Sabra Health Care REIT Inc (SBRA) 2022 Q2 法說會逐字稿

(technical difficulty) and welcome to the Sabra Health Care REIT Second Quarter 2022 Earnings Call. I would now like to turn the call over to Lukas Hartwich, Executive Vice President-Finance. Please go ahead, Mr. Hartwich.

Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2021 as well as in our earnings press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at sabrahealth.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 Matros, CEO, President, and Chair of Sabra Health Care REIT.

Thanks, Lukas, and thanks, everybody, for joining us today. To start, I just want to note that how we're looking at the business and talking about the business is a little bit different now. From our perspective, we've moved from pandemic to endemic. And that's just an acceptance. We think of the reality is the virus is always going to be here in some form of fashion. The number of cases, both for staff and residents that we have on a daily basis throughout the portfolio is in the hundreds, [it is] not thousands, much less tens of thousands as we saw during the worst of the pandemic. So we prefer not to be here, obviously, but we think it's here to stay and the levels of cases that we're seeing at the facilities, both again in terms of staff and in terms of residence is not impactful in and of itself on the business. Other things are impactful, but that in and of itself is [not an] impact along the business.

Moving to reimbursement. We've added some disclosure to show 2 charts: one, the extensions of FMAP. And we're showing our top 10 (inaudible) extension for FMAP and the actual Medicaid rate increases that we would normally get on an annual basis. And what we've seen, and this reflects the comments we've made over the past 1.5 years about the tone changing in a lot of the states relative to Medicaid under funding the business and state budgets being better than anticipated throughout the pandemic. So we're really pleased that with the number of states that have extended FMAP for a pretty long period of time through 2023 in a number of cases. And in those states that give much larger than historical increases for annual Medicaid rate increases. And in the case of a couple of states, we've got both FMAP extensions and regular Medicaid rate increases. So all in, that affects approximately 60% of our skilled nursing portfolio. And as you think about the [CARES Act] and things like that, tailing off, [PHE] has been extended through October. We are somewhat optimistic that it will be extended through year-end. But other things have fallen off. So really -- we really look to the states to be helpful here. And certainly, in those states that took these actions, it's incredibly helpful and will help with staffing issues as well.

I also want to note and express our appreciation of CMS for the final rule. That was a 340 basis point improvement over what the proposed rule was -- and important to note that of that 340 basis point improvement, 110 basis points was specifically due to capturing inflationary costs. Obviously, it doesn't capture all the inflation, but at least it's a step in the right direction. And since it's part of the formula, we should expect to see inflation capture to next year's market basket as well. Additionally, although occupancy in our skilled portfolio improved to 100 basis points sequentially from first quarter to second quarter, we are seeing a slowing down in July, both due to seasonality and continued labor pressures. Labor pressures are not as bad as they were at their worst. Agency has come down and hiring is up, but it's still going to be a slog for a while. It's tough, and it has hampered the rate of recovery relative to how quickly patients could be admitted. But we're also seeing seasonality come back. We haven't seen seasonality over the last couple of years. And both those factors apply to our senior housing portfolio as well as our skilled benching portfolio.

Moving on to investments in our overall strategy, our investment activity continues to be healthy, although most of the deals we see are in the senior housing space with some opportunities in the behavioral space. Although we don't see many opportunities in the skilled space, buyers reached many of our skilled assets at attractive pricing. As a result, we anticipate ample proceeds to fund new investments and so any increase in leverage as we saw in this quarter is specifically due to timing, and we, therefore, don't intend to access the markets. These dispositions will also result in the lowest skilled exposure in the portfolio since prior to the CCP merger. While that asset class will still be our largest, we'll be a much more diversified REIT with senior housing and behavior balancing us out. In terms of ESG, we are close to publishing our second annual report. We expect that to be out in the next several weeks and look forward to any input and comments as people have a chance to review that report. And with that, I'll turn the call over to Talya.

Thank you, Rick. I'm going to start with some brief comments on the performance of our fully owned managed senior housing portfolio and then provide an update on the initiatives that we have undertaken to allow us to continue to diversify our portfolio and improve the durability of Sabra's revenue stream. In the second quarter of 2022, we saw continued improvement in the operating performance of our wholly owned managed senior housing portfolio despite the impact of the Omicron variant, which worsened ongoing labor challenges. As occupancy and rates continue to rise, operating leverage is a positive, providing a list of cash net operating income. The headline numbers for the quarter on a same-store basis are as follows.

Occupancy for the second quarter of 2022, excluding nonstabilized assets was 80.7%, driven by a 290 basis point increase in our assisted living communities and a 60 basis point rise in our independent living communities compared to the prior quarter. Comparing second quarter 2022 to second quarter 2021, occupancy in our assisted living communities increased 620 basis points and 230 basis points in our independent living communities. Same-store occupancy has consistently trended up across our portfolio since the COVID-19 surge in early 2022. RevPAR for the period, excluding nonstabilized assets was $6,291, in our assisted living portfolio, a 6.6% increase over second quarter 2021 and $2,671 in our independent living communities, a 3.2% increase over second quarter 2021. Rising occupancy, coupled with rate growth reflects both the stickiness of existing residents and our operators' ability to balance rate increases while attracting new residents.

Excluding government stimulus funds, cash NOI for the quarter increased nearly 11% over the prior quarter and 44% in our assisted living portfolio alone. This dramatic increase in cash NOI and assisted living is largely attributable to higher revenue in our wholly owned (inaudible) portfolio. Because this portfolio has more memory care, the occupancy impact from COVID-19 surges has been greater, but the rebound has also been faster. Cash NOI margin, excluding government stimulus funds increased 1.5 percentage points driven by our assisted living portfolio, where margin expanded by 4 full percentage points over the prior quarter.

Our operators continue to address labor challenges and now inflation impacting cost, which is food and utilities. Higher expenses are partially offset by revenue growth but continued to impact the rebound of NOI margin. While in-place residents have been receiving 6% to 8% rate increases year-over-year, new residence rates are 10% to 13% higher on a year-over-year basis. Strong leasing velocity continues across our portfolio with gross move-outs normalizing and even dropping below pre-pandemic levels as availability and competition for staff remain a challenge that is mitigated but not yet solved by higher wages.

Last quarter, I mentioned that we had undertaken a comprehensive review of our portfolio with the intent of recycling assets and recycling capital. We are now determining which properties are long-term holds and which are candidates for conversion, repositioning or sale. As we continue to convert select properties for use as addiction treatment facilities, our investment in behavioral health is increasing. At the end of the second quarter, Sabra's investment in behavioral health included 14 properties and 2 mortgages with a total investment of approximately $730 million.

We intend to invest an additional $27.6 million of capital to complete the conversion of 3 of these properties, all of which have been leased to operators. Subsequent to the end of the quarter, we executed leases with behavioral health operators on 3 wholly-owned properties, 2 had operated as skilled nursing facilities and one is a memory care community. We are now in the process of converting those buildings for use of inpatient addiction treatment facilities. The investment value of these properties will be approximately $47.5 million with an expected stabilized yield of approximately 9%. Together, this represents more than $800 million invested and committed to behavioral health real estate, consistent with our discussion last quarter.

In the past 12 months, 43% of adults in the U.S. who sought mental health or addiction treatment were unable to access care because of cost, availability, lack of treatment options, and wait times. We are committed to supporting the delivery of behavioral health services by creating and financing the places where they happen so that these critical services are accessible to all, regardless of age, income or location. In doing so, we are creating value in our portfolio by generating higher returns in durable income streams as well as continuing to diversify our portfolio. Our attention to this underserved sector is being noticed, and we are now in active discussions with more operators on additional conversion opportunities.

Our portfolio review has also led us to explore selling some of our skilled nursing assets. Despite recent dislocation in the lending markets, buyers' appetite for skilled nursing properties remains active and pricing strong. At the same time, we remain highly selective in our new investments as we manage our capital. We view recycling capital and assets as another path to continue to enhance and diversify our portfolio without accessing the capital markets for funding. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer. Thanks, Talya. For the second quarter of 2022, we recognized normalized FFO per share of $0.39 and normalized AFFO per share of $0.38.

Compared to the first quarter of 2022, normalized FFO per share increased $0.01 primarily due to higher NOI from our consolidated senior housing managed portfolio, higher normalized FFO from the Enlivant Joint Venture, primarily related to $3.4 million of government grant income received during the quarter and a decrease in stock compensation expense as a result of adjusting payout estimates on performance-based awards that were set pre-pandemic. These amounts are partially offset by lower NOI from tenants whose rent is accounted for on a cash basis.

This decrease is primarily due to the first quarter collections under the Avamere lease that we highlighted on last quarter's call. As a reminder, in the first quarter, we recognized rent from Avamere for December 2021 and January 2022 at their pre-adjusted rent together with rent for February and March 2022 at their adjusted [ramp].

Compared to the first quarter of 2022, normalized AFFO per share was flat since normalized AFFO does not include stock compensation expense, and therefore, the pickup noted for normalized FFO does not impact normalized AFFO. Cash NOI for the quarter totaled $118 million compared to $123.5 million in the first quarter. This decrease is primarily the result of $5.2 million of lower cash rents, mostly related to the difference I noted earlier in rents [collected] from Avamere as well as fluctuations in collections from tenants accounted for on a cash basis. Cash NOI in the first quarter included a $2.3 million lease termination payment on a facility that was closed and subsequently sold, which also accounts for the change in interest and other income this quarter.

Cash NOI for the second quarter includes $3.6 million of support payments made by our unconsolidated joint venture to Enlivant, which is partially offset by $3.4 million of grant income recognized in Live and joint venture. As we noted last quarter, funding for support payments did not require additional capital contributions from Sabra, but rather were funded with proceeds received by the Enlivant joint venture from (inaudible). These decreases are partially offset by a $2.7 million sequential improvement in cash NOI from our senior housing managed portfolio. Cash collections from our tenants remain strong and are in line with historical standards. Less than 6% of our NOI is below 1x [EBITDARM] on coverage with rents on nearly all of those tenants being recognized on a cash basis. Additionally, more than half of the tenants with EBITDARM coverage below 1x are paying their full contractual rent to us.

As of June 30, 2022, our annualized cash NOI was $450.3 million, and our SNF exposure represented 60.7% of our annualized cash NOI, down 100 basis points from the first quarter and down 640 basis points from a year ago. G&A costs for the quarter totaled $8.6 million compared to $10.4 million in the first quarter of 2022. Excluding the stock compensation expense adjustments I referenced earlier, recurring cash G&A was $7.8 million compared to $7.9 million in the first quarter. During the quarter, we recognized impairment charges totaling $11.7 million related to 4 SNFs that are being evaluated for sale as part of our initiative to reposition our portfolio and recycle capital.

Now turning to the balance sheet. Over the past several years, we have prioritized strengthening our balance sheet, not only with regards to our leverage levels, but also with a focus on maturity laddering and reducing our variable rate debt exposure. This 3-pronged approach to managing our balance sheet has proven invaluable in the current debt environment and positions us well moving forward. We have no material maturities until 2024, which reduces our refinancing risk in the near term. Additionally, we have reduced the level of unhedged variable rate debt from 27.2% of our consolidated debt at the end of 2018 to 6.6% today.

Excluding our revolver, our unhedged variable rate debt is only 1% of our consolidated debt as of June 30. Because of our hedging activities, our annual interest expense is approximately $4 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 June 30, 2022, totaled approximately $924.8 million, consisting of unrestricted cash and cash equivalents of $67.2 million and available borrowings of $857.7 million under our revolving credit facility. As of June 30, our leverage was 5.44x. While this leverage level is above our long-term target of 5x, we view this as simply a short-term timing mismatch.

During the quarter, the balance on our revolver increased $125.5 million as we closed on our investment in the Ciena joint venture, and we expect to pay down the revolver by the end of the year as we receive proceeds from completed and pending sales, which are expected to generate over $210 million in gross proceeds. Once these proceeds are received and we repay our revolver borrowings, we expect leverage to be closer to 5x. We continue to focus on strengthening our balance sheet and portfolio without accessing the capital markets and are well positioned to do just that.

Regarding our capital recycling program, Talya referenced in her prepared remarks, there are 2 points I would like to make. First, the assets we are selling are primarily poorly performing assets that are on a cash basis, and we have been recognizing rents received from them that are below their contractual rents. Second, while we can't comment on the specifics of the sales until they close, we feel it is important to point out that through a combination of recently completed investments, like our joint venture with Ciena, which has a 6.5% stabilized yield and future investments in our senior housing managed and behavioral health portfolios, we expect to be able to replace the NOI from these sold assets while meaningfully increasing the quality of our portfolio and durability of our earnings. On August 3, 2022, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on August 31, 2022, to common stockholders of record as of the close of business on August 17, 2022. The dividend represents a payout of 79% of our normalized AFFO per share of $0.38.

Lastly, I would like to address our decision to not issue guidance this quarter. We continue to see positive momentum on occupancy and labor availability, albeit at a slower pace than expected. The timing and velocity of the [recovery remains] unknown and this, combined with macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time. And with that, we'll open up the lines for Q&A.

(Operator Instructions) Our first question comes from Juan Sanabria with BMO.

Just maybe hoping to spend some time on the transition assets you mentioned 25 that are either in process or in the future. Just trying to get a sense of the earnings impact of that? How much rent are those guys paying downtime of repositioning the assets -- and just kind of the rent uplift or degradation that we should expect as those assets are first repositioned and then released to new tenants? Just trying to get a better sense of earnings really.

Yes. Juan, I would say, as I mentioned in my prepared remarks, that the assets we're selling are not well-performing assets. And I think that stands -- that's the logic you apply to the assets that we are transitioning to new operators. Said differently, we would be transitioning these to new operators. If the current operators were doing a job that we thought was achievable at those facilities. So in most cases, if not all, these are on a cash basis, we're receiving some limited amount of rent on these portfolios. We think they are good assets in good markets, but we think a better operator could do a better job there and increase the earnings that we were getting from the existing operators. It may take a little bit of time. There's going to be some friction there as they transition operations to the operators. But in the long run, we see this as a positive for our portfolio.

The other thing I would add, Juan, is that this is [not] going to happen in one day. So the impact is incremental and not even going to be visible to the investment community because of the way these things get spread. What are the portfolios we actually started talking about some time ago, about 1.5 years ago, which is in New York, and that's still ongoing because everything takes [forever] there. And some of these decisions also, certainly in the case of the New York portfolio, in the case of another portfolio was impacted by the pandemic in terms of how it impacted the operators. In these cases, it was a couple of individuals who have been running these companies for a long time, and they're just done (inaudible) just finished and they just want it out. And so a lot of this stuff has actually been pretty cooperative. Actually, none of it's been antagonistic or adversarial at all. So that's really the way to think about it. [25%] is in a lot of facilities, and if you spread those transitions out over the period of time it's going to take for them to actually occur at any given moment, it's just not going to have much of an impact.

And then on the dispositions themselves, the 210 that you talked about, can you comment on or provide the cash or the rents that were flowing through FFO in the second quarter, on those assets?

Yes. Yes, Juan, we're not in a position to talk about nor should we talk about those sales until they've closed. I think that once we have the cash in hand and those sales are closed, we could provide additional color on what's going away. I think the part that should provide you and everybody else for that matter, comfort is the statement that I made in my prepared remarks, which is we expect to be able to replace that NOI with the investments that we're making. So you can just take a guess at the kind of investments we're making, what the associated cap rates are with that. And you could assume it's going to be somewhere at least equal to that, if not lower than that.

Yes. So these are specifically skilled nursing assets [as they have been] mentioned, we've been talking about for a while now. There's just an appetite for that out there from private buyers and private capital who have existing operating companies. And since these have been cash tenants, the yield we're getting is pretty fantastic, which goes to Mike's comment that even reinvesting in senior housing is a positive outcome for the company. So that's it.

Our next question comes from the line of Michael Griffin with Citi.

I'm just curious what caused the tick down in skilled nursing coverage this quarter, and so where could you see that trending throughout the rest of the year?

Yes. You have to keep in mind that we're moving one quarter further away from the large injection of stimulus into the space. So you had a quarter last year where there was similar coming in mainly in the form of the provider relief fund. And then this quarter, the latest quarter that we picked up had virtually nothing in it. I think the more comparable metric is to look at the coverage we disclosed on our SNF portfolio without PRS funds and see how that compares to last quarter, which is stable.

And so I said a little bit differently, we're not seeing declining trends there. It's simply a matter of what Mike just talked about.

Okay. That's helpful. And then just one question on the capital markets. Just given that the equity cost of capital seems to be improving, I guess, why not try to tap into those capital markets as opposed to selling the assets?

Well, you may be an outlier there, but I'll remind everybody at the reaction that the investment community had when we did the -- when we use the ATM, the way we did last year, when we did the $100 million equity offering at $14.40 last fall, I mean, people just came just short of flying out here to our corporate office and [hanging us by our necks]. So that's the kind of reaction that we got. But look, for us, we're not selling assets that you think are fantastic assets. Some of it obviously got made worse by the pandemic. But as we assess them, the recovery is going to be really long and arduous and may not even get there to some of these assets. So as Mike mentioned a couple of minutes ago, we think doing this is going to improve the long-term durability of our earnings stream. But -- and also, as I mentioned, leaving us with a much more diversified REIT at the end of the day.

Yes. And the other thing I'll add to that is, as Rick alluded to, we're not just selling assets to fund growth, right? -- could we access the equity market today? I don't want to. I don't think the price is appropriate for us to do that even though I think we're trading over NAV as we sit here today, we're not just selling assets to fund growth. That's one benefit of it. But the more important part of it is a term you keep hearing in our prepared remarks and in our comments is the durability of earnings. We're repositioning our portfolio. We're improving our portfolio, and we're creating a better portfolio for when the capital markets are going to be more favorable and that could fuel additional growth. So I wouldn't look at it solely that we're selling assets just to buy new assets.

The other thing I'd say is just to put this in perspective, 25 facilities isn't a lot of facilities. When you look at the size of our portfolio, $200 million in disposition proceeds, when we normally do about $100 million a year anyway, isn't that it's just not that significant. So it's not like we're restructuring the entire company or anything like that. We're fine-tuning it really.

Our next question comes from Vikram Malhotra with Mizuho Group.

First, I just wanted to understand or clarify you had mentioned 6% of the tenants under one-time coverage. What was that last quarter? And then you mentioned about if I heard correct, 50% of those are cash paying. Could you just clarify that?

Yes. So to answer your first question, that number is pretty steady and it has been the last couple of quarters. In terms of what I said is that most of those tenants -- almost all those tenants that are in that 6% that I quoted on a cash basis, half of that 6% or more than half of that 6% are paying us their contractual rent. And the reason why we point that out is I think there's a knee-jerk reaction whenever you hear that somebody is not covering the rent, they're not going to pay their rent, right? That's not the case. We're getting rent paid as the contractual rents, not even like below contractual rents. We're actually getting contractual rents on those tenants, even though we account for it on a cash basis. And even though in the near term, their EBITDARM coverage is below 1x. So just to give you some level of comfort that there's not that adjustment coming down the pipe because they've been below that 1x coverage and (inaudible).

Okay. That's helpful. And then just the -- you mentioned the sequential dip in cash income or cash rent. Essentially, most of that was the Avamere change. But just going forward, just to be clear, are you baking in, in your underwriting any additional tenants not being able to pay rent? Or for now, is it just steady as it goes?

It's steady as she goes for now. But I would also -- I'm always going to caution everybody, the recovery is slower than [what we would] all like in large part due to the labor pressures. And as we've been talking about the last several quarters, even though we've had a pretty steady portfolio, there's always a chance that if this thing drags on, people may need some assistance. But we use that assistance as not material to the company overall and shouldn't affect our underwriting.

Okay. Great. And then just last one on the diversification plan. I guess this was asked last quarter as well, but you've seen improving trends on the skill side. You obviously focused on [behavioral]. So maybe just revisit for us the -- are there any specific goals in terms of the mix you'd like to achieve? Is some of this just still trying to derisk the SNF portfolio? Maybe just update us on your thoughts on more diversification.

Sure. So I think the most important point is that we're very bullish on the skilled space. And even as we diversify, over half the portfolio is still going to be skilled nursing. So with over positive trends we see in that space over the next several years, we'll benefit from [this] because it's still going to be over half the portfolio, and we're comfortable with it being half the portfolio. I think if you look back at us historically, and certainly, if you look back at us before the merger, when we were in the [50s] as opposed to over 60% skilled nursing, the investment community viewed us -- actually sell side and buy side view us as being a more diversified REIT, and we traded at a better multiple in those periods of time. So that's really one of the drivers here -- is diversify risk to spread across more asset classes that we feel good about. But we certainly, at this point, don't have a long-term goal, let's say, getting skilled from somewhere in the 50 percentile exposure down to half of that. So that isn't the intention at all. We just want to be somewhat more diversified just to spread our risk and not be in one asset class, and therefore, completely dependent upon market sentiment of that one asset class.

So really diversification of payer volatility well or expectations of payer volatility -- so the senior housing is obviously side of the pay, Skilled nursing is primarily government payers and behavioral is sort of a mash up of all of the above, although for us, it's more commercial insurance with a little bit of government pay. So it's also that. So when people talk about some of the -- people get -- investors get nervous about Medicare changes or Medicaid changes. This is -- this sort of helps, I think, mitigate the amplitude of that risk.

Our next question comes from Tao Qiu with Stifel.

First of all, thank you for the state-by-state disclosure FMAP and Medicaid rate growth. I think the data is really helpful to clarify the amount of state support out there still despite perhaps the pullback at federal level. It looks like a lot of the support is going to sustain through at least midyear 2023. And the Medicare refinery has improved for next year. So I'm curious how you think about Medicaid funding beyond 2023, what is more permanent in nature and whether we will see a funding cliff for certain states at some point?

Yes. So a lot of it is a function of where the state budgets are at any given point in time. And the dialogue has been much more positive. So before you had state budget issues and you didn't really have a positive dialogue. But I think the access issues that we're showing to see across the country, Wyoming lost (inaudible) just in the past couple of months lost 10% of their beds, because of financial issues. There have been since -- in the last 7 years, there's 1,000 [left] nursing homes with another 400 that are going to be closing as we speak. So the decline is really accelerating.

And so our belief is all that will create a better environment as we have these discussions with the states beyond 2023, assuming their budgets are in pretty good shape. But before even if the budgets weren't in pretty good shape, it didn't necessarily mean anything. So I think that's been a real positive. The pandemic has demonstrated for the states that with all the operators have been saying, it's been true and that is in most states, Medicaid is under-funded. And so we've seen, obviously, a lot of space addresses.

So you never know for sure. I think the momentum is positive, and I think the access issues are really going to create problems for these states, because you can't even look at -- most of the access problems is going to affect the indigent Medicaid patients. So senior housing is not going to be an option for them. Home health is not going to be an option to them. There aren't options for them.

You're going to have people that are just sitting in hospitals, because there's no place left to them to go. And they have no funds. So anyway, I don't want to belabor it, but that's kind of my viewpoint on it.

Okay. And to follow up on that point, staffing has been a constraint on admission and top line, at least in the past few quarters. Now that we have more clarity on Medicare and Medicare way seems to be growing better for some space.

Does it make sense for operators to kind of increase their investment in labor? Does it make sense for Sabra to kind of provide more liquidity and bridge to operators so that we can get ahead of the positive reimbursement expenses that coming (inaudible)?

Yes. So I think there are a couple of things. One, the operators are even before they were starting to -- they've already increased wages pretty dramatically. So this is going to make it even easier.

So the operators understand that -- even if labor gets better, there was a labor shortage before the pandemic. The answer really is more occupancy. And when RUG IV was in place and you only took short-term rehab patients and length of stay test shrinking, occupancy kept declining.

And you reached that point when you've got a business that's 90% fixed costs that you just can't cover it. So as the demographic continues to improve and as we've talked about, we don't expect occupancy to get to pre-pandemic levels. We expect it to continue to improve both our skills and on senior housing.

So the combination in the skill space of these rate increases plus demographic adding more occupancy is going to help a lot. But -- so operators aren't going to sort of hang on to that money and just let it all go to the bottom-line. They're going to be putting it into workforce.

As far as Sabra is concerned, we think there are things that we can do from an investment in tech, for example. And we're very willing to work with our operators on investing in that. Most of the operators don't have state-of-the-art, smart labor systems which really help you manage labor, helps you provide a lot more flexibility to employees.

So we're absolutely willing to look at things like that. And if there are other ways that our operators need help, their capital partner, and we're willing to do that to help them get to a better place.

And as I mentioned earlier, because this recovery is taking longer, we may need to step-up and be more helpful. And we're more than willing to do that. And obviously, we're in a position financially where we have the strength to do that.

Understood. That's good to know. If I may squeeze in one more question on the environment, I think the assets -- the portfolio is smaller in nature, therefore, occupancy can be more volatile. But it looks like the wholly-owned asset occupancy growth has been quite strong for 2 quarters.

And I think it's up 350 basis points this quarter and 750 year-on-year, which should yield some pretty decent operating leverage. I'm assuming the JV is also seeing similar strength. I'm wondering if the recent momentum has changed your discussion with TPG. And what would it take to restart the marketing process? And what kind of upside can we expect?

Yes. So yes, the trends are similar with the JV. So yes so directionally the same. It doesn't really change the decision with TPG. In terms of actually marketing the portfolio, we're at a point right now where you really need to market the portfolio of 2023 numbers that everybody can believe in. So -- the focus on the part of the management team at Enlivant is to start the budget process probably right at the Labor Day and put together a 2023 budget that the bankers can market off of.

So looking at that time frame, we would expect the marketing process to kick off later this year and then go into obviously go into 2023. So -- and it isn't so -- it's not really so much about the portfolio for us, but once TPG made the decision to exit, they weren't -- they didn't just make the decision to exit the real estate, that's one matter. But they made the decision to exit the operating company. And the operating company was built to support a much larger enterprise than currently exists as the company was sort of being built and it's got a pretty healthy burn rate.

And it's not something that we feel that we're in a position to support on a go-forward basis in addition to dealing with the leverage and all that. So from our perspective, we want to see obviously a successful process, but we don't see ourselves changing our position relative to supporting that marketing process.

Our next question comes from Rich Anderson with SMBC.

So I want to attack the Medicaid future question from a slightly different angle. So you have these FMAP add-ons that's good, obviously. You have states that are flushed with cash from various stimulus measures of the past. Is it -- is this one of those things where you're kind of -- you have every reason to grow your Medicaid or increase your Medicaid outlays for the coming year, but that maybe states will view this as sort of a stop-gap type of year and that going forward, we get back to more of the garden variety increases of 1% to 2%. Is that at all a possibility in the relative short-term in your mind?

No, I think it really is going to be a function of what the state budgets look like sort of post -- as we get into 2023 and post-2023. Based on all the dialogues that have happened with a lot of these states, they recognize they need to do more. So I don't -- as long as these funds are there, I don't see them sort of arbitrarily saying, okay, we've gotten through COVID, we're going to go back to 1.7% annual increases.

And the other thing is within the state systems, there are inflationary components. Most states that sort of a drag of a year -- 2-plus years by the time all the costs are recognized but those inflationary components are going to drive Medicaid rates on a go-forward basis. The positive -- and what we really appreciate about what happens currently with these rates is we thought we were going to have to wait those 2 years for the Medicaid cost report process to catch up with the reality on the ground. And so a lot of these things got to jump on it. So they just did that because they had the funds to do that and they recognize the issue. But going forward, there's a formula that's going to help perpetuate higher rates as well.

So -- and then the other point I would just reiterate is what I said earlier in that some of these states are starting to have some pretty serious access issues. And that's going to create a lot of bad headlines. So that will be a factor as well. So I think all of that is positive and all that should go towards continuing the momentum, not in all 50 states, obviously, because we're obviously not even seeing that in 50 states now, but in enough states that it's helpful to those of us that have [initial] presence.

Do you think Texas is 12% add-on could foreshadow them being more accommodative when it comes to their base Medicaid rate when they ultimately decide that? Is this something that we could look at is that's interesting as a foreshadowing event? Is that possible?

I would never predict anything about Texas. That's positive.

Okay. Fair enough.

And look, there's no legislative session this year. So it's not anything that has come up as an issue again until 2023. So I mean, I think we were all pleasantly surprised that what Texas did, but I'll just kind of leave it at that. I was pleasantly surprised. I don't know that a foreshadow anything in that state.

Okay. Talya, you said -- or maybe as you Rick said, labor pressures impacting occupancy in July, which, of course, we understand, but then you also said seasonality. And is my understanding that third quarter is really the seasonally uptick you might expect in occupancy, particularly for senior housing is you have the building blocks of move-in activity during the previous months and quarters culminating in some occupancy lift coming through in the third quarter. That's kind of what I'm hearing from your peers. I'm curious as to why you think seasonality plays a reverse role for you in the third quarter?

Not in the third quarter, in December. Right now. Yes. So it was in June going into July, but it will start picking up as we are -- later in the quarter. Yes.

Okay. So you were commenting on July, not third quarter in its entirety?

Right. Exactly. And you also had some momentum in the fourth quarter, that gets disrupted at the end of the year by the holidays and then usually have a nice uplift as you go into January.

Okay. Last question for me is the comments you made about the Enlivant and TPG joint venture, you're not willing to kind of support things and so on. Does that, at any level, extend to your wholly owned exposure to Enlivant?

No. We really like those facilities. Those facilities are actually a little bit different. Talya, do you want to comment on those facilities?

Sure. So first of all, they're not -- the joint venture has order the legacy ALC assets for those old enough to remember that company. The wholly owned assets we have, which are 11 are geographically clustered and they are assets that were acquired by TPG and so individually, they are more or larger in terms of units per community, et cetera. And they also have more memory care, as I mentioned in my talking points. So they have a different dynamic both in terms of income statement, because they're simply larger. They also have had different response because of memory care to COVID to some extent, just a little more volatility there on occupancy. And they also tend to have higher rates in general because of the memory care.

And I'd also note that, we're more than happy for the -- to have the same management team running the wholly owned Enlivant portfolio for us.

Our next question comes from Connor Siversky with Berenberg.

Appreciate the wait-room music and Rich took most of my questions, but just running back to seasonality. I'm wondering if there are any forward indicators that you have identified that may suggest you actually see that occupancy ramp up.

For example, I know, for a period, Massachusetts had ended elective procedures, which has now come to an end. But are operators discussing at all a ramp-up in electives and anything else that might push more patients into the SNF portfolio?

Yes. So the conversations with the operators, they actually see that flow. That flow in the demand isn't really an issue for them. The issue is how many admits could they handle given the steps that they have and provide the care they need to provide. That's really the issue.

Most of the states have loosened everything up with electives and things like that. So -- and we don't have any operators that aren't admitting at all. It's just that some of them having to admit more slowly than they would like to admit.

But I think the hope that a lot of them have is that, as that volume becomes more readily available, it will coincide with at least some improvements in labor, so you'll start having things pick up again.

Okay. Understood.

[It is] a little bit hard to predict, obviously.

Right. Understood. And then just jumping back to potential transitions, as it relates to behavioral health. I know there's been conversation in the past on the difficulties related to entitlements for that kind of asset class.

And I'm wondering if your transition a specific SNF asset, for example, to behavior health or senior housing. Do you have to change the entitlement in that process, or is that an easier route to go down, versus a greenfield development or something of that nature?

The short answer is, it really depends. It's not -- there's no blanket answer. Every situation, we go through the zoning analysis and figure out what we can do and what we can't do. And we look to things where we've needed a zoning change or a variance or a special use permit or something. And frankly, sometimes that's worth it.

Sometimes you can get that done, because it's a tax -- it increases the community tax basis. So it's positive and others, you're never going to win against the neighbors. So it totally depends.

So where you've seen us execute conversions, have typically been that -- the zoning has been as of right, and that's the -- clearly, the most efficient way to go forward. And so, we try to focus on those unless we see an easy glide path on another.

Our next question comes from Steven Valiquette with Barclays.

I guess, as I'm kind of looking at pages 5 and 6 in the supplement, the skilled nursing occupancy sort of flattish or bouncing around 5 quarters in a row. Well, it did improve in the last quarter. Just I guess one question on occupancy and then one question on the skilled mix. I guess just first on the occupancy, do you have any guess for how much the staffing shortages in skilled labor within your SNF portfolio, maybe holding back occupancy, whether it's tens of basis points or hundreds of basis points?

And then the second question is just on the skilled mix been trending down 5 quarters in a row. But over that time, we've seen elective procedures generally rebounding over that same 5-quarter period. So I think intuitively, I would think Medicare post-acute mix should be improving. So I guess the question is, are the skilled staffing shortages impact in the Medicare occupancy more than Medicaid? Is it really just as simple as that? Just want to understand kind of that dynamic around the skilled mix.

Yes. So it's really almost impossible for us to estimate how much staffing shortages are impacting occupancy. It's a little bit easier during Omicron, because there was such a huge relationship there with the number of staff that were out, but now it is a little bit harder. It's not hundreds of basis points, but I would say it's probably at least 100 basis points, but it's really hard to tell.

On the skilled mix, say a couple of things. One, 3 of the last 5 quarters, it was actually relatively flat in our skilled mix. It's down a little bit the last 2 quarters to (inaudible) it was around 40% for the 3 previous quarters give or take. So on elective surgery, I think there isn't as direct relationship under PDPM as there was under -- there was 100% correlation. Under PDPM, it's not the same correlation because you take more complex longer-term Medicare nursing patients rather.

So yes, I wouldn't look at the elective surgery having the same kind of relationship that you used to have. I mean, it's just -- it's just popping around a little bit. I think one of the things that we hear from our operators is that, they're more willing to take Medicaid patients to try to get occupancy up than they normally would take. So that's having some impact, whether it accounts for the entire impact, I'm not really sure, but that's some of it.

Our next question comes from Joshua Dennerlein with Bank of America. Our next question comes from Austin Wurschmidt with KeyBanc.

I wanted to go back to the 25 transition assets, which you've kind of bucketed within the good assets, good locations, but bad operators. How much cash rent did you collect on those in the second quarter? And what sort of the upside potential if you were to apply a target coverage level to more stabilized operations?

Yes. So in terms of the amount that we recorded this quarter, I'll have to get back to you on that one. I don't have that right in front of me, but I'll reiterate what I answered earlier is once these are transitioned and once we have an operator who can stabilize at those operations, we would expect, I think you should expect as well to see better performance under those assets in the form of NOI that we're recording than they have been producing over the last several quarters. Talya, if you have anything to add there?

Yes. I think that's right. And look, a transition can be accompanied by some capital improvements by us as well, effects what's required for the asset where prior operator wasn't willing to really do the work associated with that. So these are -- each one of these -- each one of these transitions is a story. They're not quick transition. They don't happen overnight, and there's -- there's a lot of discussion that happens on both with the existing operator and how they're exiting as well as the new operator coming in. And we've been doing -- the ones we've done the exiting operator has been happy to exit.

Right. And the way we're looking at this is we probably gathered from our comments on this call, this is taking a long-term look at our portfolio, right? The short-term answer, the easiest short-term answer is to not do the transition because we just give pay wherever we get paid, and there's no disruption there. That's not the right long-term solution. What we're looking to do is to do right by our portfolio and by our shareholders on a long-term basis.

Got it. That's helpful. And then I wanted to also touch on the dispositions. Last quarter, you loosely kind of bracketed $100 million to $300 million, I think, of skilled nursing dispositions for the year. And I'm just curious if kind of the ones you've completed heretofore and what you've got under contract sort of hits that targeted amount. Or do you expect there could be some additional beyond what you outlined in the release?

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

But as Talya mentioned in her comments that we are taking -- we're taking a look at our portfolio to identify potential other situations, where a transition could make sense or perhaps the sale can make sense. So I'm not going to sit here and say we're capped out. That's all we're going to do for this year. There may be some other opportunities granted, we are already in August and these things don't happen overnight, especially on SNFs because there's regulatory approvals and other (inaudible) to get through to actually complete a sale. So even if we identify something today, that's something that could easily bleed into early 2023.

And then just last one for me, Rick. Maybe you mentioned, you don't like to predict outcomes in Texas, but there isn't a legislative session until 2023. I think the FMAP add-ons in Texas are set to expire at the end of this year. Do you think that they'll extend that until maybe there is a legislative session? Any thoughts there? And that's all for me. Thanks.

That's going to be the focus for -- on the ground from a lobbying perspective. But I have no idea, whether the state is going to be willing to extend it or not. Would be logical obviously, can then to do it because it's a bridge to the next legislative session, but I have no idea if I was going to guess, I would guess negatively, not positively.

(Operator Instructions) Our next question Daniel Bernstein with Capital One.

Okay. I just wanted to go back to the kind of the market for skilled nursing acquisitions, and maybe understand the kind of the motivations of buyers to be so aggressive on the assets. And maybe how they're financing them, considering how much debt has gone up and they're still being aggressive. I don't know if you have any other color or comments on that?

Yes. So you have to think about it differently. You have to think about it as an operating model. So when I was an operator, I approached it the same way, and that is these operators don't just have the skilled nursing business. They have therapy business, a pharmacy business. They have home health. They do have lab and radiology. And so the actual facility in addition to providing whatever value that provides is a vessel to drive revenue in all the other ancillary businesses.

So we don't look at it as -- we don't think they're overpaying -- it's just a completely different model. We're just buying the real estate. They're buying [Holdco] and they're using that to generate additional revenue and NOI for all their sister businesses. And that's why they're able to pay more. So it's not a matter of them overpaying. And they typically look at [bridge to HUD].

Is there -- what would -- I guess I was trying to understand like what would motivate -- or what would be the catalyst to move cap rates and investment yields higher in SNF space to the point that would be more attractive to you guys? What -- I mean given what you just explained what's going to move cap rates up, [if] it's not debt -- debt cost?

Well, I mean if debt continues to move up, you might see a change there because these are leveraged buyers, as Rick said, they use -- they access bridge to HUD and then and HUD to lock in their rates for on a fixed rate basis for the long term. So cap rates move to move another 200 basis points, you may -- you obviously are closing the gap between debt and equity. I'm hoping that doesn't happen, because it will affect everybody else much worse. But they still -- they have all the investment areas where we are active, SNF still has significant room between debt rates and when you think about it long term, especially and going in cap rates. So there's still money to be made, particularly at that leverage level and over the long term. Because if we think about long-term debt rates, right now, levels that people can access is higher than it was, but it is not high on a long-term 40-year, 30-year basis. So if you're a -- 3 or 5-year hold, what I just said doesn't matter, right? But if you got a 40-year horizon, it does.

That makes sense. And then one quick question on hiring. It does seem like net hiring in the health care space and skilled nursing, senior housing starting to improve. How quickly do new hires make a difference on whether a skilled nursing facility can have more admits? These new hires coming from the contract agency side, people looking for more stability on where there's a risk of recession or is it going to take some time to train some of the new hires that are coming into the space. And we don't see a lot of immediate uptick in the ability for SNF to increase occupancy from those hires?

Yes, almost all of the impact on day one because they're already all qualified. The -- obviously, the licensees are licensed and the certified nursing assistants are typically come in certified. For those that don't, there the operators either have their own certification programs or they have a contractual arrangement with a third-party certification program to get them certified quickly.

They can do work in the meantime there are certain things they can't do (inaudible) certified nursing assistance. But from an admission perspective, as soon as they come in, you're good to go. If you hire 10 employees tomorrow, they're going to be able to provide the care necessary to start remitting based on those additional employees right away.

Our next question comes from John Pawlowski with Green Street.

I have a question about just the trajectory of occupancy and how we kind of on the SNF business and how we get back to pre-COVID levels. So I guess I'm a little surprised that we haven't seen bigger, bigger increases in recent months. And so, when you've got supply actually negative in the sector, Rick, you mentioned labor might only be holding occupancy back by 100 bps. We're already seeing seasonality where, I see you're coming out of a (inaudible), we wouldn't see seasonality because of pent-up demand. So I know I'm new to studying this business, but just curious what else is holding back to occupancy and could we be looking at kind of structurally lower occupancy levels whenever this endemic has passed?

No, it's purely labor. And look, I'm just guessing at how much labor is impacting the growth. But if we were growing at 100 basis points -- if we've been growing at 100 basis points every month, we'd be in great shape. Right, that's not a small number, but that's a big number a month when -- before Delta hit and we were growing by close to 70 basis points a month in our skilled occupancy.

And based on that before Delta, we thought we'd be pretty close to pre-pandemic levels, early this year, right? So the 100 basis points is not a small number. I probably should have given you the time frame might look at about 100 basis points and may be impacting us by 100 basis points a month.

And even if it even if we can get back to the 70 basis points a month that we saw pre-Delta, we'd be in pretty good shape by early next year from an occupancy perspective. And then you would continue to see it grow because of the supply issues, combined with the demographic issues. You continue to see it grow after that.

And the growth after that is critical because, when I mentioned earlier in the call that, 90% of your costs are fixed. You've got that inflection point. So if you go from 80 patients in the building to 83 patients, that's a straight pull-through to the bottom line. And that gives you an awful lot of additional cash to use on your staff, as well as whatever else [you want to] investing in the building.

Okay. That makes sense. I misunderstood the 100 bps drag on growth versus just the spot occupancy level. A question on the conversions -- okay. A question on the conversions of obsolete skilled nursing into behavioral health. Just curious if you can help me visualize these facilities, what were the common threads that actually made these properties obsolete? And then how do you get comfortable that there will be deep enough demand pool and a behavioral health wrapper that wasn't there and a skilled nursing wrapper?

So the obsolescence factor typically has to do with number of rooms, room sizes, just -- and frankly, the economics of running a skilled nursing business in that location. And it -- older buildings are older buildings, and don't forget most skilled nursing buildings are relatively old. So the opportunity to convert to behavioral changes the revenue stream quite dramatically.

You also have the ability to utilize, first of all, semiprivate rooms, and that's very common and in certainly an addiction treatment. And it's a -- and typically, we're doing residential models, even though we are taking out some rooms in order to create more [comparative] rooms and other kind of meeting spaces.

You can also have shared bathrooms, sort of dormitory style, if you will, in addiction treatment. It's a relatively short stay and people -- it is accepted or you would never be able to do that in senior housing. And that's one of the things that's a limiting factor when you could assets like skilled nursing -- older skilled nursing facilities that don't have full bathrooms in each room, let alone private bathrooms.

Okay. Just a follow-up there, Talya. I think you mentioned 9% stabilized yield. How many years does it take to get to that 9% stabilized yield?

It's going to be a function of a couple of things. One is what the payer -- payer mix is. So if it's largely a Medicaid building, you could get there very, very quickly because that building will fill very fast. And there's a dearth of supply and a tremendous demand.

We also, in these conversions, sometimes are using a percentage rent concept until we hit a certain level. And so in commercial insurance, as occupancy -- as the payer -- commercial occupancy will build up, maybe it's going to take a couple of years to get to stabilization. And then, we -- and we use percentage rent during that period, and then we'll hit that 9% or thereabout. I mean that's sort of a -- there's going to be a range depending on the asset as to how much we're getting that's through the band.

Our next question is a follow-up from Juan Sanabria with BMO Capital Market.

It sounds like some of these assets you are either selling or transitioning, just aren't paying rents and therein lies the upside as you redevelop or redeploy the proceeds. So just curious what the delta is between contractual rent and cash collection to get sense of -- the magnitude potential upside?

So in terms of the delta between cash basis rents and contractual, it varies. And I don't have these specific numbers on these assets that we're selling. So I really can't give you that color right now.

It doesn't make sense to give an aggregate number, Juan, because there's just too wide. The variances are too wide.

It could range from zero to full contractual rent forecasting --?

Overall across the portfolio, not even with all the assets -- what the delta to try to get a sense of what the upside is, is either tenants start repaying rent or you transition them to a new operator who pays rent or...

Again, we have cash basis -- so we have cash basis tenants that pay us full rent, 100% of their contractual rent, and we have some that don't. And that's going to vary. I mean, some better and more dire situations are paying zero, and some are paying somewhere between their full contractual rent and zero. It's a number that bounces around one. I wish I had a better answer for you on that.

For the second quarter, you can't give what was accrued for cash collected versus what was --?

We don't accrue rents on -- for cash basis tenants. That's why they're cash basis.

Okay. Accrued and -- or cash versus the lease amount -- can you give that number for the second quarter?

I cannot give you that number for the second quarter.

But you don't accrue the cash-based tenants.

And I'm currently showing no further questions. At this time, I'd like to turn the call back over to Rick Matros for closing remarks.

Thanks, everybody for your time today. We're always available, if you all want to do, just give us a call. Hope everybody has a good remainder of the summer and a great Labor Day. Take care.

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