Q2 2021 Sabra Health Care REIT Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Sabra Health care REIT second quarter 2021 earnings call I would now like to turn the call over to Michael Costa EVP of Finance and Chief Accounting Officer. Please go ahead Mr. Costa.
Thank you.
Before we begin I want to remind you that we will be making forward looking statements and 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 and life and joint venture our expectations regarding our.
Tenants and operators and our expectations regarding our acquisition disposition and investment plans.
These forward looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially including the risks listed in our form 10-K for the year ended December 31, 2020, as well is and 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. The the comments we make today are still valid and addition references will be made during this call to non-GAAP financial results.
Messenger 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 and the financials page of the investors section of our website at Www Dot Sabra health Dot Com, our form 10-Q earnings release and supplement can also be accessed and the investors section of our website.
And.
And with that let me turn the call over to Rick Metros, Chairman and CEO of Sabra Health care REIT, Thanks, Mike and thanks, everybody for joining US today first let me start by once again thinking of our operators and all of the team members that work at the facility the spinner.
A really tough and bug.
The worst is over but there were still from challenges ahead of them.
And for myself and someone who has spent most of my career as an operator of I still can't even imagine what it was like.
The last 18 months to deal with Covid.
And the facility so that continue to have all and thanks, our appreciation and our admiration.
As you saw and the separate principally the gig Harold Andrews, our CFO and will be retiring at year end.
He'll stay on and the consultation Roe.
2 years following his retirement, which essentially means the tireless and it's gonna be available to us for whatever we need and in an advisory capacity and.
Sure Michael the access of him as well and and.
And with that we're really pleased and I got my concept will be promoted from the CFO position and Mike's been with us.
Cash and in fact, our whole team and together since inception so.
This is the really smooth transition for us and keeps us culturally and attack.
And what we anticipate having mike's position replaced our goal is early in the fourth quarter. So we've got a few months of overlap between my accounts and all of them.
New individual.
Next we'll move on moving onto the and live and exiting.
No. Some of this was expected.
Couple of comments and I'll, let him make 1 our exit from alive and it's specific to and live it we're completely committed to continuing to grow and senior housing.
I want to note and.
Express my appreciation of authority of the management team.
Live it and.
And our desire with the wholly owned portfolio to continue to work with them and to continue to grow with them.
After the sale of Detroit.
<unk> joint venture.
There were a couple of things that really happened and just.
Go back a little bit of history prior to the pandemic, we were getting pretty close to wanting to exercise the option on the 51% of TPG owned but the pandemic really changed everything and 2 things specifically impacted our decision, making 1 is the leverage of 1 of the leverage was high as it is the most PEO and companies prior to the pandemic.
And.
Somewhere around 9 times and it wasn't unreasonable and the size of the check and we'd have to REIT to bring leverage down to levels that works for both of us.
Was it wasn't an overwhelming amount.
Because of the pandemic impacts and occupancy and NOI that Leverages now 20 times.
The other issue is the operating company platform, which was really built.
To support a much larger and growing enterprise.
In order to accommodate that.
And again that was impacted by the pandemic as well and the current management fees no longer support that platform.
And the structure of the management agreement and the fee structure, specifically what has to be increased pretty dramatically to a point that we think is not market and.
And so those 2 the combination of those 2.
2 items just makes this summer.
And that would be extremely dilutive to us.
Probably over the next couple of years.
And at least and.
It's something that.
From our perspective as much as we like the portfolio, we're better off moving forward, it's immediately delevering and accretive and.
And it simplifies everything about our company and our reporting which we like as well and.
So it's really it really comes down.
2 of those issues.
TPG at some point, we will start the process and the whole tag along with that and.
And that'll be that and.
The other final point I would make is when we exited 2018. We had finished all the restructuring early in 2019 that was related to CCP, along with the sales of Genesis as well and.
Senior care centers, and we were really focused and committed to our shareholder based on not having noise and certainly even though the merger accomplished a lot of what we wanted to have happened and the company. It was a lot of noise over that 18 month period and over the course of 2019.
We stay true to that and.
I think people rewarded as of as a result of that we get our first 2 investment grade note offerings, which really successful and the pandemic hit but our commitment doesn't change 1 of the avoid noise and we just wanted to move forward and.
And do deals that are more predictable understandable and just focus on growing the company. The result of our exiting and light and puts us in a position that reduction that we're dealing with lower leverage and the optionality of that comes and that comes with lower leverage that we've never had before.
Let me make some comments now about Covid and.
And.
And the current reimbursement environment.
So at this point, we're not seeing trends with the variant and the facilities.
And.
The vaccination rates as we've been talking about the last couple of quarters is exceedingly high for patients and residents throughout the south of the portfolio well over 90% and many of our operating drove a 95%.
And the workforce is aware and we would like it to be but it's certainly much higher than the general population.
North of 70% and the aggregate although this.
Unlike residents and patients where there isn't much disparity between the uptake rate on patients and residents. There is the sturdy with employees, so, but 70% to 75% and the aggregate is pretty much where we are and vaccination status for employees.
Ma'am you may have just seen that Massachusetts is now mandating.
Explanations for all health care workers, we think thats. The good thing we havent several operators that have mandated vaccinations for employees not very many have.
The primary concern.
With all of the pressures on labor, which I'll get to in the minute as well is that the Louis employees, but I would tell you that for those of our operators.
Did mandate vaccinations and they did move employees.
And if they have to do it again do the mandate again from that perspective. It was completely work that it created and much more comfortable atmosphere and the <unk>.
Facilities and replacing the employees that the law.
Unfortunately, we've got other actions happening other states you may have seen in Texas that even if operators want to mitigate the vaccines they cannot.
So thats really I find out distressing and.
The real head scratcher.
So it just puts operators in Texas, and a little bit more difficult position, but I would say that 1 of the reasons and we're not seeing breakout trends, we have COVID-19 here and there and obviously with the value, but we're not seeing trends because the operators are huge protocol. So people are aware of masks and when they come into the facilities growth.
Workforce and visitors, so that's helping quite a bit as well.
Well, so we feel pretty pleased with where we are with COVID-19 and the facilities and out of all of our buildings. We only have 10 facilities that are completely clear of Covid, we actually have 1 operator.
As reopening of Covid unit because of this.
As far as of the primary hospital partners of overrun with Covid and so they're doing that to help out of the hospital.
So we may see a little bit more of that as well in terms of the provider relief fund and that's now at $43.7 billion. It's increased as I noted it would be last quarter because of the money monies that have been returned by the hospitals.
And faithful of distribution has been and delayed really sort of a couple of years and it was the most recently it was delayed because of the debate around infrastructure and pay for the fund is now protected and so.
And that we fully expect that there will be and announcement on the amount of timing and methodology, but we don't know what it is at this point Phe was extended through mid October if not the has been extended through December 31.21.
And the final rule from CMS of the market basket came in at 1.2% of pretty much where it was expected and there was no priority adjustment to PDP and this year I would note that I've seen some and some of the commentary after CMS made the announcement.
From some of the analysts out there we're expecting the hefty who will be and adjustment next year. So October 22 for fiscal year 2023, but we don't know about that either CMS did note that.
This year, obviously it was a tough year to use anything of the database because of Covid really impacted all of the numbers and really drove up the acuity. So we don't even know if the 5% there is a real number secondly, with the varian affecting operating is to some extent and we don't know how thats going to play out over the next few months.
And ensure how good the database is going to be and.
In fiscal year 'twenty to either so we'll see but however, it turns out 1 of the.
The things that we do feel very good about in terms of the relationship with the CNS is that the Delaware and disrupt the industry. So anything that they feel they need to do I think will be spread out and a way over time that doesn't impact.
Our operators and the fact of the matter is.
Increase Medicare revenue should come from the smart operators, who are moving acuity.
And not be dependent on market basket and the other things.
Now, let me move onto our acquisition pipeline. The acquisition pipeline is in excess of $2 billion, it's actually easier than it's ever been so I'm talking pre pandemic times, it's still primarily senior housing, but we're starting to see some skills.
And some more behavioral opportunities and.
Just sort of.
And of that when we discuss the without the pipeline both of the potential deals that we're actively reviewing theyre always continually coming in and out.
And a lot of these will fall off as well.
But when you talk about the amount that we have and the pipeline. It's just it's not the amount that hits our guests with the amount of that hits, our desk and after the review we decided to actually spent some time lines and do some underwriting analysis et cetera.
In terms of our strategy going forward, we will continue to be opportunistic within the asset classes that we're in and while we would like to find some larger opportunities where all of them to do larger deals.
We're not going to be taking on larger deals of that.
Require restructuring or any of the cleanup that will prolong sort of the noise around the company and so we'd rather stretch a little bit for our portfolio that's real.
Has the quality that we feel good about and has clear upside and is accretive.
As opposed to paying something less for of troubled portfolio beyond that we're laser focused sort.
And sort of the bread and butter deals.
The $30 million to $80 million deals and even even less than that and.
And obviously more than that.
And because those of the deals that are easily digestible and the teams really focused on it and cumulatively will provide some good growth for sabra going forward, so regardless of.
Anytime, we make and looking at larger opportunities, we never take our eye off the smaller opportunities.
In terms of occupancy trends, our top 8 skilled operators, which is 71% of our NOI. Since the end of December 2025 of them are up 601 basis points from the aggregate skilled mix, while lower than the December high acuity continues to normalize is 1 of 144 basis points higher than pre pandemic levels.
And we're seeing similar trends and the remainder of our skilled portfolio Hollywood will discuss our senior housing occupancy trends with al improving more quickly than anticipated.
And I noted earlier and made a comment about labor challenge and Thats really the biggest challenge right now and.
Until the pandemic related benefits.
And off in September.
I know you all have seen this and all sectors people just aren't coming back to work and so that puts stress on the operators and areas that we haven't seen and stretch before so nursing and therapy and 1 thing because there's always the shortage there.
We're seeing labor strength.
And departments like dietary and housekeeping and laundry and.
And use of temporary agency and some cases so we.
And we expect that to improve as we start moving into the fourth quarter, but that's still that's very tough right now and it's going to be tougher of wild and it does have some impact.
Potentially on the trajectory and the rate of recovery for occupancy because depending on what your staffing levels are at any particular time, you may not be able to accommodate and.
We don't have.
Operators that have had to close the ultimate so everybody is moving.
But for example, if you've got 7 of admits that you'd like to do and the next week and of happy may only be able to do 5 so.
Occupancy growth is continuing to happen.
And here and there it could get impacted by some of the labor stress.
The skilled portfolio EBITDA rent coverage was flat sequentially on an EBIT and.
And on the EBITDAR basis remains above 1 times.
When excluding provider relief funds and the Triple net senior housing portfolio. It was down to 112 from 1 to 3 sequentially and that was purely a function of a strong pre pandemic quarter dropping off and that was replaced by the severely impacted quarter coming out of the difference in the occupancy between the core of that dropped off and the core of that came on the <unk>.
180 basis points or.
Our other acute and post acute operators of 11, 6% of NOI continued to perform at a high level of coverage and occupancy higher we continue to be strategically focused on growing the behavioral and addiction segments and with that I will turn the call over to Italia.
Thank you Rick.
Sabra and senior housing wholly owned and managed portfolio of continued on the path of rebuilding occupancy and net operating income after the successful distribution and implementation of the COVID-19 vaccine may and.
And the first quarter of this year the headline numbers for the wholly owned and managed portfolio.
As solid.
At the end of the second quarter of 2021, and 78, 4% up 322 basis points from 75, 1% at the end of the prior quarter same store revpar, excluding non stabilized communities was slightly higher than the prior quarter of $2230 compared to 3200.
And $5 and in line with the best part and the second quarter of 2020 share.
And so our cash net operating income increased by 34% sequentially and margin increased by 5.9% compared to the prior quarter and large part because of the occupancy rebound and our wholly owned and live and portfolio as well as reduce pandemic related operating costs, such as additional labor PPE and supply.
And with a small boost and $519000 of kind of a grant and kind of in the second quarter of 2021.
When we look at sequential operating results on a more detailed basis, we see that the pandemic was not uniform and its impact on occupancy with higher acuity assets experience and greater declines and faster recovery and the vaccine clinics been pivotal to the turnaround.
Average wholly owned and managed assisted living portfolio, excluding acquisitions made during the quarter.
Many of the occupancy recovery that began in the second half of March driven primarily by our wholly owned and live and assets, which comprise about half of the units from March 2021 to April of 2020 and.
Occupancy increased by 160 basis points to 60, and 95% from April to May 2021, occupancy increased 214 basis points to 71, 7% and from May to June 2021, occupancy increased 39 basis points to 72, 1% and.
The low in March through mid July occupancy increased from 25 basis points to 71, 8%. This trend was driven by our wholly owned and live and portfolio, which had spot occupancy of 72, 1 percentage at the end of July of 200 basis points above the June.
We are seeing leads and torque consistently well above 219 paddles, indicating the pent up demand for needs based community continues with no current infection and outbreak and this portfolio and move out volume has reverted to normal trends, allowing occupancy to rebound.
For comparison Sabra is net leased assisted living and memory care portfolio has shown continued occupancy recovery, increasing 246 basis points and the second quarter compared with the prior quarter during the quarter the increases were steady from.
The March to April 2021 occupancy increased by 84 basis points to 75, 7% from April to May 2021, occupancy increased 71 basis points to 70% of 3.5% from May to June 2021, occupancy increased 63 basis points to 77, 1%.
And from the low and February through mid July occupancy increased 505 basis points to 77, 6%.
Because the required EBITDA and coverage of 1 quarter and arrears.
And that lower coverage reflects declining occupancy from the pandemic over 11 months with only March reflecting the post vaccine recovery.
Sabra managed independent living portfolio experienced the last occupancy loss and our assisted living portfolio.
And it's for Capri has been more gradual and edition is has been impacted by deferred move outs and lack of prioritization for vaccine distributions and the U S and delayed vaccine distribution and Canada.
From March to April 2021 occupancy increased by 71 basis points to 77% from April to May 2021 occupancy decreased 52 basis points of 76, 5% and from May to June 2021, occupancy increased 166 basis points to $78.
<unk>.
Some of the low and may through the end of July occupancy increased 212 basis points to 78, 6%.
And higher acuity settings initial vaccination clinics began in January and were completed in February and independent living vaccination clinics began in March and continued into April and both cases, we see the timing of vaccination and the communities as pivotal to increasing occupancy and.
<unk> are higher care portfolio of communities independent living and experienced a higher rate of move outs in may and resident and independent living requiring higher levels of care of deferred moving during the pandemic, resulting in pent up and move out volume trend that has reverted to normal levels this quarter and this past quarter zone.
Together these factors delayed the occupancy of recovery.
Demand for our independent living and appears to be strong and holiday leads are tracking 10% higher than in 2019 and move ins are tracking at nearly 20% higher than 2019, and importantly, the rate of lead to leads conversion is higher than in 2019.
Our occupancy gains and began to be felt and the second quarter. Our cross our wholly owned managed portfolio of pandemic related expenses also dropped 56% quarter over quarter. The decline would have been even greater but for ongoing workforce challenges being faced the same challenge affecting all industries and of vaccine mandate and <unk>.
And as of June 1st, resulting and temporary increased agency utilization of permanent staff and recruiting and our portfolio. We're seeing seeing nearly all community residents and patients vaccinated staff participation has been lower and ahead of industry rate of the industry range of 67% and communities.
And where operators of mandated employee vaccination, we are seeing participation of the same level as residents. There is the cost of this mandate of the staff of fusing the vaccine must be replaced the temporary labor until permanent employees can be higher.
Even in this challenging labor market, we expect vaccine mandates to become increasingly commonplace across all segments of the health care industry, considering the current concerns over the delta variant spreads.
And live and among other operators have already mandated vaccinations and holiday is requiring it of the new hires our operators continue to per resident safety first and.
And with that I will turn the call over to Harold Andrews, SaaS, Sovrans Chief Financial Officer.
And first let me just say, it's been a real pleasure working with all of the investors and all the analysts. These past 11 years and the extent of blast and really a blessing working with Rick and Mike and the whole Sabra team.
It's tough to leave the greatest gig of all time for me, but I do know that Mike will continue to do amazing things for Sabra and <unk> CFO and I'm thrilled for him to have this opportunity.
So let me now quickly into the quarter I will give a quick overview of the numbers for Q2, and then provide additional color on our 2021 guidance. The first I wanted to provide some additional color on the decision not to acquire Tpg's, 51% interest and the <unk> joint venture and the other exit the investment when the opportunity arises.
And for clarification of the sales process will be handled the TPG, we expect to exercise of our tag along rights to sell our interest if and when that sale occurs.
As Rick noted the decision was the other indication of the lack of belief and the management team or recovery prospects for the portfolio at some point and the future rather than the pandemic has had and not only a significant impact on the expected near term financial performance of the portfolio.
But it also had impacted our cost of equity capital as compared to late 2019 will be contemplated exercising our option to purchase the portfolio.
These 2 factors along with the current debt to EBITDA of 20 times as of June 32021, compared to the historical none of the 5 times leverage has significantly increased the cost to sabra to buyout TPG and rightsize the leverage on the portfolio to match our balance sheet targets.
Additionally, expectations of the need for a higher management fee on the portfolio was further reduced the long term earnings prospects below our prior expectations.
These factors will result in an extended period of earnings dilution for us if we were to acquire the 51% interest and what we believe to be the fair market value of the portfolio.
And this decision has resulted in our recognizing an impairment on the investment during the quarter of $164.1 million, reducing our carrying value to an estimated fair market value of $114 million per.
Finally, we currently have our net debt to adjusted EBITDA approaching the lowest level, we've seen and our history at 475 times, excluding the in light of the joint venture debt.
And wed like to point out that the calculation excludes our share of the <unk> joint venture debt and only include actual cash distributions from the joint venture to Sabra and that EBITDA calculation. Since this was the proper measure of cash available for us to repay sabra consolidated debt.
This current 475 times leverage includes only $5.7 million of.
Of cash distributions from the joint venture and our adjusted EBITDA amount as the joint venture suspended distributions to preserve cash during the pandemic.
As a result of our leverage will likely be positively impacted by the sale of the portfolio. As an example, if we receive proceeds equal to our new carrying value of $114 million or net debt to adjusted EBITDA will decline on a pro forma basis.
1.9 times to 456 times.
And the fit of the potential further delevering are significant to our strategy to maintain a long excuse me of strong balance sheet and provide us with significant optionality and how we think about funding future growth.
And now for the numbers for the quarter for the 3 months ended June 32021, we recorded total revenues rental revenues and NOI of $152.9 million of $110.8 million and $121.3 million, respectively, as compared to $152.4 million of $113.4 million.
And of $121.3 million for the first quarter of 2021.
This decrease and the rental revenue of $2.6 million.
And is primarily due to a decrease and collections related to leases accounted for on the cash basis.
Note that rental revenues can fluctuate quarter over quarter due to the timing of collections and recording of cash base rental income as demonstrated by our first quarter rental revenue increasing by $2.7 million over the fourth quarter of 2020.
Total revenues and NOI were also impacted by a $3.1 million increase in revenues from our wholly owned senior housing managed portfolio compared to the first quarter. The increase is due to a $5 million and government grant income as well as 2 senior housing management facilities, we acquired in 2021.
I was further impacted by the result of the and live at joint venture, which generated $2.3 million of cash NOI. During the quarter. This was lower compared to the first quarter due to a $2.5 million of 1 time support payment the joint venture made to the management company to support its cash flow needs.
Excluding this onetime payment cash NOI increased by $1.7 million over the first quarter of 2021.
Finally, COVID-19 related costs and our senior housing managed portfolio, excluding the joint venture totaled $4 million per the quarter and a half million dollars decrease compared to the first quarter.
That's up over the quarter was $85.7 million and a normalized.
Normalized basis was $88.4 million <unk> 41 per share. This compares to normalized <unk> of $85.5 million or <unk> 40 per share and the first quarter of 2021.
<unk> excludes from <unk>, certain noncash revenues and expenses and was $83.9 million and on a normalized basis was $86.6 million or <unk> 40 per share.
This compares to the normalized <unk> of $83.2 million or.
<unk> 39 per share and the first quarter of 2021 the <unk>.
Primary and normalizing items for <unk> and that the PFS flow with the elimination of the onetime support payment made by the end of life and joint venture to the management company the.
The increases of normalized <unk> and normalize there, but from a primarily related to increases the NOI previously discussed.
For the quarter, we recorded a net loss attributed to common stockholders of $132.6 million or <unk> 61 per share of which 76 per share is the impairment charge related to the and lines of joint venture.
G&A cost per the quarter totaled $8.8 million.
Third to $8.9 million and the first quarter of 2021 and included $2.3 million of stock based compensation expense in both quarters REIT.
Current cash G&A costs of $6.2 million or 5.1% of NOI and in line with our expectations.
We continue to have very strong liquidity position as of June 30, with approximately $1.1 billion of cash and availability on our line.
During the quarter, we acquired 1 senior housing managed community and acquired and acquired land for 1 skilled nursing transitional care facilities for an aggregate purchase price of $33.9 billion with the weighted average estimated stabilized cash yield of 7.7 and 8%.
Additionally, the skilled nursing and transitional care facilities is currently under construction with a budget of $19.6 million is the.
Estimated to be completed mid 2022.
Also made and $11 million of preferred equity commitment on the 150 units senior housing development during the quarter.
This preferred equity investment and the preferred return of 10% per year and as of June 30 of 2021, we have funded $3 million of this commitment our.
Our year to date of investment activity totaled $75.5 million with an average weighted average estimated stabilized cash yield of 794%.
We have completed the sale of 2 skilled nursing transitional care facilities for aggregate net sales proceeds of $5.9 million.
The sales resulted in the aggregate $3.8 million net loss on sale.
We issued 4.9 million shares of common stock under our ATM program during the quarter and an average price of $17.76 per share generating net proceeds of $85 million.
As of June 30 of 2021, $75.8 million of available under the ATM program.
With our decision to low longer consider the acquisition of Tpg's, 51% majority interest in the lives of joint ventures, We believe we have positioned ourselves well to focus future equity issuance opportunistically and financing growth rather.
Other than on ensuring that our leverage does not exceed our target maximum ratio of 5.5 times.
We were in compliance with all of our debt covenants and continue to have strong credit metrics as of June 30 of 2021 as follows leverage 475 times interest coverage of 5.2 times fixed charge coverage 5.3 times total debt to asset value of 33% unencumbered.
Asset value.
Unsecured debt of 300% and secured debt to asset value just 1%.
On August 4th 2021 of the company's board of directors declared a quarterly cash dividend of <unk> 30 per share. This dividend will be paid on August 31 to common stockholders of record as of August 17th.
The dividend represents a payout of 75% of our normalized <unk> per share.
And now a few quick comments about our 2021 guidance, we expect the amounts per diluted common share for the full year 2021 as follows net loss 15 to 13.
<unk> of $1.53 to $1.55, normalized <unk> of $1.56 to $1.58.
<unk> of $1.51 to $1.53 to normalized <unk> of $1.53 to $1.55.
The above estimates are based on certain key assumptions spelled out in our supplemental.
And so just a few of those.
The estimated amount above do not include any anticipated from funds from the provider relief fund for our senior housing managed communities.
The in light of joint venture is expected to be held through the end of 2021 and contribute normalized <unk> and normalized <unk> during the second half of 2021 of between 4% and $5.4 million.
And 3.3% and $4.5 million respectively.
The senior housing managed portfolio average quarterly occupancy excluding the JV is expected to fall within a range of 76, 8% and 78, 9%.
During the second half of the year expect we expect the closed investments totaling $111 million with the weighted average initial cash yield of 8.2%.
Dispositions and loan repayments for the second half of 2021 and are expected to total of $95.6 million with associated annualized cash NOI of $6.4 million.
And we anticipate funding these identified investments with cash on hand, and the revolver and.
And the incremental acquisitions not identified here would likely be funded with revolver and with match funding the equity component using the ATM program because of.
Finally, I'll leave you with this our expectations for the second half of 2021 implies an expected decline from the first half of 2021 at the high end of the normalized <unk> and normalized <unk> of ranges of <unk>.
<unk> and <unk> per share respectively.
The vast majority of this decline is due to higher weighted average shares outstanding during the second half of 2021 as compared to the first half of <unk>.
Along with lower cash rental revenues due to the transition of 1 operators assets discussed on our first quarter's earnings call, which represents approximately 1 penny of the decline.
These declines are partially offset by higher earnings expectations for the managed portfolio and the second half of 2021 as compared to the first half.
And with that I'll open it up the Q&A.
Thank you to ask the question, you'll make the press star 1 on your telephone to withdraw.
All of your question press the pound key.
The first question comes from Rich Anderson with <unk>. Your line is open.
Hey, Thanks, good morning.
Richard.
So.
You talked about the new Kari.
Imply as the previous carry on the JV was $2.78, and I think I have my math right.
And.
Full value of $5.67.
And at 49% I recall talking about the 51% being kind of of $400 million type of nuts.
Can you just sort of connect the dots to Hal.
And the value of the live and portfolio and the JV has changed over time.
And particularly now with the impairment because that sounds a lot like distress and I don't know how much meaningful distress that we've seen really and the and the transaction environment for the senior housing business. Overall, so I'm. Just wondering if you can disconnect the in light of and situation with kind of the broader observations about senior housing.
Sure well I'll start by just kind of giving you a little bit of insights into and how that valuation is determined and we talk a little bit about and see some details and our and our 10-Q of about the calculation, but it is based on a discounted cash flow model. Obviously, we don't have any offers to look at from a from a.
Valuation perspective and is taken into account.
Not only the fact that there has been a decline and the performance of the portfolio, but it also takes into account some assumptions around right sizing the management fee for the portfolio.
So I think when you look at what's out there and the market today and some of the pricing I think that was very informative for evaluation calculations.
And we utilized a professional firm to help us with that calculation and certainly the recent deals provide data points, which were helpful and.
And I would say I don't view it as the distressed.
The stress valuation as much as it's highly levered and therefore the equity value.
And there is some amount of of risk associated with the discount and utilizing the discounting calculation and we built into it to be conservative, but I don't view it as a distress valuation at this point I think it's a conservative valuation, but I think when you factor and adjustments to the management fee factor and the amount of debt to sort of.
The portfolio it gives a fair a fair.
Share number for consideration and puts us in a position of where we're not likely to have to see much of the.
Change 1 way or the other once the asset was the portfolio actually sells.
Yes.
And then on the process of getting it sold.
Can you describe the sort of the lack of <unk>.
And the motivation of TPG to get it done I mean youre sort of.
Kind of sit there waiting now and what's the what's the chance that this can sort of stay with you well through 2022.
Well I think.
This is of vintage funds for TPG, and they've done pretty well on it and.
And I think they were willing to hang in the pre pandemic for a while as the company was starting to really do well.
And my opening remarks, we were really getting closer to wanting to do something of that 51%, but the pandemic change everything including changing everything for.
The fund in terms of.
How low everybody wants to sit around and wait for things to recover so.
And so in terms of timing.
It is going to be with us I would say through.
And at least the first half of 'twenty, 2 simply because of it takes a few months to find the buyer.
Going to take another up to 6 months to close to close the transaction. So yes, it's going to be there for a while but.
And that's why we want you to make the announcement now Clinton and supplemental take the write down and so from our perspective.
It's behind US will always be happy to answer the questions you talk about what's happening with GAAP component of the portfolio relative to occupancy recovery and things like that.
And if people have questions.
The visibility for it its gone as far as we're concerned.
Okay, well, thanks for that and congrats to household and Mike.
Thank you.
Thank you. Our next question comes from Nick the legal risks.
Scotiabank Your line is open.
Thank you I just wanted to go back to Rick you talked about getting out of the in line with JV is being deleveraging that that's clear very clear, but maybe you could talk a little bit more about you said the assumption that you think it's also an accretive transaction for you.
Sure Yeah, I think the way to think about that.
We can't stand Pat with where we're at.
With the joint vision and other words TPG lots of sell the portfolio. So we did the kind of buy it.
Got to exit at some point and so for us to go in and.
Invest the money to acquire it will be extremely dilutive for us and so it's accretive for us given the situation that we have right now we either have to buy it and be dilutive or sell it which would be accretive to that of that comparative basis that makes sense.
Okay got it alright.
And the other question was in terms of the guidance I know you did mention the the cash basis tenants.
Last quarter.
And I thought the annual rent for that was less than $4 million and yet the guidance now is.
You know a little bit higher than that in terms of the cash basis tenants.
Impact so is there is there.
Am I missing something is there another tenant.
That is creating an issue.
So just to give a little more into the weeds about it Doug.
Net portfolio.
Youre right its just under $4 million in cash revenue and they paid rent basically through the end of June so thats $2 million and the first half of the year and we're not expecting to get any rent and the guidance for the second half of the year, it's going to take months to get that portfolio transition and the new operator up and running so that 2 million.
Is that Penny I referenced and my comments around the decline.
As it relates to comparing.
The first half of the second half we also.
Received of 100% of the rents from Genesis and and our previous guidance numbers, we've assumed Genesis would at some point.
Strike and deal with those guys and reduced rents on some level, even if it was just the.
The rents that are going to be going away here and a few months or I should say of about 18 months. So now we're assuming that those rents get paid fully through the end of 2021 and so that's why the cash basis rents are going up are staying pretty solid.
We are seeing net $2 million decline.
The net 1 operator and.
This is also specific and New York.
And it's just the process that we have to go through there are other states, where the transition would have been a lot smoother and we wouldn't have gone the number of months that were contemplating without getting the new operator, and and picking up rent again. So that's really just the New York issue.
So it's just timing.
Okay. Thanks, just 1 other quick 1 is on the senior housing occupancy guidance.
And it looks like it doesn't assume that much of the pickup in the back half of the year. Maybe you can just talk about kind of what underlies that assumption how much youre just being conservative based on.
Delta Varian issues, maybe coming back because it sounds like the move in activity everything else <unk> point earlier was pointing in the right direction.
And I think Thats exactly right, Nick and the absence of the variant.
Given how well the recoveries and growing particularly on the al side of his colleagues pointed out.
We would've felt more bullish and.
And while we're still pretty optimistic we're just.
And to be conservative on those assumptions for guidance purposes.
Okay. Thanks.
Got it thanks, Greg.
Yes.
Thank you. Our next question comes from funds.
Santa Maria with BMO capital Your line is open.
Hi, guys just hoping.
Another question on the alignment of JV and the sales process.
I guess when do you expect that to start and.
<unk>.
How should we think about the opco issue here in terms of.
What is the the lack of profitability because of the collapse and cash flows because of the corona virus or is it.
Repair of feasibility issue kind of before all of this happens just because it didn't expand maybe at the Opco.
And as previously anticipated.
Thanks, Juan so.
We believe CPG is going to start talking to folks after labor day.
So I'm not sure of the day.
Exactly formulated and settled on that but that's our understanding in terms of opco kind of it.
Really goes back to what I said earlier and that is the platform we built to support.
A company that we're going to continue to get larger and TPG continuing to make investments and the senior housing space.
And outside of the JV and so.
And the pandemic just put a halt to all of that and so.
You've got the combination of the impact of the pandemic on occupancy and NOI and the fact that GAAP portfolio isn't going to be growing their focus as it should be is on the recovery. It's a really well run company and so they just got it will get back to where they were from a recovery perspective, and so and.
And remember these are these are smaller facilities and.
And so you can't.
The smaller facilities the more dependent upon corporate support and take larger facilities, where you can actually have more infrastructure in place the whole.
Our wholly owned portfolio of for example, those are larger facilities those are the original ALC facilities.
And so happy to have quite a bit more and memory care as well. So it's really a combination of combination of those things and.
And whether there'll be <unk>.
Changes to Opco as the results of the process.
And we could all just speculate of spec.
Speculate about that but thats really with the issuance of that makes sense.
Yes. It does thank you.
And then just from Genesis.
So I'm assuming it sounds like they continue to be current I mean have you had any discussions with them about the.
The they're assets that they're running and about the ability to continue to pay rents that coverage level of debt.
Of that and if you could just remind us how much is under that kind of top up of Mou Tech Inc.
And Youre booking quarterly now and when does that come off again.
So I'll take the first part and health Tech and the last part the.
We haven't had any discussions with them.
And really since the new management team has been in place they're aware.
Sure.
We're aware of the fact that we have other operators that are prepared to take over those 8 facilities.
Necessary, but they are paying the rent and as Harold mentioned and they're paying the base rent plus the excess rent.
There are similar amounts and that excess range about $10 million Burns off at the end of 'twenty 2.
Thank you.
Okay.
Thank you. Our next question comes from Nick Joseph with Citi. Your line is open.
Thanks first of all congratulations the upheld.
Upheld and Mike.
Rick mentioned being committed to the senior housing growth.
And you've seen a few large deals and the space. So I'm wondering how many opportunities you're seeing that really fit exactly what youre looking for.
Yes.
And we.
We're still continuing to see opportunities that we're taking a run at where we are.
And we have economic solutions that make sense at the group.
Some of the.
Some of the large deals that you've probably heard about the come to market have been a feeding frenzy, because theres still quite a.
Quite a bit of capital that's looking to cut out sizable.
<unk> into the senior housing space Theyre, not going to do it by doing Onesies and Twosies Derek when you do it by doing.
Half of $1 billion or more than 3 quarters of the $1 billion at the time zone, there, they're gunning for those deals and frankly.
And where we're making sure we're in the mix, where we want to be and where do the pursuing a lot of other transactions that are smaller scale and.
And you've seen in our supplemental we are getting things done.
And it's not.
Not flashy headlines, but thats, okay were just China.
And just keep doing what we know how to do and give the wow and make them accretive.
Thanks, and then just as you think about kind of the overall portfolio I guess post COVID-19 and whenever that is.
The other geographical differences already particularly on the scope and size.
When you come out of the debt how do you think about kind of positioning the portfolio.
Geography perspective are there any markets that maybe a little more active and trying to.
Either exit or less of exposure just given the lessons learned over the past 18 months.
So we're spread out pretty nicely right now of geographically and.
We haven't had tenant issues.
And so.
We really feel like we addressed the things that we needed to address through the merger and with Genesis and things like that.
So from the disposition perspective anything that we do going forward is going to be kind of normal stuff you'd like disposal something here or there.
And if the circumstances.
Cohort and a certain market.
We just we just don't have that much exposure problematic markets. At this point I think we've set ourselves up pretty well going forward.
Thanks.
Yes.
Thank you. Our next question comes from Steve Valiquette with Barclays. Your line is open.
Yes.
Thanks, Hello, everyone. Thanks for taking the question.
And just touched on a couple of these but Rick just on that topic of labor and the related impact on snap of occupancy.
And you provided some useful commentary in the prepared remarks.
See that 1 of your sniff REIT peers talked about some portfolio.
And facilities and operators, having self imposed admission bans and if they can add staff and.
And clinically appropriate levels. So I wanted to hear just a little bit more on your characterization of your collective operator partners around that.
And if that's possible.
And also the spread between our and versus LPN.
Any comments on severity of labor shortage, when breaking it down that way.
Yeah. So.
What it's not just skilled.
The living and independent living as well so just as you are seeing.
And other industries.
It's across everything so but in terms of the self imposed occupancy bands, we don't have any operators doing that it may restrict.
The number of admissions and so the.
The rate of recovery of the acceleration of recovery and maybe a little bit slower.
And as a result of that and certain markets or with certain operators, but we don't have operators that are of such a severe state that they are proposing occupancy occupancy bands.
And and really.
The strength and more on the non nursing and therapy.
Areas.
And it is our nursing and therapy and nursing and therapy, we always have a certain level of stress. There. We don't see a big difference between stress on our and staffing versus the LPN and staffing.
It's just I think we've caught everybody a little bit off guard with the benefits is the degree of stress that they are seeing and dietary laundry and housekeeping.
As of just core core functions.
And obviously for the facility.
Got it okay, alright, I appreciate the color. Thanks.
Yes.
Thank you. Our next question comes from Daniel Bernstein with capital 1 of your line is open.
Alright.
Good morning.
I wanted to go a little bit each of the revpar growth the strength of that that you saw and senior challenging particularly Inc.
And.
And maybe the mechanics behind that is it more of a function of increasing acuity.
In place rent raises.
Maybe off.
And just holding the line on.
And coming rents and that discounting as much just trying to understand maybe the sustainability of that.
Because there's been a little bit stronger than I expected.
The stronger than you expected the good thing and.
Yes.
We have seen.
And.
Revpar being very consistent throughout the pandemic and it continues.
And it's been surprising because you've had such occupancy pressure during the.
The.
The worst of the <unk>.
Pandemic and yet revpar.
And didn't really move much and it was all of that occupancy so.
When we looked at and.
And boy versus current levels.
It really can't tease out and answer.
And like you can think I got all the way Tom It's all on the level of care, Yeah, there's probably in some instances and a little more level of care and that number.
And I spoke to and actually I think of in the past.
It's also independent living where theres no level of care.
It's just held trading day blade, because it's not a price sensitivity.
And that's our conclusion.
There has been discounting in the market overall.
And we're seeing that come in.
And at the Ratchet down.
And we're clear about it.
So the it's not it's not quite as much as what we've seen before among all of the operators.
And we've seen some operators to be very aggressive and discounting in or from their regular rates in Oregon suggest get heads and the beds.
Are the operators and our portfolio have not been aggressive on discounting and they really held firm.
And.
Partly it's the value proposition and frankly.
And the cheapest the cheapest solution is not necessarily the best and often not the best solution and these cases when you care is an issue.
And so we.
We've seen the continued.
Stability of Revpar growth.
Hasnt waned.
Yeah.
Okay, and I guess, maybe a related question.
And this combined with the occupancy.
And I don't know if you gave this out earlier, but.
As you of any forecast for what margins.
And you might look like the second half of the year I know the Delta Varian for the.
Monkey wrench into that but.
Margins were big pick up in margins and the second quarter versus <unk> and <unk>.
Any thoughts on where margins are heading particularly in light of some of them, we'll hear from pressures out there.
And I'm hesitant to predict.
And.
And.
Downward variance aside if we don't have something nature of them don't have next version of in the post Delta variants, which I heard about this morning and Inc.
Continued occupancy growth, which is what this is all about and expense expenses coming into control.
<unk> expansion of margins and heading back to trending back to a normal level and we've we've been fairly conservative in terms of our view about when.
Senior housing returns to kind of pre pandemic levels, So I would I would.
Les that I would lay margins out along the same timeframe.
And so and another way to think about it is we expect margins to improve because of the very we're not willing to say that the payment of accrued and the move next quarter of FSA.
In the first quarter of second quarter.
Okay, and then 1 last question.
How do you feel your operators are prepared for.
The current surge, especially in terms of <unk>.
The.
Mass.
And things like that are you seeing any shortages.
Price is going up on that.
Yes, actually we're not seeing much low air shortages, primarily because of the December surge.
It really hit.
Inventory and depleted PPE and so the first 6 months of this year and it's been a concerted effort to rebuild.
Pte so.
And it's more normal level of stuff now because as I noted earlier, even though the external communities.
Interest and Covid exists and of a lot of states and.
And the facilities they hear the protocols and so they've maintained and the PPE to do what they need to do within the facilities and so yes, I think from a PPA perspective, I think they are.
And are prepared for issues related to this area and the look we know theyre going to be more mutations so net sort of whatever whatever comes next but we also think that I'm not sure. It will be to the same extent that we saw last year, but the adherence to protocols should.
Have a positive impact on the flu as well this year and it was great last year of the impact that it should be helpful. This year as well so.
And we're guardedly optimistic that the fluid fees and what sort of do what it normally does because of the protocols that are still being adhered to the facility.
The facility level.
Alright, I appreciate all of the color. Thanks.
Sure.
Thank you as a reminder to ask a question you'll need the press star 1 on your telephone. Our next question comes from Lukas <unk> with Green Street. Your line is open.
Thanks, most of my questions have been answered, but I was hoping on the manor manor.
And as senior housing portfolio can you just closed.
<unk> NOI compared to pre COVID-19 levels from that same portfolio.
And pulling of hanging on the second.
Sure.
And the elsewhere in China that Luke and the maintenance.
Alright.
Uh huh.
Well you know our supplemental has Q2.2020 and on the same store basis.
And that that gives you some gauge because obviously Q2.2020.
And I guess at the very start and then Sam.
The 1 thing we can get your math on that growth.
And as part of offline.
And then my other question was just the third of the $2.5 million support payment of the JV manager of what was that exactly.
Yes.
So that was the.
As we've been talking about the the.
Manager.
And as.
The operates at a loss and with.
With the pandemic and the impact of lower low revenues, and therefore, lower management fees and we're in a situation where they needed to get shored up a little bit on their cash flow and so.
So we and TPG as the owners of the.
Of the 4.
Portfolio of the JV and made the determination to provide them with the $5 million incremental management fee for the quarter to get their cash flow of shored up during this time and.
And so that's what that relates to its 1 time it will be the only time that we provide that incremental cash payment and.
So we normalized.
If we haven't made the decision to exit.
And in light of being the need to do a little bit more of a since we made the decision to exit the 2.1 time only.
Alright, okay. Thank you.
Thanks.
Thank you and there are no further questions and the queue I'd like to turn it back to Rick <unk> for closing remarks.
Thank you all for joining the call today and.
And.
And a follow up on as always were readily available and.
And.
Take care, thanks, again and be safe.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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