Q3 2021 Sabra Health Care REIT Inc Earnings Call
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Box edition speak for standing by and welcome to the Sabra Health care third quarter 2021 earnings call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone as a reminder, today's program may be recorded I would now.
I'd like to introduce your host for today's program, Michael Costa Executive Vice President Finance and Chief Accounting Officer. Please go ahead Sir.
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.
Turning to our expectations regarding our future financial position and results of operations, including the expected impact of the ongoing COVID-19 pandemic, our expectations regarding our tenants and operators and our expectations regarding our acquisition disposition and investment plans. These forward looking statements are based on management's current expectations.
And are subject to risks and uncertainties that could cause actual results to differ materially including the risks listed in our Form 10-K for the year ended December 31, 2020, as well as in our earnings press release included as exhibit 99, one to the form 8-K, we furnished to the SEC yesterday, we undertake no obligation to update our forward looking.
To reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments, we make today are still valid.
In addition references will be made during this call to non-GAAP financial results Investor encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the investors section of our website at Www Dot Sabra health Dot com our Form 10-Q.
<unk> earnings release and supplement can also be access in the investors section of our website and with that let me turn the call over to Rick Metros Chair and CEO of Sabra Health care REIT, Thanks, Mike and thanks, everybody for joining us.
I'd like to start today actually with a.
Quote that Todd has shared with me is.
The dedication and general Mcchrystal, a new book, which is called risk a user's guide.
To the health care and other essential workers, who when faced with risk that is often difficult to effectively assess.
And impossible to completely mitigate.
Respond with quiet courage and too often sacrificed themselves for others.
Once again want to thank them.
All of our workforce out there everything they're doing on a day to day basis.
Let me move on to labor now because Thats <unk>.
Most obviously on everybody's lives.
First I'll start by saying labor pressures are really different by market. So there's not a simple answer.
Something I can say in the aggregate in terms of trends. So for example in California, the northeast States in Texas.
The labor shortage, just hasn't been as bad as in other markets. It's also better in states that have kept up with wage increases.
Charter in the Southern States for example are far behind on wage equity and so our operators in those states are having more difficulty with labor and other states. So it really is.
All over the place we also see a difference in labor pressure in the culture of our operators.
So that does make some difference as well and that part is actually.
Quite good because the fact that culture can affect retention and recruiting.
Its helpful and we're trying to share best practices with our tenants.
Pertains to that our operators do have some level of optimism that those who have not come back into the workforce will do so as they start spending off for the holidays and have a look and have a stressed environment with COVID-19, we're seeing and the vaccination uptake improving and creating a safer work environment currently 40% of our operators have mandated.
I don't know if everybody has seen the news today, but the new mandate.
CDC and Osha was effective on January 4th So by January 4th all health care workers as well as others will have to be vaccinated and there's marketing.
Marketing any allowance for testing and the absence of being vaccinated.
In terms of the workforce amongst our operating our operators just under 80% of the Workforces now vaccinated. So that's really a nice improvement since the last quarter.
The industry average and certainly above the national average in general So we feel pretty good about that I would say that.
For those that haven't mandated there still is a fear that they.
They're going to lose too many employees if they mandate.
It just really hasnt support about all of the operators that we're aware we're.
We're aware of that have mandated typically have a loss at any employees.
And they've actually been able to use that as a recruiting tool because they do have a safer environment. So, but nevertheless, we understand the concerns that operators have but now they're just gonna have to mandate, whether they like it or not we think thats a good thing.
And these labor issues are the primary impediment in the pace of the recovery.
That said our tenants have operated for incurring additional labor costs, such as temporary agency in order to continue to push occupancy increases as much as possible. So in other words, we don't have.
Tenants that are saying, we're just market because we have labor shortages they'd rather spend more on labor.
Revenue.
Those relationships.
Sources again, that's something that we favor because the demand is clearly there.
In terms of funding COVID-19, public health emergency access with extended again for another 90 days with Medicare sequestration effected through year end and we have optimism that that will be extended again net funding increase is extended through the end of first quarter 'twenty two.
I'll move on to investments now our investment pipeline continues to be very active we have approximately $2 billion of the pipeline still not much skilled nursing, 75% of that $2 billion or potential investments that are in excess of 100 million to date, we've closed approximately $400 million with a weighted average cash yield of seven 5%.
And I want to note, we did announce the closing of the first charge on the <unk>.
Loan and that's a deal that we feel really good about we felt it was important to be a good capital partner there arent that many strong operators yet in the addiction space.
Would it be there for those who are in.
And that commitment to RCA was also a commitment to the sector relative to our intent going forward.
So a quick comment on the balance sheet I know Harold will talk more about that.
The two offerings that we did.
Both the debt and the equity offering both serve to strengthen the balance sheet and puts in really good shape on a go forward basis.
Level of Optionality when it comes to finding acquisitions that we haven't had.
Historically.
Moving onto operations, excluding Prs skilled rent coverage is down sequentially on a trailing 12 month basis, primarily due to the second quarter of 2020 being replaced with the second quarter of 2021.
Quarterly standalone basis, and sequential drop which was significant but nevertheless, the sequential drop was due specifically to higher labor costs.
Our skilled occupancy which lost momentum late summer is now showing some improvement recently.
The biggest turnaround has been avenir haven't Mir had actually fall in 300 basis points lower than the December low.
But since opening the Covid unit.
Their occupancy 400 basis points of expansion and even though the cobalt units won't be around forever that should certainly by then.
Long time ago.
Given the occupancy on a longer term basis.
Yes.
Portfolio.
With that I'll turn it over to <unk>, and then she'll turn it over to Harold and then we'll go to Q&A Tanya. Thank you Rick and the third quarter Sabra wholly owned senior housing managed portfolio continued to build on a recovery that began late in the first quarter nationwide labor shortages, coupled with the rise in COVID-19 infections from the delta varying slowed the speed.
Of the recovery during the latter part of the third quarter, we see clear signs of demand for senior housing and believes that the operators will mitigate labor shortages through initiatives on compensation culture and safety as we stand here today, the recovery of occupancy heels on track, but the solution to the labor shortage remained blurry.
The headline numbers for the wholly owned managed portfolio are as follows occupancy in the third quarter of 2021, excluding non stabilized communities with 78, 8%, a 150 basis point increase from $77 three in the prior quarter.
Revpar, excluding non stabilized communities was 3272 essentially flat to the prior quarter's 3263 Revpar has remained stable over the past five quarters across those independent and assisted living despite starches and patent in the pandemic.
Cash net operating income declined by 11% sequentially and margin decreased by three 4% compared to the prior quarter in part because no coffee grant income was received in the third quarter compared with just over $500000 of granting come in the second quarter, excluding the grant funds.
Cash net operating income declined six 2% and margin decreased only two 4% operating expenses in Sabra is assisted living and memory care properties, including the wholly owned and live in portfolio skewed higher in the third quarter, mostly in September because of contract labor costs.
Across the wholly owned managed portfolio, we are seeing leads at 20% to 50% above 2019 levels across the quarter and conversion rates higher than in 2019. The Delta Varian appears to have delayed some moving volume during September as well as slightly increased move outs.
Communities are beginning to recover from the effects of the Delta Valiant with move outs normalizing and move in velocity picking up.
While the focus remains squarely on rebuilding occupancy in order to rebuild revenue the shortage of labor and utilization of contract labor and higher costs have become a critical element in the path to economic recovery.
Higher acuity communities have more staff. Therefore, we have seen contract labor impact assisted living and memory care much more than independent living.
Sabra wholly owned managed assisted living portfolio has continued the occupancy recovery that began in the second half of March getting 234 basis points from the end of the second quarter to the end of the third quarter.
June 2021 to July 2021 occupancy increased by 166 basis points from July 2021 to August 2021 occupancy increased 53 basis points from August 2021 to September 2021 occupancy increased 89 basis points from the low in March.
Through mid October our occupancy increased 457 basis points to 73, 9%. This trend was driven by our wholly owned and living portfolio, which had occupancy of 73, 7% in September 400 basis points above June occupancy.
For a comparison properties net leased to assisted living and memory care portfolio has shown continued occupancy recovery, increasing 303 basis points in the third quarter compared with the prior quarter note that in the supplemental information materials. We show this portfolio statistics, one quarter in arrears, which currently includes the periods immediately.
Prior to and then immediately following the distribution of the vaccine to senior housing communities.
While revenue in our wholly owned assisted living portfolio grew three 6% quarter on quarter, excluding excluding grant and contract.
Revenue grew seven.
7% quarter over quarter.
Cash NOI margin compressed.
To 15, 1% compared with 21, 7% in the second quarter.
Excluding grants and come about 70% of this change is attributable to an increase in contract labor cost and our wholly owned <unk> portfolio of which more than half was incurred in September.
<unk> managed it.
Independent living portfolio experienced less occupancy loss than our assisted living portfolio and its recovery has been more gradual.
Throughout the duration of the pandemic, we have seen that move outs have been driven by the need for higher cure and we continue to see that this quarter from June 2021 to July 'twenty to 'twenty. One occupancy was flat from July to August 2021, occupancy increased 183 basis points and from August to September 2021.
We see increased 30 basis points cash NOI in our wholly owned independent living portfolio grew four 2% quarter over quarter and margin expanded by 8% while occupancy pressure at two of our Canadian retirement homes and catch up on maintenance deferred due to the pandemic offset some of the gains.
Jade availability and cost of labor is not a meaningful factor and with that I will turn the call over to Harold Andrews, <unk> Chief Financial Officer.
Thanks, Tanya I'll give a quick overview of the numbers for Q3 discuss recent balance sheet activity and briefly discuss our 2021 guidance before doing so let me make a couple of remarks about the change in accounting for Avalere lease as we noted in our September 13th 2021 business update Avalere has experienced cash flow.
Constraints over the past several months from census declines as a result of the spike in COVID-19 cases in Oregon, Colorado, and Washington, together with admission limitations in these states as well as from increased labor pressure.
We have been using their letter of credit to satisfy their rent obligations beginning in September 2021 to help with these cash flow constraints. This letter of credit is expected to cover the rent obligations through a portion of their December 2021 amounts due and we expect the full amount of rents due to the end of 2021 to be paid.
However, even with the encouraging pickup in census, they have seen since the opening of Covid specific units in Oregon, We concluded that the lease no longer meets the high threshold to continue accounting for it on an accrual basis.
As a reminder, we must conclude that it is more than 75% probable that we will collect 97% or more of all payments due over the life of the lease to continue accounting on it.
Cool straight line basis do you have a mere lease does not mature until 2031.
Given the less than optimal EBITDAR coverage historically put this lease.
The 10 year remaining term and the uncertainty of the future stabilized performance level for these operations. We concluded that some level of rent adjustment in the future may be necessary. We expect this determination will not be made until sometime during 2022.
As we begin to get additional clarity on future stabilized performance expectations.
Consequently wrote off $25 $2 million of straight line rent receivable balances related to this lease.
We continue to have $19 $1 million above market lease intangible assets associated with the middle East on our balance sheet any future lease amendments may result, in a write off or acceleration of the amortization on all or a portion of this balance.
And now onto Q3 results for the three months ended September 32021, we recorded total revenues rental revenues and NOI of $128 6 million $85 4 million and $96 $3 million respectively included in these amounts is the write off of $25 two.
Millions of straight line rent receivables noted previously.
Excluding this amount total revenues rental revenues and NOI was $153 $8 million $110 $6 million and $121 $5 million, respectively, as compared to $152 $9 million or $110 $8 million and $121 3 million.
For the second quarter of 2021.
While our NOI after normalizing the Avenir write off was essentially flat being just $200000 higher than in Q2. There were some notable changes in each direction and our managed senior housing portfolio and the <unk> joint venture that landed us there.
Why from our managed senior housing portfolio decreased $1 2 million to $9 $1 million.
Due primarily to the fact that we received no government grant income this quarter compared to 500000 last quarter as well as the impact of higher COVID-19 expenses and labor costs as Tal you discussed in her prepared remarks.
Remarks.
NOI for me in light of the joint venture was $3 $5 million, which is $1 $2 million higher than the second quarter, primarily due to the second quarter NOI containing the $2 5 million onetime support payments to joint venture made two enlivened excluding this amount.
The joint venture decreased sequentially by $1 $3 million Rev.
Revenues from the joint venture increased by $1 $3 million.
Due to increased occupancy of two 2% to 71, 9% for the quarter compared to the second quarter offset by higher labor and COVID-19 expenses.
On the expense side for Saab the G&A costs for the total for the quarter totaled $8 $7 million compared to $8 8 million in the second quarter of 2021 G&A costs included $2 4 million of stock based compensation expense for the quarter compared to $2 $3 million in the second quarter.
Recurring cash G&A costs of $6 $4 million were six 7% of NOI and in line with our expectations interest expense totaled $24 2 million for the quarter remained effectively unchanged from the second quarter.
The result of this activity is <unk> for the quarter of $59 9 million and normalized <unk> of $85 3 million or <unk> 38 per share.
<unk> was normalized primarily to exclude the Avenir straight line receivable write off this compares to normalized <unk> of $88 $4 million or <unk> 41 per share in the second quarter of 2021.
<unk>, which excludes from <unk> certain noncash revenues and expenses was $84 $8 million in normalized <unk> was $85 2 million or <unk> 38 per share. This compares to normalized <unk> of $86 $6 million or <unk> 40 per share in the second quarter of 2021.
<unk>.
For the quarter, we recorded net income attributable to common stockholders of $10 2 million or five cents per share.
Under the balance sheet, we issued $800 million of three 2% senior unsecured notes due 2031.
Net proceeds were used to repay $345 million of our U S dollar based term loans.
Subsequent to quarter end redeemed all $300 million of our outstanding four 8% senior unsecured notes due 2024 and to fund a portion of the RCA mortgage loan.
This issuance allowed us to improve our weighted average debt maturity by two four years to seven years and reduced our cost of permanent debt by 23 basis points to 358%.
Again, we were in compliance with all our debt covenants as of September 32021, and continue to have strong credit metrics as follows all of which are pro forma for the redemption of our 2024 notes, which occurred on October 7th are leveraged 481 times interest coverage 532 times fixed charge.
Average four nine times total debt to asset values, 34% unencumbered asset value to unsecured debt 289%.
Secured debt to asset value of just 1%.
We continue to have a very strong liquidity position after giving effect to the redemption of $300 million of four 8% senior unsecured notes that were due in 2024 as of September 32021, we had approximately $1 $2 billion of cash and availability on our line.
On October 15th we completed an underwritten public offering of $7 8 million newly issued shares of our common stock at a price of $14 40 per share and received net proceeds before expenses of $112 $6 million. These proceeds were used to fund a portion of the RCA mortgage loan.
A number of November three 2021, our board of directors declared a quarterly cash dividend of <unk> 30 per share of common stock the dividend will be paid on November 32021 to common stockholders of record as of the close of business on November 16th 2021.
The dividend represents a payout of 79% of our normalized <unk> per share.
Finally, a couple of comments on our 2021 guidance, we reaffirm our previously issued guidance range for normalized <unk> of $1 56 to $1 58 per share normalized <unk> of <unk>.
<unk> 53 to $1 55 per share.
Our previously issued guidance did not include the impact of two matters that affected our full year 2021 per diluted common share guidance for net loss <unk> and <unk>. The first is we have a new straight line rent receivable write off which had an <unk> 11 per share impact on net loss and <unk> the second.
Is the debt extinguishment costs related to the 2024 note redemption early in the fourth quarter that resulted in a 17 cents per share impact on net loss and SSO and 16 cents per share impact on ASF. So the.
The impact of these two transactions are added back arriving at our expected normalized <unk> and normalized <unk> and with that we'll go ahead and open it up to Q&A.
Secondly, once again, if you have a question. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Richard exit from F. N. B C. Your question. Please thanks, good morning out there in parallel because your last call. So.
Congrats on that.
Oh Wow.
Rich I appreciate it.
So.
Can you just remind me Rick is the mandate January 4th mandate, that's just unskilled right not senior housing is not.
A part of that is that correct.
So.
I was clear on that before I'm, a little less clear on the news. This morning, because it says all health care workers. The original mandate was healthcare.
Is that received.
For federal money and that's not the case with senior housing so im assuming that Youre correct that senior housing still called out, but our guess is that.
That we will have more housing.
Housing provides will recover because a lot of them are one of the mandate.
We will see more senior housing operators may be doing with it I think thats correct. Okay.
In terms of avid mirror.
Its nice little bounce on the occupancy side and I know you've got a reserve.
Time to figure out what youre going to do with that longer term, but what would it take.
For you to not have to do something I mean.
If we get 400 basis points of occupancy gain.
Willing.
Some of them with some sort of regularity.
There is there.
The scenario that you could get back assuming COVID-19 cases decline and all the good things that hopefully will happen in the future that maybe nothing will have to happen.
Yeah. So I think so the way we think about it rich is that I know, you'll recall that prior to the pandemic avid Mir had a lot of coverage of any of our material tenants and so you know hitting just kind of.
Problematic period of time these last nine months.
And starting out with getting a coverage just made it even that much more difficult for them. So I think we are inclined to want to do something for them.
Just wanted to see with that is once things stabilize but we don't expect that it's not going to have a material impact on the company on numbers or anything like that but I think we would like them to have a little bit more breathing room.
Just could you never know and I think that's demonstrated that to us.
I mean, we have a lot of conversations with you over the course of all of the restructuring we did related to the merger and it.
All the things that we do for the other tenants actually held up really well during the pandemic.