Q3 2022 Sabra Health Care REIT Inc Earnings Call

November 8, 2022

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Good day, ladies and gentlemen, and welcome to the separate health care REIT third quarter 2022 earnings call I would now like to turn the call over to Lukas Hot which S. VP Finance. Please go ahead Mr. <unk>.

Thank you and good morning, before we begin I want to remind you that we will be thinking 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.

<unk> an investment plan these.

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 well as in our earnings press release included as exhibit 99, one to the form eight.

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 <unk> 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 nature of CEO , President and share of Sabra health care REIT. Thanks.

Thanks, Lucas Thanks, everybody for joining us we appreciate it I'll start.

The North American transition.

To start with.

Management change at North America, and in concert with that change management and the board undertook a reevaluation of what they wanted to do with the portfolio going forward.

They approached us with a couple of options one option was to downsize the company to the 12 month Sabra facilities that they have primarily primary ownership in.

And the other was a rent reduction we did it.

Due to the wet reduction is something that was necessary.

We ended the performance of the portfolio.

And we're actually happy to accommodate them.

West to downsize with 12 buildings. This is a very good portfolio, we've always gotten inbounds on it. So we knew that we would have some terrific options in terms of transitional.

Portfolio. So that's why that occurred was specific to that.

North American.

We have assigned transition agreement, it's a very cooperative transition.

Everyone terrific on their end with us and we wish them the best going forward.

In terms of.

The bidding process it was pretty robust we felt.

Going to Ensign and Avenir, and Washington was the best possible outcome for us for a couple of reasons in terms of Avalere.

They've been doing it really be doing pretty well since we address their issues.

Adding these four buildings really fills in their market needs provides some really terrific opportunities to the managed care contracting perspective, and when you add these four buildings to their portfolio. In addition to the recently received 40% Medicaid rate increase in Washington.

This makes them stronger tenants from our perspective, so really good transaction for us to do.

With Avalere.

As to anthem.

Everybody knows.

They're extremely strong operator.

So we see that as real upside the credit quality.

They are quite different from that.

A private operator.

Their market equity cap corporate guarantee and the transparency to being public which.

Most investors don't have with the Reits because most of our tenants are private so we think that's an added plus the durability of our earnings stream going forward.

Results of this.

On transaction.

It has even greater certainty so.

We feel great that we've been able to extend our relationship with them.

<unk>.

And our.

Evaluation, we felt like the trade off.

This upgrade in exchange for the 12% reduction on.

<unk> was well worth it so.

Sure, we'll get more questions on that during Q&A moving onto the operating environment labor continues to improve its still tough.

But occupancy is now improving as well as labor and food.

Note and remind everybody that our triple net occupancy.

There is a.

Quarter in arrears.

While our occupancy was flat in the second quarter as noted in the release.

On the skilled side June through October occupancy increased 180 basis points, which we view directly.

Labor getting better and similarly for R. R.

A L portfolio.

That was up 190 basis points during that same timeframe. So June through October our senior housing lease portfolio also continues to improve and we had a nice bump in rent coverage there.

Moving on to investment activity, we continue to see opportunity in relatively small senior housing deals and secondarily behavioral deals.

There are some investment opportunities.

Police have shown a slight uptick but nothing of note. We're also seeing more activity that we hope to transact on in Canada from a high level, we continue to view investments through a capital recycling lens. So in other words, our investments will be continue to be funded with proceeds from asset sales and we expect that to continue as we move into 2020.

Sorry.

And then finally a note on ESG.

Issued our second report.

We've also started a new program called Green links which is a small fund designed to give our triple net operators access to capital to fund initiatives in energy and water efficiencies. These initiatives will be accretive to our operators and therefore beneficial to us and our commitment to the sabra ESG initiatives and with that I will turn the call over to Italia.

Thank you Rick I will discuss the performance of our wholly owned managed senior housing portfolio and our investment activity and behavioral health.

The operating results of our wholly owned managed senior housing portfolio saw continued positive trends in the third quarter of 2022, we have seen tailwind on occupancy and rates for a few quarters and are now seeing labor costs start to decline as agency increasingly replacements coming staff, which will both lower and stabilized expense.

The headline numbers for the quarter on a same store basis, our solid occupancy for the third quarter of 2022, excluding non stabilized assets was 81, 5% driven by a one three percentage point increase in our.

In our independent living communities compared to the prior quarter, comparing third quarter, 2022% of third quarter 2021 occupancy in our assisted living communities increased two seven percentage points and two five percentage points and our independent living communities same store occupancy has continued to trend up.

Since the Amazon variance start in early 2020.

<unk> cost for the period, excluding non stabilized assets was 6306 in our assisted living portfolio, a 50 basis point increase over the prior quarter and a six 4% increase over third quarter 2021, revpar for the period, excluding non stabilized assets with 2000 and $705 in R&D.

Pennant living communities, a one eight increase over the prior quarter and a five 5% increase over third quarter of 2021.

Excluding government stimulus funds cash NOI for the quarter was slightly ahead of the prior quarter, our independent living portfolio saw a six 7% increase in cash NOI at most of the increase in quarter over quarter revenue when directly to the bottom line continued rate increases in our assisted living portfolio offset.

Some of the margin pressure, resulting from higher labor costs.

And the quarters immediately following the vaccine rollout rollout are needs based portfolio experienced in earlier and steeper rebound that are in the independent living portfolio, which we described at the time.

While independent living has been playing catch up on occupancy and Revpar, the lighter staffing model and lower cost structure has allowed cash NOI to recover at a faster pace.

We have seen pricing power across our entire portfolio was 8% to 9% between 8% to 9% annual increases to rates inclusive of care and positive re leasing spreads.

<unk> care using debt to continue to drive elevated move out rates, particularly at our higher acuity property.

If we compare the same store operating results of our Canadian assets with our U S assets, our Canadian assets have been outperforming our U S community throughout 2022 on a same store basis here are some quick statistics.

You can see for the third quarter in our Canadian communities increased three nine percentage points compared to the prior quarter and seven three percentage points compared to the third quarter of 2021. This compares with our U S communities increase of 10 basis points on a sequential quarter basis, and one five percentage points compared to the third.

Quarter of 2021.

Revpar growth in our Canadian portfolio with only slightly higher than in our U S portfolio. However, cash NOI for the third quarter in our Canadian communities was 12, 2% higher on a sequential basis, and 43, 7% higher compared with the third quarter of 2021 and comparison cash.

NOI in our U S portfolio, excluding government stimulus.

Didn't you have fun.

Dropped slightly on a sequential basis.

And grew two 5% compared with the third quarter of 2021 over the past four quarters cash NOI in our Canadian communities grew nine 5% per quarter on a compounded basis.

These statistics reflect only our same store assets in Canada, which comprises 60% of the units in our wholly owned managed portfolio.

We believe that the rebound we're seeing in Canada as a function of strong demand emerging after the lifting of COVID-19 restrictions that remained in place longer than in the U S. Essentially the same scenario experienced domestically in the months following the rollout of the vaccine.

Let me now turn to our behavioral health portfolio at the end of the third quarter Sabra is investment in behavioral health included 16 properties two mortgages with a total investment of $756 million.

We intend to invest an additional $53 million of capital to complete the conversion of five of these properties all of which have been released to operators as well as another property identifies for conversion at the completion of these conversions sovereigns investment in behavioral health will total over $800 million.

We continue to meet with new operators and explore business relationship within the addiction recovery factor as well as other areas of behavioral health, where we see investment opportunities.

And with that I will turn the call over to Michael cockpit, Roberts Chief Financial Officer.

Thanks Tanya.

For the third quarter of 2020 to recognize normalized <unk> per share of <unk> 36.

Normalized <unk> per share of <unk> 35.

Compared to the second quarter of 2022 normalized <unk> per share and normalized <unk> per share decreased <unk> <unk>, primarily due to lower NOI from the <unk> joint venture as a result of receiving $3 $4 million of government Grant income last quarter.

And lower NOI from tenants, whose rent is accounted for on a cash basis.

This is a timing issue as the shortfall was received subsequent to quarter end quarter end and recognized in the fourth quarter.

During the quarter, we wrote off roughly $16 5 million of straight line rental income receivables primarily related to the transition of our North American health care facilities to Ensign and <unk> mirror that we previously announced.

These amounts are added back in arriving at normalized <unk> and <unk>.

Cash NOI for the quarter totaled $115 6 million compared to $118 million for the second quarter. This decrease was primarily the result of lower rents received from cash basis tenants I. Just noted and is expected to reverse itself in the fourth quarter.

Cash NOI for this quarter includes $2 $2 million of excess rent paid by Genesis pursuant to the memorandums of understanding entered into in 2017. When we began the disposition of a majority of our Genesis exposure.

These events had a burn off period of just over four years from the date. The properties were sold and are reaching the end of that burn off period.

We expect the amount of Genesis excess rents we recognize in earnings to decrease to $1 2 million in the fourth quarter of 2022 and be $1 $6 million and $328000 for the full year 2023, and 2024, respectively.

As of September 32020 to less than 5% of our NOI is below one times EBITDAR coverage.

As of September 32022, our annualized cash NOI was $448 4 million and our sniff exposure represented 60% of our annualized cash NOI down 70 basis points from the second quarter and down 740 basis points from a year ago.

G&A costs for the quarter totaled $9 7 million compared to $8 6 million in the second quarter of 2022.

This increase is due to a $1 $3 million increase in stock based compensation expense compared to the second quarter of 2022.

As a reminder, last quarter, we made an adjustment to the payout estimates on performance based awards that were set pre pandemic, which resulted in a reduction to stock based compensation expense in that quarter.

Excluding stock based compensation expense adjustments I referenced earlier recurring cash G&A was $7 6 million compared.

Compared to $7 8 million in the second quarter.

During the quarter, we recognized $60 $9 million of impairment of real estate related to six snips that are under contract to sell as part of our capital recycling efforts.

Now turning to the balance sheet.

Our balance sheet continues to be an area of strength for sabra with no material maturities until the second half of 2024 and no floating rate debt outside of the balance of our revolving line of credit, which we expect will be repaid by the end of the year with proceeds from in process dispositions, our proactive approach to hedging our variable rate exposure.

<unk> has proved highly valuable in this current rate environment, we have seen short term rates increased significantly in a short period of time.

Because of our hedging activities or annual interest expenses, nearly $8 million lower than otherwise would be at today's market rates.

We are in compliance with all of our debt covenants and our liquidity as of September 32022 totaled approximately 890 million consisting of unrestricted cash and cash equivalents of $26 $3 million and available borrowings of $861 $4 million under our revolving credit facility.

As of September 32022, our leverage was five five times.

As we have stated the last few quarters. This leverage level is above our long term average target, but we view this as simply a short term timing mismatch.

During the quarter, we repaid $18 $8 million of borrowings under our credit facility and expect to pay down our revolver by the end of the year as we received proceeds from completed and pending dispositions, which are expected to generate roughly $200 million in gross proceeds.

Once these proceeds are received and we repay our revolver borrowings, we expect leverage to be closer to our long term average leverage target.

We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable and we are well positioned to do just that.

On November seven 2022, our board of directors declared a quarterly cash dividend of <unk> 30 per share of common stock did.

The dividend will be <unk> will be paid on November 32022 to common stockholders of record as of the close of business on November 17 2022.

The dividend represents a payout of 85, 7% of our normalized <unk> per share of 35.

Lastly, as we have communicated in the past several quarters, we did not issue earnings guidance. This quarter. While we are encouraged by the continued albeit slow recovery in the labor markets, which we view as a key barrier to occupancy recovery.

Timing and velocity is still a question mark.

This uncertainty against the backdrop of macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time.

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

Thank you.

To ask a question you will need to press star one one on your phone. Please standby as we compile the Q&A roster.

One moment, please while first quarter.

Our first question will come from Austin, where Schmidt of Keybanc capital markets. Your line is open.

Hey, thanks, everybody.

Rick I was just hoping first you could you provide a little bit more detail on the terms of the new lease new leases of the transaction transition assets as far as lease duration escalators escalators that are baked in there and if theres any sort of fair market rent resets.

In the coming years.

Yes, those are actually in the in the press release.

But.

For Avalere.

The annual rent escalator is 275% for <unk>.

The annual escalators CPI based out to exceed two 5% the duration of the leases for answer.

Yes, there are two master leases one is 18 years 120 years of financial cost.

Yes, I appreciate it sorry about that and then separately I was wonder if you could provide an update on the 2017 and <unk> 17 in process transitions that you announced last quarter.

And if theres been any change in cash rent contribution versus what those were contributing in <unk> and when do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence.

Over time.

Yes, So I think the quick answer is theres no changes to what we put into our.

And our <unk>.

Investor presentation, excuse me last quarter those transitions are still in process and the timing is unchanged. We expect those to stabilize between now and the end of 'twenty four.

And then with the eight that are already transitioned have those stabilized at the $4 8 million quarterly run rate.

They're progressing as we had expected I'd have to get the exact number of where they stand relative to what we're stabilization is but they're progressing as we expect.

So we expected those to take a number of months and for the stabilized well into 2023, so they're on track but.

Similar timeframe to the other 2017.

Okay. That's helpful. Thank you.

Thank you.

One moment please for our next question.

And our next question will come from Juan Sanabria.

BMO capital markets. Your line is open.

Hi, good morning.

Hoping you could talk a little bit more about the transition.

And why the need to reduce the rent if the coverage on the assets that was in place was seemingly pretty healthy from the outside looking in maybe at the tier three coverage.

Was a lot worse than that necessitated.

Our rent.

A lower rent for the new operator, so just hoping you could talk through why.

While there is some dilution coming in with the transition.

Well, it's just really a function of negotiation I think the.

The cash flow stream was pretty steady.

Every once in a while you can transition the portfolio and get an increase.

We've done that with smaller portfolios.

Historically, but most cases.

People know that you have to transition and so just because the part of the negotiation and in this case.

We need to the 12% reduction.

As being significant enough to offset the positive aspects of moving to ensign.

And frankly, we.

There were offers that was slightly higher.

But we thought the attributes of going with ensign and strengthening avenir.

More important.

Some incremental difference.

So it is a lower in North America, but maybe not just as well.

And then you highlighted some transitions that you were doing and I guess, we're still in process 25 assets that will be it.

And so this was this was in addition.

To what you talked about that had upside that this obviously is.

An offset so is there anything else that.

Nothing.

There is nothing else.

The 25 that we had previously announced were a function of ongoing discussions with our operators.

So a lot of transparency and a lot of.

Productivity relative to those transactions this was different.

There was a change in management.

The board's decision.

We had a great relationship with the prior management team.

Or is it a strategic reevaluation.

<unk> came to us late in the summer so.

Yes, it was.

It was a unique.

The circumstance.

Nothing should be extrapolated from it relative to the rest of the portfolio.

Okay, and then just one last one for me for the dispositions the $200 million that you have targeted.

Any sense on what is from a modeling perspective in terms of.

Cap rate or a rents associated with that and do any of the buyers any issues with with financing some of that given the capital market dislocations, we're all living through.

I can I can talk to that.

Yeah.

So we're still looking at.

Year end type of closing.

Yes.

Most of those transactions so to get to that 200 ish million.

<unk>.

The financing challenges that are hitting that hit everybody.

As you know.

It has been pretty recent and Thats one of the portfolio is the largest component of that $200 million has been something thats been underway for a fairly lengthy period of time.

So they've had their financing organized and committed to prior to.

The most recent.

Rate hikes.

That answer your question.

Any color on kind of the yield implied on the $200 million.

Oh, it's.

It's a single low single mid single digit, yes mid to low single digits.

Thank you very much.

Thank you.

One moment. Please our next question.

Okay.

Our next question will come from Steven Valiquette of Barclays. Your line is open.

Great. Thanks, good afternoon, everybody and good morning.

So more of an industry question here, but last quarter, you guys had a pretty useful slide on the status of some of the dedicated Davis among your top 10 statutory operating at a level of presence just looking for any updates on any key states and the evolution of some of the.

State rate updates any color you could rival would certainly be helpful. Thanks.

Yeah sure Steve Thanks.

We didn't include that chart. This time, because there's been no there's been no change no updates.

So I think the.

The one state that we all are anxious to find out about.

Is Texas.

Our operators on the ground are cautiously optimistic that there'll be successful with gables level of rate increase will share we will see.

<unk>.

Other than Texas.

Texas handled ethanol, which was appreciated.

No Medicaid rates have been historically low there.

Really.

The industry has been underfunded. So I think the reason for the optimism is not just the dialogue that operators are having with legislators.

But.

Fact that the pandemic demonstrated some real issues in the system there so.

That's the one that were really low weighted toward but no other updates because thats why we didnt put it on the chart.

Okay and one other quick one apologize if I missed this but what's the skilled mix in the.

The property is going over to enzyme.

Notorious for being able to improve that pretty dramatic within I'm wondering if that's a big.

A big part of their improvement plan as far as the operations within that but just for the starting point and where that is right now.

Yes.

Skilled mix is one of the two highest in our portfolio.

Excess from a revenue perspective, the 60%.

And so skilled mix was already high.

We'll see whether ensign can make that higher or not there are huge opportunities on the expense side.

The.

The facilities has historically been allowed to sort of do their own thing when it comes to expenses, So and some believe they have a lot to bring to the table from an expense perspective and of course, there are corporate synergies as well so.

I think any changes in skilled mix, probably will be incremental but there'll be much bigger pick up some of the other two areas. So the improved rent coverage as a result of this deal that we noted in the releases.

We expect.

That should continue to improve not just because you're recovering from the pandemic.

Because of the programs until we are putting in place there that have been brought on similar success in the remainder therefore in the rest of their portfolio.

Yes, Okay that makes sense that's helpful. Thanks.

Yes.

Okay.

Thank you.

One moment. Please next question.

And our next question will come from Joshua <unk> of Bank of America Merrill Lynch.

Your line is open.

Yeah, Hey, guys appreciate the color around North American, but maybe.

Maybe just was there any discussion of 12.

12%.

I feel like I normally like.

My lease I would have to kind of cover the difference between whoever comes in and takes my apartment.

First one I was supposed to pay so is there any discussion on north American covering that.

Production or.

Okay.

Yes.

No because it wasn't that kind of a negotiation or there wasn't that kind of leverage in place.

So.

They work sincerely interested in sizing down.

So.

Yes, it just wasn't that kind of.

Leverage to negotiate negotiate that our rent is fully covered at the current contractual level through the February one transition date, though.

So is there I don't understand why there wasn't leverages vote landlord versus tenant here.

Are they typically responsible for the fall.

Well terminal east through the end of the agreement or was was it coming due on February one.

Well.

Say a couple of things first.

We have a confidentiality agreement so there's not a whole lot I can say that specific.

Actual negotiations that we went through.

But.

Once we made the decision to transition.

And so that they can move down to 12 buildings as opposed to.

Honoring their request score reduction.

That removed any of those other levers.

Okay.

Alright.

Is there are there any other tenants you could kind of talk.

Locked away.

Or.

Releases structure.

No as I said this is Terry.

<unk> situation.

And.

It had a lot to do with the board's involvement and the changes in management and the reevaluation of the portfolio. We're not seeing this elsewhere in the portfolio. So all the statements we've made about the portfolio generally historically.

Remain true today.

Sometimes things happen that are unique.

Anticipate but you Shouldnt extrapolate no one should extrapolate this to any other aspects of the portfolio.

Okay.

One final question for me.

When did these conversations start.

North American and your team.

Somewhere around the middle of August .

Alright.

I appreciate the color thanks, Greg.

Thank you.

One moment please next.

Next question.

And our next question will come from Michael Griffin of Citi Research. Your line is open.

Great. Thanks, I guess pro forma for this transaction and Simon have a mirror now through your largest tenants you spoken pretty positively about both of them.

Would you expect to continue to grow these relationships and how great can we see them become as a percentage of your tenant base.

Well I think we've.

Ever since we did the merger we've been pretty committed to try and keep everybody below 10%. So that we're not overexposed to any one tenant.

So.

I put it this way.

Ensign in Abu meter toward additional facilities to us that we just thought were.

Tastic things to execute on we would happily do that.

We're not going to set as a goal that we're going to continue to grow and get them to X percentage higher than they are now.

I still think we're better off regardless of how good the operators are having as much diversity in our portfolio as possible.

Sure.

Got you.

The commentary you were saying around Canada.

Relatively more positive.

Should we maybe see an increase in investment from from you in Canada or is this more kind of tactical and opportunistic approach.

So a couple of thoughts one is.

We've already.

Acquired Maher and Canada. This year prior to this past quarter. So that's already in there.

And those assets were down in the numbers that I provided because.

He is the only same store sales numbers over time.

The environment in Canada.

For the past year and a half maybe has been very interesting.

There are some generational shift occurring.

And <unk>.

Groups are selling assets.

And and portfolios and every everybody that.

That you cover for sure has been active in that market.

And we have had some good fortune in executing some transactions this year.

I think youll continue to see ads B act trying to be active there I think the biggest challenge for anybody in the acquisitions World right now is a capital.

Mike earlier talked about.

About our <unk>.

Focus on recycling capital, that's one and two.

The bid ask spread that is.

He is in place today.

Trying to get to a place where our acquisitions are actually accretive if not the first year then shortly thereafter.

Okay. That's it for me thanks for the time.

Thank you.

And one moment for our next question.

Our next question will come from Vikram.

Is it <unk>.

Securities Your line is open.

Thanks, so much for taking the question so.

I wanted to just follow up on the on the transition of these assets you said it was a unique circumstance where.

The board decided to change I guess, what the strategy of the firm.

And that led you to having to renegotiate, but I'm just trying to get a.

Better understanding of the leverage you say sort of went away versus.

And I'm, saying, we can take cost out et cetera, or just the outlook there what these operators had.

And and how.

How that squares with this lower rent level that they wanted a required to operate these facilities does doesn't when you say there is no read across I'm almost wondering like these are very well regarded operators.

Would that not suggest other operators would also say hey, as we negotiate things when leases come due or in this environment. We would also like a lower rent level.

Even though their synergies down the road.

Im just trying to square away either.

Well regarded up there you said theres better credits, so I'm, just not sure how that squares with.

And they have an ability to take out cost how does that square with lower end.

Well first of all I appreciate the question.

First of all a lot of transition that is the case do what it does.

Having a lower rent because youre, making a transition.

People feel like they are in a position of strength.

So that does happen thats not unusual it's not a function of the.

The quality of this portfolio or the projections of the earnings stream going forward.

I'm not sure.

How much is depreciated.

Brutal last three years have been in this recovery is taking much longer than positive.

Any of us ever expected.

Everybody is taking a much more conservative everybody that we are aware of are taking a much more conservative approach to how long recovery is going to take just having more breathing room within leases.

This industry has never gone.

Through anything like this.

So I think there needs to be a lot more weight put on realism.

Disaster that the last three years ago, and we're still probably what over a year away from recovery from an occupancy perspective.

<unk>.

And a little bit more so from a margin perspective, so everybody is doing.

Trying to give themselves more breathing room, I think that's really understandable.

So then is it safe to say like looking forward with how maybe labor has surprised in terms of persistent key remaining high costs and shortages of labor in.

Your underwriting going forward for the portfolio you are now baking in more.

Rent adjustments just given the situation because in the past you've said.

We're not making any more rent reductions.

No we're not baking in any more rate reductions because with our portfolio. We are where we are as we look at new acquisitions, we're putting.

Levels in place that reflect where they currently are.

<unk>.

And so that gives us room to grow going forward and gives us more certainty and gives us more more room as well so no that's.

That's not the case, we will report more rent reductions or factoring that into new new acquisitions.

Okay.

Yes, because again I was just going back like last quarter. We would have looked at these tenants and said Oh theyre over one four times covered.

No issue.

And so it just I know this was a unique circumstance, but it naturally makes one wonder like a <unk>.

Given what you just described in the one four coverage.

Is that does that have enough buffer from here on or do you need to create that buffer just given how.

The environment is.

And then call it just gets more.

And the question, but one last thing.

I just want to make sure I understand the behavior.

Portfolio and kind of what appropriated appropriate coverages are here, but in the top 10 tenants the behavioral coverage.

It did fall and so I'm, just wondering on a spot basis, where does that stand.

Is there anything we should be concerned about in terms of restructuring.

I'll take the first part and kick over behavioral Italia, but there is no concern at all that we say that on the one four that you referred to that is on an EBITDA basis. When we underwrite we underwrite on EBITDA basis. So we underwrite one four to one five on an EBITDA basis. So that's obviously a big difference because this something like a four.

The basis point differential between EBITDA and EBITDAR. So one four coverage was EBITDAR.

We will continue to underwrite on a 104 to 105 basis on an EBITDAR basis, so from an EBITDAR basis.

Our comfortable on a go forward basis as we have been historically that one four to one five coverage will be sufficient to skilled nursing.

And maybe this is Tyler on the behavioral health side I don't have that spot occupancy for you but.

That's specific.

Operator.

<unk> has actually had to have some pressure on its occupancy hasn't been able to.

Mission for mutations <unk> and <unk>.

Not being able to get enough staff and that's actually what drove slightly lower NOI and therefore, a little pressure on that on on coverage.

Other operations factor that operate smaller buildings and other parts of the country and they are covering it upwards.

Five times.

So it really varies.

And to be operations et cetera.

Buildings, and what fundamentally is going on inside the buildings, we typically underwrite at about two two to two five times.

On new acquisitions in this space the other point I'd make is even though labor issues.

All the asset classes to one extent or another the behavioral facilities.

Economic model of those facilities breakeven point is much lower from an occupancy perspective than it is for skilled nursing and senior housing so there's actually more breathing room, there as well.

Okay. Thank you.

Thank you.

And one moment please for our next question.

And our next question will come from Tayo Okusanya of credit Suisse.

Line is open.

Hi, yes.

Good morning out there just the long Vikram <unk> line of questioning again. This idea of are there any additional watch list tenants that you guys may be kind of have your eye on and I ask that in the context of just again the rent coverage on the senior housing portfolio.

It's still pretty tight at this point and.

Fundamentals there towards two pretty tight even with the recovery. So just kind of curious how you're kind of thinking about that.

At this point given kind of underlying fundamentals in both skilled and senior housing.

Sorry, Tyler can you can you repeat the last part of that question.

Sure again this idea of.

You'll walk between last quarter and this quarter.

<unk> kind of your watch list tenants if again, if there's any real change in the list and I just asked that in the context of kind of rent coverage on your senior housing portfolio is through a pretty tight.

Fundamentals in skilled and senior housing is still pretty challenging.

Yes, so a couple of things our watch list is the <unk>.

Aim as it's been.

Like I mentioned in my prepared remarks are sub one EBITDAR coverage is about is less than 5% of our overall NOI I think the other thing to point out is on the senior housing piece for the Triple net is a very small.

A portion of our portfolio I understand your question on the coverage.

It is a small piece of our triple net portfolio and the only other point I'd make tayo is even though it is tight it's at least improving so went from 109.

113, so that's certainly not where we want it to be but they are showing improvement so.

As we've been saying kind of all along.

The recovery may be taking longer than we'd like but we all believe that we've been through the worst of it and I think the worst of it really was one of the <unk> here.

And that exacerbated all the labor issues in kind of reverse solid occupancy gains and all that kind of thing so.

We're well past the worst of it and we're not seeing COVID-19.

Today as I mentioned this on the last quarters. There continues to be true, we're not seeing COVID-19 in and of itself impact the business. The vaccinations have been highly effective as had been the boosters. Most of the SaaS is taxed as well. So the business is holding up really well relative to current COVID-19 cases.

Negligible.

Got you that's helpful and then on the <unk> front I know, we've always kind of.

The last thoughts around it was before you do anything with TPG kind of wait for this thing to recover and then maybe there could be conversation at that point just looking at occupancy today, it looks like 85%, which is pretty high relative to kind of where the industry is is now under appropriate time to start looking at.

At the JV again in what could be the potential outcome.

Yes, so they.

Your occupancy is at 85, but.

It's in 70, 576%, but that said.

The portfolio is going to be marketed soon.

From a from the bankers perspective, and TPG perspective, and which we agree.

At this point, we need to go out with 23 numbers that are believable in order to work with the portfolio.

So that's what will happen so the management team.

Pleasingly, our budget process that will be presented to the board will sign off on it.

And sometime before year end, the marketing process will be kicked off by the bankers tell.

While you're on that 85, 5% that youre looking at Thats for Sienna joint venture.

Gotcha Okay.

Helpful.

Great.

Thank you.

One moment please for our next question.

Our next question will come from John Pawlowski Green Street Advisors LLC. Your line is open.

Thanks, Good morning, Michael with regards to statistically shared with percentage of tenants below one times EBITDAR coverage could you share the same statistics on EBITDAR.

Yes, so I can get that exact number for you and as you recall, we don't talk about but we don't disclose EBITDAR because of the various ways that.

Our peers reported it just becomes a non comparable number but in terms of.

EBITDAR coverage.

Pulling it up right now it's consistent with what we've.

As disclosed in the past.

And it is.

Just about just under 6%.

Sorry, so the same percentages tenants are below one on both EBITDAR and EBITDAR roughly if I get two percentage difference.

Low 5%.

On <unk> and just below 6% on EBITDAR.

Okay, maybe I'll follow up.

Quick question on the Mcguire Group I believe you extended a working capital loan to them, but their EBITDAR coverage is almost two times. So just from the outsider's view, they shouldnt need cash, but they need cash. So can you just give us a sensor.

Whats drove the working capital loan and do you expect to extend additional loans to operators in the coming quarters.

Now.

Is tied to transition the portfolio.

The day to day coupon for us.

So that SaaS, what that's associated with.

We have provided there if your working capital loans.

In general to our operators.

If we need to get you usually are very short term in nature.

And they're really to expedite that transition and make it to make it happen faster.

Okay.

But that said.

We've been pretty consistent saying that because this recovery is taking as long as it is that we believe that we will need to help people help tenants out on to.

For some period of time.

And.

Weather and that can come in a number of forms that may not be tied to transitions. So that could be in the form of rent relief for a period of time partial or full or it could be a working capital loan as well so.

We leave the door open to <unk>.

Step up and help our tenants as they try to get to the other side of this whole three year experience.

Okay. That's it for me thanks for the time.

Thank you.

One moment for our next question.

Our next question will come from Daniel.

Daniel Bernstein of capital one Securities Your line is open.

Alright, thanks for taking the call and I.

I apologize just to hear a dog barking in the background.

[laughter].

A quick question here are there any part.

Dangerous work in hybrid now.

Are there any purchase options.

That were given to ensign or avenir and part of that transition of its north American assets.

So.

Okay.

And then another question I had here was.

Obviously <unk> been in the headlines what has been the flu vaccine uptake. If you have any information on this versus say historical pre COVID-19 levels.

Our residents and employees.

Getting the flu vaccine at higher levels pre COVID-19, just trying to get a sense.

I don't have I don't have good data on that Dan.

Cause if it was higher than pre COVID-19 levels.

Usually a pretty concerted effort to get residents vaccinated.

For the flu.

For employees, that's always kind of been then doing their own thing.

I don't think there's ever been much of a concerted effort in the past or employees like there was with Covid.

I don't have good data on that but I would be surprised.

To see if there was an uptick we're not seeing any impact yet I know that there has been sort of this triple concern between COVID-19 and flu and RSV, which is mostly impacting little kids in older adults, but we're not seeing that hit the business at this point.

Okay. No I appreciate that I was just wondering whether there's a cultural change or not but I guess, there's not enough data.

And then the last question I don't know if you went over this earlier in the call or not but what was the cash NOI shortfall from those tenants who paid in <unk> and <unk> to requeue.

This was an asset.

It was somewhat modeling purposes, yes, it was somewhere in the neighborhood of call it $2 million somewhere in that range.

As far as our cash NOI goes yeah, it dropped by about call it $2 $4 million and Thats roughly the number we're looking at.

Okay and that was all paid early in <unk>.

Correct.

Okay.

That's all I have I appreciate it thanks.

Thanks Vince.

Thank you.

And one moment please for our next question.

Yes.

Our next question.

We will be coming from Richard Anderson of SMB C Group. Your line is open.

Thanks, Good morning.

So I have a.

I have a question on sort of the irony of cut.

Cutting rent.

And giving a portion of that portfolio to an operator, where you adjust cut rent of a mirror.

So I wonder if that weighed into your thinking at all in terms of where these 24 assets would go in.

And how.

Given the history with Avon.

I assume youre feeling much better about them at this point given the restructuring, but how does how does those four assets marry with the existing <unk> portfolio in terms of coverage and rent and is it is it perhaps a precise reflection of what you had in place already there.

Yes, So let me.

I think better answer your question since you used the word irony.

Just a little bit of history. So Avenue, obviously, we got Avenir as part of the merger Avenue with the one tenant that we didnt do anything for the rent coverage was always really tight.

But we chose not to do anything to them, where we took care of all the other operators that we gave of sold assets or whatever it was.

Because they had other revenue sources with some of their ancillary businesses.

Once the pandemic hit they still continue to manage through it but given how long the pandemic quite on.

Sort of became too much so.

We felt like we really needed to do something for them at that point, but we put that recap capture mechanism because we thought that they could over time get back to a higher rent level and.

So where some of this fits into all of our thinking is by giving them before additional facilities is going to make the portfolio that much stronger overall.

<unk>.

Particularly when you add the 20% Washington State Medicaid rate increase.

So the acceleration of the recovery will happen even more quickly.

Than we anticipated so.

Washington is a key market for them.

Made a lot of sense.

And I think <unk> has two buildings in Washington, maybe I might be off a little bit, but they don't have much of a presence up there. So it made a lot more sense.

<unk> preferred.

Just to do the Calvert, California portfolio as well so does that answer your question I guess.

<unk> assets the coverage on them is it is it a reflection of what the existing new existing coverages with avenir because it's higher.

No I think thats a good estimate there.

Okay.

Second question, you said that there was.

Some huge expense opportunities for enzyme in particular.

Because of the quality of the company, perhaps but also just that small portfolio.

But was that is that upside that expense.

Opportunity for them a function of them enzyme or was it a function of the existing way by which the portfolio is being managed that combination I'm just curious to what degree there was an under management situation that that enzyme.

Exploit.

Yes, it was more a function of how north American operator, there is a lot of autonomy at the facility level relative to purchasing where and Tim as everybody knows.

Our local operators do have.

A lot of independents and a lot of authority, but ensign does take advantage of its scale when it comes to group purchasing and getting discounts as a result of that so that's a completely different philosophy.

I'm not saying was right are the ones wrong, there are different reasons for companies doing that.

But ensign, bringing that philosophy to bear will.

<unk>.

Positive results on the margin for this portfolio.

Is there a similar.

Expense opportunity for the foregoing epimere or is that sort of just status quo.

The avenir opportunity is more on the revenue and occupancy side.

Because of their geographic distribution of Washington prior to getting these four buildings they.

<unk> had some difficulty in getting the managed care contracts that they want at the rates. They what these four buildings if they sell.

Whatever because it's only for buildings, but it actually densify their markets and their urban communities. So that they have already had conversations with the insurers. So they believe that this opportunity will allow them to.

Not only get additional managed care contracts, but get better rates because of the volume that they are going to be able to provide from a service perspective to those insurers around the Seattle market.

Okay, great. Thanks very much.

Yes.

Thank you.

I'm seeing no further questions in the queue I would now like to turn the conference back to Rick <unk> for closing remarks.

Thanks, everybody for your time I know it was a lot to digest.

And hopefully we've answered your questions. If you have additional follow up the teams available as we always are to have additional discussions thanks and take care.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

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

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Good day, ladies and gentlemen, and welcome to the Sabra Health care REIT third quarter 2022 earnings call.

I would now like to turn the call over to Lukas Hot which as VP Finance. Please go ahead Mr. <unk>.

His position and investment plan.

These forward looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results could differ materially including the risks listed in our Form 10-K for the year ended December 31, 2021, as well as in our earnings press release included as exhibit 99, one to the form eight.

K, we furnished to the SEC yesterday.

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 nature, CEO , President and share of Sabra health care REIT. Thanks.

Thanks, Lucas Thanks, everybody for joining us we appreciate it I'll start.

Within North American transition.

To start with the management change at North America, and in concert with that change management and the board undertook a reevaluation of what they wanted to do with the portfolio going forward.

They approached us with a couple of options one option was to downsize the company to the 12 non sabra facilities that they had primarily primary ownership in.

And the other was a rent reduction we did it.

Do the rent reduction is something that was necessary given our assessment of the performance of the portfolio.

And we're actually happy to accommodate them.

The request to downsize and 12 buildings. This is a very good portfolio, we've always gotten inbounds on it. So we knew that we would have some terrific options in terms of transitioning the portfolio. So that's why that occurred or specific to that.

Sure.

North American rehab.

The site transition agreement, it's a very cooperative transition.

Terrific on their end with us and we wish them the best going forward.

In terms of.

The bidding process it was pretty robust.

<unk>.

Going to Ensign and Avenir in Washington, with the best possible outcome for us for a couple of reasons in terms of Avalere.

They've been doing they've really been doing pretty well since we address their issues, adding these four buildings really fills in their market needs provides some really terrific opportunities for managed care contracting perspective, when you add these four buildings to their portfolio. In addition to the recently received 20%.

Cade rate increase in Washington.

Just makes him a strong with tenants from our perspective, so really good transaction for us to do.

With Avenir as.

As to anthem.

Everybody knows has been extremely strong operator.

So we see that as real upside the credit quality.

Quite different from <unk>.

A private operator.

They are market equity cap corporate guarantee and the transparency for being public which.

Most investors that would have with the Reits because most of our tenants are private so we think that's an added plus the durability of our earnings stream going forward.

Result of this.

This transaction.

<unk> has.

It has even greater certainty so we.

We feel great that we've been able to expand our relationship with them.

<unk>.

And our <unk>.

Evaluation, we felt like the trade offs.

This upgrade in exchange for the 12% reduction on.

<unk> was well worth it so.

Sure, we'll get more questions on that during Q&A moving onto the operating environment labor continues to improve its still tough.

But occupancy is now improving as well as flavors include.

Note that provide everybody that are triple net occupancy.

It is.

Quarter in arrears.

While our occupancy was flat in the second quarter as noted in the release.

On the skilled side June through October occupancy increased 180 basis points, which we view directly.

Of labor getting better and similarly for our payout al portfolio.

That was up 190 basis points during that same timeframe. So June through October our senior housing lease portfolio also continues to improve we have a nice bump in rent coverage there.

Moving on to investment activity, we continue to see opportunity in relatively small senior housing deals and secondarily behavioral deals skilled nursing investment opportunities have shown a slight uptick but nothing of note. We're also seeing more activity that we hope to transact on in Canada from a high level, we continue to view investments through a capital recycling lens.

So in other words, our investments will be continue to be funded with proceeds from asset sales and we expect that to continue as we move into 2023.

And then finally a note on ESG.

Issued our second report.

We've also started a new protocol green links which is a small fund designed to give our triple net operators access to capital to fund initiatives in energy and water efficiencies. These initiatives will be accretive to our operators and therefore beneficial to us and our commitment to the sabra ESG initiatives and with that I will turn the call over to Italia.

Thank you Rick I will discuss the performance of our wholly owned managed senior housing portfolio and our investment activity and behavioral health.

The operating results of our wholly owned managed senior housing portfolio saw continued positive trends in the third quarter of 2020 team, we've seen tailwind on occupancy and rates for a few quarters and are now seeing labor costs start to decline in agency is increasingly replaced with permanent staff, which will both lower and stabilized.

The headline numbers for the quarter on a same store basis, our occupancy for the third quarter of 2022, excluding non stabilized assets was 81, 5% driven by a one three percentage point increase in our.

In our independent living communities compared to the prior quarter, comparing third quarter 2020 through the third quarter 2021 occupancy in our assisted living communities increased two seven percentage points and two five percentage points and our independent living community same store occupancy has continued to trend up.

Since the Amazon variant start in early 2020.

<unk> core for the period, excluding non stabilized assets was 6306 in our assisted living portfolio, a 50 basis point increase over the prior quarter and a six 4% increase over third quarter 2021, revpar for the period, excluding non stabilized assets with $2705 in R&D.

The patent living community, a one eight increase over the prior quarter and a five 5% increase over third quarter of 2021.

Excluding government stimulus times cash NOI for the quarter was slightly ahead of the prior quarter, our independent living portfolio saw a six 7% increase in cash NOI at most of the increase in quarter over quarter revenue when directly to the bottom line continued rate increases in our assisted living portfolio offset.

Some of the margin pressure, resulting from higher labor costs.

And the quarters immediately following the vaccine rollout rollout are needs based portfolio experienced in earlier and steeper rebound in our IND and independent living portfolio, which we described at the time.

While independent living has been playing catch up on occupancy and Revpar, the lighter staffing model and lower cost country has a lot of cash NOI to recover at a faster pace.

We have seen pricing power across our entire portfolio was 8% to nine between eight 9% annual increases to rate inclusive of care and positive re leasing spread.

<unk> continued to drive elevated move out rate.

At our higher acuity property.

If we compare the same store operating results of our Canadian assets with our U S assets, our Canadian assets as an outperforming our U S community throughout 2022 on a same store basis here are some quick statistics.

Occupancy for the third quarter in our Canadian communities increased three nine percentage points compared with the prior quarter and seven three percentage points compared to the third quarter of 2021. This compares with our U S communities increase of 10 basis points on a sequential quarter basis, and one five percentage points compared to the third.

Quarter of 2021.

Revpar growth in our Canadian portfolio with only slightly higher in our U S portfolio. However, cash NOI for the third quarter in our Canadian communities was 12, 2% higher on a sequential basis and $43, 7% higher compared to the third quarter of 2021 and comparison cash.

NOI in our U S portfolio, excluding government stimulus stimulus plan.

Slightly on a sequential basis.

And grew two 5% compared with the third quarter of 2021 over the past four quarters cash NOI in our Canadian communities grew nine 5% per quarter on a compounded basis.

These statistics reflect only our same store assets in Canada, and which comprised 16% of the units in our Holly.

The managed portfolio.

We believe that the rebound we're seeing in Canada as a function of strong demand emerging after the lifting of covenant restrictions that remained in place longer than in the U S. Essentially the same scenario experienced domestically in the months following the rollout of the vaccine.

Let me now turn to our behavioral health portfolio at the end of the third quarter salaries investment in behavioral health, including 16 properties through mortgages with total investment of $756 million.

We intend to invest an additional $53 million of capital to complete the conversion of five of the property.

Richard the need to operators as well as another property identify for conversion at the completion of these conversion solid investment in behavioral health will total over $800 million.

We continue to meet with new operators and explore our business relationship within the addiction recovery factor as well as other areas of behavioral health, where we see investment opportunity.

And with that I will turn the call over to Michael Kaufman Roberts Chief Financial Officer.

Thanks Tanya.

For the third quarter of 2022, we recognize normalized <unk> per share of <unk> 36.

Normalized <unk> per share of 35.

And lower NOI from tenants, whose rent is accounted for on a cash basis.

This is a timing issue as the shortfall was received subsequent to quarter end quarter end and recognized in the fourth quarter.

These amounts are added back in arriving at normalized <unk> and <unk>.

Cash NOI for the quarter totaled $115 6 million.

Compared to $118 million for the second quarter. This decrease was primarily the result of lower rents received from cash basis tenants I. Just noted and is expected to reverse itself in the fourth quarter.

These rents had a burn off period of just over four years from the date. The properties were sold and are reaching the end of that burn off period.

We expect the amount of Genesis excess rents we recognized in earnings to decrease to $1 2 million in the fourth quarter of 2022 and be $1 $6 million and $328000 for the full year 2023, and 2024, respectively.

As of September 32020 to less than 5% of our NOI is below one times EBITDAR coverage.

G&A costs for the quarter totaled $9 7 million compared to $8 6 million in the second quarter of 2022.

This increase is due to a $1 $3 million increase in stock based compensation expense compared to the second quarter of 2022.

Excluding stock based compensation expense adjustments I referenced earlier recurring cash G&A was $7 6 million compared.

Compared to $7 $8 million in the second quarter.

During the quarter, we recognized $60 9 million of impairment of real estate related to six snips that are under contract to sell as part of our capital recycling efforts.

Now turning to the balance sheet.

<unk> has proved highly valuable in this current rate environment, we have seen short term rates increased significantly in a short period of time.

Because of our hedging activities or annual interest expenses, nearly $8 million lower than it otherwise would be at today's market rates.

We are in compliance with all of our debt covenants and our liquidity as of September 32022 totaled approximately $890 million consisting.

Consisting of unrestricted cash and cash equivalents of $26 $3 million and available borrowings of $861 $4 million under our revolving credit facility.

As of September 32022, our leverage was five five times.

As we have stated the last few quarters. This leverage level is above our long term average target, but we view this as simply a short term timing mismatch.

Once these proceeds are received and we repay our revolver borrowings, we expect leverage to be closer to our long term average leverage target.

We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable and we are well positioned to do just that.

On November seven 2022, our board of directors declared a quarterly cash dividend of <unk> 30.

Per share of common stock the.

The dividend will be <unk> will be paid on November 32022 to common stockholders of record as of the close of business on November 17 2022.

The dividend represents a payout of 85, 7% of our normalized <unk> per share of <unk> 35.

Lastly, as we have communicated the past several quarters, we did not issue earnings guidance. This quarter. While we are encouraged by the continued albeit slow recovery in the labor markets, which we view as a key barrier to occupancy recovery the timing and velocity is still a question mark.

This uncertainty against the backdrop of macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time.

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

Thank you.

To ask a question you will need to press star one one on your phone. Please standby as we compile the Q&A roster.

One moment please file first.

Our first question will come from Boston, where Schmidt of Keybanc capital markets. Your line is open.

Hey, thanks, everybody.

In the coming years.

Yes, those are actually in the in the press release us in but.

For.

<unk> added EMIR.

Annual rent escalator is 275% for.

And then the annual escalators are CPI based not to exceed two 5% the duration of the leases for ensign or <unk>.

Yes, there are two master leases one is 18 years 120 years of financial cost.

Yes, I appreciate it sorry about that and then separately I was wondering if you can provide an update on the <unk> 17, and <unk> 17 in process transitions that you announced last quarter.

And if theres been any change in cash rent contribution versus what those were contributing in <unk> and when do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence.

Overtime.

Yes, So I think the quick answer is theres no changes to what we put into our.

And our <unk>.

Investor presentation, excuse me last quarter those transitions are still in process and the timing is unchanged. We expect those to stabilize between now and the end of 'twenty four.

And then with the eight that are already transitioned to have those stabilized at the $4 8 million quarterly run rate.

They're progressing as we had expected I'd have to get the exact number of where they stand relative to what we're stabilization is but they're progressing as we expect.

So we expected those to take a number of months before they stabilize well into 2023, so they're on track but.

Similar timeframe to the other 2017.

Okay. That's helpful. Thank you.

Thank you.

One moment please for our next question.

And our next question will come from Juan Sanabria.

BMO capital markets. Your line is open.

Hi, good morning.

Hoping you could talk a little bit more about the transition and.

And why the need to reduce the rent if the coverage on the assets that was in place was seemingly pretty healthy from the outside looking in maybe at the tier three coverage.

It was a lot worse than that necessitated.

Our rent.

A lower rent for the new operator, so just hoping you could talk through why.

While there is some dilution coming in with the transition.

Well, it's just really a function of negotiation I think the.

The cash flow stream was pretty steady.

Once every once in a while you can transition the portfolio and get an increase and Red River.

Done that with smaller portfolios.

Historically, but most cases.

People know that you have to transition and so just because the part of the negotiation and in this case.

We didn't achieve the 12% reduction.

As being significant enough to offset the positive aspects of moving to ensign.

And frankly, we.

There were offers that were slightly higher.

But we thought the attributes of going with ensign and strengthening avenir.

More important than some.

Some incremental difference.

So it is a lower in North America, but maybe not just as well.

And then you highlighted some transitions that you were doing and I guess, we're still in process 25 assets aggregated.

And so this was in addition.

To what you talked about that had upside that this obviously is a.

An offset so is there anything else that nothing.

Nothing.

There is nothing else one look the 25 that we had previously announced were a function of ongoing discussions with our operators.

So a lot of transparency and a lot of productivity relative to those transactions. This was different there was a.

The change in management.

The board's decision.

We had a great relationship with the prior management team.

They did a strategic reevaluation and came to us late in the summer so.

Yes, it was.

Unique.

The circumstance.

Nothing should be extrapolated from it relative to the rest of the portfolio.

Okay, and then just one last one for me for the dispositions the $200 million that you have targeted.

Any sense on what is from a modeling perspective in terms of.

Cap rate or a rents associated with that and do any of the buyers any issues with with financing some of that given the capital market dislocations, we're all living through.

I can I can talk to that.

So we're still looking at.

Year end type of clothing.

Yes.

Most of those transactions.

To get to that 200 ish million.

<unk>.

The financing challenges that are hitting that hit everybody.

As you know.

Has been pretty recent and net and one of the portfolios are larger.

Largest component of that $200 million has been something that's been underway for a fairly lengthy period of time.

So they've had their financing organized and committed to prior to the meeting.

The most recent.

Hi.

That answer your question.

Okay.

Yes, any color on kind of a yield implied on the $200 million.

Yes.

Single low single mid single digit mid to low single digits.

Thank you very much.

Thank you.

One moment. Please next question.

Okay.

Our next question will come from Steven Valiquette of Barclays. Your line is open.

Great. Thanks, good afternoon, everybody and good morning.

So more of an industry question here, but last quarter, you guys had a pretty useful slide on the status of some of the dedicated Davis among your top 10 stage III operator.

I was just looking for any updates on any key states and the evolution of some of the.

State rate updates any color you could rival where I was talking to be helpful. Thanks.

Yeah sure Steve. Thanks. So we Didnt include that chart. This time, because it's been there has been.

No change and no updates.

So I think the one state that we all are anxious to find out about.

Is Texas and our operators on the ground are cautiously optimistic that they'll be successful with getting a rate increase will share we will see.

No.

Other than Texas.

Texas handled ethanol, which was appreciated.

No Medicaid rates have been historically low there.

Really.

The industry has been underfunded. So I think the reason for the optimism is not just the dialogue that operators are having with legislators.

But.

Fact that the pandemic demonstrated.

Some real issues in the system there so.

That's the one that we're really awaiting for but no other updates because thats why we didnt put it on the chart.

Okay. One other quick one apologize if I missed this but what's the skilled mix in the.

The property is going over to enzyme in the kind of notorious for being able to improve that pretty dramatically, but im wondering if thats.

A big part of their improvement plan as far as the operations within that but just for the starting point and where that is right.

Yes.

Skilled mix is one of the two highest in our portfolio and exit from a revenue perspective, 60%.

And so skilled mix is already high.

We will see whether ensign can make that hired out there are huge opportunities.

The expense side.

The.

The facilities.

<unk> historically been allowed to sort of do their own thing when it comes to expenses. So as I believe they have a lot to bring to the table from an expense perspective and of course, there are corporate synergies as well so.

We expect.

That should continue to improve not just because you're recovering from the pandemic, but because of the programs until we are putting in place there that have been that brought them similar success in the remainder of therefore in the rest of their portfolio.

Okay. It makes sense that's helpful. Thanks.

Yes.

Thank you.

One moment. Please next question.

And our next question will come from Joshua <unk> of Bank of America Merrill Lynch.

Your line is open.

Yeah, Hey, guys I appreciate the color around North American, but maybe.

Maybe just was there any discussion of 12.

12%.

I feel like I normally like it broke.

My lease I would have to kind of.

However, the difference between whoever comes in and takes my apartment.

First one I was supposed to pay so is there any discussion on north American covering that 4% reduction or.

Great.

No because it wasn't that kind of negotiation or there wasn't that kind of leverage in place. So.

They were sincerely interested in sizing down.

So.

There just wasn't that kind of.

Leverage to negotiate negotiate that our rent is fully covered at the current contractual level through the February 1st transition data.

So was there.

I don't understand why there wasn't leverages vote landlord versus tenant here.

Are they typically responsible for the fall.

We will term at least through the end of the agreement or was was it coming due on February one.

Yes.

Say a couple of things first we have a confidentiality agreement. So there's not a whole lot I can say that specific to the actual negotiations that we went through but.

But.

Once we made the decision to transition.

And so that they can move down to 12 buildings as opposed to.

Honoring their request for reduction.

That removed any of those other levers.

Okay.

Alright.

Is there are there any other tenants you could kind of talk.

Walk away.

Where we are.

The release is structured.

No as I said this is a unique situation.

And.

It had a lot to do with the board's involvement and the changes in management, where reevaluation of the portfolio. We're not seeing this elsewhere in the portfolio. So all of the statements. We've made about the portfolio generally historically.

As for today.

Sometimes things happen that are unique.

You don't anticipate but you shouldn't extrapolate no one should extrapolate this.

As to any other aspects of the portfolio.

Okay.

One final question for me.

When did these conversations start between North American and your team.

Somewhere around the middle of August .

All right.

I appreciate the color. Thanks.

That's correct yes.

Thank you.

One moment please.

Next question.

And our next question will come from Michael Griffin of Citi Research. Your line is open.

Great. Thanks.

Pro forma for this transaction and Simon have a mirror now through your largest tenants you've spoken pretty positively about both of them.

Would you expect to continue to grow these relationships and how great can we see them become as a percentage of your tenant base.

No I think.

Ever since we did the merger we've been pretty committed to try and keep everybody below 10%. So that we're not overexposed to any one tenant.

So.

I put it this way as ensign and <unk> toward additional facilities to us that we just thought were.

Tastic things to execute on we would happily do that.

Without going to set as a goal that we're going to continue to grow and get them to X percentage higher than they are now.

I still think we're better off regardless of how good the operators are having as much diversity in our portfolio as possible.

Got you.

And then the commentary you were saying around Canada I guess.

Relatively more positive.

Should we maybe see an increase in investment from from you in Canada or is this more kind of tactical and opportunistic approach.

So a couple of thoughts one is.

We've already.

Wired Maher and Canada. This year prior to this past quarter. So that's already in those and those assets were down in the numbers that I provided because I used to only same store sales numbers over time.

The environment in Canada.

For the past year and a half maybe has been very interesting.

There are some generational shift occurring.

And <unk>.

Groups are selling assets.

And right and portfolios and every everybody that.

That you cover for sure has been active in that market.

And we have had some good fortune in executing some transactions this year.

I think youll continue to see as the act trying to be active there I think the biggest challenge for anybody any acquisitions world right now is a capital.

Mike earlier talk about.

About our <unk>.

Focus on recycling capital, that's one and two.

The bid ask spread that.

Is in place today.

Trying to get to a place where our acquisitions are actually accretive if not the first year then shortly thereafter.

Okay.

Okay. That's it for me thanks for the time.

Thank you.

And one moment for our next question.

Our next question will come from Vikram.

<unk> Securities Your line is open.

Thanks, so much for taking the question so.

Just wanted to just follow up on the on the transition of these assets you said it was a unique circumstance where.

The board decided to change I guess, what the strategy of the firm.

And that led you to having to renegotiate, but I'm just trying to get a.

Better understanding of the leverage you say sort of went away versus.

And I'm, saying, we can take costs out et cetera, or just the outlook what these operators had.

And how.

How that squares with this lower rent level that they wanted or required to operate these facilities does doesn't when you say there is no read across I'm almost wondering like these are very well regarded operators.

Would that not suggests other operators would also say hey, as we negotiate things when leases come due or in this environment. We would also like a lower rent level.

Even though their synergies down the road.

I'm just trying to square away like these are well regarded up there you said theres better credits. So I'm just not sure how that squares with.

And they have an ability to take out cost how does that square with lower end.

Well first of all I appreciate the question.

First of all a lot of transition that is the case do what negotiating a lower rent because youre, making a transition.

People feel like they are in a position of strength.

That does happen thats not unusual it's not a function of the.

The quality of this portfolio or the projections of the earnings stream going forward, but.

I'm not sure.

How much it's appreciated.

Brutal last three years have been in this recovery is taking much longer than positive.

Any of us ever expected.

Everybody is taking a much more conservative everybody that we are aware of are taking a much more conservative approach to how long recovery is going to take and just having more breathing room within leases.

This industry has never gone.

Through anything like this.

So I think there needs to be a lot more weight put on the realism.

Disaster that the last three years ago, and we're still probably what over a year away from recovery from an occupancy perspective.

Yes.

And a little bit more so from a margin perspective, so everybody has been.

Trying to give themselves more breathing room, I think that's really understandable.

So then is it safe to say like looking forward with how maybe labor has surprised in terms of persistent key remaining high costs and shortages of labor in there.

Your underwriting going forward with the portfolio you are now baking in more.

Rent adjustments just given the situation because in the past you've said.

We're not making any more rent reductions.

No we're not baking in any more rate reductions because with our portfolio. We are where we are as we look at new acquisitions, we're putting.

Levels in place that reflect where they currently are.

And.

And so that gives us room to grow going forward and gives us more certainty and gives us more more room as well so no that's.

That's not the case it would be a little bit more rate reductions, we'll factor that into new acquisitions.

Okay.

Yes, because again I was just going back like last quarter. We would have looked at these tenants and said Oh theyre over one four times covered.

No issue.

And so it just I know this was a unique circumstance, but it naturally makes one wonder like a <unk>.

Given what you just described is the one four coverage.

Is that does that have enough buffer from here on or do you need to create a buffer just given how.

The environment is.

Call. It just gets more comment than a question, but one last thing.

I just want to make sure I understand the behavior.

Portfolio and kind of what appropriated appropriate coverages are here, but in the top 10 tenants the behavioral coverage.

Did fall and so I'm, just wondering on a spot basis, where does that stand.

Is there anything we should be concerned about.

In terms of restructuring.

I'll take the first part and kick over behavioral Italia, but there is no concern at all that we say that.

On the the 104 that you referred to that is on an EBITDA basis. When we underwrite we underwrite on EBITDA basis that we underwrite one four to one five on an EBITDA basis. So that is that's obviously a big difference because there's something like a 40 basis point differential between EBITDA and EBITDAR. So the one four coverage.

<unk> was EBITDAR.

We will continue to underwrite on a 104 to 105 basis on an EBITDAR basis, so from an EBITDAR basis.

We are comfortable on a go forward basis as we have been historically that one four to one five coverage will be sufficient to skilled nursing.

And on maybe this italia in the behavioral health side I don't have that spot occupancy for you, but that SaaS specific.

Operator.

<unk> has actually had to have some pressure on its occupancy hasn't been able to.

Admissions limitation Q2.

I'm not being able to get enough staff and that's actually what drove slightly lower NOI and therefore, a little pressure on the on on coverage.

We have other operations factor that operate smaller buildings and other parts of the country and they are covering at.

<unk>.

Five times, so it really varies.

SCB operations et cetera.

Buildings, and what fundamentally is going on inside the buildings, we typically underwrite at about two two to two five times.

On the new acquisitions and.

The other point I'd make is even though labor issues.

Perfect all the asset classes to one extent or another the behavioral facilities.

The economic model of those facilities breakeven point is much lower from an occupancy perspective than it is for skilled nursing and senior housing so there's actually more breathing room, there as well.

Okay. Thank you.

Thank you.

And one moment please for our next question.

And our next question will come from Tayo Okusanya of Credit Suisse. Your line is open.

Hi, yes.

Good morning out there just the long Vikram <unk> line of questioning again. This idea of are there any additional watch list tenants that you guys may have your eye on and I ask that in the context of just again the rent coverage on the senior housing portfolio.

It's still pretty tight at this point and fundamental of their tours to pretty tight even with the recovery. So just kind of curious how you're kind of thinking about that.

Kind of at this point, given the kind of underlying fundamentals in both skilled and senior housing.

Sorry can you repeat the last part of that question.

Sure again.

Yes.

You'll walk between last quarter and this quarter.

Kind of your watch list tenants if again, if there is any real change in the list and I just asked about in the context.

Rent coverage on your senior housing portfolio is through a pretty tight and I think fundamentals and skilled and senior housing is still pretty challenging.

So a couple of things our watch list is the same as it's been.

I mentioned in my prepared remarks are sub one EBITDAR coverage is about is less than 5% of our overall NOI I think the other thing to point out is on the senior housing piece for the Triple net that's a very small part.

<unk> of our portfolio I understand your question on the coverage.

It is the smallest piece of our triple net portfolio and the only other point I'd make tayo is even though it is tight.

At least improving.

So went from 109.

113, so that's certainly not where we want it to be but they are showing improvement.

As we've been saying kind of all along.

The recovery may be taking longer than we'd like but we all believe that we've been through the worst of it and I think the worst of it really was wanting OMA crowd here.

And that exacerbated all the labor issues in kind of reverse or the occupancy gains and all that kind of thing. So I think we're well past the worst of it and we're not seeing COVID-19.

Today.

And this on last quarters, there continues to be true, we're not seeing COVID-19 in and of itself impacted business. The vaccinations have been highly effective as had been the boosters. Most of the SaaS is taxed as well. So the business is holding up really well relative to current COVID-19 cases, theyre pretty negligible.

Gotcha, that's helpful and then on the <unk> front I know, we've always kind of the.

The last thoughts around it was before you do anything with TPG.

Kind of wait for this thing to recover and then maybe there could be conversation at that point, just looking at occupancy today, it looks like 85%, which is pretty high relative to kind of where the industry is at.

Now Unappropriate time to start looking at at the JV again in what could be the potential outcome.

Yes, so your occupancy is 85, but.

It's in 70, 576%, but that said.

Yes.

Portfolio is going to be marketed soon.

From a from the bankers perspective, and <unk> perspective in which we agree.

At this point, we need to go out with 23 numbers that are believable in order to walk up the portfolio and so that's what will happen. So the management team.

Completing their budget process that will be presented to the board will sign off on it and sometime before year end.

Marketing process will be kicked off by the bankers.

Yes, sorry on that 85, 5% that youre looking at Thats for our CNS joint venture.

Gotcha, Okay Thats helpful.

Great.

Thank you.

Yep.

Thank you.

One moment please for our next question.

Our next question will come from John Pawlowski Green Street Advisors LLC. Your line is open.

Thanks, Good morning, Michael with regards to statistically shared with percentage of tenants below one times EBITDAR coverage could you share the same statistics on EBITDAR.

Yes, so I.

I can get that exact number for you and as you recall, we don't talk about but we don't disclose EBITDAR because of the various ways that.

Our peers reported it just becomes a non comparable number but in terms of.

EBITDAR coverage.

Pulling it up right now it's consistent with what we've.

Disclosed in the past.

And it is.

Just about just under 6%.

Sorry, so the same percentages tenants are below one on both EBITDAR and EBITDAR roughly its like a two two percentage difference.

Low 5%.

On EBITDAR and just below 6% on EBITDAR.

Okay, maybe I'll follow up.

Quick question on the Mcguire Group I believe you extended it a working capital loan to them, but their EBITDAR coverage is almost two times. So just from the outsider's view, they shouldnt need cash, but they need cash. So can you just give us a sensor.

Whats drove the working capital loan and do you expect to extend additional loans to operators in the coming quarters.

Now.

Is tied to transition the portfolio.

The date that they are.

Coupon for us.

So that that's what that's associated with.

We have provided there if youre working capital loans.

In general to our operators.

If we need to they usually are very short term in nature.

And it really to expedite that transition and make it to make it happen faster.

Okay.

But that said.

We've been pretty consistent saying that because this recovery is taking as long as it is that we believe that we will need to help people help tenants had on audits for some period of time and whether that can come in a number of forms that may not be tied to transitions. So that could be in the form of rent relief for a period of time.

Partial or full or it could be a working capital loan as well so.

We leave the door open.

Step up and help our tenants as they try to get to the other side of this whole three year experience.

Okay. That's it for me thanks for the time.

Thank you.

Okay, one moment for our next question.

Our next question will come from Daniel.

Daniel Bernstein of capital one Securities Your line is open.

Hi, Thanks for taking the call and I.

I apologize just to hear a dog barking in the background.

[laughter].

A quick question here are there any part.

Dangerous work in hybrid.

Are there any purchase options.

That were given to ensign or avenir and part of that transition of its north American assets.

So.

Okay.

And then another question I had here was obviously <unk> been in the headlines what has been the flu vaccine uptake. If you have any information on this versus say historical pre COVID-19 levels.

Our residents and employees.

Yes.

Getting the flu vaccine.

Zero levels pre Covid just trying to.

Get a sense here.

I don't have I don't have good data on that then I would be surprised if it was higher than pre COVID-19 levels, there's usually a pretty concerted effort to get residents vaccinated.

For the fluke.

For employees, it's always kind of been then doing their own thing.

I don't think there's ever been much of a concerted effort in the past or employees like there was with Covid.

Don't have good data on that but I would be surprised.

To see if there was an uptick we have not seen any impact yet I know that there's been sort of this triple concern between COVID-19 and flu and RSV, which is mostly impacting little kids in older adults.

But we're not seeing that hit the business at this point.

Okay No I appreciate that.

Just wondering whether there's a cultural change or not but I guess, there's not enough data.

And then the last question I don't know if you went over this earlier in the call or not but what was the cash NOI shortfall from those tenants who paid in <unk> and <unk>.

Just what was it.

Somewhat modeling purposes, yes, it was somewhere in the neighborhood of call it $10 million somewhere in that range because as.

As far as our cash NOI goes yes, it dropped by about call it $2 4 million and Thats roughly the number we're looking at.

Okay and that was all paid early in <unk>.

Correct.

Okay. Okay.

So all I have I appreciate the time thanks.

Thanks, Dan.

Thank you.

And one moment please for our next question.

Yes.

Our next question will.

Coming from Richard Anderson of SMB C Group Your line is open.

Thanks, Good morning.

So I have a.

I have a question on sort of the irony of Av.

Cutting rent and giving a portion of that portfolio to an operator, where you adjust cut rent of Amir.

So I wonder if that weighed into your thinking at all in terms of where these these 24 assets would go.

And how.

Given the history, we have I mean.

I assume youre feeling much better about them at this point given the restructuring, but how does how does those four assets marry with the existing <unk> portfolio in terms of coverage and rent and is it perhaps a precise reflection of what you have in place already there.

Yes, So let me I think better answer your question since you used the word irony.

Just a little bit of history. So Avenue, obviously, we got Avenir as part of the merger.

With the one tenant that we didnt do anything for the rent coverage was always really tight.

But we chose not to do anything to them. When we took care of all the other operators that we gave those sold assets or whatever it was.

Because they had other revenue sources with some of their ancillary businesses.

Once the pandemic hit they still continue to manage through it but given how long the pandemic quite on.

Became too much so.

We felt like we really needed to do something for them at that point, but we put that recap of capture mechanism because we thought that they could over time get back to a higher rent level and.

And then so.

Some of this fits into all of our thinking is by giving them. The four additional facilities is going to make the portfolio that much stronger overall and particularly.

Particularly when you add the 20% Washington State Medicaid rate increase so the acceleration of the recovery will happen even more quickly.

Than we anticipated so.

Washington is a key market for them.

That made a lot of sense.

And I think just has two buildings in Washington, maybe I might be off a little bit, but they don't have much of a presence up there. So it made a lot more sand today and they preferred.

Just to do the California portfolio as well so does that answer your question.

Yes.

For assets the coverage on them is it is it a reflection of what the existing new existing coverages with Avalere does it higher.

No I think thats a good estimate there okay.

Okay.

Second question, you said that there was.

Some huge expense opportunities for enzyme in particular.

Because of the quality of the company, perhaps but also just the national portfolio.

But was that is that upside that expense.

Opportunity for them a function of them enzyme or was it a function of the existing way by which the portfolio was being managed a combination I'm just curious to what degree there was an under management situation that that enzyme.

<unk>.

Yes, it was more of a function of how north American operator, there is a lot of autonomy at the facility level relative to purchasing where.

Tim as everybody knows.

Our local operators do have.

A lot of independents, a lot of authority, but ensign does take advantage of its scale when it comes to crude purchasing and getting discounts as a result of that so that's a completely different philosophy.

I'm, not saying was right at the one's wrong, there are different reasons for companies doing that but.

But ensign, bringing that philosophy to bear.

No.

<unk>.

Positive results on the margin for this.

This portfolio.

Okay and is there a similar.

<unk> opportunity for the foregoing to <unk> or is that sort of just status quo.

No the Avenir opportunity is more on the revenue and occupancy side.

Because of the geographic distribution of Washington prior to getting these four buildings.

They've had some difficulty in getting the managed care contracts that they want at the rates. They what these four buildings.

So.

Whatever because it's only for buildings, but it actually densify their markets and they're in there.

Urban communities, so that and they have already had conversations with the insurers. So they believe that this opportunity will allow them to.

Not only get additional managed care contracts, but get better rates because of the volume that theyre going to be able to provide from a service perspective to those insurers around the Seattle market.

Okay, great. Thanks very much.

Yes.

Thank you.

I'm seeing no further questions in the queue.

I'd now like to turn the conference back to Rick <unk> for closing remarks.

Thanks, everybody for your time I know it was a lot to digest.

Hopefully we've answered your questions. If you have additional follow up the teams available as we always are to have additional discussions thanks and take care.

Yeah.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

Q3 2022 Sabra Health Care REIT Inc Earnings Call

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