Q2 2022 Sabra Health Care REIT Inc Earnings Call

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Okay.

And welcome to the Sabra Health care REIT second quarter 2022 earnings call.

I'd now like to turn the call over to Lukas heart, which.

It didn't of finance. Please go ahead, Mr Hawk, which.

Thank you and good morning, before we begin I want to remind you that we will be making forward looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including 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 2021 as.

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 statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments, we make today are still valid.

In addition references will be made during this call to non-GAAP financial results investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the investors section of our website at Sabra health Dot com.

Our Form 10-Q earnings release and supplement can also be accessed in the investors section of our website.

And with that let me turn the call over to Rick <unk>, CEO , President and chair of Sabra Health care REIT.

Lucas and thanks, everybody for joining us today to start I just want to note that.

How we're looking at the business and talking about the business is a little bit different now from our perspective, we've moved from pandemic and debit and.

And Thats just an acceptance we think of the reality of the virus is always going to be here.

Some form of fashion the number of cases, both for staff and residents that we have on a daily basis throughout the portfolio is in the hundreds.

Thousands tens of thousands as we saw during the worst of the pandemic. So.

We prefer not to be here, obviously, but we think it's here to stay and the levels of cases that we're seeing at the facilities. Both again in terms of staffing in terms of residents is.

Is not impactful in of itself.

Other things are impactful, but that in and of itself is an impact along the business.

Moving to reimbursement.

There's some disclosure to show the two charts one.

The extension to that maps and we'll show you our top 10 states. So extension for <unk> and the actual Medicaid rate increases that we would normally get on an annual basis.

What we've seen and this reflects the comments we've made over the past year and a half about the tone changing in a lot of the states relative to Medicaid underfunding, the business and state budgets being better than anticipated throughout the pandemic.

So we're really pleased with the number of states that have extended F maps.

For a pretty long period of time through 2023, the number of cases.

And in those states that gave much larger than historical increases for annual Medicaid rate increases and in the case of a couple of states, we got growth map extensions and.

Hum.

Regular Medicaid rate increases so all in.

That affects approximately 60% of our skilled nursing portfolio.

You think about.

The cares act and things like that tailing off a ph D has been extended through October we are somewhat optimistic that ups will be extended through year end.

Other things have fallen off so it really we really look to the states.

To be helpful here and certainly.

Those states that took these actions it's incredibly helpful. It will help with staffing issues as well I also want to note.

And express our appreciation to CMS for the final rule that was a 340 basis point improvement over what the proposal was an important to note that of that 340 basis point improvement of 110 basis points was specifically due to capturing inflationary costs, obviously, it doesn't capture all of the inflation, but at least.

It's a step in the right direction and part of the Formula We should expect to see inflation.

Inflation captured in next year's market basket.

As well.

Additionally, although occupancy at our skilled portfolio improved 100 basis points sequentially from first quarter to second quarter. We are seeing a slowing down in July both due to seasonality and continued labor pressures labor pressures are not as bad as they were at their worst agency has come down and hiring is up but it's still going to be it.

<unk> for a while it's tough and it has hampered.

The rate of recovery relative to how quickly patients could be admitted but we'll also see seasonality come back we haven't seen seasonality for the last couple of years and both those factors apply to our senior housing portfolio as well as our skilled nursing portfolio.

Moving on to investments in our overall strategy of investment activity continues to be healthy although most of the deals we see around the senior housing space with some opportunities in the behavioral space, Although we don't see many opportunities in the skilled space buyers rich for many of our skilled assets at attractive pricing as a result, we anticipate Apple proceeds to fund new.

So any increase in leverage as we saw this quarter, specifically due to timing and we therefore don't intend to access the markets.

Dispositions will also result in the lowest skilled exposure in the portfolio since prior to the CCP merger, while that asset class will still be our largest will be a much more diversified reached with senior housing can be here, it's a real balancing this out.

In terms of ESG, we are close to publishers is our second annual report.

That would be out in the next several weeks.

I look forward to any input and comments as people have a chance to review that report and with that I'll turn the call over to Todd. Thank you Rick.

I'm going to start with some brief comments on the performance of our wholly owned managed senior housing portfolio and then provide an update on the initiatives. We have undertaken to allow us to continue to diversify our portfolio and improve the durability of <unk> revenue stream.

In the second quarter of 2022, we saw continued improvement in the operating performance of our wholly owned managed senior housing portfolio. Despite the impact of.

The <unk>, Barry, which which worsened ongoing labor challenges as occupancy rates continue to rise operating leverage as a positive providing a lift to cash net operating income the headline numbers for the quarter on a same store basis are as follows occupancy for the second quarter of 2022, excluding non <unk>.

<unk> assets was 87% driven by a 290 basis point increase in our assisted living communities and a 60 basis point rise in our independent living communities compared to the prior quarter.

<unk> second quarter, 2022% of second quarter 2021 occupancy in our assisted living communities increased 620 basis points.

And 230 basis points and our independent living communities.

Same store occupancy has consistently trended up across our portfolio since the COVID-19 surge in early 2022.

Revpar for the period, excluding non stabilized assets was $606291 in our assisted living portfolio, a six 6% increase over second quarter, 2021, and 2000 and $671 and our independent living communities, a three 2% increase over second quarter.

2021.

Rising occupancy coupled with rate growth reflects both the stickiness of existing our existing residents and our operator's ability to balance rate increases while attracting new residents.

Excluding government stimulus funds cash NOI for the quarter increased nearly 11% over the prior quarter and 44% in our assisted living portfolio alone. This dramatic increase in cash NOI in assisted living is largely attributable to higher revenue in our wholly owned <unk> portfolio because of this.

Portfolio has more memory care the occupancy impact from COVID-19 searches has been greater but the rebound has also been faster.

Cash NOI margin, excluding government stimulus funds increased one five percentage points driven by our assisted living portfolio, where margin expanded by four full percentage points over the prior quarter.

Our operators continue to address labor challenges and now inflation impacting costs, such as food and utilities higher expenses are partially offset by revenue growth, but continue to impact the rebound of NOI margin. While in place residents have been receiving 6% to 8% rate increases year over year new residents.

Rates are 10% to 13% higher on a year over year basis strong leasing velocity continues across our portfolio with growth move outs normalizing and even dropping below pre pandemic levels.

<unk> ability and competition for staff remain a challenge that is mitigated, but not yet solved by higher wages.

Last quarter I mentioned that we had undertaken a comprehensive review of our portfolio with the intent of recycling assets and recycling capital. We are now determining which properties are long term hold and which are candidates for conversion repositioning or scale as we continue to convert select properties for users addiction treatment facilities.

Our investment in behavioral health is increasing.

The second quarter <unk> investment in behavioral health included 14 properties and two mortgages with a toilet investment of approximately $730 million, we intend to invest an additional $27 6 million of capital to complete the conversion of three of these properties all of which have been leased to operators.

Subsequent to the end of the quarter, we executed leases with behavioral health operators on three wholly owned properties to had operated as skilled nursing facilities and one is in memory care community. We are in.

Now in the process of converting those buildings for use of inpatient addiction treatment facilities. The investment value of these properties will be approximately $47 $5 million with an expected stabilized yield of approximately 9% together this represents more than $800 million invested and committed to behavioral health.

All estate consistent with our discussion last quarter.

In the past 12 months, 43% of adults in the U S, who sought mental health or addiction treatment were unable to access care because of cost availability lack of treatment options and wait times, we are committed to supporting the delivery of behavioral health services by creating and financing the places where they happen.

And so that these critical services are accessible to all regardless of age income or location in doing so we are creating value in our portfolio by generating higher returns and durable income streams as well as continuing to diversify our portfolio our attention to this underserved sector is being noticed.

We're now in active discussions with more operators on an additional conversion opportunities.

Our portfolio review has also led us to explore selling some of our skilled nursing assets. Despite recent dislocation in the lending markets buyers appetite for skilled nursing properties remains active and pricing strong at the same time, we remain highly selective in our new investments as we manage our capital we view recycling.

<unk> and assets is another half to continue to enhance and diversify our portfolio without accessing the capital markets for funding and with that I will turn the call over to Michael Costa <unk> Chief Financial Officer.

Thanks Tanya.

For the second quarter of 2022, we recognized normalized <unk> per share of 39.

Normalized <unk> per share of <unk> 38.

Compared to the first quarter of 2022 normalized <unk> per share increased <unk> <unk>, primarily due to higher NOI from our consolidated senior housing managed portfolio.

Higher normalized <unk> from the <unk> joint venture primarily related to $3 $4 million of government Grant income received during the quarter and a decrease in stock compensation expense as a result of adjusting payout estimates on performance based awards that were set pre pandemic. These.

These amounts are partially offset by lower NOI from tenants, whose rent is accounted for on a cash basis.

This decrease was primarily due to the first quarter collections under the avid Adam Air lease that we highlighted on last quarter's call.

As a reminder, in the first quarter, we recognized rent from Avalere for December 2021, and January 2022 at their pre adjusted rent together with rent for February and March 2022 at their adjusted ramp.

Compared to the first quarter of 2022 normalized <unk> per share was flat since normalized <unk> does not include stock compensation expense and therefore, the pickup noted for normalized <unk> does not impact normalized <unk>.

Cash NOI for the quarter totaled $118 million compared to $123 5 million in the first quarter.

This decrease is primarily the result of $5 $2 million of lower cash rent, mostly related to the difference I noted earlier and rents collected from <unk> as well as fluctuations in collections from tenants accounted foreign cash basis.

Cash NOI in the first quarter included a $2 3 million lease termination payment on a facility that was closed and subsequently sold.

Which also accounts for the change in interest and other income this quarter.

Cash NOI for the second quarter includes $3 6 million of.

Support payments made by our unconsolidated joint venture to enlighten, which is partially offset by $3 4 million of grant income recognized within life joint venture.

As we noted last quarter funding for support payments did not require additional capital contributions from Sabra rather were funded with proceeds received by the <unk> joint venture from TPG.

These decreases are partially offset by a $2 $7 million sequential improvement in cash NOI from our senior housing managed portfolio.

Cash collections from our tenants remained strong and are in line with historical standards.

Less than 6% of our NOI is below one times EBITDAR coverage with rents on nearly all of those tenants being recognized on a cash basis.

Additionally, more than half of the tenants with EBITDAR coverage below one times are paying their full contractual rent to us.

As of June 32022, our annualized cash NOI was $453 million and our sniff exposure represented 67% of our annualized cash NOI down 100 basis points from the first quarter and down 640 basis points from a year ago.

G&A costs for the quarter totaled $8 6 million compared to $10 4 million in the first quarter of 2022.

Excluding the stock compensation expense adjustments I referenced earlier recurring cash G&A was $7 8 million compared.

Compared to $7 9 million in the first quarter.

During the quarter, we recognized impairment charges totaling $11 $7 million related to for snips that are being evaluated for sale as part of our initiatives to reposition our portfolio and recycle capital.

Now turning to the balance sheet.

Over the past several years, we have prioritized strengthening our balance sheet not only with regards to our leverage levels, but also with a focus on maturity ladder ing and reducing our variable rate debt exposure. This.

This three pronged approach to managing our balance sheet has proved invaluable in the current debt environment and positions us well moving forward.

We have no material maturities until 2024, which reduces our refinancing risk in the near term. Additionally, we have reduced the level of unhedged variable rate debt from 27, 2% of our consolidated debt at the end of 2018 to six 6% today.

Excluding our revolver, our unhedged variable rate debt is only 1% of our of our consolidated debt as of June 30.

Because of our hedging activities our annual interest expense is approximately $4 million lower than it otherwise would be at today's markets.

Days market rates.

We are in compliance with all of our debt covenants and our liquidity as of June 32022 totaled approximately $924 8 million.

Consisting of unrestricted cash and cash equivalents of $67 $2 million and available borrowings of $857 $7 million under our revolving credit facility.

As of June 30, our leverage was 544 times.

This leverage level is above our long term target of five times, we view this as simply a short term timing mismatch during the quarter the balance on our revolver increased $125 $5 million as we closed on our investment in the Sienna joint venture and we expect to pay down our revolver by the end of the year as we receive proceeds from completed and pending.

<unk>, which are expected to generate over $210 million in gross proceeds.

Once these proceeds are received and we repay our revolver borrowings we expect leverage to be closer to five times, we continue to focus on strengthening our balance sheet and portfolio without accessing the capital markets and are well positioned to do just that.

Regarding our capital recycling program tie referenced in our prepared remarks, there are two points I would like to make.

First the assets, we're selling are primarily poorly performing assets that are on a cash basis and we have been recognizing rents received from them that are below their contractual rents.

While we can't comment on the specifics of the sales until they close we feel it is important to point out that through a combination of recently completed investments like our joint venture with <unk>, which has a six 5% stabilized yield and future investments in our senior housing managed in behavioral health portfolios, we expect to be able to replace the NOI from these sold assets.

While meaningfully increasing the quality of our portfolio and durability of our earnings.

On August three 2022, our board of directors declared a quarterly cash dividend of <unk> 30 per share of common stock to.

The dividend will be paid on August 31, 2022 to common stockholders of record as of the close of business on August 17 2022.

The dividend represents a payout of 79% of our normalized <unk> per share of 38.

Lastly, I would like to address our decision to not issue guidance this quarter.

We continue to see positive momentum on occupancy and labor availability, albeit at a slower pace than expected.

The timing and velocity of the recovery remains unknown and this combined with macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time.

And with that we'll open up the lines for Q&A.

Thank you to ask a question you will need to press star one one on your telephone.

Please stand by while we compile the Q&A roster.

Our first question comes from one Santa Maria with BMO. Your line is now open.

Hi, good morning.

Just maybe hoping to spend some time on the transition assets. You mentioned 25 that are either in process or.

In the future.

Just trying to get a sense of the earnings impact of that.

How much rent are those guys paying downtime of repositioning the assets.

And just kind of the the rent uplift or degradation that we should expect as those assets are first reposition and then relates to new tenants just trying to get a better sense of earnings really.

Yes.

Yeah.

I would say as I mentioned in my prepared remarks that the assets, we're selling are not well performing assets and I think that stands that's largely you can apply to the assets that were transitioned to new operators.

Said differently, we would it be transitioned to new operators. If the current operators were doing a job that we thought was.

Was achievable at those facilities. So in most cases, if not all of these are on a cash basis, we're receiving some limited amount of rent on these portfolios. We think they are good assets in good markets, but we think a better operator could do a better job there and increase the earnings that we have been.

That we were getting from the existing operators.

It may take a little bit of time, there's going be some some friction there as they transition operations to new operators, but in the long run we see this as a positive for our portfolio and the other thing I would add one is that this isn't all going to happen in one day. So the the.

The impact.

The impact is incremental and not even going to be visible.

To the investment community because of the way these things will spread one of the portfolios. We actually started to talk to you about some time ago about a year and a half ago.

Walk and that's still ongoing because everything takes together there.

And some of these decisions also certainly in the case of the New York portfolio in the case of another portfolio was impacted by the pandemic in terms of how it impacted the operators at.

It means cases it was a couple of individuals who has been running these companies for a long time.

They're just done the pandemic just finished I just pointed out and so a lot of this stuff is actually been pretty cooperative actually none of it.

And as Victor adversarial at all so.

That's really the way to think about it 25 is that a lot of facilities that would be spread those transitions out over a period of time, it's going to take for them to actually occur.

At any given moment, it's just not going to have much of an impact.

Yeah.

And then on the dispositions himself to $2 10.

I'll pick out can you comment on or provide.

The cash or the rents that were flowing through <unk> in the second quarter.

On those out yet.

Yes.

We're not in position to talk about nor should we talk about those sales until they've closed once we have the cash in hand, and those sales are closed we could provide additional color on what's going away I think the part that should provide you and everybody else for that matter comfort is the statement that I made in my prepared remarks, which is we expect to be.

Well to replace that NOI with.

With the investments that we're making so you can just take a guess at the kind of investments, we're making what the associated cap rates are with that and you could assume it's going to be somewhere EBIT at least equal to that if not lower than that so these are specifically skilled nursing assets as has been mentioned already been talking about for a while now theres just an appetite for that out there.

There.

<unk> from private buyers and private capital has a lot of existing operating companies and since <unk> been cash tenants. The yield we're getting is pretty fantastic, which goes to mikes comment that even reinvesting in senior housing.

As positive as a positive outcome for the company.

No.

That's it.

Sure.

Thank you.

Yeah.

Thank you.

Our next question comes from the line of Michael <unk> with Citi. Your line is now open.

Hi, Thanks for taking the question.

Just curious what caused the tick down in skilled nursing coverage this quarter and sort of where could you see that trending throughout the rest of the year.

Yes.

You have to keep in mind that we're moving one quarter further away from the large injection of stimulus into the space. So you had a quarter last year.

The wisdom of coming in mainly in the form of the provider relief funds and in this quarter. The latest quarter that we picked up had virtually nothing in it.

I think the more comparable.

The trick is to look at.

The coverage, we disclosed on our sniff portfolio without Prs funds and see how that compares to last quarter, which is <unk>.

Table.

And so set a little bit differently, we're not seeing declining trends there.

Simply a matter of what Mike just talked about.

Okay. That's that's helpful. And then just one question on.

On the capital markets, just given that the equity cost of capital seems to be improving I guess why not try to tap into those capital markets as opposed to selling the assets.

Well.

You may be an outlier there.

Ill remind everybody that the reaction that the investment community had when we did the what we use the ATM. The way we did last year. When we did the $100 million equity offering in 2014 40 last fall.

I mean people just came.

Sure Doug.

Hi out here too to our corporate office and.

That's probably our next so.

That's the that's the kind of reaction.

We got.

But.

Look for us.

Not selling asset that you think are fantastic assets. Some of it obviously got made worse by the pandemic.

But.

And as we assess then the.

The recovery is.

Gonna be really long and arduous and may not even get their facilities assets. So as Mike mentioned, a couple of minutes ago. We think doing this is going to improve the long term durability of our earnings stream.

And also.

Mentioned, leaving us with a much more diversified.

At the end of the day and the other thing I'll add to that is.

As Rick alluded to we're not just selling assets to fund growth right.

Could we access the equity market today I don't want to I don't think the price is appropriate for us to do that even though I think we're trading over <unk> as we sit here today we're.

We're not just selling assets to fund growth.

One benefit of it but.

But the more important part of it is a term you keep hearing in our prepared remarks and in our comments is the durability of earnings we're repositioning our portfolio, we're improving our portfolio and we're we're creating a better portfolio for when the capital markets are going to be more favorable in that could fuel additional growth.

So I wouldn't look at it solely that were selling assets just to buy new assets. The other thing I'd say.

Just to put this in perspective 25 facilities there isn't a lot of facilities. When you look at the size of our portfolio $200 million and disposition proceeds what we normally do about $100 million a year anyway isn't that.

It's not that significant so it's not like.

Restructuring the entire company or anything like that were fine tuning it really.

Yes.

Alright, that's it from me thanks for the time.

Okay.

Thank you.

Our next question comes from Vikram Malhotra with Mizuho Group. Your line is now open.

Thanks, so much for taking the question.

First I just wanted to understand or clarify you had mentioned 6% of the.

The attendants under one time coverage.

What was that.

Last quarter.

And then you mentioned about if I heard correct X 50% of those are.

Cash being could you just clarify that.

Yes, so to answer your first question that number is pretty steady and it has been the last couple of quarters.

In terms of.

What I said is that most of those tenants almost all of those tenants that are in that 6% that I quoted on a cash basis.

Half of that 6% or more than half of that 6% are paying us their contractual rent and the reason why we point that out is I think theres a knee jerk reaction whenever you hear that somebody is not covering their rent, they're not going to pay their rent right. That's not the case.

We're getting rent paid as a contractual rents not even like below contractual rents, where you're actually getting contractual rent on those tenants, even though we account for on a cash basis and even though in the near term their EBITDAR coverage is below one times.

So just to give you some level of comfort that there's not.

That adjustment coming down the pipe because they <unk> been below that one times coverage and this could be a key paying us.

And if you had to.

Okay.

That's helpful. And then just you mentioned the sequential dip in cash.

Our cash rents essentially most of that was.

The other change.

But just going forward just to be clear are you baking in in your underwriting any additional tenants not being able to pay rent or for now is it just steady as she goes.

It's <unk>.

As she goes for now.

Okay.

I would also caution everybody.

The recovery is slower than what you already we would all like in large part due to the labor pressures and as we've been talking about the last several quarters, even though we've had a pretty steady portfolio.

There's always there's always a chance that if this thing drags on people may need some assistance, but we've used at assistance has not material to the company overall and shouldn't affect our underwriting.

Okay, Great and then just last one on the on the diversification.

Plan.

I guess this was asked last quarter as well, but you've seen improving.

Trends on the skilled side.

Obviously, you focused on behavior.

Maybe just revisit for us.

Are there any specific goals in terms of the mix you'd like to achieve.

Some of this just still trying to derisk the sniff portfolio, maybe just update us on your thoughts on more diversification.

Sure So I think.

Most important point is that we're very bullish on the skilled space and even as we diversify over half the portfolio is still going to be skilled nursing. So whatever positive trends, we see in that space over the next several years will benefit from it because it's still going to be happy.

Half the portfolio.

We're comfortable with it being half the portfolio.

I think if you look back at us historically, and certainly if you look back or else before the merger when we were in the fifties as opposed to over 60% skilled nursing.

The investment community viewed us as both actually sell side and buy side viewed us as being a more diversified REIT and we traded at a better multiple.

Sure.

In those periods of time, so that's really one of the drivers here is diversify risk to spread across more asset classes that we feel good about.

But we certainly at this point don't have.

Long term goal of getting skilled from somewhere in the 50 percentile exposure down to half of that.

That isn't any attention at all we just want to be somewhat more diversified just to spread our risk and not be not be in one asset class and therefore completely dependent upon market sentiment for that one asset class.

Yeah, it's a really it makes sense.

Diversification of care payer volatility.

Applications of payer volatility.

So it's B C.

Senior housing senior housing is obviously private pay skilled nursing is primarily government payors and behavioral is sort of a mash up of all of the above although for us it's more commercial insurance with a little bit of government pay. So it's also that so when people talk about some of the.

Okay, industrial get nervous about Medicare changes or Medicaid changes.

Yes, sure. It helps I think mitigate the amplitude of that risk.

Great. Thanks for the color.

Thanks.

Okay.

Thank you. Our next question comes from Cal Shoe with Stifel. Your line is now open.

Hey, good morning, everyone great quarter first of all thank you for the state by state is closure.

Nike rate growth, yes, I think the data is really helpful to clarify the amount of space support out there scale, despite perhaps a pullback from a federal level.

Looks like a lot of the support has been a sustained through at least mid year 2023, and the Medicare final rehab improve for next year. So I'm curious how you think about Medicaid funding beyond 2023, what is more permanent in nature, and whether we will see a funding cliff for certain states at some point.

Yes, so a lot of it is.

A lot of it is a function of where the state budgets are kind of at any given point in time.

But.

The dialogue has been much more positive so before.

You have to state budget issues and didn't really have a positive dialogue, but I think.

The access issues that we're starting to see across the country.

<unk> lost no my panel rather.

Just in the past couple of months lost 10% of their Smith.

Okay.

Because of financial issues.

There have been since in the last seven years.

A thousand west nursing homes with another 400 that are going to be closing kind of as we speak so.

So the decline is really accelerating.

So our belief is all that will create a better environment as we have these discussions with the states beyond 2023.

Assuming their budgets are in pretty good shape, but before even if their budgets were in pretty good shape. It doesn't necessarily mean anything so I think thats been a real positive. The pandemic has demonstrated for the states that with.

All the operators have been saying has been true that as in most states Medicaid is underfunded.

And so we've seen obviously a lot of space addressable so.

So you never know for sure, but I think.

The momentum is positive.

Thank the access issues are really going to create problems for these states because.

You can't even look at.

Most of the access problems is going to affect the indigent Medicaid patients.

Senior housing is not going to be an option for them home health isn't going to be an option for them there are options for them.

Have people that are just sitting in hospitals, because theres no place left to go and they have no signs so.

I don't want to belabor, it, but that's kind of my viewpoint on it.

Okay, and Q falloff on that claim staffing has been <unk>.

Trained all information on topline.

In the past few quarters, while they will have more clarity on Medicare or Medicare rate seems to be growing you know better for some of the states doesn't make sense to cooperators.

Increased investments in labor.

It makes sense with sabra to kind of provide more liquidity and bridge two operators. So that they can get ahead of the targeted reimbursement.

Okay.

Yeah. So I think there are a couple of things one the operators or even before that they were starting to they have already increased wages pretty dramatically. So this is going to make it even easier so.

The operators understand that.

Even if labor gets better there was a labor shortage before the pandemic.

The answer really.

It's more occupancy and.

When rugs four was in place and you only took short term rehab patients and length of stay kept shrinking occupancy.

Kept declining.

And you reach that point when you've got a business that's 90% fixed costs that you just can't cover it so as the demographic continues to improve and as we've talked about we don't expect occupancy to get to pre pandemic levels. We expect it to continue to improve both our skilled and.

Senior housing so the combination in the skilled space.

These rate increases plus demographic.

Demographic, adding more occupancy.

It's going to help a lot but.

So operators arent sort of hanging onto that money and just let it all go to the bottom line they are going to be putting it into workforce as far as sabra is concerned.

We think there are things that we can do.

From.

And investment in Tech for example.

And we're very willing to work with.

Our operators are investing in that most of the operators don't have state of the art Smart laser systems, which really help you manage labor helps you provided a lot more flexibility to employees.

So we are absolutely willing to look at things like that and.

And if there are other ways that our operators made health, where their capital partner and we're willing to do that to help them get to a better place and as I mentioned earlier because this recovery is taking longer we may need to step up and be more helpful.

We're more than willing to do that and obviously, we're in a position financially we have the strength to do that.

Understood. That's good to know if I may squeezing one more question around alignment I think the assets into the portfolio.

Smaller in nature. Therefore in your occupancy can be more volatile, but it looks like the wholly owned asset occupancy growth has been quite strong for two quarters now I think it's up to 350 basis points this quarter and 750 year on year.

We should yield some pretty decent operating leverage I'm, assuming the JV is also seeing similar strength I'm wondering if the recent momentum has changed your discussion with TPG and what would it take to restart and marketing process and what kind of upside can we expect.

Yeah. So.

So yes, the trends are similar with the JV so called.

So directionally the same it doesn't really change that.

A decision with TPG in terms of actually locking in the portfolio. We're at a point right now where you really need to market. The portfolio 23, 2023 numbers that everybody can believe in so.

The focus on the part of management team and live it is to start the budget process, probably right. After labor day and put together a 2023 budget that the bankers can market offered so.

No.

So looking at that timeframe, we would expect the marketing process.

Rick off later this year.

And then go into obviously go into 2023 so.

And it isn't so.

So it's not really so much about the portfolio for us, but once TPG made the decision to exit.

They want they can just make the decision to exit the real estate.

One matter, but they made the decision to exit the operating company and the operating company was built to support a much larger enterprise than currently exists.

Company was sort of being built and it's got a pretty healthy burn rate.

It's not something that we feel that we're in a position to support.

On a go forward basis in addition to dealing with the leveraging all of that so.

So from our perspective.

We wanted to see obviously, a successful process, but we don't see ourselves.

<unk>, our position relative to supporting that marketing process.

Got it thank you very much.

Yeah.

Thank you our.

Our next question comes from Rich Anderson with SMB see your line is now open.

Rich Anderson your line is open please check your mute button my mute button was the issue.

So.

How are you doing good morning, So I wanted to attack the Medicaid.

Your question from a slightly different angle.

So you have this these F map add ons.

That's good obviously you have states that are flush with cash from various stimulus.

Measured as of the past.

Is it is this one of those things where youre kind of you have every reason to grow your Medicaid.

<unk> Medicaid outlays for the coming year, but that may be states will view this as sort of a.

No.

A stop gap type of year end that going forward, we get back to more of the garden variety increases of 1% to 2% is it.

Is that at all a possibility in the relative short term in your mind.

No I think it's I think it really is going to be a function of what the state budgets look like sort of post as we get into 2023 and post 2023.

Based on all the dialogues that have happened with a lot of these states. They recognize they need to do more so I don't as long as the funds are there.

So see you then.

And sort of arbitrarily, saying, okay, we've gotten through Covid, we're going to go back to one 7% annual increases.

And.

The other thing is within the state system zero inflationary components most states.

A drag.

On a year to two plus years by the time, all the cost to recognize but those inflationary components are going to drive Medicaid rates on a go forward basis the positive.

And what we really appreciate about what happened.

Currently with these races, we thought we were going to have to wait for those two years for the Medicaid cost report process to catch up with the reality on the ground and so a lot of these states got to jump on it. So they just did that because they have the funds to do that and they recognize the issue, but going forward there is a formula.

Going to help perpetuate.

Higher rates as well so.

And then the other point I would just reiterate is what I said earlier that some of these states are starting to have some pretty serious access issues.

That's going to create a lot of a lot of bad headlines so.

That'll be a factor as well so I think all that is positive and all of that should go towards continuing the momentum not in all 50 states, obviously, because we're obviously not even seeing that 50 space now what it enough states that is helpful.

Those of us that have Nashville, Pretzels do you think Texas is 12% add on could foreshadow them being more accommodative when it comes to their base Medicaid rate when they ultimately decide that is this is this something that we could look at it is.

That's interesting.

<unk> as a foreshadowing event is that possible.

I would never predict anything about Texas.

With positive.

Okay fair enough.

And look there is no there is no legislative sessions. This year. So it's not anything that has come up as an issue again until 2023 so.

I mean, I think we were all pleasantly surprised that with Texas Dave.

Just kind of leave it at that I was pleasantly surprised I don't know that our fore shadows anything in that state.

Okay.

Tony You said.

Or maybe it was you Rick just said.

Labor pressures impacting occupancy in July which of course, we understand but then you also said seasonality and is my understanding that third quarter is really the season seasonally.

Uptick you might expect in occupancy, particularly for senior housing is you have the building blocks of move in activity during the previous months.

Orders.

Culminating in some occupancy lift coming coming through in the third quarter, that's kind of what I'm hearing from your peers I am curious as to why you think seasonality plays a reverse role for you in the third quarter.

Not in the third quarter in the summer.

But right now I'll start so yeah, yeah, yeah. So it was in June going into July , but it will start picking up as we go later in the leg.

Later in the quarter, yes, okay. Okay.

You also have your comment I think you were commenting on July not third quarter entire in its entirety.

Right exactly and you also have some momentum in the fourth quarter that gets disrupted at the end of the year by the holidays and then you usually have a nice uplift.

As you go into January .

Okay last question for me is the comments you made about the enliven TPG joint venture you know youre not willing to kind of support things and so on.

At any level extend to your wholly owned.

As Youre doing.

No we really like those facilities those facilities are actually a little bit different topic do you want to comment on those facilities.

So first of all they're not the joint venture has what are the legacy ALC assets for those old enough to remember that company.

The wholly owned assets, we have which are 11 are geographically clustered and they are assets that were acquired by TPG and until individually they are at.

Our larger in terms of units per community et cetera, and they also have more memory care as I mentioned in my talking points.

They have a different dynamic both both in terms of income statement, because there's simply larger they also had different response, because if memory care too.

<unk>.

Covid to some extent just throw more volatility there on occupancy and they also tend to have higher rates in general because of the memory care.

Also note that we are.

We're more than happy for me to have the same management team running.

The wholly owned portfolio for us.

Thanks very much.

Yep.

Thank you.

Our next question comes from Commerce diverse ski.

Bearing Baird your line is open.

Hey, Kurt.

Hey can you guys hear me okay.

Yes.

I appreciate the weight room music and rich took most of my questions, but just just running back to seasonality.

I'm wondering if there are any.

Word indicators that you have identified that May suggest you actually see that occupancy ramp up for example, I know for a period, Massachusetts.

Elective procedures, which has now come to an end but.

Our operators discussing at all that ramp up in elective.

Else that might push more patients into into the sniff portfolio.

Yes, so the conversations with the operators they actually.

See that Florida.

That flow into demand isn't really an issue for them the issues.

Many admits because they handle given the staff that they havent provide the care they need to prevent provide that's really that's really the issue most of the states have loosened everything up of elective or things like that so we don't have any operators that are bidding at all it's just that some of them are having to admit more slowly than they would like to I would like to admit.

But I think the hope that a lot of them have as that.

As that volume.

Becomes more readily available it will coincide with at least some improvements in labor so you'll start having things tick up again.

So a little bit more a little bit hard to predict obviously right understood and then just jumping back to potential transition as it relates to behavioral health I know theres been conversation in the past on the difficulties related to entitlements for that kind of asset class and I'm wondering if you're transitioning a spa.

<unk> sniff asset for example to behavioral health or or senior housing do you have to change the entitlement in that process.

Or is that is.

Is that an easier route to go down.

Versus versus a greenfield development or something of that nature.

The short answer is it really depends it's not there's no blanket answer Ed.

Every situation we go through this.

Any analysis and figure out what we can do and what we can do when we looked at things were.

Where we've needed a zoning change or a variance or special use permit or something and frankly, sometimes that sometimes you can get that done because it's a tax.

It increases the community's tax basis, so, it's a positive and others.

Yeah, we're going to win against the neighbors South.

Totally depends so where were you seeing us execute conversions have typically been.

That debt designing has been as of right and that's.

Clearly the most efficient way to go forward.

And so we try to focus on those.

And easy glide path.

Another.

Okay.

Got it okay. That's helpful color. Thank you.

Thank you.

Our next question comes from.

With Barclays. Your line is open.

Thanks, Hello, everybody. Thanks for taking the question.

I guess I'm kind of looking at pages five and six in the supplement.

Skilled nursing occupancy.

It's sort of flattish bouncing around near five quarters in a row.

While it did improve in the last quarter or just I guess one question on occupancy then one question on the skilled mix I guess just first on the occupancy do you have any guesstimate for how much the staffing shortages in skilled labor within your sniff portfolio, maybe holding back occupancy.

It's tens of basis points or one hundreds of basis points.

And then the second question is just on the skilled mix trending down.

Five quarters in a row, but over that time, we've seen elective procedures generally rebounding over that same five quarter period. So they can intuitively I would think Medicare post acute mix should be improving.

I guess the question is are the skilled staffing shortages.

Impacting the Medicare occupancy more than Medicaid is it really just as simple as that just wanted to understand kind of that dynamic around the skilled mix.

Okay. So.

It's really almost impossible for us to estimate how much staffing shortages are impacting occupancy was a little bit easier during omicron, because it was such a huge relationship there with the number of staff that were out.

But now it is a little bit harder, it's not hundreds of basis points, but it's.

I would say, it's probably at least 100 basis points, but.

It's really hard to tell on the skilled mix I'd say a couple of things one three.

Three of the last five quarters. It was actually relatively flat our skilled mix, it's down a little bit the last two quarters.

To 38, 2% and $37 eight from where it was around <unk> 40 per share for the three previous quarters give or take and so on.

On electric surgeries, I think there isn't as director relationship underpinning Pn as there was under rug floor rugs, four there was a 100% correlation under PETN.

It's not it's not the same correlation because you've taken a more complex longer term.

Medicare.

Nursing patients rather so yes.

Look at the elective surgery is having the same kind of relationship that used to have.

It's just popping around a little bit I think one of the things that we hear from our operators is that theyre more willing to take Medicare patients to try to get occupancy up in the.

Normally would take so that that's having some impact whether it accounts for the entire impact I'm, not really sure, but thats some of it.

Okay.

Okay. That's helpful. Thanks.

Yep.

Thank you. Our next question comes from Joshua <unk> with Bank of America. Your line is open.

Okay.

Okay.

Joshua Your line is open please check your mute button.

Hey, Josh.

Thank you our next question.

From Boston, where Schmidt with Keybanc Your line is open.

Yes, Hi, I wanted to go back to the 25 transition assets, which you've kind of buckets within the good assets good locations, but bad operators.

Cash rent did you collect on those in the second quarter and what sort of the upside potential. If you were to apply a target coverage level to more stabilized operations.

Yes, so in terms of the amount that we recorded this quarter off to get back to you on that one I don't have that right in front of me, but I'll reiterate what I.

Answered earlier is.

Once these are transitioned and once we have an operator, who can stabilize at those operations.

We would expect anything you should expect as well to see.

Better performance under those assets in the form of NOI that we're recording than they have been.

Producing over the last several quarters Tayo. If you have anything else I think I think that's right.

And that the transition can be accompanied by some capital improvements by AST as well, especially if that's what's required for the asset, whereas prior operator wasn't willing to do the work associated with that so these are each one of these each one of these transitions is a story there.

They are not they're not quick transition.

They don't happen overnight and cares.

There's a lot of discussion that happens on both for the existing operator, and how they're exiting as well as the new operator coming in.

And we've been doing the ones we've done the exiting operating area has been happy to exit right.

The way we're looking at this as probably gathered from our comments on this call.

This is taking a long term look at our portfolio right. The short term answer the easy short term answer its not through the transitions because we just get paid wherever we get paid and there is no disruption there, but that's not the right long term solution. We're looking to do is to do right by our portfolio and by our shareholders on a long term basis.

Got it that's helpful. And then I wanted to also touch on the dispositions last quarter, you've loosely kind of.

Bracketed $100 million to $300 million I think of skilled nursing dispositions for the year and I'm just curious if kind of the ones you've completed here before and what you've got under contract sort of hits that targeted amount.

Or do.

Do you expect there could be some additional.

Beyond what you outlined in the release.

Well I would say this with what we closed in the first quarter and second quarter combined with what we have left to complete in the year, yes, youre going to be somewhere towards the higher end of that $100 million to $300 million range that we gave last quarter, but.

Paul you mentioned in her comments that we are taking that we're taking a look at our portfolio to identify potential other situations, where a transition could make sense or perhaps the sale can make sense. So I'm not going to sit here and say we're capped out that's all we're going to do for this year there.

There may be some other opportunities granted we are already in August and these things don't happen overnight, especially on Smith's because theres regulatory approvals and other red tape you have to get through to actually complete a sale.

So.

Even EBIT, if we identify something today that something that could easily bleed into early 'twenty three.

And then just last one for me Rick maybe you mentioned you don't like to predict outcomes in Texas, but there isn't a legislated.

Session until 2023, I think the F map add ons in Texas are set to expire at the end of this year do you think that they'll extend that until maybe there isn't a legislative session.

Any thoughts there.

And that's all thanks.

Yes.

That's going to be the focus for.

Round.

From a lobbying perspective, but I have no idea, whether the state's gonna be willing to extend it or not.

It would be logical obviously for them to do it because it's a bridge to the next legislative session, but.

I have no idea.

It follows.

If I was going to guess I would guess negatively in a positive.

Got it understood. Thank you.

Thank you as a reminder to ask a question at this time. Please press star one lines are.

Our next question. Thank you Bernstein with capital Bonnie Your line is now open.

Hi can you guys hear me it was a little staticky right through it again for me.

Yes.

Okay.

I just wanted to go back to the kind of the the market for skilled nursing acquisitions.

Maybe I understand the kind of the motivations of buyers to be so aggressive on the assets.

And maybe how they are financing them considering how much debt has gone up and they are still being aggressive I don't if you have any other.

Our comments on that.

Yes. So you have to think about it differently you have to think about it as an operating model.

When I was an operator I approach. It the same way that is these operators searches have skilled nursing business they have.

A therapy business of pharmacy business. There you have home health they may have lab and radiology.

And so the the actual facility.

<unk>.

In addition to providing whatever value that provides us a vessel to drive revenue and all the other ancillary businesses. So we don't look at it is we don't think Theyre overpaying.

It's just a completely different model, we're just buying the real estate, thereby holdco and they're using that to generate additional revenue and NOI.

For all of their sister businesses. So that's why they're able to pay more so it's not a matter of them overpaying and they typically typically look at bridge to HUD.

Is there.

What would be.

Hey, guys I was trying to understand like what would motivate what would what would be the catalyst to move cap rates and investment yields higher than the sniff space.

Point, there would be more attractive to you guys.

Okay.

Given what you just explain what you know what's going to move cap rates up.

Not that that cost.

Well I mean.

That continues can exactly you might see a change there because these are leveraged buyers as Rick said they use they access bridge to HUD and then.

And hard to lock in their rates for a fixed rate basis for the long term so.

GAAP rates move to move another 200 basis points.

You may see.

You obviously are R. R.

Closing the gap between debt and equity.

I'm, hoping that doesn't happen.

Because it'll affect everybody else much worse.

But they still they have all the the <unk>.

Investment areas, where we where we are active.

Still has significant room between GAAP rates and when you think about it long term, especially.

And and going in cap rates.

So there's still money to be made particularly at that that leverage level and over the long term because if we think about long term GAAP rates.

Right now Bob.

<unk>.

That people can access.

It's higher than it was but it is not high from a on a long term 40 year 30 year basis.

Yes.

Got it.

Three to five year hold what I, just said doesn't matter.

Right.

Good morning, guys horizon.

It does.

It makes them it makes sense and then one quick question on hiring.

It does seem like net net hiring in the healthcare space and skilled nursing seniors housing starting to improve how quickly.

Two new hires make a difference in weather skilled nursing facility can have more admits does it.

These new hires coming from the contract agency side people looking for more stability.

Where there's a risk of recession or is it could take some time to train some of the new hires that are coming in that space.

We don't see a lot of you know.

Immediate uptick in the ability for <unk> to increase occupancy from from those hires.

Almost all the impact on day, one because they were already all qualified.

The obviously the licensed services or license.

Yes.

And the certified nursing assistants are typically typically come in certified for those that don't.

There the operators either have their own certification programs. So they have a contractual arrangement with a third party certification program to get them certified quickly. They can do work in the meantime.

Certain things they can do the certified nursing assistant.

But from an admission perspective.

As soon as they come in.

You're good to go with a few higher.

10 employees Tomorrow, you are going to they're going to be able to provide the care necessary to start with meeting based on those additional employees right away.

That's good that's good to know.

Thanks, that's all I have.

Yeah.

Yes.

Thank you. Our next question comes from John Pawlowski with Green Street. Your line is now open.

Okay. Thanks for taking the question I have a question about just the trajectory of occupancy and how he kind of on the snack business and how do we get back to pre COVID-19 levels. So I guess I'm, a little surprised that we haven't seen.

Bigger bigger increases in recent months and so when you've got supply actually negative in this sector are Rick you mentioned labor might only be Halloween holding occupancy back by 100 beds.

Already seeing seasonality, we're seeing are coming out of a credit or we wouldnt see seasonality because of the pent up demand. So I know I'm new to studying this business but.

Just curious what else is holding back because the occupancy and could we be looking at kind of structurally lower occupancy levels. Whenever it's endemic does is passed.

No, it's purely labor and look at it.

I'm just guessing at how much labor is impacting the growth, but if we were growing at a 100 basis points.

We're growing at a 100 basis points every month, we'd be in great shape.

A small number but that's a big number of months before delta here.

And we were growing by close to 70 basis points a month in our skilled occupancy and based on that before Delta we thought we'd be pretty close to pre pandemic levels. Early this year right. So the 100 basis points is not a small number I probably should have given here.

Timeframe might look at about 100 basis points.

It may be impacting us by 100 basis points, lower but even if it even if we can get back to the 70 basis points a month that we saw pre delta we'd be in pretty good shape.

By early by early next year for their occupancy perspective, and then you continue to see it grow because of the supply issues combined with the demographic issues you will.

We continue to see it grow after that and the growth after that is critical because what I mentioned earlier in the call that 90% of your costs are fixed you've got that inflection point. So if you go from 80 patients and ability to 83 patients. That's a straightforward through to the bottom line and that gives you an awful lot of additional cash to use.

On your staff.

As well as whatever else you want to investing in the building.

Okay that makes sense I misunderstood the 100 bps drag on growth versus just the spot occupancy level.

A question on the conversions.

Okay. A question on the conversions of.

<unk> skilled nursing and behavioral health just curious if you can help me visualize these facilities what were the common threads that actually made these properties obsolete and then how do you get comfortable that there'll be a deep enough demand pool and in behavioral health care app or that wasn't there in a skilled nursing wrapper.

So the obsolescence factor.

Typically has to do with.

The number of runs run sizes.

And frankly, the economics of running it.

A skilled nursing business in that location.

Yes ultra.

Older buildings are older buildings and don't forget in the skilled nursing buildings are relatively old so the opportunity to convert to behavioral changes the revenue stream quite dramatically.

You also have the ability to utilize.

To utilize at first of all.

Semi private rooms typically.

Very common and be in certainly in addiction treatment.

And and it's a resident and typically we're doing residential models, even though we are taking out some runs in order to create more.

Terry fever, and other kind of meeting meeting spaces.

You can also have shared bathrooms.

Inventory style, if you will.

In.

In.

Addiction treatment.

Relatively short stay and people.

It's accepted well he would never be able to do that in senior housing.

And that's one of the things that the limiting factor when you convert assets like skilled nursing older skilled nursing facilities. They don't have full bathrooms in each room.

Let alone private bathrooms.

Yes.

Okay, just a follow up there I think.

You mentioned, 9% stabilized yield how many years does it take to get to that 9% stabilized yield.

It's going to be a function a couple of things one is what the pair.

Their payer mix is so if it's largely Medicaid building you could get there very very quickly because that building will sell very fast and there is there is a dearth of supply and the tremendous demand.

We also in these conversions, sometimes youre using a percentage rent concept until we hit a certain level and and so in commercial insurance as the occupancy.

<unk> commercial.

Occupancy will go that maybe it's going to take a couple of years to get to stabilization and then.

And these are percentage rent during that period ends and then we'll hit that 9% or thereabouts.

That's sort of a its.

There's going to be a range, depending on the asset as to how much how much were getting but that's that's.

It does.

Dan.

Okay. Thank you for taking the questions.

Thank you. Our next question is a follow up from one <unk> with BMO capital markets.

Your line is now open hi, thanks.

Alright.

It sounds like some of these assets either selling or transitioning just arent paying rents and therein lies the upside as you redevelop or redeploy the proceeds.

So just curious what the delta is between contractual rent in cash collections, just to get a sense of that.

The magnitude of potential upside.

Okay.

So in terms of the delta between cash basis rents and contractual it varies and I don't have the specific numbers on these assets that we're selling.

So I really don't want to give that color right now no. It.

It doesn't make carmike to give you a tax.

It doesn't make sense to give an aggregate number one because there is just too wide variances are too wide.

It could range from zero to full contractual rent forecast cool I mean overall across the portfolio and that even with all the assets whats the delta there.

Try to get a sense of what the upside is it's either tenants start repaying renter, you transition them to a new operator pays render.

We have calibrated.

Okay.

So we have cash basis tenants that pay us full rent 100% of their contractual ramp and we have some that don't and that's going to vary I mean some is.

That are in more dire situations are paying zero and some are paying somewhere between their full contractual rent and zero.

It's a number that bounces around wanted I wish I had a better answer for you on that.

For the second quarter, you can't give what was accrued for cash collected versus what was we don't really we don't accrue we don't accrue rents on a cash basis tenants Thats why theyre cash basis.

Accrued Andrew cash versus there'll be surmount can you give that number for the second quarter.

I cannot give you that number for the second quarter, but you don't accrue for cash basis tenants.

Yes, I got it.

Okay. Okay.

Hi, Brad.

[laughter].

Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to Rick May Trust for closing remarks.

Thanks, everybody for your time today, we're always available. So if there's any follow up you. All wanted to just give US call hope everybody has a good remainder of the summer and a great labor day take care.

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

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

Okay.

Okay.

Okay.

Thank you.

Got it.

Fair enough.

Right.

Yes.

[music].

Right.

Yes.