC guidelines become more uniform, we'll be able to quantify a clearer trajectory. And it's heartening that, despite community spread in some areas, vaccines appear effective: facilities with very frail residents are holding up. For facilities that have used restrictions well, many have no positive COVID cases and no negative impacts.

Operator, Operator

Our next question comes from Nick Joseph of Citi. Your line is open.

Nick Joseph, Analyst - Citi

Thank you. Appreciate the updated comments on Enlivant. Are there any contractual timing considerations for the JV?

Rick Matros, Chairman & CEO

No, there are no contractual timing constraints that would force a decision. You can wait and see on the recovery before making a decision. I don't anticipate they'll wait until full recovery; they'll likely want to see some recovery and trajectory. There's a case to be made for valuation whether it's to us as a buyer or someone else.

Nick Joseph, Analyst - Citi

Okay. Just on the positive commentary overall, can you marry that with your leverage thoughts and issuing ATM equity to keep leverage levels where they are versus letting it drift a little higher in the near term?

Harold Andrews, Chief Financial Officer

I think it goes back to what some might see as a disconnect in tone. We are positive on improving fundamentals, yet our earnings are basically flat quarter-over-quarter. A lot of that is driven by shares we've issued in the first quarter and the shares we expect to issue in the second quarter to fund acquisitions and maintain leverage. As we see clarity on recovery in our managed portfolio, we can begin to look at leverage on a longer-term basis and how equity issuance may moderate. We already feel that issuance should begin to moderate as performance improves. The joint venture outcome will also affect how we think about financing and potential exits. Leverage is still important; we intend to maintain it below 5.5x including unconsolidated JV debt. We have issued equity in the past to manage leverage and we'll continue to if necessary, but we expect issuance to moderate as recovery becomes clearer.

Rick Matros, Chairman & CEO

I'll add that since the pandemic started we have taken an extremely conservative stance on balance sheet and liquidity. We cut the dividend first and focused on being a good, conservative steward of capital. That means we'll be in a stronger position to grow again as EBITDA recovers and leverage drops naturally. We'll have real optionality on the leverage side and that's something I welcome as CEO.

Operator, Operator

Our next question comes from the line of Steven Valiquette of Barclays. Your line is open.

Steven Valiquette, Analyst - Barclays

Just to come back quickly on the question of Q2 '21 FFO guidance being down a little sequentially from the first quarter. You mentioned you're being conservative because of the pandemic. Is the concern more about risk of rent collections in the triple-net portfolio, or more perhaps REVPOR or pricing in the managed assets? Because it seems like from an occupancy standpoint there's pretty good visibility for Sabra and the industry for occupancy to improve sequentially. Just trying to confirm if the conservatism is tied to rate or collections?

Harold Andrews, Chief Financial Officer

I'll take that. It's just overall caution. I would say we don't have material concerns about collections in triple-net. But at the same time, the managed portfolio is cash-basis and tenants pay as they're able, so you can see volatility and timing differences. Also part of what's driving the appearance of disconnect is the share count: shares issued in Q1 and expected issuance in Q2 dilute per-share metrics. So while the absolute dollar differences may be small, per-share metrics can appear down. There aren't specific triple-net operators of material concern — it's largely cautiousness around cash-basis timing and the managed portfolio dynamics.

Rick Matros, Chairman & CEO

We don't have concerns with triple-net collections; that held up well. The managed portfolio is near its bottom and we're just a few weeks from hitting the trough, so we want to be prudent.

Operator, Operator

Our next question comes from the line of Lukas Hartwich of Green Street. Your line is open.

Lukas Hartwich, Analyst - Green Street

Thanks. I was hoping you could talk a little more about the opportunity set for behavioral health hospital acquisitions. Is there much deal flow in that segment?

Talya Nevo-Hacohen, Chief Operating Officer

I'll take that. The answer is yes: we're seeing more deal flow than we've seen in prior years. Certainly in addiction treatment there is a lot of interest from many capital sources. It's a sector that is evolving rapidly and presents roll-up opportunities because it has been relatively small-scale and very localized. The operating model has evolved quickly even over the last five years, so there is a lot of interest and more transactions now than ever before. For the time being, yes, deal flow is improving.

Lukas Hartwich, Analyst - Green Street

That's helpful. And then on the acquisition in Alaska, curious what the challenges are with asset-managing. I think that's your only property in Alaska, so maybe talk about the challenges of managing that property from far away and whether you hope to add more properties in that state.

Talya Nevo-Hacohen, Chief Operating Officer

Sure. There may be an opportunity to expand that property and add additional units, specifically IL units; that's something we may see over time if it makes sense, which would give us a bit of a campus there. Our asset managers visited the building prior to closing and didn't seem hesitant at all about making the trip to Alaska. Given our portfolio in the Pacific Northwest, it's not that much further if you're already up in Washington and Oregon.

Rick Matros, Chairman & CEO

Lukas, if you haven't seen it, it's really phenomenal.

Operator, Operator

Our next question comes from Todd Stender of Wells Fargo. Your line is open.

Todd Stender, Analyst - Wells Fargo

Hi. Thanks. Totally recognize it's a little premature to get too enthusiastic about the positive move in trends. But on Holiday, you had two good months in March and April. What are you hearing from Holiday right now and how are they ramping their marketing efforts? Given seasonal demand and the reopening, could there be some upside?

Talya Nevo-Hacohen, Chief Operating Officer

One interesting thing over the last year is that large operators, including Enlivant and Holiday, have shifted a lot of effort to digital sales. Outreach became different during the pandemic because you weren't speaking face-to-face. They moved to optimizing their websites and focusing on outreach through digital channels rather than relying as much on referral agencies. It's hard to predict exactly how referral sources will shift as doors open and people evaluate options, but what we do know is move-outs have declined and we expect those to normalize. Together, that dynamic suggests there may be pent-up need for transitions to higher levels of care where appropriate.

Todd Stender, Analyst - Wells Fargo

Understood. That's helpful. Switching gears, when I look at the cash yields on the senior housing facilities you bought in Q1 and Q2, they're in the high sevens. It sounds like they include earn-outs. Do you have a year-one initial going-in yield, or are these stabilized yields?

Talya Nevo-Hacohen, Chief Operating Officer

So far, we've presented stabilized numbers, which include earn-outs. Those stabilized yields generally reflect a 12- to 18-month window for both of those assets.

Operator, Operator

Our next question comes from Joshua Dennerlein of Bank of America. Your line is open.

Joshua Dennerlein, Analyst - Bank of America

Rick, last quarter you provided thoughts on when SNF and senior housing occupancy might return to pre-pandemic levels. Any updated thoughts you can share?

Rick Matros, Chairman & CEO

I still feel the same way with the caveat that my guess is as good as anybody's; we don't yet have enough time to observe a consistent trajectory. I still believe skilled nursing sometime in the first quarter of 2022 will be back to pre-COVID occupancy levels or pretty close. For senior housing, I still think it's likely to be the latter half of 2022. By 'pretty close' I mean close enough that markets will feel comfortable that recovery is underway.

Joshua Dennerlein, Analyst - Bank of America

Do you think the recovery will be choppy or more steady? Any color on the summer outlook?

Rick Matros, Chairman & CEO

It's contingent on several factors. One, how much pent-up demand influences move-ins; second, how acuity normalizes as hospitals resume normal admissions and elective surgeries. There's potential for choppiness: pent-up demand is helping but acuity and length of stay dynamics could still cause variability. Summers traditionally see a dip in occupancy on the skilled side, but given delays in surgeries and other factors this year, we may not see the traditional dip. My hope is there will be steady growth through the summer that would allow us to start projecting forward.

Joshua Dennerlein, Analyst - Bank of America

On the SNF side, how are you thinking about mix going forward? Do you expect more Medicare patients to come back first because they are discharged from hospitals, or some other mix dynamics?

Rick Matros, Chairman & CEO

First, keep in mind that when patients come in for rehab they come in under Medicare. We have very few operators that take Medicaid-only patients. What changes over time is the length of stay and complexity: some patients come in under Medicare and go home in a short rehab stay; others come in under Medicare with very complex nursing needs and then convert to longer-term residents and may involve Medicaid over time. PDPM impacts length of stay and case mix and we expect to see positive influences from PDPM once things normalize. The dynamic will continue to evolve as acuity rebalances.

Operator, Operator

Our next question comes from the line of Tayo Okusanya of Mizuho. Your line is open.

Tayo Okusanya, Analyst - Mizuho

I wanted to talk about the 5.5x leverage target you've set for yourself. Is that hard set by the rating agencies in order to maintain investment grade, or is there flexibility around it? I understand EBITDA going up provides flexibility, but where does that target come from and why limit yourselves there?

Rick Matros, Chairman & CEO

Tayo, it's not a hard limit imposed by all rating agencies, but it is the target Fitch identified for us to maintain our current credit rating. If we were to move above that level on a sustained basis, Fitch indicated they would downgrade Sabra absent other mitigating factors. They had placed us on a negative outlook specifically because our leverage was above that level previously. We got focused and brought leverage down below that level before the pandemic. When the pandemic hit, we knew we had to manage leverage. Because of our actions and commitment, Fitch removed the negative outlook. In the near term we intend to keep leverage below that level. When they look at leverage they do so inclusive of our profile, and historically they allow for some ups and downs if not sustained. If we were to exit the joint venture, our leverage would drop significantly and give us more flexibility. Conversely, if we acquired the remaining JV interest, we'd need to consider how to manage leverage with that higher balance sheet exposure. The key is avoiding a sustained elevated leverage level.

Tayo Okusanya, Analyst - Mizuho

Got you. And on state and local government stepping up with support for skilled nursing, what are you hearing? Is it too early to see major moves and how might that change as federal support winds down?

Rick Matros, Chairman & CEO

It's definitely too early to predict specifics, but the dialogue and tone have changed. State budgets did not take the projected hits at the onset of the pandemic and federal Medicaid support has provided some relief to states, giving them more room to act. FMAP increases and other federal measures have helped and states are more aware of long-standing underfunding of Medicaid. So the tone is more constructive, but it's premature to anticipate what states may do.

Operator, Operator

At this time, I'd like to turn the call back over to CEO Rick Matros for closing remarks.

Rick Matros, Chairman & CEO

Thank you. Thank you for joining us. We appreciate your time today and your support. As always, we're available for follow-up and hope everybody has a good weekend and continues to stay safe out there. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.