Q3 2024 Sabra Health Care REIT Inc Earnings Call
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Adam: Good day, everyone. My name is Adam and I'll be your conference operator today at this time I would like to welcome everyone to the <unk> third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply put.
Adam: Star one followed by the number one on your telephone keypad, if you'd like to withdraw your question just press the pound key.
I'd like to now turn the call over to Lukas Heart, which SVP Finance. Please go ahead, Mr Hart, which.
Lukas Heart: Thank you and good morning, before we begin I want to remind you that we will be making forward looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations.
Lukas Heart: Including our earnings guidance for 2024, and our expectations regarding our tenants and operators and our expectations regarding our acquisition disposition and investment plans here.
Lukas Heart: 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, 2023, as well as in our earnings press release included as exhibit 99, one to the form 8-K, we furnished the S T.
Lukas Heart: C yesterday.
Lukas Heart: 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.
Lukas Heart: In addition references will be made during this call to non-GAAP financial results investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the investors section of our website at Sabra health Dot com.
Lukas Heart: 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 Natrium, CEO, President and chair of Sabra Health care REIT, Thanks, Lukas and thanks, everybody for joining us.
Lukas Heart:
Rick Natrium: Start I'd note that we've now had several quarters in a row.
Rick Natrium: Continuing improvement.
Rick Natrium: And all of our primary asset classes.
Rick Natrium: We've really distance ourselves from the pandemic were hitting highs in several statistical categories. So we really feel good about where we are right now occupancy for our sniff portfolio was up 130 basis points sequentially. Our skilled mix continues to increase up one.
Rick Natrium: 110 basis points sequentially as higher now than it's been for quite some time occupancy for our same store shop portfolio was up 90 points.
Rick Natrium: 90 basis points sequentially and margins in both those portfolios continued to strengthen occupancy in our triple net senior housing portfolio hovering around 90% for four quarters running now our EBITDA rent coverage for skilled nursing and Triple net senior housing portfolio was at 1.94 at 1.37 respect.
Rick Natrium: We are at levels that are much higher than we've seen for years.
Rick Natrium: Certainly well before the pandemic as noted in the press release only out of a more of a mirror of our top 10, so a decrease but that was specifically due to the percentage rents that we've been receiving it was still a strong one at 187 I think the fact that we've been getting percentage rents for a number of months now as anticipated and yet they still.
Rick Natrium: Rent coverage is as high as it is shows that this particular lease restructure worked out really exactly as anticipated and our faith in the operator, certainly it's been rewarded.
Speaker Change: Coverage and occupancy about behavioral and other category were essentially flat sequentially. As these now include four quarters of lower occupancy stabilize addiction treatment center that was added to the pool last year.
Speaker Change: Our leverage has continued to decrease we increased guidance at the midpoint.
Speaker Change: Strong mid at.
Speaker Change: At the mid point strong growth at something over 6% on a year over year basis, and we expect that to carry over into 2025 as well investments for the quarter, both new and previously announced totaled just under $100 million. We're now seeing more activity in our investment pipeline.
Speaker Change: Past months.
Speaker Change: Primarily deals of one or two assets, we're starting to see some more portfolio opportunities as well as more off market opportunities as we've talked about.
Speaker Change: Really all year, we're really focused on doing high quality investments with good yields operators that we really trustful not interested it nor do we need to do larger portfolio deals usually at least some portion if not most of the facilities those larger portfolios do require a lot of work.
Speaker Change: We just don't need that noise around us right now and the way we've approached our investments to date and we'll continue to approach them.
Speaker Change: Helping fuel the year over year growth that we're seeing and expect to see going forward.
Speaker Change: There are older assets are primarily shop and much of what we're seeing in the pipeline.
Speaker Change: As I said.
Speaker Change: We will look at those will continue to look at those but we're just going to stay focused on what we've been doing that is high quality newer vintage assets, we're starting to see an uptick in skilled nursing opportunities, although not dramatically. So and are committed to doing skill investments as well and with that I'll turn the call over to target.
Speaker Change: Thank you Rick.
Speaker Change: As far as 84 property managed senior housing portfolio, including joint ventures. It sure had a strong quarter on a sequential quarter basis. The total managed portfolio, including non stabilized communities and the joint venture's assets, a chair and a 140 basis point increase in occupancy along with 60 basis.
Speaker Change: This point growth in cash NOI margin Ciber managed portfolio.
Speaker Change: To grow through the addition of high quality well performing properties, while operations continued to improve within the existing portfolio. Sabra is same store managed senior housing portfolio, including joint ventures that sure had excellent results this quarter, excluding non stabilized assets the headline numbers our revenue.
Speaker Change: For the quarter grew seven 6% year over year with our Canadian community is growing revenue by 10, 8% in the same period.
Speaker Change: Occupancy in our assisted living and independent living portfolio with nearly even at 84, 1% and 84, 9% respectively.
Speaker Change: Cash NOI for the quarter grew 17, 8% year over year above last quarter's results in our U S communities cash NOI grew 15, 3% on a year over year basis, while in our Canadian communities cash NOI for the quarter increased 24.8.
Speaker Change: And over the same period benefiting from the strong performance of our joint venture properties.
Speaker Change: Rather poor in the third quarter of 2024 had robust growth at four 2% year over year, while ex poor was nearly flat for the same period. The minimal increase in export is a function of occupancy growth and limited cost increases, reflecting the impact of operating leverage across this part.
Speaker Change: Yep.
Speaker Change: We continue to see strong revenue increases across our senior housing portfolio, accompanied by very modest expense growth with operators skillfully balancing the levers of occupancy and rate to achieve to continue to achieve outsized cash NOI growth. We believe that the portfolio as a whole has reached the point where operator.
Speaker Change: Language will contribute materially to cash NOI growth.
Speaker Change: As Rick mentioned, our our net leased stabilized senior housing portfolio continues to thrive with consistently rising rent coverage, reflecting the underlying operational recovery.
Speaker Change: <unk> total investment in behavioral health remains static this quarter, we see growing interest in this asset class among real estate investors as well its brokerage firms, which have staffed up to cover the sector and with that I will turn the call over to Michael Costa Sabra as Chief Financial Officer.
Michael Costa: Thanks Tanya for.
For the third quarter of 2024, we recognized normalized <unk> per share of <unk> 35, normalized <unk> per share of <unk> 37.
Michael Costa: This represents a one penny increase in normalized <unk> per share from our second quarter results and year over year growth of 9% on the back of steady improvement in our managed senior housing performance and continued stability in our triple net portfolio.
Michael Costa: In absolute dollars, our normalized <unk> totaled $86 $9 million for this quarter I would like to highlight a few key components of this quarter's earnings.
Michael Costa: Cash rental income from our triple net portfolio totaled $91 $8 million for the quarter, which was better than the $90 million quarterly run rate provided on our second quarter call.
Michael Costa: Driven primarily by percentage rents collected during the quarter.
Michael Costa: NOI from our managed senior housing portfolio totaled $22 $9 million for the quarter compared to $28 million last quarter. This increase was driven by the addition of the two property portfolio, we acquired for $75 $8 million at the beginning of the third quarter and continued sequential same store growth.
Michael Costa: Recurring cash G&A was $9 $5 million this quarter and slightly better than the $10 $4 million per quarter run rate provided on our second quarter call.
Michael Costa: We expect fourth quarter recurring cash G&A to be closer to that previously provided run rate.
Michael Costa: As noted in our earnings release, we updated our full year 2024 guidance on a diluted per share basis as follows net.
Net income 48 to 49.
Michael Costa: F O $1.35 to $1 36, normalized <unk> of $1 39 to $1 40.
Michael Costa: <unk> dollars 41 to $1.42 and normalized <unk> of $1 43 to $1 44.
Michael Costa: This represents an increase at the midpoint of our normalized <unk> per share and normalized <unk> per share guidance of two pennies and one penny respectively.
Michael Costa: At the low end of our range, our triple net cash NOI for the fourth quarter is approximately $90 million, which is the same as the quarterly guidance, we provided last quarter and conservatively assumes no percentage rents are collected.
This triple net cash NOI assumption is in line with the actual results of the third quarter, excluding percentage rents as noted earlier.
Michael Costa: Our guidance incorporates all announced investment and disposition activity as well as announced activity under our ATM program and does not assume additional investment disposition or capital transactions beyond those already disclosed.
Now briefly turning to the balance sheet.
Michael Costa: Our net debt to adjusted EBITDA ratio was five three times as of September 30 of 2024, a decrease of one five times from June 30 of 'twenty 'twenty, four which was driven primarily by the continued NOI growth in our managed senior housing portfolio. This.
Michael Costa: This steady and continued improvement in our balance sheet strength together with increasingly attractive industry operating dynamics was a key driver to Moody's recent upgrade of our outlook from stable to positive.
Michael Costa: As of September 30th 2024 were in compliance with all of our debt covenants and have ample liquidity of $947.8 million consisting.
Michael Costa: Consisting of unrestricted cash and cash equivalent of $63 million available borrowings of $847 $4 million under our revolving credit facility.
Michael Costa: $37 $4 million related to outstanding forward sales agreements under our ATM program.
Michael Costa: This year through September 32024, we utilize a Ford feature under our ATM program to allow for the sale of up to seven 3 million shares at an initial weighted average price of $15 41 per share net of commissions.
Michael Costa: As of September 32024, we had $386 $7 million available under our ATM program.
Michael Costa: Finally on October 31, 2024 sovereigns board of directors declared a quarterly cash dividend <unk> 30 per share of common stock the dividend will be paid on November 29, 2024 to common stockholders of record as of the close of business on November 15th 2020 for.
Michael Costa: The dividend is adequately covered and represents a payout of 81% of our third quarter normalized <unk> per share.
Michael Costa: And with that we'll open up the lines for Q&A.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Nick <unk> with Scotiabank. Your line is open.
Speaker Change: Hi, This is ellner Chang on with Nick Thanks for the questions.
Speaker Change: So over the last year, you had a few quarters and accelerating year over year.
Speaker Change: Continued growth at the shop segment.
Speaker Change: And it seems like labor cost inflation continues to improve does that give you more confidence in providing additional segment guidance items for 2025 as you evaluate your expectations there.
Yeah, I think as we it's a little too early for us to talk about 2025 guidance, that's something that we'll address when we release our fourth quarter earnings.
Speaker Change: And evaluate what is meaningful to provide with you know a high degree of confidence.
Speaker Change: Okay. Okay. Okay. It makes sense and then and then maybe just on the on the balance sheet as he touched on.
Speaker Change: There briefly.
Speaker Change: You're seeing leverage improvement driven by by the shop portfolio.
Speaker Change: And it's a key driver of why you've got the credit rating upgrade.
Speaker Change:
Speaker Change: Upgrade what do you credit rating agencies want to see in terms of.
Speaker Change: Your leverage target or operating metrics too.
Speaker Change: So maybe earn an upgrade in the future.
Speaker Change: Yeah, I think all the rating agencies, they obviously have their different.
Speaker Change: Pain points or you know areas their focus on in terms of leverage levels and debt service coverage levels, but those are probably the two main aspects that they are focused on which is going to be where our leverages at what the trajectory of that leverage is and then our fixed charge coverage ratio both of which are.
Speaker Change:
Speaker Change: By themselves would be investment grade rated I think for Moody's what they want to see is that sustain and continue to improve as it has the last couple of quarters getting that positive outlook was a big step in that direction and you know were hopeful.
Speaker Change: Some point in the near future.
Speaker Change: Next step with them, which would be investment grade or is forthcoming.
Speaker Change: Okay got it thank you and that's it for me.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of John <unk> with Wells Fargo. Your line is open.
Speaker Change: Thank you maybe if we could just start on the shop guidance going back to that.
Speaker Change: It looks like another good quarter and at the beginning of the call you mentioned Revpar up four two.
Speaker Change: Explore relatively flat I guess could you talk about what was underlying your expectations coming into the quarter, but this performance look like and I know your guidance is a little bit maybe does this number of land a little bit higher than lower than the midpoint of your expectation and is there a little bit of conservatism not updating your guidance here.
Speaker Change: Yeah, I mean, so what we said last quarter when we put out our guidance on shop growth was mid to high teens growth and I think that's felts fell squarely within our expectations.
Speaker Change: And similarly for the fourth quarter.
Speaker Change: We're still saying mid to high teens growth and if we have another quarter. That's close to what we had this quarter you know it would be in line with what we're expecting we're hoping that it performs the upside but.
Speaker Change: Where we came in is.
Speaker Change: Very much in line with what we expected.
Speaker Change: Got it and then maybe on the acquisition front.
Speaker Change: Obviously, you pre announced the larger deal you gave us another deal here, but maybe talk about Rick made some comments about seeing ample opportunities in the space can we talk about how yields have trended over the quarter, maybe what youre seeing here in <unk> and that is there a larger opportunity set and maybe even the potential to accelerate into next year I understand we're not giving guidance right now but just.
Speaker Change: Any color on how the landscape is changing and I understand some competition is coming back but.
Speaker Change: Just where can volumes go from here.
Tal: This is Tal yeah, I think the opportunity remains robust, particularly while.
Tal: Cost of debt remains relatively high compared to what it had once been that really pulls the leverage buyers out of the market all of our forces them to bid up prices like <unk> seen our our initial yields. So I think that's the positive right now so when our cost of capital I think we can be.
Tal: Quite competitive and you've seen our peers be quite competitive as well.
Tal: Where we're being selective.
Tal: We are seeing some high quality.
Tal: New new or newer vintage assets, particularly in senior housing that are performing well either stabilized or close to stabilized. So that we feel that we're getting a strong yield with a very low risk profile are in place and.
Tal: Going forward now I think the opportunity set is large I think that.
That's the private equity funds are I'm sure there are salivating and wanting to execute but it's the pricing is still tough we're seeing them still be sellers into the market.
Tal: And.
Tal: Well, we'll see what happens it's all about cost of debt.
Speaker Change: The only other thing I'd mention is everything is connected right. John So our performance has been really solid these last several quarters cost of capitals improved and that's gonna make it that much easier for us to compete and do more going forward, but even though we may be even though we believe we'll be able to do more.
Speaker Change: So Todd your comments, we're still very committed to being very slow.
Speaker Change: And not doing anything that's going to create a lot of noise because of the work involved because of the structures that you have to put together to make it happen.
Speaker Change: And I think that's a commitment that we've made to our investors.
Speaker Change: Starting last year as we started exiting the pandemic.
Speaker Change: We've gotten a lot of support and very positive feedback about that.
We're just not going to veer off course, and staying on this course produces this kind of earnings growth even at the midpoint, which is at the higher end of REIT World I think it's a good strategy.
Speaker Change: Okay got it thank you.
Speaker Change: Our next question comes from the line of Austin, where Schmidt with Keybanc. Your line is open.
Austin Schmidt: Yeah, Richard Italia I appreciate the comments first of all on kind of remaining disciplined.
Austin Schmidt: Last quarter, you had referenced kind of a pickup in opportunities, particularly skilled nursing I think it was one two to the point you just made your cost of capital has only gotten better. Since then I guess, what's held you back from buying more <unk>.
Austin Schmidt: This past quarter.
Austin Schmidt: Curious if youre, losing out on deals or everything is just taking a little bit longer to materialize and I also don't believe you referenced behavioral this quarter as a target what are the latest thoughts there. Thanks.
Speaker Change: Yeah, I think behavioral is not a target for acquisition for US right now and as you recall I have spoken in the past.
Speaker Change: It began as a vehicle for us to re use existing assets that are no longer viable as other skilled nursing or senior housing that is that is a was a fixed amount of assets that we've depleted that and that we've converted those.
Speaker Change: So right now we're sitting tight on that the opportunities in that arena.
Speaker Change: Are rarely of institutional quality these days.
Speaker Change: In terms of acquisitions.
Speaker Change: The opportunity set is very much in senior housing and skilled nursing today.
On the skilled nursing front in terms of volume and what we're seeing and how can we have an executed billions of dollars versus what we the buildings, we've seen it really goes to being selective.
Speaker Change: Understanding the risk in some of the assets, we've seen because they really tranche out into assets that are challenged whether their skill their senior housing and Rick referenced that AR, which is not those have not been risks we've been willing to undertake.
Speaker Change: Most of the higher quality assets.
Speaker Change: We have been bidding on sometimes we don't win the bid, but we're all we're generally right up there and it's been our choice whether to pursue or not pursue yes.
Speaker Change: Couple of other couple of other comments on behavioral we've been in that long enough to come to the conclusion that there is a very particular bottle that we like from a capital perspective, and that's what we have with two of our partners where the operating platform is owned by a private equity firm.
<unk>.
Speaker Change: We like that relationship because there is another there.
Speaker Change: Deep pockets of the us that are in the deal. So if we can find more opportunities like that we'll pursue them and those are very very few and far between as everybody knows.
Speaker Change: Most operators in the skills and the senior housing business.
Speaker Change: Don't have much in the way of balance sheets, but you've got operators that are very good at around a long time and that gives you a lot of confidence but in the behavioral space.
Speaker Change: Most folks who knew him.
And untried and there just isn't the history. There. So if we can find more opportunities like we have with two of our partners.
Great, but we expect them to be few and far between on the skilled side I would I would just add to what Todd said.
Speaker Change: Most things are still off market. There was a big portfolio recently that everybody saw we saw that too.
Speaker Change: We just chose not to do it we just didn't think it was it was right for us.
Speaker Change: So we're starting to see some more skilled opportunities, but they just haven't been that great. Yet so we're not really holding back.
Speaker Change: Let's say, we were being selective and most of that most of the good opportunities that we're seeing are on the shop side. So.
Speaker Change: You know as soon as we see better opportunities on the skilled side and we expect to see more of those.
Speaker Change: As NOI continues to stabilize and folks that haven't had yourself feel comfortable putting their assets in the market and you will see it assume more skills skilled deals.
That's all really helpful. I mean, how should we take your comment about the fact that you stated we're seeing more portfolio opportunities, but then I think you said, where we're not as interested in those deals and all that comes with it can you just marry those two comments please.
Speaker Change: Well, yes, the portfolio deals that we've seen have some hair on it.
Speaker Change: And.
Speaker Change: At this point.
Speaker Change: Where we are developmentally is.
Speaker Change: As a company.
Speaker Change: We've taken big swings in the past we felt it was necessary because of other circumstances and we were willing to take on the work to do that.
Speaker Change: We don't need to do that now we need to be focused on doing the kinds of deals that that give us durable and sustained earnings growth.
Speaker Change: High quality.
Speaker Change: <unk>.
Speaker Change: And that's kind of it.
Speaker Change: Let others do the step it requires a lot of heavy lifting.
And then just the last one for me the asset you acquired subsequent to quarter end senior housing managed.
Speaker Change: Is that sort of the profile Youre speaking of last quarter newer assets, well leased and Thats really why youre able to acquired at the yield that you did about above 8% and I guess, how deep is that opportunity set at those types of yields.
Speaker Change: Thank you I don't think I don't think every deal is going to be an eight and a half plus initial yield.
Speaker Change: But I.
Speaker Change: I think we can still do deals that that will make all of us.
Pleased with the spread to our cost of capital on the senior space and yes that is a pretty good example.
Speaker Change: We we got that deal because we know the operator, well and plan to keep them in place which helps.
Speaker Change: Helped helped us out on a competitive basis.
Speaker Change: Our next question comes from the line of one center Breo with BMO capital. Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: Just on the on the shop business curious if you have any early signs or thoughts on how revpar could trend.
Speaker Change: Given I'm, assuming you're already talking about or January one.
Speaker Change: Rate increases here. So just curious on your thoughts whether pricing could actually accelerator for hold or how you guys are thinking about it.
Speaker Change: I think mid single digits is the right way to think about it it it's hard to.
Speaker Change: I think that's whether it's 4%, 6% it's in that zone I haven't heard any operator talk about numbers higher than that unless they're taking I'm not sure they're turning around a building that's been under leased and under managed.
Speaker Change: Okay, Great and then.
Speaker Change: Just on the seniors housing triple net side look.
Speaker Change: It looked like occupancy.
Speaker Change: It's a little bit sequentially could you just give a little back story as to that and then as part of that what's the.
Speaker Change:
Speaker Change: Setbacks.
Speaker Change: Are the driver of percent rents just to think about that on a go forward basis.
Speaker Change: Yeah. So your first question on the senior housing leaves I mean, it went from 90% last quarter to 89, 6% this quarter, so not a real meaningful drop in <unk>.
Speaker Change: Pretty steady if you look over the last four or five quarters.
Speaker Change: 90% is a pretty healthy occupancy for that facility type.
Speaker Change: So.
Speaker Change: Nothing really to point to there and nothing of concern at all as far as that goes it's a small pool of assets.
Speaker Change: Any movement by any facility effects. The whole pool. Why then these also are a big facilities. So all of that kind of goes into it but if.
If we have a steady state around 90% going forward I think will be pretty good with that right.
And sorry, what was your second question I wanted to Oh percentage right Yeah that was.
Speaker Change: Yeah. So in terms of percentage rent I mean, we've been collecting it now for several quarters this year.
Speaker Change: Under that lease, which has obviously been helping our cash NOI from our from our Triple net portfolio.
Speaker Change: And in terms of expectations on that I mean, we do expect there's going to be some amount we continue to collect going into the future that lease also has the ability to reset terms.
Speaker Change: There is a window that opens in 2025 to reset the terms on that to have a fixed lease.
Speaker Change: And we will continue monitoring and seeing how that portfolio performance has performed really well as Rick alluded to in his opening remarks.
Speaker Change: And when we think that time is right to flip it from having percentage rent a base plus percentage rent just a fixed amount will explore that but you know.
Speaker Change: That portfolio continues to perform well, we're getting percentage rents, it's been additive to our earnings and we're really happy with that outcome.
Speaker Change: We have a it's a long window, we have on making that decision its at least a couple of years.
So we'll have a lot of time to monitor that.
Speaker Change: Thank you guys.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from the line of Michael Griffin with Citi. Your line is open.
Michael Griffin: Great. Thanks, I'm wondering if you can give some additional color just on the occupancy gains in the sniff portfolio. During the quarter is it a function of better staffing at the facilities, maybe greater referral numbers are just as kind of continued upward trajectory in occupancy recovery that we've seen over the past couple of quarters and then maybe as you think ahead.
Michael Griffin: Obviously, we've seen a material uptick in occupancy this year, but is it fair to assume there's going to be more seasonality is kind of the the industry normalizes over the next year or so.
Michael Griffin: So.
Speaker Change: The increase in occupancy there has never been and needs a referral issue that's always been a function of labor and how and how much labor available to admit as many patients as possible. So yes. It's just that labor has gotten better so thats allowed occupancy to continue to checkups.
It's improved over the last year, a little bit more than we would've thought given given labor issues. So we.
Speaker Change: We expect it to keep ticking up I mean the industry.
Speaker Change: Both skilled and senior housing are projected to be fully occupied in the next few years, given the dynamics with the demographic and no new supply.
Speaker Change: Housing side of declining supply on the skilled side.
Speaker Change: So it's.
Speaker Change: It's going to be interesting to see what happens with.
Speaker Change: Seasonality and normally once we got out of the pandemic I would expect to see seasonality come back in but on the skilled side for example, with supply continuing to decline. When you think about eight to 900 buildings closing over the last four plus years only 15 new facilities Bill.
Speaker Change: Last year, it's just going to continue that way so.
Speaker Change: It's possible that that could mask some of the seasonality that remains to be seen but I think that's a real possibility that we're still not going to see sort of the normal seasonality that we've historically seen so time will tell.
Speaker Change: That's kind of the way we see it right now.
Speaker Change: Great appreciate the color there Rick and then maybe just one question on capital availability.
Speaker Change: Obviously, the demand I think we've seen for both seniors and skilled with the demographics sets up well over the next couple of years, but it seems like lenders are still relatively apprehensive to provide that capital.
Speaker Change: Your conversations and kind of what Youre seeing out there has there been more appetite for lending and maybe if you could give some color on kind of the availability of bridge to HUD debt that would be helpful. As well. Thank you.
Hum.
Speaker Change: Lenders are.
Speaker Change: So we you know we are at.
Speaker Change: As mortgage financing as a matter of course, and and so Mike can talk more about our balance sheet debt, but what I hear them in in our times that Nick and you are lying and speaking with other operators and owners.
Speaker Change: And lenders is there is definitely an interest among the lenders to be back I think there was an issue of price now Fannie Mae still has a substantial bad book of senior.
Speaker Change: Senior housing loans.
Speaker Change: It is its overwhelmingly the majority of their bad debt right now so and then they foreclosed on additional assets, so Fannie mae's not not a.
Speaker Change: Not really actively lending but Friday.
Friday is.
Speaker Change: Hum.
Speaker Change: We can have and I have not spent a lot of time in the bridge to HUD World recently, but there is still definite activity and a bridge to HUD space and it's nonbank lenders and it has been for awhile.
Speaker Change: And Dell I think their risk appetite may have shifted.
Speaker Change: Ah down somewhat from where they were a few years ago, but also as a.
Speaker Change: Results on operating results on skilled nursing has has improved and kind of normal gotten closer to kind of a normalized place. So they don't have to take as much.
Has its still extremely slow.
Speaker Change: Extremely.
Speaker Change: Great. That's it for me thanks for the time.
Speaker Change: Our next question comes from Rich Anderson with Wedbush. Your line is open.
Rich Anderson: Hey, Thanks, good morning so.
Rich Anderson: Here you on complications you know the ctr or you deal with JV and preferred equity is not your cup of tea, but I'm wondering if you run into any of your REIT peers and that makes it a little bit more difficult to find stuff given that they have you know your cost of capital has gotten better, but there's an and.
Rich Anderson: One or two others is better than yours as well.
Speaker Change: So are you are you finding that you're running into other Reits or is it just too big of a playing field and it's not an issue.
Speaker Change: I think a couple of things as well.
It's a big playing field, but the others when it comes to skilled nursing.
Speaker Change: We all value of these assets the same way, it's gonna be between in the item 10 cats. So even if someone its cost of capital is a little bit better than ours.
Speaker Change: They're not going to come in at an eight cap to beat us on it. So we can compete on any of the skilled stuff that's out there and if we wanted to do bigger stuff that had a little bit more work required to it if we chose to do that we could do that soon.
Speaker Change: When it comes to the skilled caught the cost of capital piece, just as an issue it's not a barrier at all on the shop side in terms of our peers.
Speaker Change: No.
Speaker Change: Dr. Gary.
Speaker Change: Other peers aren't really doing shop.
Speaker Change: We don't view bad costs.
Speaker Change: Well tower was the same obviously right so.
Speaker Change: We're the only ones right now that are out there doing it.
Speaker Change: Yeah, and you're in your size category you mean.
Speaker Change: Right right.
Speaker Change: What about is investing in that incrementally from here also too much of a complication or are you willing to go down that path more.
I mean, we did alone earlier this year it was a smaller loan on a skilled nursing facility.
Speaker Change: Had a clear pathway to ultimate ownership of that I mean that is.
Speaker Change: More within our wheelhouse than going out and doing very large mezzanine loans or something like that but.
Speaker Change: But by and large like Ricks alluded to or brick said earlier and he said on previous calls as well.
The bigger and more complex those things become the more complex our story in a more noisy our story becomes which is precisely what we're trying to avoid so there may be opportunities that present themselves with a trusted operator on a on an asset that we'd like to own eventually that could make sense like the one we did earlier this year, but you shouldnt expect that to be a loss.
The driver of our of our investment activity.
Rich Anderson: Rich, we get that but yes.
Speaker Change: Turning to the excess cash we understand why some of our peers.
Find a place to park that put that to work.
Speaker Change: Body is different.
Speaker Change: Totally understand that but thats just not a place that we're at the strategy that we've been executing resulted in.
Speaker Change: Anemic year over year growth that would be different but that's not the case. This is working.
Speaker Change: No.
Speaker Change: And as you know really well.
Speaker Change: There are still folks out there.
Speaker Change: I need to see what we're going to take that next big swing or have that thing that's going to require a call to discuss.
Speaker Change: We don't believe that we're going to stay.
Speaker Change: Focused and disciplined and all that kind of stuff right that debt.
Speaker Change: We are ill equipped to sort of be a little boring right. So we're just sticking with it as long as we continue to get the results that we're getting which are pretty good.
Speaker Change: Hey.
Speaker Change: And on the shop growth, it's a nice turnaround from the beginning I think at the beginning of the year, where you did 9% and everyone was like Wow.
Speaker Change: Why is it so low and then you said yeah, we got to work on it what what what happened to flip the switch to get a requisite levels of double digit growth out of your shop portfolio.
Speaker Change: Was there something strategic or was there something one time ish back then that sort of muddied. The story on a temporary basis apologies for not remembering exactly.
Speaker Change: It's all good the 9% was really an outlier and we talked about whenever it was couple of quarters ago. It was really a tough comp from the previous year, because if you look at the other quarters this year.
Speaker Change: The growth has been squarely in that mid to high teens level and it has been even going back to last year. If you look at year over year growth.
Speaker Change: The growth has been really strong that portfolio and it's really effectively what we expected in terms of the natural recovery in that portfolio as you start picking up occupancy.
Speaker Change: Operating expenses start to moderate operating leverage kicks in all the stuff you talked about every quarter. That's that was what we expected and it's playing out that way.
Speaker Change: Was it an anomaly.
Speaker Change: But it was a bad club that's all.
So no strategic change or anything like that.
Speaker Change: Change the landscape last for me.
Speaker Change: Kind of past the that the happy point of coverage I mean, I should say of reimbursement, perhaps for Medicare Medicaid and maybe this time next year, we'll be talking about a more typical number do you think we're sort of at the sweet spot of coverage gains and that we will by this time next year they.
The coverage improvements that you're seeing and perhaps the.
Speaker Change: Other the metrics occupancy and so on start to come.
Speaker Change: Decelerate down to a more.
Speaker Change: Typical growth pattern or do you see that there is more than a year left in that thesis going forward. Thanks, Yes, I've seen more than a year left for a couple of reasons why I think we probably have one more year from a Medicaid Medicare perspective, because of the lag time in capturing inflation that will have some outsized rate.
Speaker Change: <unk>, so I think.
Speaker Change: Next summer, which is when we get about 70% of our Medicaid rate increases in October 125, I think we'll still have pretty good rate increases not as good as this year I don't think we're going to see over 7% again on Medicaid.
Speaker Change: And not necessarily even 4% on Medicare, but I think we are at least one more year.
Speaker Change: Somewhat outsized compare to.
Speaker Change: Years' past on both Medicare and Medicaid the other thing I'd note is that we continue we expect occupancy to continue to increase so even we're.
Speaker Change: Even with the rate increases moderate.
Speaker Change: The operating leverage is so significant in both of these asset classes that.
Speaker Change: We would expect to continue to see margin growth and our rent coverage.
Speaker Change: So I mean I think it was you rich two quarters ago that says hey is it possible that we're going to see two times coverage in the aggregate at some point and we're almost there.
Speaker Change: Alright, so and the other thing I would note, particularly on skilled more so than senior housing is that operating leverage inflection point kicked in lower than it has historically because the revenue per patient day has grown at such a pace.
Speaker Change: It has outpaced what's happened with inflation so in other words.
We are already.
Speaker Change: At prepared we already hired their prepaid debit margins when occupancy in the skilled portfolio was still 200 basis points off pre pandemic levels.
Right. So I think it's I think it's I think it's for sure more than a year.
Speaker Change: Okay. Thank you.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Our next question is from Alex <unk> with Baird. Your line is open.
Speaker Change: Hi, Thank you for taking our questions first one for me is what are you seeing as the best risk adjusted returns currently in the pipeline.
Speaker Change: And I think it's I think it's the kinds of assets you've seen us buy them.
Third newer vintage.
Speaker Change: High quality, well performing senior housing assets.
And and I think theyre going to be some snaps that fall into that category as well.
Speaker Change: Newer vintage maybe more loosely defined on the case of snaps than senior housing, but nonetheless newer.
Speaker Change: Since those doses that all makes sense for us.
Speaker Change: Yeah helpful.
Speaker Change: How much more upside is there from having their rent and do any other tenants have meaningful upside for percentage rent.
Speaker Change: Yeah.
To answer your second question Theres, not any other tenants with meaningful percentage rents.
Speaker Change: And baked into their leases the upside for avid mirror I mean, I don't think there is technically a cap on it so.
Speaker Change: It's going to be just as they continue to improve on their operations, we're going to see that benefit. So it's hard to say how much that upside could be but we still think there's a bit of upsides to capture there which could be most important has taken that window that we're gonna have starting next year to reset to a fixed rate.
Bin picking the right moment that works frankly, not just for Sabra, but works for avid mirror as well its got to work for both of us.
Speaker Change: So that'll be an ongoing conversation over the next year plus.
Speaker Change: And then we won't have anything left.
Speaker Change: <unk>.
Speaker Change: With percentage rents.
Speaker Change: Got it. Thank you that's it for me.
Speaker Change: Okay.
Speaker Change: Our next question comes from Michael Strick with Green Street. Your line is open.
Thanks, and good morning.
Michael Strick: So I know you called out the operating leverage impact on NOI growth within the shop business can you just quantify the flow through of incremental occupancy NOI that you are currently seeing today across the shop portfolio.
Speaker Change: Frankly, I have not done that tried to back into that math, but we're seeing the numbers I gave you on rats on export and tell the story, so even though expenses increased somewhat.
Speaker Change: It's really variable costs that increase with occupancy not not fixed cost.
Speaker Change: And the fact that export is essentially flat now.
That kind of tells you where that spot is and so at that point is just revenue minus the variable cost that's really that's really going to the bottom line and that's.
Speaker Change: Yeah.
Speaker Change: Senior housing that's going to be a substantial portion.
Speaker Change: Got it that's helpful.
Speaker Change: Maybe moving going back to the sniff transaction environment and conversation, what's driving the increase in sniff opportunities out there.
Speaker Change: What type of sellers are you seeing start to become a bit more active.
Speaker Change: Well I think because of the pandemic you had a lot of the assets that were out there were sort of lender force distressed assets.
Speaker Change: I think a lot of sellers, who didn't have to sell but ordinarily would sell has simply been waiting for their NOI should become stable enough and predictable enough.
Speaker Change: That they don't feel like they can get hosed on price.
Speaker Change: And I think with.
Speaker Change: We've got the Medicaid rates.
Speaker Change: <unk> are now baked in and Medicare just happened October one so with that with the reimbursement increases baked in and hopefully as we go into next year, we'll see more sniff opportunities that are off market.
Speaker Change: Great. Thanks for the time.
Speaker Change: Yes.
Speaker Change: Again, if you'd like to ask a question press Star then the number one on your telephone keypad. Our next question is from Tayo Okusanya with Deutsche Bank. Your line is open.
Speaker Change: Hi, yes, good afternoon, everyone.
Speaker Change: Conversation around acquisitions is very interesting is like Damned, if you do damned if you Don.
Speaker Change: Anyway.
Speaker Change: First question around the senior housing Triple net portfolio I think one of your peers on their earnings call talked about.
Speaker Change: Increasing interest in trying to convert some of the triple net senior housing to RIDEA market seem to kind of respond positively to that just wondering whether that's cross your mind, whether it makes sense within your portfolio.
Speaker Change: Well, we've been doing that all along Thats why the senior housing Triple net portfolio is so small now so we've already we've already we've been active in doing that on a regular basis and we're kind of out of those opportunities because right now the remainder of that triple net portfolio as legacy stuff with really good operators to coverages. So.
Speaker Change: 103, seven so.
Speaker Change: They don't have an incentive at this point theyre doing really well they don't have an insight at this point to convert to shop. So.
Speaker Change: The other is mostly transitions to newer operators.
Speaker Change: So I think I don't think that.
Speaker Change: The number is going to change dramatically you will those see youre going to see our mix of assets change because you're going to see more shop.
Speaker Change: Growth with the company, which will decrease the percentage that's triple net senior housing. It's also going to decrease the percentage of IL. That's in our senior housing portfolio because most of the shops that we'll be doing doesn't have much or any IL in it.
Speaker Change: And because the behavioral opportunities that were that we would like are going to be so few and far between that percentage of NOI is going to drop in kind of a crew to shop. So I think youll see skilled sort of hover somewhere around where it is we can do a really large scale deal tomorrow, and it's not going to change.
Speaker Change: The percentage that much.
Speaker Change: So I would expect to see that hover around where it is shop will increase IL will decrease the triple net will decrease.
Speaker Change: And behavioral will decrease.
Speaker Change #100: That's a helpful color and then one more for me just again, Richard could you talk a little bit about kind of from a regulatory perspective, what youre expecting going forward whether that's.
Speaker Change #100: Election, particularly related or again, you also have to see a mess out there talking a little bit tougher about 2025 and their viewpoints on you know theyre going to keep moving ahead on minimum staffing.
Speaker Change #100: If something dramatically changes if they're going to go for them to be full steam ahead on the regulatory changes they want to implement and curious what your thoughts on that.
Speaker Change #101: Well, they can say, what they want and I respect that but our point of view hasnt changed on.
Speaker Change #101: On the fact that we believe minimum staffing is going to go away because it's just a really really bad idea.
Beyond that though I think the impact of Chevron is much broader than how it is going to impact the outcome to the staffing mandate because it goes to the way regulators have arbitrarily and unilaterally made decisions.
Speaker Change #101: So I think it's going to be tougher.
For any of these regulatory bodies too.
Speaker Change #101: Just arbitrarily say, we're going to do this to now we're going to do that.
Speaker Change #101: Now, what I and I would suggest that our.
Speaker Change #101: Our trade association, which really represents the industry.
Speaker Change #101: When it comes to this kind of stuff both legislatively.
Speaker Change #101: And as we've seen with the staffing mandate with lawsuits.
Speaker Change #101: I think theyre going to be much more aggressive post chevron and just not sort of sitting back and accepting things.
Speaker Change #101: Things just being done to us without any real rationale without any focus really on.
Speaker Change #101: What's really going to improve quality of care to the patients and residents that we could that we care for.
Speaker Change #102: That's helpful. Thank you.
Speaker Change #103: There are no further questions at this time I'll turn the call over to Rick matrix.
Rick matrix: Thanks, everybody for your time today as always we're available for follow up and look forward to talking with you and then a couple of weeks, we'll look forward to seeing a lot of you in Vegas for NAREIT.
Rick matrix: Have a great day.
This concludes today's conference call you may now disconnect.
Rick matrix: [music].
Rick matrix: Luke Soc.
Rick matrix: Yes.
Rick matrix: No it's.
Rick matrix: But life goes on.
And this all.
Rick matrix: Sure.
Rick matrix: Key Bon ton.
Rick matrix: Let's just being.
Rick matrix: We had some.