Sabra Health Care REIT Inc (SBRA) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT's Second-Quarter 2012 Earnings Conference call. This call is being recorded.

I would now like to turn the call over to Talya Nevo, Chief Investment Officer. Please go ahead, Ms. Nevo.

Thank you. Good morning, everyone. 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 business strategies and expectations for growth opportunities, our expectations concerning our recent acquisition activity, our expectations regarding the development of our acquisition pipeline, and our future results of operations.

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 those listed in our form 10-K filed with the SEC on March 3, 2012, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC today. 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 applicable.

In addition, references will be made during this call to non-GAAP financial measures. Investors are encouraged to review those non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included at the end of our earnings press release and in the supplemental information materials included as Exhibit 99.1 and 99.2, respectively, to the form 8-K we furnished to the SEC today. These materials can be accessed in the Investor Relations section of our website at www.SabraHealth.com.

Let me now turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Thanks, Talya, and thanks everybody for joining us this morning, or this afternoon for a number of you. I'll go through my remarks, and then I'll kick it over to Harold Andrews, our CFO, who will go through his, and then we'll go to Q&A after that.

We had a very productive second quarter. Our revenues grew 34% to $25.1 million over Q2 2011. Our FFO grew 61% for the same period. Our AFFO grew 52% for the same period. Our rent coverage, as we expected, rebounded, for the trailing three months, was at 1.80, 1.34, and 1.55 for facility EBITDARM, EBITDAR, and tenant EBITDAR, respectively. For the trailing 12 months, we were at 1.81, 1.34, and 1.55 for facility EBITDARM, EBITDAR, and tenant EBITDAR, respectively. This excludes the one facility that we're in the process of divesting.

Occupancy for the skilled nursing portfolio was up quarter over quarter 20 basis points to 87.9. As you've probably seen, it was an extremely mild winter, and occupancy and skilled mix were down generally for the sector in the second quarter, which is a little bit unusual. It actually happened in 2009, as well. We were pleased that our operators actually saw an increase in occupancy on a quarter-over-quarter basis. Skilled mix was down 490 basis points to 37.5%, and that was due basically to three factors -- the CMS cuts, obviously, which were a lot of it; again, the mild winter; and percentage-wise, as a result of the occupancy increase.

Our deal activity for the quarter totaled $36.7 million, and for the year we're now at $76.6 million. We fully expect to hit our acquisition volume target of $150 million to $200 million for the year, and actually expect to be well within that target well before the end of the year. We have no update on guidance, as we just updated guidance as part of our high-yield add-on a little bit over a week ago, so nothing's changed since then.

In terms of the high yield add-on, just a couple of comments I want to make. We had anticipated doing something in the debt markets in the fourth quarter, but as we were following where our bonds were trading, it's just a very hot market, and our bonds were trading at levels that really had no relationship to where the Company was rated. We felt like it was an opportunity that we should jump on with rates so good. I think as a result last Monday, we started out looking for a $75 million add-on. We up-sized it to $100 million at $1.06, which gave us a yield to maturity of about 6.94%, and a yield to [worse] somewhere around 6.5%. Really just great rates for us. Again, we were opportunistic and it just gives us that much more capital to work with, which we have no concern at all that we're going to be able to deploy expeditiously.

In terms of our expectations for the remainder of the year in our pipeline, our pipeline remains in the $350-million range, which changed that the pipeline is about half of it is now senior housing, specifically assisted living and memory care. We think that over the next couple of months, we will be in a position to make announcements that will demonstrate not just our commitment, but our ability to execute on senior housing deals, both in terms of stabilized assets, and in terms of building development pipelines in the senior housing arena against, specifically AL and memory care, so we're really excited about those opportunities. As we think about where we are and where we're going strategically, our focus will continue to be skilled nursing, assisted living, and memory care. We do want to start emphasizing senior housing more, so that over the longer haul we'll have a much better balance between private-pay senior housing and skilled nursing in the portfolio, ultimately, attempting to have at least a 50-50 split. Obviously, it will take us some time to get there.

In terms of how we get there, we really look at it in a couple of different ways. For right now, the most important thing still for us is to reduce our exposure to our primary tenant, Sun/Genesis. The way things are going, by the end of the year we should have that exposure down to about 60%, so we will have taken it from 100% to approximately 60% in two years, which is a pretty nice outcome. We expect by the latter part of next year to have them below or somewhere around 50%, which will be a milestone for us and is key for the rating agencies as we look forward to additional improvements in our ratings.

What will change for us at that point is, as we look at our pipeline today, when we see good skilled nursing deals, we're going to want to get those done. We're not going to want to wait and hope that we'll get the next two or three assisted living or memory care deals. Once we hit 50%, I think you'll see us more actively bypassing skilled nursing deals so that we could more aggressively build out the senior housing component of our asset base. We look forward to that. In the interim period, we still believe that, based on our existing activity, and the way the pipeline's looking, that you'll see some nice up-ticks from us relative to the percentage of senior housing deals that we do going forward, and certainly between now and the end of the year versus skilled nursing.

In terms of Sun/Genesis, only just a couple of comments there. I think we've already talked about it a lot. Earlier this week, Formation did secure its financing for the deal, so that's all in place, and the change in ownership process is in place, as well. I think that the Genesis and Sun folks are looking for end-of-third-quarter close to the deal. I would tend to think it will take longer than that, so it shouldn't surprise anybody if it goes to the end of the year, simply because the change-of-ownership process -- it's not a problem, but it's a little bit unpredictable, and Genesis is looking for a change of ownership in a number of states that they don't currently operate in. Again no issues there, it's just timing. Our expectation's probably a little bit different from a closing perspective than their expectations, but everything is on course, and of course getting the financing in place was the most critical benchmark to date, and they are good to go on that.

With that, let me pass it over to Harold Andrews, our CFO, and then we'll go to Q&A after that. Harold?

Thanks Rick, and thank you everybody for joining the call this morning. For the three- and six-month periods ended June 30, 2012, we recorded revenues of $25.1 million and $48.8 million, respectively, compared to $18.8 million and $36.4 million for the same periods in 2011, increases of 33.6% and 34.2%, respectively. 73.7% of our revenue was derived from our leases to subsidiaries of Sun Healthcare Group during the quarter, down from 96.5% in the second quarter of 2011. On an annualized pro forma basis, taking into account all of our closed transactions, the Sun portfolio represents 69.7% of our total revenues.

FFO for the three- and six-month periods ended June 30, 2012, was $13.5 million, or $0.36 per diluted common share, and $25.2 million, or $0.68 per diluted common share, respectively. This compares to the same period in 2011 of $8.4 million and $15.7 million, respectively, or $0.33 and $0.62 per diluted common share. AFFO, which excludes from FFO our acquisition pursuit costs and non-cash revenues and expenses, was $15.7 million, or $0.42 per diluted common share during the quarter, compared to $10.3 million, or $0.40 per diluted common share for the first quarter of 2011 -- second quarter of 2011, excuse me. For the six months ended June 30, 2012, AFFO was $29.7 million, or $0.79 per diluted common share, compared to $19.7 million, or $0.77 per diluted common share on a normalized basis for the same period in 2011.

Our net income was $5.9 million, or $0.16 per diluted common share for the quarter, compared to $2.1 million, or $0.08 per diluted common share for the second quarter of 2011, and $10.3 million, or $0.28 per share for the six-month period ended June 30, 2012, compared to $3.3 million, or $0.13 per share for the same period in 2011. G&A costs for the quarter totaled $3.5 million, and included stock-based compensation expense of $1.6 million and acquisition pursuit cost of $0.4 million. Excluding these non-cash and transaction-related costs, G&A costs were 5.8% of total revenues for the three months ended June 30, 2012. This compares to 7.3% in the same period of 2011. In addition, recurring cash G&A costs were $1.5 million for the quarter, down $0.2 million compared to the first quarter of 2012.

Interest expense for the three- and six-month periods ended June 30, 2012, totaled $8.1 million and $15.8 million, respectively, compared to $7.5 million and $15.1 million for the same period in 2011. Interest expense included the amortization of deferred financing costs of $0.9 million in the current quarter and $0.5 million in the second quarter of 2011. Our current weighted average interest rate for all outstanding borrowings at June 30, 2012 was 6.62%, a decline of 63 basis points compared to our weighted average for the first quarter of 2012 of 7.25%. This reduction was a result of our utilization of our revolving line of credit at a rate of 3.49%, the 50-basis-point reduction of our $58.6 million variable rate mortgage loan, and the refinancing of $20.9 million of HUD debt at a rate of 2.49%.

Switching over to the balance sheet, in the statement of cash flows, our real estate investments totaled $822.2 million before accumulated depreciation at June 30, 2012, an increase of $25.4 million since March 31 of 2012, resulting from the Ridgecrest Manor and Aurora 2 portfolio acquisitions. In addition, we originated the $11 million Onion Creek mortgage loan, which is reflected in loans receivable, along with a $10 million Meridian mezzanine loan originated in the first quarter of 2012. The weighted average year-one cash yield on our investments during the quarter was 9.8%.

Cash flows from operations totaled $24.1 million for the six months ended June 30, 2012, compared to $17.9 million during the same period of 2011. In addition to the investments mentioned above, cash and a line of credit borrowings of $42.5 million were primarily used during the six months ended June 30, 2012, for scheduled principal payments on mortgage debt of $1.6 million, payment of deferred financing costs associated with the revolving line of credit amendments, and other debt financing activity of $3.4 million, and payment of two quarterly dividends totaling $24.5 million.

Cash and cash equivalents decreased by $39.1 million during the six-months ended June 30, 2012, to $3.1 million as of June 30, 2012. As previously mentioned, we borrowed $42.5 million on our revolving line of credit during the quarter, leaving us about $157.5 million of availability on the line, which, combined with our cash and cash equivalents, provide us with approximately $160.6 million of liquidity as of June 30, 2012. Including the $103.8 million of net proceeds from our July 26, 2012, add-on debt issuance, we have pro forma liquidity of $264.4 million before paying offering expenses.

This liquidity, along with cash flows from operations, subsequent to June 30, is available to fund our $0.33 per share dividend to be paid August 31, 2012, and for ongoing operations and future acquisitions. We were in compliance with all of the debt covenants under our senior notes indenture and our secured revolving line of credit as of June 30, 2012. Our key metrics have continued to improve over time, and remain strong on a pro forma basis, taking into consideration the $100 million add-on senior notes issuance in July.

Those metrics include the following as of June 30, based on terms defined in our credit agreements -- consolidated leverage ratio at 4.29 times and at 4.88 times on a pro forma basis; consolidated fixed charge coverage ratio of 2.97 times and 2.52 times on a pro forma basis; minimum interest coverage ratio of 3.29 times, and 2.75 times on a pro forma basis; total debt to asset value of 42% and 45% on a pro forma basis; and secured debt to asset value of 20%, or 15% on a pro forma basis. Our unencumbered asset value to unsecured debt was 193%, and 152% on a pro forma basis.

We don't believe that any of the covenants in our indenture or amended credit agreement will limit in any significant manner our ability to deploy our available liquidity support or acquisition strategy. Rather, our strong liquidity and strong credit status provide us with the flexibility to continue our growth plans using available cash and the revolver, while being opportunistic and accessing equity markets in the future. Finally, just a couple of quick comments on our rent coverages, reminding everybody that they are presented one month in arrears. As Rick mentioned, our tenant coverages amounts for the three months ended May 31, 2012, improved over the three months ended February 28, 2012.

The specifics of that improvement are as follows -- the facility EBIDARM coverage increased from 1.58 to 1.76; facility EBITDAR from 1.12 to 1.3; tenant EBITDAR from 1.35 up to 1.53. Furthermore, excluding the one asset we've identified as a disposition candidate, our coverage amounts improved to 1.80 for facility EBITDARM, 1.34 for facility EBITDA, and 1.55 for tenant EBITDAR.

With that, I'll turn it back to Rick.

Just to follow-up on what Harold just said, in terms of an update on the potential dispositions that we talked about, I think on our last call, that we've been working with Sun. We talked last time about two dispositions. Genesis has determined that they would like to continue to run the one facility that was being considered for the disposition. So we're really only disposing the one facility, and then there are four other facilities that are being transferred to another operator. Those are all going forward and there don't seem to be any road bumps as we speak today on that.

With that, why don't we go to Q&A.

(Operator Instructions)

Rob Means, Stifel Nicolas.

It's Dan Bernstein filling in for Rob. Hopefully I don't embarrass Rob with any of the questions here.

(laughter) No, Rob usually does a pretty good job of that himself; I wouldn't worry about it, there.

He'll hear about it, eventually, right?

I just wanted to start off on the skilled nursing side. When I start looking at the three-month EBITDAR coverage, and the 12- month EBITDAR coverage, they're starting to level out. Do you see additional mitigation opportunities at your operators? I guess, maybe going forward, if we go forward another quarter or two, are we seeing the trough for EBITDAR coverage post the Medicare cuts last October?

I think that the third quarter for the skilled nursing sector is always a seasonally light quarter. So you're not going to see, I don't think, material change there. There should be some improvement in coverage in the fourth quarter, because I think what's still out there in terms of mitigation is, a lot of the operators reduced the amount of wage increases they're given. Employees get wage bumps throughout the year. Some of that is still to come. When you think about in a skilled nursing facility, wages being about 50% of revenue, and the reduce those wage increases 5%, it's a pretty meaningful number. That 's why we expect, by the time we report our rent coverage numbers for the full year 2012, that they will be somewhat higher than they are today.

Okay that's very helpful.

Turning to the pipeline, you're now talking about half seniors' housing and half skilled nursing. I guess, one, is it something that you've done intentionally to look for more seniors housing? Or is that simply you're seeing more sellers in the market maybe, for whatever reason? Two, can you talk about your underwriting criteria for seniors' housing versus skilled nursing, and maybe whether you're looking at triple-net or TRS-type of investments?

I'll take the first part, and then I'll turn it over to Talya. This was a concerted effort on our part to focus on senior housing in terms of reaching out, developing relationships. Yes, it's been 100% a result of that. Because we haven't really been in it before, we don't really have the perspective of saying there's more activity now than there was six or eight months ago, because it's really a result of our focus. Our cost of capital is coming down more quickly than we had anticipated.

Obviously, we expect that to continue, and certainly the add-on was a good sign of that, and the recent upgrade by Moody's. And then of course the re-financings that Harold articulated. Those are pretty material changes in our interest rates. That's made it more doable for us to focus on assisted living and memory care. Independent living remains somewhat expensive still for us. There are other issues associated with independent living as well that make us more interested in assisted living and memory care.

I'll turn it over to Talya now.

Dan, it's Talya here.

On underwriting, we obviously look at a lower coverage on the completely private-pay types of senior housing we're looking at. So on a EBITDAR-to-rent coverage, it's more on the 1.2, 1.3 range. Then lease cap rates are really, for the most part, eight-handle, any work for us -- we're looking between 8% and, call it, 9%, depending on the asset size, quality, operator, and such.

In times of RIDEA versus triple-net, I think what we've said before with RIDEA is a couple things -- one is, it's something we're open to, but it has to be the right situation, which means it has to be the right kind of portfolio, a growth opportunity and the right operator. If we can get those things to converge, then I think you'll see us go for it. The risk profile is different, but for the right opportunity, it can be a very rewarding structure. For the most part, I think, broadly speaking, the bulk of our transactions you'll still see as triple-net lease stuff for the foreseeable future.

That said, it's more likely than not that there will be some RIDEA opportunities.

Okay; and then one question for Harold -- are there additional refinancing opportunities on your balance sheet within the mortgages that you have? Again, even further decreased interest costs, or are we probably looking at the end of that refinancing cycle for Sabra?

No, there continue to be opportunities for us. One of the nice things that came out of the Sun/Genesis transaction is Sun wasn't able to assist us in doing HUD refinancing, primarily related to accounting issues and collateral requirements for HUD. With the transaction with Genesis, we are amending our leases that will give us the collateral that we need and give us the cooperation that we need from Genesis to refinance additional existing mortgage debt using HUD financing if the rates continue to be strong.

There are more opportunities to come. As you know, that process can take some time, so there's nothing imminent; but there actually is one load that we're working on today that might close in the next couple of months for somewhere around $30 million -- $25 million to $30 million. There is a bigger part of our mortgage debt with GE that is a candidate, but that's further out. We'll definitely be looking at that.

Okay, I appreciate it. I'll jump in the queue. Thank you.

(Operator Instructions)

Tayo Okusanya, Jefferies

Good afternoon, everyone. First of all, congratulations on a very solid quarter.

Gentlemen, as we look at the balance sheet now, you have a massive amount of liquidity. You had always kind of talked about this $300 million to $350 million acquisition pipeline. You seem really geared up now to really take advantage of that. I'm just curious how we should be thinking about an acquisition guidance for the back half of the year going into 2013? How much of that $300 million, $350 million can you take advantage of as soon as possible?

I think so. Through the first six months of the year, we did just under $80 million in acquisitions. We don't expect to be really any higher than, say, closer to $200 million than $150 million by year-end. We'll have more done in the second half of the year than we did in the first half of the year. But we don't expect to go hog wild on it, because one of the things that's been fortunate for us is, the quality of the pipeline has really continued to improve, both in terms of SNFs and senior housing, particularly on the senior housing side, as I commented earlier.

We're being really particular about what we do. We are -- even though I said earlier that once we get Sun/Genesis down to 50%, we may very actively start bypassing skilled nursing deals to do assisted living deals -- we're actually starting to do some of that now. I would tell you that there are a couple of skilled nursing deals that we clearly could have been in the running for, but with what we expect to have happen on the senior housing side, it would have completely offset the benefit of doing those in terms of shifting the percentage of the asset base in our portfolio.

I think, strategically for us, we are much better served, both from the impact on our ratings, our cost of capital, and, frankly, our multiple, if we pursue this strategy and maybe do a little bit less in total acquisitions, so that we can more proactively re-shape our asset base so it's got a different balance than it does today. We think at the rate we're going -- if we were much more aggressive in doing acquisitions, maybe we can get Sun down to 50% three or four months earlier, but that's really all you're talking about. I think for us, we're best following the path I just articulated. And I think our shareholders will receive a much better benefit that way, as well.

That make sense. I'm assuming again the acquisitions you're looking at on the senior housing side, since you just got paper in at a 6.92 rate, even those deals are not going to end up being accretive to your earnings?

We underwrite everything on a balance-sheet-neutral basis, but it obviously helps being able to use the revolver, as inexpensive as it is, and certainly the new high yield helps, as well. We understand that there is a lot less of a spread for us with AL and memory care, given our cost of capital, than there is with skilled nursing. The best way to improve that spread is to re-shape the balance of our portfolio, as well as continue to get Sun's exposure decreased.

We're just trying to think strategically, and fortunately we have the opportunity to do that. In addition to getting more senior housing deals done, within those senior housing deals, I think you'll see recent-vintage assets -- so pretty new assets. We would expect to have development opportunities to announce as well. There'll be a lot to look forward to, we think, in terms of the pipeline deals that we're working on.

Okay. Just one more question on senior housing. Could you just remind us -- the nine senior housing assets that you currently own already that show up in the supplementals, what those are again?

They are assisted living.

Okay, so they're all assisted living.

Yes, and those are pure senior housing assets. We don't break it out this way any more, but there are a handful of other facilities out there that formed the SNF basket that do have assisted living beds in them. It got really complicated with the multi-facility designation and all that, and it's not that material. We just decided to do it the way we're doing it now.

Very helpful. I'll jump back in the queue. Thank you.

(Operator Instructions)

Tayo Okusanya, Jefferies

I'm back. (laughter) Another quick question -- Medicaid -- just kind of curious, we're now past July 1. What the states are saying in regards to their fiscal year 2013 budget, and the net impact to your operators?

Yes, the same as we've seen the last two years. We expect a flat-rate environment. The state budgets are in much better shape now than they were a couple of months ago, but things are just so tight out there. I think before the recession, if the budgets had improved as much as they've improved over the last two years, we would start seeing Medicaid rate increases. Because it's just still a very muddy economic environment, even though their budgets have improved -- notwithstanding California and a couple of states -- we don't expect to see rate increases on an aggregate basis. It will be the same way it's been.

The one thing I do want to point out -- you just triggered something, Tayo, and I know you wanted to ask something else -- on Medicare, it's important to note that even though, assuming the sequestration happens in January, even though that sequestration will offset the net market basket that the sector receives on October 1, what's important to note here is that about two-thirds of Medicare rate growth in the skilled nursing sector comes from acuity shift, not from government pricing. In a flat rate environment, you'll have a rate increase recorded and sequestration takes it away, and you're flat on a government pricing perspective.

I would fully expect to see Medicare rate growth, even in a flat-rate environment. If you think back to the five and six years prior to RUGs IV, which is still a very big opportunity for the sector, Medicare rates were increasing about 8% or so a year across the sector with 3% market basket. That's where you'll see that differential being acuity-based. Again, flat Medicaid, flat Medicare from a pricing perspective, assuming sequestration happens, but nevertheless, Medicare rate growth.

That's very helpful. All right, that's it for me.

Quinton Falelli, Citi.

In light of the Sun/Genesis merger, and maybe, Rick, if we could just go through what your views are in terms of operator consolidation in the skilled space and the seniors housing space? And what kind of opportunities you think that might present for you over time?

The Sun/Genesis deal doesn't indicate anything about consolidation; it's a one-off deal. There are very few buyers out there for big portfolios in the skilled sector. There's a regional company that is on the market right now, a West Coast regional skilled company that's got 50 facilities. So you may see a one-off here or there on a regional basis, but that's really about it. I would say, similarly, from what we see on the senior housing sector, there aren't -- ALC had been in the market for a while; that's not on the market, and it looks like that's not going to happen.

There might be a little bit more out there on the senior housing side than there is on the skilled side, but I don't think a whole lot. In terms of opportunities for us, that stuff isn't really that relevant. In terms of going after bigger deals, we're not going to compete with the big guys, anyway. We have kind of our niche of $10 million to $100 million, our deal size, with $20 million to $50 million being a sweet spot. Nothing else really affects that.

Maybe if I just switched to your cost of equity? I know you've got significant liquidity available to you, which will keep you going for some time. I'm just curious, given share prices up considerably this year, in the mid-$18 range, are we at a level where we could see you potentially raise equity, or do you think you still need to put this capital to work, and you're going to get a better cost of equity down the track?

Two things -- one, we have plenty of capital. We don't need to raise equity right now, so I don't see us doing that. The other thing is, even though we've had nice share appreciation, there are two things I'd point out. We got beat up last fall for about six months after the CMS cuts and people's concern about Sun. I would say that we got beat up sort of a little bit too much, and so some of the recovery was just a natural recovery, once people got comfortable with that Sun -- even before the Genesis announcement -- that Sun was viable and all that kind of stuff.

The share appreciation, I think, is a little bit misleading from that perspective. I'd almost look at the share appreciation from just prior to the CMS cuts to where we are today. There's still been some appreciation, but not to the same level. The other thing I'd point out is, even though it's nice to have the stock price back in the $18s, we still trade at a steep discount to everybody else, and as we should. I'm not making an issue out of it. We've got still 69% exposure to Sun/Genesis. With the way things are going for us, we think there is just a ton of upside on the stock and the multiple as we continue to grow the portfolio, shrink our exposure to Sun and change our asset base.

When it does come time for us to consider doing some equity, it's not going to be an automatic thing that we'd say, let's go out and do a secondary offering. Because of the deal sizes that we look at, we don't need a whole lot, and so we'll consider other products. We'll consider smaller tranches of equity, through either an ATM or an overnight, or maybe we do preferred -- something along those lines that's less dilutive to our shareholders but allows us to manage our balance sheet, mix and match equity and debt a little bit, and give our stock some more time to appreciate.

That's great. Thank you.

At this time, I'd like to turn the call back over to Rick Matros for any closing remarks.

Thank you everybody for your time and support. We're all around, so if you've got individual follow-up that you'd like to do with us, we're here and available, and we'll look forward to talking to you all soon. Thanks very much, have a great day.

This does conclude today's conference. We thank you for your participation. You may now disconnect.