Q1 2022 Sabra Health Care REIT Inc Earnings Call
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Did they ladies and gentlemen, welcome to the state where health care, we first quarter 20 twice you already have a cough.
Turn the card was sent to your house Lucas Hardwick AVP Finance. Please go ahead with the harlot.
Thank you and good morning, 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 your expectations regarding our future financial position and results of operations, including the expected impact of the ongoing COVID-19 pandemic our expectations regarding our <unk>.
And it's and operators and our expectations regarding our acquisition disposition and investment plans. These.
These forward looking statements are based on management 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 31st 2021.
As well as in our earnings press release included as exhibit 99.1 to the form 8-K, we furnished the SEC's yesterday.
We undertake no obligation to update a forward looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments. He made today are still valid.
In addition references will be made during this call to non-GAAP financial results investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financial page of the investors section of our website at <unk> Dot com.
Our Form 10-Q earnings release and supplements can also be accessed in the investors section of our website.
And with that let me turn the call over to Rick Neutrals C E O President and chair of Sabra healthcare re thanks Lucas Good data everybody. Appreciate everybody joined the call. Let me start off by talking about Uhm guidance. So as everybody knows we have an issue guidance, it's really specifically because of the managed portfolio, even though it's recovering it's.
Been a pretty short period of time that we've seen recovery. So we just need a little bit more the trajectory over a longer period of time. So that we have a strong level of confidence and get back to providing guidance that said, Mike and his talking points will get some direction on with the triple net.
Triple net numbers will look like over the course of the year our strategy for this year, it's pretty simple we're focused on diversifying the portfolio with smaller deals in our existing asset prices, primarily in behavioral addiction treatment and assisted living.
And that combined with Smith asset sales will lead us we believe by the end of the year, having skilled nursing exposure either close to her at our all time lows.
And as a result of expected asset sales or existing cash position Hello, our leverage is and.
Deals that we think we should get done this year, we have no <unk>, there's no expectation that we will have to access the if if the equity market.
Moving onto a COVID-19 related data despite post overcrowds areas. The portfolio has not been impacts at this point our tenants have had an insignificant number of positive cases, among staff and residents and and that's really all over our geographic areas in the states and in Canada.
Moving onto Tenet health portfolio continues to be stable with no discussions with tennis on restructuring leases. The proposed C. M. S rule on the skilled nursing market basket. If it were to become part of would reduce our skill Brent coverage by point O. Two.
Our occupancy gains for our top seven skilled operators increased 190 basis points from January through March so it really terrific recovery from the hit we all took with Overcrowd. The wholly owned a L portfolio showed similar trends and tell you will spend more time on that.
Our independent living portfolio hasn't shown that level of movement, but it never really drop is significantly. So it's been a relatively stable portfolio for us it's not a needs based asset class.
Moving on to Medicaid rates, you may recall or are you an early call I noted that with federal assistance tapering off the industry is more focused now on the state assistance going forward. We are starting to get a lot more information about Medicaid rate increases will look like over the course of the year.
To which happened over the summer nine of our states with 167 of our skilled nursing facilities will have larger than historical rate increases. This year. Most have already been approved there are a few that are still pending legislation, but we're optimistic about them.
Ask for a ph you know there's a lot of questions on the public health emergency access to whether it will get extended we should know by May 15th if it gets extended an additional quarter are currently expires July 15th the states had been assured by the administration that you'll receive a 60 day notice if it is.
[noise] expire so that's where the 515 date comes in.
Just want to make a couple of comments about asset class outlook, and it's really a lot of it revolves round skilled nursing in the five years.
Prior to the pandemic just under 800 nursing homes closed over.
Over the course of the pandemic 300, more close with 400 additional nursing home set to close so in other words and 26 months, we've had almost as many nursing home closures as we had in the five years prior to the pandemic.
That combined with demographic growth.
Renovated facilities and taken care of is out of service will propel occupancy pre pandemic levels as we look at it over the next several years.
We're also positive on senior housing occupancy treads as we see a window of several years of occupancy growth before the supply dynamics that hampered growth prepaid that might begin to have an impact.
And finally, just a couple of comments on our ESG initiatives, probably noted our press release, we're really excited about this partnership we have as well living lab and yellows partnership phase one of the partnership is going to be focused on the physical environment facilities, and specifically portable air filtration phase two will focus on them.
Troy stress and burn out, which obviously is a critical issue for the industry are second ESG report is expected to come out this summer and with that I will turn over call over to tell Ya.
<unk> first I'm gonna make some comments on the performance of our manager senior housing portfolio, and then I'll I will highlight some of the initiatives that we've undertaken over the past few years to diversify our portfolio and improve the durability establish avenue.
And the first quarter of 2022, we saw continued improvement in the operating performance as a wholly owned managed senior housing <unk>. Despite the surge in the <unk>, which worsening the Labour challenge is already being felt as occupancy in rates continue to rise when you've reached the point of operating leverage is a benefit providing a left turn that off.
<unk> the headline numbers on the same store basic R occupancy for the first quarter of 2022, excluding nonstabilized asset with 79.3% driven by a 190 basic point increase in our system living communities and partially offset by 830 basis point decline in our independent living.
Communities compared to the prior quarter, comparing the quarter to first quarter of 2021 occupancy in our assisted living communities increased 640 basis points and 140 basis points in our independent living community.
Spot Occupancies as of the end of April in our larger portfolios have grown between one and two percentage points above the average for the first quarter.
<unk> for the period, excluding nonstabilized assets with $6279 an hour assisted living portfolio, a 5.6 per cent increase over first quarter of 2021 and $2578 in our independent living community is a 1% increase over the first quarter of 2021.
Cash and a wife with a quarter, excluding any government stimulus plans increased 10% over the prior quarter and 18% over first quarter of 2021.
Our enlightened joint venture show, the same trends of increasing occupancy <unk> and improving cash NOI occupancy with the first quarter of 2022 was 74.2% a 1.6% increase over the prior quarter and 6.2% over the first quarter of 2021.
Spot occupancy at the end of April was 75.7%, a 150 basis point increase since the end of the first quarter.
<unk> for the period with $4733, a 6% increase over first quarter of 2021 cash and a wife with a quarter increased 16% over first quarter of 2021, excluding any government stimulus funds.
Emerging from the <unk> early 2022 operators are addressing three key factors hiring and retaining staff <unk> and leasing velocity Ah largest operators are seeing way trade increases for frontline staff of 13% to 15% compared to early 2021.
And achieving positive net hires.
Offsetting this increased cost is occupancy gloves, coupled with higher rate increases are operators have raised right, 5% to 7% for current residence and are resetting rates, even higher for new movements as leasing velocity continues to rise.
We have undertaken a system adequate view of our portfolio 200 to identify properties within our portfolio, which are candidates for sale or conversion to an alternate use while the market for skilled nursing properties has been active in pricing robust we have look to sell certain properties in our portfolio to recycle capital for those properties.
Identified for conversion, we have found that the residential format of skilled nursing and senior housing sets up well for inpatient behavioral health assets, specifically addiction treatment.
And 2019, we made our first investments in Standalone addiction treatment facilities acquiring three buildings, we used to two different operators. All three of the buildings had been built for other uses such as medical office in long term acute care and were the purpose to serve as inpatient addiction treatment facilities.
Our investment in behavioral health now total is about $730 million with a weighted average yield of 8.3% comprised of 13 owned properties and two mortgage loans behavioral health facilities now represents 13.4% of our annualized cash NOI. In addition, cyber controls a pipeline of future.
Your deal.
Eight of the 13 properties and all of the property during the mortgages.
Mortgages are case studies for adaptive reuse, including three that are sabra owned properties that we targeted for conversion to an alternate use. We currently have four more owned skilled nursing and senior housing properties that are under letter of intent with an operator and will be modified for use his addiction treatment facilities upon <unk>.
<unk> the conversion of these four properties as well as the conversion of an asset acquired at the end of 2021, we anticipate that our investment in the behavioral health sector will increase by about $75 million a mortgage loan to R. C. A has the second tranche, which when founded will increase our.
Investment in the space by another $35 million, we believe that investing in the behavioral space, particularly an addiction treatment accomplishes set several important objectives.
Increases our investment in an area of healthcare, which has enormous unmet demand.
Creates organic growth through a proprietary pipeline of owned assets adopted for a new used a process, which is in Cyrus control, allowing us to grow net operating income without competing for assets and with less additional capital.
Delivers assets battery economic returns for both Sabra and a new operator, so that services are <unk>.
So naturally as well as geographically to those who seek care.
Further diversify as the revenue streams in our portfolio by adding commercial insurance at in N network rates as a primary pair it must location.
Allows us to repurpose existing structures mitigating the environmental impact of greenhouse gas emissions associated with new construction.
We continue to meet and explore relationships with sophisticated operated operators in the behavioral space will have scalable platforms and evidence based results by providing capital and real estate to expand community based care for commercially insured patients we are participating in the democratization of behavioral.
Health care in our country and with that I will turn the call over to Mike Castor Fabrice Chief Financial Officer.
<unk> for.
For the first quarter of 2022, we recognize normalized F. S O per share of 38 cents and normalized <unk> share of 38 cents.
Compared to the fourth quarter of 2021 normalized if a full per share increased one penny primarily due to higher N O Y from our wholly owned managed senior housing portfolio higher normalized <unk> from being alive and joint venture and the recognition of Avenue December 2021 rent obligation upon receipt and the <unk>.
First quarter.
As we discuss on last quarter's call we amended the Avenue release effective February 1st and during the first quarter. We received December 2021 in January 2022 ranch at their previous lease rate.
Compared to the fourth quarter of 2021 normalized F. S. O for sure decreased one penny primarily due to an increase in weighted average shares outstanding on an absolute dollar basis normalized F. S O increased by $627000.
Cash L Y for the quarter totaled 123.5 million compared to $109.2 million in the fourth quarter.
Included in cash in a way for the fourth quarter is $7.4 million of support payments made by our unconsidered joint venture to enlightened.
The $7.4 million represents solver sure of the $15 million support payments made by the joint venture which were entirely funded by a contribution from T. P. G to the joint venture.
Differently Sabra did not contribute any funds towards a support payment made to invite them.
After normalizing for the support payments cash in Hawaii increased $6.9 million sequentially.
As of March 31st 2022 are annualized cash into why it was $449.6 million and our spirits exposure represented 61.7% of our annualized cash in Hawaii down from 65.5% a year ago.
G&A cost for the quarter totaled $10.4 million compared to $8 $2 million in the fourth quarter of 2021 <unk>.
<unk> cost for the quarter include $2.5 million of stock based compensation expense compared to $900000 of stock based compensation expense in the fourth quarter.
The current quarter stock based compensation expanse of $2.5 million is more indicative of a go forward run rate as the fourth quarter expense reflects chewing up payout estimate that year and <unk>.
Recurring cast G&A, which is historically higher in the first quarter was $8 million or $6, 4% of cash in Hawaii and in line with our expectations.
We were in compliance with all of our deck covenants as of March 31st 2022 and.
And continue to maintain a strong balance sheet or.
Our liquidity as of March 31st 2022 totaled approximately $1 billion, consisting of unrestricted cash and cash equivalents of $24.8 million and available borrowings of $983.2 million under a revolving credit facilities.
As of March 31st 2022, our leverage was 511 times well below our maximum of five and a half times.
As I noted last quarter from time to time or leverage may pick up above our long term target of five times as it did this quarter, but we would expect leverage to come down naturally over time, as we recycled capital and as performance in our manager senior housing portfolio recovers for the pandemic.
Given the current cost of our equity capital, we will only be using available liquidity and capital recycling proceeds to fund investing activity and manage our balance sheet.
Further we're not focused on being a material net acquirer of assets until our cost of debt and equity improve.
On March 4th 2022, our board of directors declared a quarterly cash dividend 30 cents per share of common stocks the.
The dividend will be paid on March 31st 2022.
Common stock holders of record as of the close of business on May 16th 2022.
The dividend represents a pay out of 79% of our normalized a F F O per share of 38 cents.
Lastly, while we are encouraged by the positive occupancy momentum and slow easing of labor pressures in our portfolio. The overall uncertainty regarding the recovery, including the ultimate outcome of the proposed CMS reimbursement changes remains at a level at which we are unable to confidently provide earnings guidance at this time.
For some additional color on our cash and away from our triple in that portfolio, we feel a reasonable run rate would be the triple net cash rents noted on page 20 of our supplement and adjusting that amount for the extra a month of <unk> included in that number and the January rent paid by Adam you're at their old right <unk>.
As a reminder, or triple net cash in Hawaii amount is subject to some variability because of the cash basis tenants in our portfolio.
And with that we will open up the lines for Q&A.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again, if you would like to ask a question. Please press star than mine.
First question comes from new South of the city of <unk>.
Hey, This is Michael Griffin on for Nick I'm curious I'd like to get your thoughts just so just proposed C. M. S ruling do you anticipate any changes coming out of a 60 day comment period.
Well I can tell you that the province are all primarily focused on trying to provide for you mess with the right data that will help them to come to the realization that we would all be better off if they could spread this out over two or three years. So that's what that's what the focuses.
On the part of the industry.
And we'll see you know what we'll see what happens you know we want to point out with the impact on coverage was for US just in <unk> in the event that that didn't happen, but certainly that would be a much better outcome and.
Part of the disappointment I think that we all had was that.
We.
We felt like based on prior dialogue with C. M. S. That's really the appropriate would take given everything else famous dreams and going through and by the way. There is a precedent for things like this or not asking for something that hasn't happened before.
Gotcha. That's helpful. And then just turning real quick to the addiction recovery side I'm curious what the timing on those conversions are and then sort of bigger picture how big you think behavioral grow that's part of the total portfolio.
[noise] so the converse so for the conversions are under L. O y R. Due to commence fairly soon those are all acid free currently own. So we control timing and it's it's it's we want to make sure that the operator has the bandwidth.
To to address.
Several assets at a time and lease up but that's that's all moving forward and in in you know it'll just take time to get architectural drawings and all that that's easy part the the there's an asset that I reference that we bought <unk>, we bought late too.
2021 for conversion from hotel to addiction treatment that construction is already underway and that will take longer because it's a longer it's <unk>. It's a larger buildings at 130 832 units, so that'll take longer than the smaller sniffing assisted living conversion.
<unk> I'll I'll, let Rick address scale it behavioral health overall, yeah. So.
Got a <unk> pretty healthy pipeline.
But it's so young.
Uhm, it's new and it's a little bit hard to predict how quickly it can get to a certain size. We haven't set any internal guidelines as to sort of capping with our exposure, we'll be we see what is really healthy growing industry that gives us one more avenue.
To diversify their portfolio and so.
It will take these things as they come.
The other thing I would note also is that because of the exposure that we've had in the recent deals that we've announced we are getting more deal flow.
But you gotta be careful you know it's it is a young industry, but I do really good deals or somebody offers and things like that so we're very cautious about how we approach all these deals.
Yep I gotcha, well that's it for me, it's actually at the time.
Thanks.
Mmm. Thank you. Our next question comes from one Santa Maria of BMO capital markets. Your line is open.
Hi, Good morning, <unk>, just curious they'll watch list if you can give us a sense of.
How that's changed over the last couple of months, given omicron and and your senses have we passed the worst and coverage should improve from here or how're you were thinking about potential downside risk apposite.
A new corporate waived cause none of us really ever want to think about it again.
Right right. So the walks was hasn't really changed partly because the hits the omicron actually happened really quickly and there's been a really quick recovery. So it's really been pretty steady safe for us and actually comes very close to mirroring mirroring what was on a watch list pre pandemic.
You know.
You've covenant for a long time on so I think you know once we went through all the repositioning 17, and 18 and get all the big asset sales. We wanted we really had taken care of the things. We wanted to take care of so things are pretty stable throughout 2019 for us and our coverage going in.
The pandemic I think was at its highest point. So there's just been a lot of consistency that for us.
And then just on.
Deemphasizing or.
The looting of the Sith exposure.
So could you just be a little bit more specific on what you think is a percentage of the port for you to get to I'm not sure what the historic.
Ah low would be that you're referencing and would that be through asset sales and or conversions and if so asset sales.
The quantum and and like to yield that you're targeting on.
<unk>.
We should think of our local sure are low point unskilled exposure was about 57%, which was <unk> prior to the announcement of the C. C. T merger. So we think we have an opportunity to be there or better by the end of the year and it's a it's a combination of a number of things it's a combination of.
Where are we arguing acquisitions, which right now isn't it a sniffling is simply because there hasn't been much availability out there in the private market is able to pay much more than a week. Because these are awkward does that have actually businesses and a lot more sandwiches and things like that so the opportunities that we have a gross orange.
Senior housing and and behavioral so that's one piece and the other is is asset sale. So we are going to be doing more asset sales and we had anticipated just because of the strength of the private market. We don't have we're having a number of conversations right now.
So we don't have a solid number to give you in terms of what our expectation is but I would say that I think last year, we get about 100 million anessa itself and we would expect it to be quite a bit more than that this year.
Any range could.
Could it be like one of our 300.
Yeah Yeah.
Not more than 300.
More than 100, how about that [laughter]. So it works. Thank you.
Yeah, and one one other thing I'll add to that that is gonna also bringdown arsenic exposure over time is going to be the recovery in our senior housing managed portfolio because of that contributes and a Y that's more on away from that portion of our portfolio compare to Smith right. So that's also going to have a positive benefit in getting our statistics.
Suppose you down.
Thank you.
Hmm.
Thank you next question comes from which Anderson S. M. B C. Your line is open.
Hey, Thanks, So you didn't mention.
Conversions as a <unk> as a mechanism to reduce your sniff exposure or none of the conversions that you have on tap right now sniff. So the other asset types.
No it's not it's not they they are smith, but they're gonna take a while to get done so in terms of having a material impact this year.
I also have an impact over time walking through material this year.
Okay. You just you walk through you know the <unk> reduction in stock of skilled nursing I think you said something like 700.
Facilities close during the pandemic.
Testing what it was five years prior.
If that's the case in demand is going up and you'd see occupancy lift I mean, I understand balance <unk>, how how do you how do you reconcile what looks like a decent runway runway for skilled nursing and the next year or two with reducing exposure there.
So I'd say I'd say, a couple of things one it it is going to be beneficial to the business and I would note that an additional four facility closures. The other reason that <unk>.
Seen a lot of decline in the number of available beds as most nursing homes are really old like 40, 50 years old and his people as operators modernize them. They take beds out of service to reduce the multi bedrooms.
Private semi private some more common areas. So in other words by way of example, 100 bed facility. After a modernization program may have 75 beds. So just to give you just a little bit more color on that in terms of.
If we think they were tailwinds to the industry why would we want to reduce our exposure. It's it's pretty simple when we're viewed as a more diversified re we trade with a better multiple and and it isn't as if we're going to have known.
No nursing homes, I mean, if we get down to 50 per cent, that's still half the portfolio you know, it's still material, but we we want to be more diversified you know as we've seen with the glorious 19 seconds during the state of the Union.
At our house, while we think things may be going for us or.
Terms of future opportunities.
This industry gets bad headlines you know.
And most of the time deserve to see all the Covid related stuff you know the hospitals don't get that but but nursing homes do and it's really it's really a shame so.
You know, we just don't want to be <unk>.
Overly dependent on what at that class will be viewed as being a single asset class re.
Okay. That's fair enough and my last is either I don't know if it's a question or a comment but on the whole CMS Clawback and you know trying to push for a season.
I I tend to disagree with that <unk> because all you're doing then is is extending then this negative narrative into future years, why not while the industry is still you know sort of calling out of its own whole why not.
Throw the kitchen sink.
And and get it done all at once so that when 2023 and 2024 roll around you know this whole C. M. S. Narrative is done with so I again, I don't know if I'm asking a question or making a comment but I don't know where you stand on it yeah with that kind of mindset and you know that.
That I'm sharing.
Yeah, So I'll I'll comment on your comment.
[laughter], so [laughter] printed out there's not gonna be uncertainty, we're going to know exactly what the impact is of spreading it out over the next few years and spreading it out over the next two years will result.
Result in positive rate increases over the next two years, and we will have better than average market baskets.
In the near future anyway, because the inflationary component seem so high and look at it and the absence of everything else <unk>.
The industry was dealing with rich with you know save for being the last phase and and how long his ph he's gonna be around and occupancy is still well below pre pandemic levels.
One more thing and you've got so many operators out there that are just hanging on if you think about maybe close to half an industry.
<unk> mom and Pops. They all have good capital partners you know it's.
It's just perfect and that was one of the reasons I made the point about how many nursing home closures, we've had accelerated because of the pandemic. So so I get your point completely and normally I would be right, where you are if all else was equal, let's just take it and get it over with but in the current situation.
So for me, it's not really a sabra issue I just look at it in terms of the entire industry and all of those operators out there that are kind of out there on the road.
Yeah.
Fair enough that I can make that next you does that give you more empathy rich.
I do I feel better now.
[laughter].
Thanks, That's all I got.
Alright.
Thank you. Our next question comes from Stephen Valiquette of Barclays. Your line is open.
Great. Thanks, a lot everybody. So I guess that you talked about the greater opportunity and behavioral.
Just remind us how many current operating partners you have for this asset class are you seeking additional high quality operating partners are just looking to expand the number of properties with your existing partner or partners. Thanks.
We have three operators with whom we have <unk> on a repeat basis, so far and as I mentioned in my remarks, we continue to look to meet sophisticated operators, who who have scalable platforms I think.
This is an incredibly fragmented industry with very few operators, having scale and so the real question is finding those that have the ability to have scale and and operated a levels today that.
That we feel are sophisticated enough to have a capital partner like us that is really going to want to go out with them.
We have that with the current operators not profile you and we have are in discussions with a handful of additional operators that we think fulfill those those prerequisites.
Okay. Yeah, that's what I was gonna ask as a a follow up actually is that the feedback from our side too is that there is a fairly finite list of hi.
High quality guys that can scale, so to that and it can be kind of a first mover advantage that you're one of the earlier companies taken advantage of it some of you agree or disagree something you probably do but just wanted to confirm your your view on that as well.
No we completely agree with that and that's why I made the comment earlier that even though the pipeline is looking more of us were really cautious with new operators because there aren't that many try to tour operators out there. We spent six months with landmark before we get our first you'll just spending time getting to know them and understand their model and all that which.
We'd never would've done.
Nursing, a senior housing because we need to know everybody or it could be two degrees of separation.
Okay perfect. Okay. Thanks.
Thank you. Our next question comes from <unk> Muslim.
Your line is open.
Just maybe first want to revisit you mentioned the uncertainty around the public health emergency I I guess declaration going away what are you monitoring and and what are you focused on in terms of the associated.
We have orders that were given our benefits that that exists it for skilled nursing and what's maybe what's on top of your over your top of the list.
Well the the top of the list is really with the states are gonna do they'll have some flexibility F map and that's why I made the comment in my opening remarks, and and and tobacco I think over the last two to three quarters I've talked about how the tone has changed at the state level of the pandemic is really demonstrated how underfunded meditative state.
<unk>, we're much healthier than anybody anticipated at the beginning of the pandemic and many states were really generous with F F.
We appreciate and so going forward to see that.
States that comprise the majority of our skilled facilities are gonna have outsized rate increases compared to past years is a huge positive. So we're going to keep our eye on that there were a couple of states within those knowing that haven't formally approved legislation yet so we're monitoring that and then the other states that.
They all have the same level of impact because we don't have as many offers in those other states, but we're monitoring that as well in terms of the three day waiver, which has been really beneficial certainly took the sabra portfolio. During the course of the pandemic now that acuity is migrating closer to normal levels, it's not as impactful as.
It wasn't we saw this over to.
2021, we sort of skill mix get closer and closer to pre pandemic levels as acuity normalized and then went delta because obviously.
Spiked up again, and we're still at elevated levels, but it's not like it was.
Okay that that's helpful. And then I just wanted to revisit your comment about the watch lists being back to pre COVID-19 levels.
I mean, the <unk>, we're in a different occupancy environment, you just laid out a lot of issue that you're monitoring so I'm I'm just kind of wondering what what gives you confidence that you know there are no more tenant issues or minima from here on.
So.
When we say consistent when we look at the the operatives that were on the watch list pre pandemic, it's really been the same operators throughout the pandemic. The reason we have a level of confidence is because.
We've already been through.
The lowest point of the pandemic from occupancy cost perspective, so we're in a better place now obviously I don't want to Jinx. It right fingers crossed that we don't have another bad very empty the very the posts Ellicott Darien something very similar to all my card in terms of mortality infection right. So that's been a positive.
But I didn't give a cautionary note on the last call and I'll tell you. The same thing on this call and that is there could be a gap as assistance declines and where people on the recovery. So it's certainly possible as we look up to the next several months that we may have to provide some <unk>.
It's gonna be short term and we don't see at least restructurings.
Got it Okay, and then just lost one in terms of.
Capital allocation between the the various businesses just obviously behavior is very interesting as you've laid out I'm just wondering on the on the senior housing sites, specifically given the tailwinds in front.
Can you just come in and how you're thinking about capital allocation between Bulletin and specifically just update us on your views on enlightened.
I'll, let Rick discuss the and live in transaction, which is I think of what you're referring to but I will I will comment about senior housing we continue to like senior housing and we'd like to be buying it I think it's a cost of capital question at the moment, because Sarah a lot of buyers for senior housing and and cap right.
Temporarily compressed in that sector as as as we all know eight is our expectations at pricing may shift somewhat given the cost of that if that <unk>. That's out there right now for everybody, particularly for <unk> buyers Uhm that may make a difference in there in their analysis.
But we still like the sector. We've we had already announced that we are in a joint venture with C. N N senior living I'm looking to acquire with with it with.
A deal in hand in Canada. So we continue to be active in that sector. When it makes economic sense for us, but we're going to be cautious with how we deploy capital I'm given that capital for us as a scarce resource.
In terms of being alive and process T. V. G is held off the marketing process wanting to have more time to see how the managed portfolio has a portfolio is recovering the portfolio has been recovering really nicely occupancy days have been material since omicron and so.
So I think we're getting close to the point, where TPG is gonna want to actively market the portfolio customer timing perspective, what that means is that it's not gonna happen this year.
Months of regulatory approval asked me to find a buyer, so where we anticipate having those facilities still on the portfolio for the remainder of 2022 and my guess as to the first quarter of 2023.
Great. Thanks, so much.
Yep.
Thank you. Our next question comes from Austin will Schmidt of Keybanc. Your line is open.
Great. Thank you I was wondering if you could provide some details behind the CMS assumptions underlying the point O. Two impact that you referenced in the release and then you know any tenants today that stand out specifically at risk from from the currency in this proposal.
Yeah. So no tenants are currently at risk because of the D. C. M. S proposal, essentially we were going to receive a 3.9% market basket increase that was sort of buoyed by inflation to a large extent and the parity adjustment with 4.6, so that guy.
Two 2.7% decrease from current rates that would be effective October 1st if the proposal becomes final.
That 0.7 per cent decrease in rage translates to stop her portfolio in the aggregate is a point O. Two decrease in coverage, it's a little bit different from Kenneth Kenneth skill mix is a big big differentiator and so for example.
I know when you all look at North Americans coverage you Wonder if it's if it's getting too tight but north American has by far the highest skill mix of any of our operators and so if you assume the difference in the dorm and EBITDAR is 40 to 50 basis points for most operators in the case of North America.
It's closer to 30 basis points, so pretty big difference there. So they're dark coverage is higher than you would think it is just looking at their dorm coverage.
Oh, two there's not a big variance between our tenants on the point O two decrease.
Okay, and then just wanted to follow up on the timeline for conversions to behavioral health you know how long is the stabilization period.
On some of these conversions and then you know I'm also curious if you could give a little more color on you know how your discerning between you know the operators that they kind of have the expertise in this business and to be you know winter's over the longer term.
Sure. So first on the conversions and stabilization. So so so it really is dependent on the size of the building.
And and the pair makes it's happening there so in some of our smaller buildings, depending on what state therein. We actually have some buildings had have Medicaid and those as a pair for addiction treatment those buildings essentially sell up almost immediately because that.
<unk> that is an underserved Ah Ah client base at and and in certain states. It actually is almost the the the the reimbursements basically the same that's parody too commercial insurance, so that it can make economic sense.
Stabilization can occur within.
Three months of when you open the building two months it can be very quick.
The.
Commercial insurance takes longer because that is all around the contract and the length of time it takes to negotiate the contract with the insurers. So it's less about marketing and more about marketing to the to the customer base, it's more about actually getting the parish lined up.
In that case and really the construction is actually not that going to be the driving force on on getting the buildings open. The converted buildings. We opened it's going to it's typically been licensure number each other's or regulatory check the box items that taken.
Time, and sometimes we find ourselves waiting for that which is not uncommon across our other property types as well.
Uhm.
<unk> Oh, how do we discern mm.
Yeah. You you you visit properties you spend time with management.
Listen to we ask a lot of questions and listen to what they do clinically.
How they market themselves.
What is their customer acquisition approach what are their results and how they understand the business and frankly, whether they can operate at a scale of more than let's say 20 beds. If they are looking to to open facilities of 150 beds. So it's <unk>.
It's in the end, it's not that different from disarming capabilities of.
Skilled nursing, operator, or a senior housing operator, or a hospital operator, it really is uhm asking similar questions along the same vein understanding their commitment and their and their investment not capital necessarily but their investment in there and their underlying business and and process.
I appreciate the thoughts thank you.
Thank you. Our next question comes from <unk> <unk>, a credit Suisse. Your line is open.
Ah yes. Good afternoon I just wanted to follow up on victims question I think the comments Rick you made about North American were very helpful. But in regards to other tenants that I think you know investors worry about could you just give a little color more around health Mark and also even within Enlightenment J V. You kind of have a quarter.
Oh, where again it was delivered 1%.
You know NOI margins, which I'm still very low.
Occupancies, so just longer term kind of local potentially happen with that portfolio.
Yeah, So I'm wanting to help mark is hanging in there pretty decent skills mix as well. So we don't expect to have to do anything different they're from a long-term perspective, they are really fantastic peppers, and one of our strongest operator. So we really don't have concerns about about health Mark in terms of.
What specifically.
Your other question about.
And <unk> again, the N O I imagine with just one per cent. This quota occupancies still kind of lower <unk> on my other shop operators. It just feels like it's lagging you know a little bit versus everybody else and then you kind of have the you know the auditor's talking about the whole issue about you know, whether it's a going concern or not so.
Just general how does and live in kind of recover or turn around and what are your expectations there.
And while I've got hit pretty hard by Omicron until you've got first chord here in March and April we saw a lot of momentum cause I think I may have mentioned didn't hit her and her talking points. So they're they've already they're showing great games in their spot occupancy show tremendous.
Games as well so that was really the first quarter was really low point for them and really almost.
Almost on January and a good chunk of February so there will pass that.
Gotcha. Thank.
Thank you Yep.
Yep.
[noise]. Thank you and next question comes from John Philosophy. It brings street your line is open.
Thanks, maybe just a follow up to that conversation I just have a question on the month to month occupancy strategy lay out the page to your press release for how far can I have a mirror. So health Mark you don't have longterm concerns, but any color on why occupancies kind of stuck in neutral at sub 66% and.
Again, I have a mere still well below the portfolio average any comments will be helpful.
Yeah, there really isn't anything specific there. It's it's really specific to their markets health walk is primarily Texas. So it's been a it's been a tough go their their skill mix has been really helpful. <unk> mix has been really helpful as well and and part of the issue with.
<unk> is the.
Kobe units, which became a larger part of the business in the latter part of last year and early and this year have now started dwindling and so that's really been the drive there and why occupancy has been flat occupants he's come down because of all the COVID-19 units that they have they've had and trying.
Build occupancy so they basically been holding serve replacing sort of one <unk> patients if you're willing to notice Dr. Patience does it get through that process.
I think that'll be fine and they've got obviously, some really nice breathing room, how we restructure them. So.
And the other thing I would point out on Avenue is they're getting really strong rate increases.
Much more than anticipated, Washington State and Oregon for Medicaid This summer.
Okay. Your comment on how smart having a tough go in Texas is that Labour shortages caffeine emissions with what's the tough go exactly yeah, two locked to a large extent, they're starting to see some improvement in that but that's been a big driver there.
Okay, and then just one final housekeeping item any color on the 7% sequential cash in a lie decline on the behavioral health <unk>.
Saw this quarter.
I think that's so.
We have one operator that was more affected than.
The <unk> comprises most of that and that operator had was impacted by <unk>.
And to some extent by my Labour as well, but occupancy in this after usually pops in January and I'm, calling really affected that there wasn't a pop and that pops to happened much later in into March. So that's that's what's going on there.
Okay. Thank you.
Thank you.
I'm showing no further questions at this time I was trying to call back over to Rick nature C O for final remark.
Yeah, Thanks and tie on your question I also wanted to the other issue that hurt and lie there in the first quarter. That's now improving as the <unk> you should have it later on how much temporary agency. They were using so that's been coming to us so that'll be a positive contributing factor going forward as well so that <unk> I want to thank everybody for their time today <unk>.
Tension in support and as always were available to talk offline look forward to seeing a lot of you know read take care.
Thank you, ladies and gentlemen does that conclude today's conflicts. Thank you all participating you may now disconnect have a great day.
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Good job.
Uh-huh.