Sabra Health Care REIT Inc (SBRA) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT First Quarter 2021 Earnings Conference Call.

I would now like to turn the call over to Michael Costa, EVP, Finance and Chief Accounting Officer. Please go ahead, Mr. Costa.

Thank you. 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 the expected impacts of the ongoing COVID-19 pandemic, 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, 2020, 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 on 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 in the Financials page of the Investors section of our website at www.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, Chairman and CEO of Sabra Health Care REIT.

Thanks, Mike, and thanks for joining us, everybody. Appreciate it. Just a quick note that this is the first reporting period where we've got all 4 quarters of the pandemic included in our statistics and our financials.

Let me start with an update on Enlivant. On the last call, which obviously was not long ago, we talked about that something would be pending in terms of a decision in the near term. Given the impact of the pandemic, particularly with the latest surge on the managed portfolio, both we and, importantly, TPG have decided that we really need to give the portfolio some time to recover. And so there's not really a time frame on it, but I would expect that at this point, they just want to see some recovery and some trajectory over the next few months. At this point, any offer that we would be able to make them is really not much of an offer. And while if we were to acquire the remaining 51%, it would certainly be at levels well below the strike price under the old option. They'd like to do a little bit better.

So we're still in the same position that we've been in all along and that is if we could strike a price at the right price, then we'll have some nice runway to grow with the portfolio. And if not, then we'll have plenty of proceeds to put to use for other investments, and it will have a minimal impact on the balance of our senior housing versus our skilled nursing. So either way, we feel like we're in a good position, but do fully agree that this just isn't the right time to put something like this on the market. So that's it for Enlivant.

I'm going to move now to give you an update on COVID and the impact on the business. For the first time, our operators are speaking with an upbeat tone, which has been really fantastic to hear. Well over 90% of our facilities have no positive cases. Since the first week of March, the number of new positive cases in our facilities has ranged from 0 to 2 facilities a week and many more than that being cleared. Over 90% of our tenants have reported over 90% uptake for patients and residents and over 60% for staff. So 90% vaccinations for our patients and residents and over 60% for staff. Virtually all of our tenants have completed the 3 clinics.

CDC has released national guidelines for cohort restrictions. So those restrictions are now being relaxed with more visitations and group activities increasing, which does a number of things. One, it's become a leading indicator of census growth; and secondarily, but also very importantly, obviously, is it helps to get our expenses back on the path to becoming normalized and back to pre-pandemic levels, which will have obviously a direct impact on the margin and on NOI.

I just want to point out though that the CDC guidelines aren't a mandate. And so there are different things happening in different markets, and some markets are still more restrictive than other markets. So hopefully, people will sort of come to the same conclusions. I also don't want to forget to note that you can never fully express or appreciate what the staff, patients and residents have endured, but nonetheless, it will never be forgotten. Still not over obviously, but we just want to express our appreciation, and as often as you do it, it's still not enough.

There's $24.5 billion in the HHS fund left. There's another $8.5 billion for rural providers. We still think that number will grow as health care businesses who didn't need the assistance start returning some of that money. We do believe that we will have access to some level of monies in that fund. The decisions haven't been made yet, but we expect that we will have access to some of that. In the rural provider piece, senior housing is being included in that dialogue. So we feel much more optimistic that there'll be some funds available for senior living and senior housing as well.

Now let me move on to reimbursement. There's been a lot of talk and speculation about the CMS proposal in the proposed rule. We now have data to better understand the impact of the pandemic on Medicare revenues. Surprisingly, only 15% of the industry skilled in place, a surprisingly small number that reflects the fact the industry did not take advantage of the 3-day waiver suspension. This may help the industry's position that the waiver suspension should be extended for a prolonged period of time to better understand the implications of making that suspension permanent. I would also note that for Sabra's operators, all the operators did skill in place, to one extent or another. There was a wide variance, but everybody did skill in place to some extent. And a lot of that has to do with the fact that we have really no long-term care providers. We have high-acuity operators that have a greater tendency to skill in place.

The other number that was a little bit surprising in some of the analysis is that the percent of COVID patients was just under 9%. I think that's misleading only because, as everybody on the call knows, we didn't have testing available for months. So we're pretty confident that we had a lot more patients and residents that had COVID that were actually diagnosed with COVID. Despite those 2 metrics, acuity in these facilities rose dramatically, driven by limited capacity in the hospitals who were only able to admit the very sickest patients and then those folks would then transfer to SNFs. This was clearly evident in the impact on skilled mix in our portfolio. And as acuity has come down, we've seen our skilled mix gradually come down from its high in December and get closer to pre-pandemic levels, although it's still higher than pre-pandemic levels.

As it relates to the proposed rule and the 5% increase in Medicare revenues above budget neutrality, it seems clear that much of the increase was driven by this pandemic-related phenomena and the prolonged spike in acuity. CMS will be taking comments on the proposed rule. We'll look at all the underlying data and it's sensitive to industry recovery. To the extent that some calibration is necessary, I believe it will be phased in or deferred over different fiscal years to allow the industry to recover. And that was a pretty strong message, I think, that CMS delivered. It was very conciliatory and they really do want to see the industry recover.

A couple of other notes relative to pandemic-related assistance. PHE was extended for another quarter. The FMAP funding increase was extended through September 30, '21, and sequestration suspension was continued through the end of '21 as well.

Now moving on to investments in operations. With $1.5 billion in our investment pipeline being reviewed, we believe we're on a path to once again grow the company. Most of the pipeline continues to be senior housing with behavioral addiction and some SNF activity, although there's not much skilled activity at this point given that federal assistance has provided time for the operators to recover. And for those that want to sell their assets, I'm sure they want to get closer to pre-pandemic pricing in terms of getting credit for that kind of NOI.

Our top 7 skilled operators, which now comprise 66% of the NOI, hit their low point in occupancy in late December and have increased occupancy approximately 431 basis points and are leading the way for the portfolio. The rest of the Sabra portfolio hasn't increased to that extent. The remaining operators outside of those top 7 tend to be operators that we only have a few facilities with and are impacted by local market conditions. Overall, still showing increases in census, but not to the extent our top 7, with the exception of Genesis, who do happen to be our most progressive operators in terms of the level of acuity that they take and the variety of clinical programs that they provide, and they also comprised some of our top operators relative to, I think, COVID units and taking COVID patients during the course of the pandemic.

I noted that skilled mix has been declining since that same point in time. And acuity, while always high, will level out at closer to pre-pandemic levels. What we don't know is -- prior to the pandemic, we did see acuity increasing and length of stay increasing because of PDPM. And obviously, PDPM was interrupted pretty early after implementation. So we'll see how that goes going forward, but I would still expect one of the impacts from PDPM will be a positive impact on length of stay. Our senior housing bottomed out well after the SNF portfolio, but it's since started its recovery as well with our leased portfolio bottoming out in February. And the leased portfolio has now seen 365 basis points of occupancy increase since. Talya will discuss the managed portfolio.

I'd note that the remainder of our portfolio, our specialty hospitals, behavioral and addiction facilities fared exceptionally well during the pandemic with occupancy increases of approximately 550 basis points over the course of the pandemic. And again, they weren't impacted by the pandemic, so there wasn't a low point to hit. And rent coverage has increased over that period of time as well. This portfolio, as most of you know, comprises an important and growing 11% of our NOI, and it's a strong focus for investments for us going forward.

And with that, I'll turn it over to Talya.

Thank you, Rick. Sabra's Senior Housing managed portfolio continued to experience operating pressures in the first quarter of 2021 due to the global pandemic.

However, when we look at the quarterly operating results on a more detailed basis as well as April results, we see an inflection point in occupancy. We have stressed over the past quarters that the challenge facing senior housing is occupancy and that improving occupancy is the vector that will drive the sector's economic recovery. Simultaneous trends of higher move-ins, fewer move-outs and increasing interest in senior housing driving tours and leads underlie the start of the occupancy recovery with normalizing expenses further enhancing margin. As we expected, the successful distribution of the vaccine has been the linchpin for the turnaround in senior housing in the United States.

The headline numbers on a quarter-over-quarter basis are as follows. Occupancy in the first quarter of 2021, excluding 2 nonstabilized communities, was 73.1% compared to 76.4% in the prior quarter. REVPOR, also excluding 2 nonstabilized communities, declined sequentially by 1.7% to $3,718 from $3,783, but was slightly higher than in the first quarter of 2020. Cash net operating income declined 33.4% sequentially and margin declined by 6% compared to the prior quarter, in part because of continued costs related to COVID and lack of grant income in the first quarter of 2021.

The details indicate a more subtle story. The rate of occupancy decline slowed over the course of the quarter in our total wholly owned portfolio and occupancy improved in April. From December 2020 to January 2021, occupancy declined 1.7% to 75.9%. From January 2021 to February 2021, occupancy declined 0.9% to 75.1%. From February 2021 to March 2021, occupancy was flat at 75.1%. And from March 2021 to April 2021, occupancy increased by 0.6% to 75.7%. From the low in mid-March until the latter part of April, occupancy increased 0.9% to 75.9%.

Similarly, in our Enlivant JV portfolio, from December 2020 to January 2021, occupancy declined 1.4% to 68.9%. From January 2021 to February 2021, occupancy declined 1.2% to 67.7%. And from February to March 2021, occupancy declined 0.3% to 67.4%. From March to April 2021, occupancy grew by 1.5% to 68.9%. From the low in mid-March until the end of April, occupancy increased 2.5% to 69.7%.

While occupancy loss has decelerated over the first quarter, pandemic-related expenses dropped sharply in our wholly owned portfolio. From December 2020 to January 2021, COVID costs declined 10.1% to $396,000. And from January to February 2021, COVID costs declined 27.7% to $286,000. And from February to March 2021, COVID costs declined 31.9% to $195,000. Similarly, in our Enlivant JV portfolio, from December 2020 to January 2021, COVID costs increased 26% to $764,000. But from January to February 2021, COVID costs declined 14.3%. And from February '21 to March 2021, COVID costs declined 36.5% to be at $416,000.

Over the past few quarters, we've all speculated about the extent of pent-up demand for senior housing. Now we have some statistics that suggest the immediate demand is [deep]. In our Enlivant joint venture, gross move-ins during March were at the highest level in 18 months and close to the historical peak of 2.3 move-ins per facility per month. At the same time, move-outs in March continued their significant decline from January and were at pre-pandemic normalized levels. In April, net move-ins significantly outpaced March results. Lead and tour volumes in March were up 35% compared to March 2019 and April 2021 tracked at a similar pace. Together, these statistics point to a backlog of interest in senior housing, which should support higher lease conversions and result in increased occupancy.

Metrics in our Holiday independent living portfolio reflects some similar trends but with a timing lag compared to our assisted living communities. Recall that Enlivant had completed 100% of its vaccine clinics by April. But Holiday, as an independent living operator not prioritized by the government, it had to create its own vaccine program. By the end of April, Holiday had already completed 2 clinics in each of our 18 of our 22 communities. While the pace of move-outs has started to decline sequentially, we expect move-out rates to normalize to pre-pandemic levels as the vaccine clinics are completed.

Gross move-ins are starting to rise with March move-ins nearly 50% higher than February move-ins. And occupancy at the end of April was 78.8%, 2.6% higher than the low in mid-March. Growth in leads has accelerated in every month since December. The other component driving revenue is rate. As discussed earlier, we have seen REVPOR hold up across our managed portfolio over the course of the pandemic. But we recognize that certain operators feel an urgency to increase occupancy and may choose to use rate as a tool. While we haven't seen material discounting within our portfolio, we are seeing greater use of incentives, particularly in our lower acuity communities where lifestyle rather than care drives the decision to move in. In our higher community activities, safety is now a key element in the sales pitch.

And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

Thank you, Talya. I'll give a quick overview of the numbers for Q1 and then provide additional color on our guidance for the second quarter of 2021.

But first, I want to note that we collected 99.9% of our forecasted rents from the start of the pandemic in February 2020 through April 2021. I would like to point out that we have one operator in New York state who has leased 3 skilled nursing transitional care facilities from us and who has decided to exit the business. These operations generate approximately $3.8 million of annual cash rents, and we expect to utilize deposits [to] continue to pay the rents through June 2021. We are in the process of transitioning these 3 facilities to one of our top operators who have significant operations in the State of New York.

We expect this transition to take some time due to the extended approval process in New York, which could result in a period of time where we are collecting no rents from these operations. Recovery from the impact of the pandemic will also take time, reducing the rents generated after the transition is completed for an unknown period of time. We do expect rents to return to the current levels in the future, but not likely to occur in 2021. Given that this portfolio represents less than 1% of our total NOI, the impact from the lost rent during this transition and stabilization period is not expected to be material.

Now for the numbers for the quarter. For the 3 months ended March 31, 2021, we recorded total revenues, rental revenues and NOI of $152.4 million, $113.4 million and $121.3 million, respectively, as compared to $152.1 million, $110.7 million and $124 million for the fourth quarter of 2020. The increase in total revenues and rental revenues of $0.3 million and $2.7 million, respectively, are primarily due to increases in collections related to leases accounted for on a cash basis. Total revenues and NOI were also impacted by a $2.1 million reduction in revenues from our wholly owned senior housing managed portfolio compared to the fourth quarter, including a $0.6 million reduction in government grants income.

NOI was further impacted by the results of the Enlivant joint venture, which were lower compared to the fourth quarter by $2 million, including a reduction in government grant income of $0.5 million. We did not recognize any government grant income during the first quarter. Finally, COVID-19-related costs in our senior housing managed portfolio totaled $2.7 million for the quarter, a $0.3 million decrease compared to the fourth quarter. $1.8 million of this related to the Enlivant joint venture, while $0.9 million was incurred in our wholly owned portfolio.

FFO for the quarter was $82.4 million and on a normalized basis was $85.5 million or $0.40 per share. This compares to normalized FFO of $88.4 million or $0.42 per share in the fourth quarter of 2020 and at the high end of our guidance we gave for the quarter in February. AFFO, which excludes from FFO certain noncash revenues and expenses, was $82.8 million and on a normalized basis was $83.2 million or $0.39 per share. This compares to normalized AFFO of $86.9 million or $0.41 per share in the fourth quarter of 2020 and at the high end of our guidance we gave for the quarter in February. These declines in normalized FFO and normalized AFFO are primarily related to the reduction in NOI of $2.7 million previously discussed.

For the quarter, we recorded net income attributable to common stockholders of $33.4 million or $0.16 per share. G&A costs for the quarter totaled $8.9 million compared to $8.1 million for the fourth quarter of 2020. G&A costs included $2.3 million of stock-based compensation expense in both quarters. Recurring cash G&A costs of $6.6 million were 5.4% of NOI and in line with our expectations. During the quarter, we recorded a $2 million provision for loan losses and other reserves, primarily related to the loan to the New York operator exiting the business we noted previously.

We continue to have very strong liquidity position as of March 31, 2021, with over $1 billion of cash and availability on our line and are poised to take advantage of acquisition opportunities. During the first quarter, we acquired one addiction treatment center and one senior housing managed community for an aggregate purchase price of $28.5 million with a weighted average cash yield of 7.7%. In addition, subsequent to quarter end, we acquired one additional senior housing managed community for $32.5 million.

We issued 5.2 million shares of common stock under our ATM program during the quarter at an average price of $17.75 per share, generating net proceeds of $90.2 million. Additionally, we utilized the forward feature of the ATM program in preparation to fund certain upcoming investments. 1.3 million shares with an initial weighted average price of $17.94, net of commissions, remain outstanding under the forward sale agreement. As of March 31, 2021, we have $139.8 million available under the ATM program.

We were in compliance with all of our debt covenants as of March 31, 2021, and continue to have very strong credit metrics as follows. Our leverage is at 4.84x, and 5.48x including our share of the Enlivant joint venture debt. Interest coverage is at 5.23x, fixed charge coverage at 5.05x. Our total debt-to-asset value stands at 33%, unencumbered asset value to unsecured debt at 295% and unsecured debt-to-asset value at only 1%.

On May 5, 2021, the company's Board of Directors declared a quarterly cash dividend of $0.30 per share. This dividend will be paid on May 28 to common stockholders of record as of May 17. The dividend represents a payout of approximately 77% of our AFFO and normalized AFFO per share.

Now a couple of comments on our Q2 2021 guidance. We are limiting our guidance again to the second quarter of 2021 due to continued uncertainty around the timing of the recovery from the effects of COVID-19. We expect the following amounts per diluted share for the quarter ended June 30, 2021: net income $0.13 to $0.14, FFO $0.38 to $0.39 per share and AFFO $0.37 to $0.38 per share. Above estimates are based on certain key assumptions spelled out in our supplemental, which I will bring attention to just a couple. Estimated amounts above do not include any anticipated funds from the Provider Relief Fund or senior housing managed communities.

As we've begun to see signs of improvement in the early part of the second quarter, we expect our senior housing managed portfolio average quarterly occupancy will fall within the following ranges: wholly owned portfolio, 77% to 79%; unconsolidated joint venture portfolio, 68% to 70%. We expect to close investments totaling $86 million with a weighted average initial cash yield of 9%. We anticipate funding investments using revolver with match funding the equity component using the ATM program. Finally, we expect to maintain leverage below 5.5x, including our unconsolidated joint venture debt, based on expected annualized adjusted EBITDA between $470 million and $472 million as of June 30, 2021.

And with that, I will open it up to Q&A.

(Operator Instructions) Our first question comes from the line of Juan Sanabria of BMO Capital Markets.

Just -- maybe just to start with a question for Harold. Apologies if I missed this as you ran through the numbers. But is there any onetime numbers to the positive? I heard you mentioned a provision for losses -- on loan losses that bumped the first quarter relative to the second quarter guide, given you're expecting SHOP to improve?

No, Juan, there was nothing in there that was kind of onetime out of the ordinary. You're looking at pretty pure, true operating results in the second quarter. So there was nothing that I would classify as onetime. Like I said, we actually didn't even get any -- we thought maybe we'd get some government funds in the quarter, but that did not happen. So it was purely just their operations.

Yes. And Juan, I take your point. Let me just add something. Obviously, we see the commentary and the fact that we are really upbeat about recovering what we're seeing so far. Although we also don't know how much is happening because of pent-up demand, what the actual trajectory is going to be over a longer period of time. And -- but the commentary goes to we're really being upbeat about some of the trends we're seeing, but our Q2 guidance is slightly down from Q1 actuals. And really what it comes down to is, like everybody else, we've been really scarred the last year.

And we don't see any reason to put out something that we think is optimistic or not even optimistic, but we're just more comfortable with putting something out there that's conservative given how early these trends are. So it's really as simple as that. There's just no upside we don't think to putting ourselves out there any more than we did for Q2. So you alluded to that in your question. So go ahead and finish out what you were asking Juan.

Okay. Just -- I think I get it, but no kind of clawback of cash rents of cash rent-paying tenants from previous periods in the first quarter that [elevate] things that would dip away or fall off in the second quarter, just to double check?

Yes. No, you're going to see some level of variability in cash collections from the cash basis operator. So if you kind of go back to prior few quarters, you'll see there's kind of a little up and down quarter-over-quarter. So -- but nothing significant there that we're expecting in any clawback or [reduction].

Great. And then I guess maybe one for Rick on the SNF occupancy. I take your point on the largest operators being the bulk. Could you give the change year-to-date for the total SNF portfolio occupancy and/or what the change has been from the trough to today in occupancy?

Yes. We don't have a number for the total one. That's still being reconciled. And people -- we have operators that have different methodologies and things like that. Over the course of the pandemic, our managed portfolio and our top operators have gotten really good at giving us just really right on data that we've required, and we've asked more of them because they have the infrastructure. There's smaller operators that we have, we just haven't pushed them because they have much more limited resources and they have their hands full. So it's positive. It's just not as positive as this, but we don't have an actual number.

Great. And just one last one for me. Anybody on the watch list? We've had some hiccups with some of your triple-net peers that have come to light. You mentioned the SNF operator in New York. Anything else to flag that you guys are watching or that we should know about?

I'll make one comment and then Harold can jump in. So one, the answer is no. We've had remarkable consistency in our watch list that was in place pre-pandemic through the pandemic. But the comment I want to make about the one operator. This has less to do with sort of their operational performance, but this particular operator, the CEO, who I've known for a long time, has been in the business for decades and certainly could have retired before this. In the pandemic, he called me and just said, the pandemic just finished him off. He just can't handle it anymore. He is stressed. He is depressed. He just can't deal with it.

And so that's what precipitated the move as opposed to sort of any concerns about operations. So if he hadn't made that phone call, then I'm not sure this would be happening. So that's -- yes, Harold, do you have anything else?

No, I don't have anything to add. As you said, Rick, the watch list has been very stable, and there's not -- no material concerns that we have with our operators. So I think it's, as you said, [good].

Our next question comes from the line of Rich Anderson of SMBC.

Rick, so I appreciate the comments on the front end of this on CMS and, whatever you want to call it, a clawback on the 5% upside to revenue. But what do you gauge as being the rush here? Like I don't quite understand. It's hard enough to pinpoint things under normal times. With all the noise, both on the revenue side and on the expense side, how are they able to really kind of come up with an informed conclusion? And also, do you expect there to be some sort of concrete sort of law by October 1 of this year? Or do you think it gets pushed a year out because of all the confusion out there?

Yes. So to your original point, I think some of us sort of reacted the same way, why not just let this year pass and then start looking at the data. Whether the 5% caught them by surprise, maybe that was the case. But we all saw acuity rising almost from day 1. So we knew that, that number was going to continue to grow over the course of the pandemic. But if you actually read the full text of the proposed rule, they're pretty tempered in their comments. I know some of the headlines haven't been, but they're pretty tempered in their comments and very conciliatory, in fact more conciliatory in the proposed rule that I've ever seen in my career.

So is it possible if something happened this October? Maybe. I don't think it's going to be major. They really have made a point indicating that they don't want to do anything to disrupt the recovery of the industry. So yes, I was surprised, but their approach, I think, is quite tempered. So...

Okay. Okay. You mentioned the number -- the top 7 operators making a big chunk of the business. You also mentioned you have a bunch that are owners of 1 or 2 or operators of 1 or 2 facilities. Is there an opportunity to sell more and kind of consolidate your portfolio a little bit and maybe not be having some of those one-off situations perhaps as a way to finance Enlivant if that does sort of come to fruition?

Well, one, from a timing perspective -- so I'll take the second part first. From a timing perspective, I don't think that -- I don't think Enlivant is all that far off, right? So I don't think we would get much turn in terms of sales to raise much money. But the other more important part of the answer, I think, is that we like our operators, and we haven't had surprises with our operators through the pandemic. When we identified -- this goes back, what, 4 years when we did CCP, it's hard to believe it's that long, we identified who we wanted to do certain things with, sell or restructure or whatever, and then we would be done and it's been stable ever since.

So I think some of what we see out there -- so there's about 32 of those operators, Rich, with 16 of them showing occupancy increases. The other 16 flat or maybe slightly down, but those are very market-specific. And a lot of that has to do with local -- department of health officials where they haven't eased restrictions yet because, as I said in my opening comments, easing a cohort restrictions is a leading indicator of census increase. So it's not like there's something inherently wrong or troubling about those operators. This stuff will pass and those environments will normalize. And they'll probably start spiking once those restrictions are lifted just as we've seen from spiking with our larger operators with pent-up demand.

Okay. Last quick question. You mentioned group activities. Are you seeing any amount of concurrent therapy starting to take shape in your facilities?

We are seeing some, and it's really all over the place, as you would expect, with restriction easings kind of all over the place. But it is happening. And so that's going to be, obviously, super helpful with labor costs and just overall expenses within the facility. So I think -- I shouldn't say I think, we are hopeful that as some of these states and municipalities that haven't eased restrictions, these are the ones that haven't suffered in any way by doing so. And as the CDC guidelines will become more uniform, and then we may have some trajectory that we could actually quantify and do something with, which we just don't have now.

And I'd also say to that point and to my opening comment about facilities that still have COVID, it's really heartening that if you think about, you've still got a pretty decent percentage of your workforce that isn't vaccinated. And so you have to assume that there is some exposure to community spread. And we're seeing -- obviously, Michigan had spikes. We have seen spikes in Washington and parts of Oregon and other places around the country. But it's not impacting buildings. It really goes to the efficacy of the vaccine that -- here, you have facilities with 90-year olds that have an awful lot of issues and they're really frail individuals, and it's all holding up. So that's what we feel really good about.

And for those facilities that have been able to ease restrictions more so than others, it's the same thing. There's no -- they're not seeing positive COVID cases there. There's nothing happening that's negative.

Our next question comes from Nick Joseph of Citi.

Appreciate the updated comments on Enlivant. Are there any contractual timing considerations for the JV?

No.

You can both wait and see on the recovery before making a decision?

Right.

Excellent.

I should say, Nick, I don't anticipate that they're going to -- this is a vintage fund, so I don't expect they're going to wait until this is fully recovered. I think I want to see some recovery and maybe some trajectory. Sort of there's a case to be made, whether it's to us as a buyer or someone else that there's a valuation here that at least gives them something.

Okay. But at least there's some flexibility there. And then just on, I guess, the positive commentary overall. Just wondering if you can kind of marry that with leverage thoughts and issuing ATM equity to kind of keep leverage levels where they are versus letting it drift a little higher in the near term.

Sure. Harold, do you want to take that?

Sure. So I think it kind of goes back to what some of the disconnect that people might see also in our positive tone and the fact that our earnings are basically flat quarter-over-quarter. A lot of that's just driven by the share count, shares that we've issued in the first quarter, shares that we will issue in the second quarter to fund acquisitions and maintain leverage. And so there is -- as we start to see clarity on recovery in our managed portfolio, then we can begin to look at leverage on a little bit longer-term basis and start to see that equity issuance needed to manage that moderate.

I think we're already starting to feel like it will start to moderate now that we've got -- as Rick pointed out early on, the pandemic is in there for the full 12 months, which is how we calculate EBITDA for leverage. But remember, we still saw EBITDA decline as the pandemic progressed, and so we're still fighting that a little bit in our equity issuance. But I think as we start to see it recover and start to see performance improve, then we can really evaluate where we're at as well as then we start thinking about how the joint venture will play out. That will give us another opportunity to look at how financing that may occur or exiting would naturally delever us and have an impact on our equity issuance.

So leverage is still an important aspect for us to maintain it below the rating agency levels, and we've issued equity in the past to do that. We'll continue to do that if it's necessary, but I think we're starting to see -- as we come out of the pandemic that, that should start to abate, and we'll be able to start to just get back to where we're only funding acquisitions through equity.

And Nick, I would just add to that. So while we're not sort of loosening up, if you will, as soon as some folks might like us to, really, since the pandemic started, we determined at that point in time that we were going to take an extremely -- not extremely but a conservative stance on everything to do with our balance sheet, with liquidity. We were the first one to cut the dividend. And so everything was being -- for us, was being -- about being a good and conservative steward of our capital so that we would be actually in a stronger position as things ease off to start growing the company again.

And we're going to be in a really good position, really, to Harold's point, as EBITDA continues to grow with the recovery and our leverage will then naturally drop even more, we're going to be in a position to have a lot more to play with there on the leverage side. Whether we decide to keep it where it is or it will be lower than it is now as EBITDA grows, do we want to keep it lower? We're just going to -- we're going to have some real optionality, and there's nothing historically that I prefer more as the CEO than having optionality.

Our next question comes from Steven Valiquette of Barclays.

Just to come back quickly on that question of the 2Q '21 FFO guidance being down a little bit sequentially from the first quarter. You mentioned that you're taking a bit more of a conservative stance just due to the pandemic. But I guess I'm just curious whether the concern is more on the risk of rent collections in the triple-net portfolio? Or is it more perhaps REVPOR or pricing on the SHOP assets? Because it seems like from an occupancy standpoint, there's pretty good visibility for Sabra and really the entire industry for occupancy to improve sequentially. So I'm just guessing the cautiousness is more tied to rates and/or collections. Just want to confirm that.

I'll take that. It's just cautiousness overall. I would say that we don't have any concerns over rent collections that are material. But at the same time, we do have managed portfolio -- I'm sorry, cash basis tenants that pay as they are able to. So you do see volatility that we want to be careful with [in] our expectations there. And as I alluded to a little bit earlier, part of what you're seeing in the dynamic is just a function of additional shares being issued, additional shares that are outstanding today that were issued in the first quarter and then the expectation of some additional shares next quarter.

So the fact that we were within $0.01 on an absolute dollar basis, it's much closer to flat. And as Rick has said, that's being cautious on our expectation across the board. But there aren't any specific triple-net operators that we have significant concerns with on -- and it's just a matter of the cash basis [guys] might have some timing differences as well.

And just the other quick 2 comments I'd make on that is we don't have concerns about REVPOR. That's held up pretty well. Maybe there'll be some discounting, but we don't have the kind of operators that would give it away like some do. So that's not a concern. But the other thing relative to managed portfolio, we're really -- we're just weeks away from hitting our bottom. So it's just not that much time for something that's been this damaging to the business.

Yes. Okay. Got it. Okay. It just helps to hear the confirmation around that and your thought pattern. So I appreciate it.

Our next question comes from Lukas Hartwich of Green Street.

I was hoping you could just talk a little bit more about the opportunity set for behavioral health hospital acquisitions. Is there much deal flow in that segment?

I'll take that. The answer is that we're seeing more deal flow than we've seen in prior years. The -- certainly, in addiction treatment, there's a lot of interest by a lot of capital sources, and it's a sector that is evolving quite rapidly and an opportunity for a lot of roll-ups of operators because it's been relatively small scale and very localized in its approach, and the operating model there has really evolved very rapidly even over the course of the last 5 years. So there's a lot of interest there, there are opportunities there, and we are seeing more transactions in that sector than we've ever seen before. So I'd say for the time being, yes.

That's helpful. And then on the acquisition in Alaska, I'm just curious what the challenges are with asset managing, I think that's your only property, in Alaska. So it's pretty far away. So maybe you could just talk about the challenges of asset managing that property. And then maybe, I'm assuming you made that acquisition with the hope to add more properties in that state. So maybe touch on that as well.

Sure. So there is an -- there may be an opportunity to expand that property and add some additional units, specifically IL units. That's something that we'll see over time whether that makes sense, which gives us a bit of a campus there, which would be nice. Frankly, we -- our asset managers have toured the building prior to closing, and they don't seem to be hesitant at all about making the trip up to Alaska, given all that we have in the Pacific Northwest. It's further, but it's not that much further if you're already up in Washington and Oregon.

Our next question comes from Todd Stender of Wells Fargo.

Totally recognize it's a little premature to get too enthusiastic about the positive move-in trends. But when you look at Holiday, they had 2 good months, March and April. What are you hearing from Holiday right now? And how are they ramping their marketing efforts? Just you've got seasonal demand potentially coming. It sounds like you get a little bit of upside. Just any color you can provide.

I can take that. So one of the things that's really interesting about the last year is that large operators, and I include Enlivant and very much so Holiday in this basket, have shifted a lot of efforts to digital sales. For one, the outreach became different during the pandemic because you weren't talking to people face-to-face. But they've really moved to owning sort of the whole optimization on their website and focusing on outreach through their website as opposed to referral agencies that were much more -- to whom they were much more beholden in the past.

So it's hard for me to say sitting here today and given the trends that we described, how all that's going to play out as people start to open their doors and start to come out and really look how the referral sources may shift or continue to move in the direction that they have been over the last year and how that impacts move-ins. What we do know is that move-outs, as a result of deaths, frankly, have declined, and we expect that to move to a normalized level for sure.

The other piece of the equation is that to the extent that residents stayed in buildings because there was a fear of moving to higher level of care, for example, because they were safe where they were and they didn't want to change, there may be some pent-up move-outs as a result of needing a higher level of care.

Understood. That's helpful. I guess just switching gears. When I look at the cash yields on your senior housing facilities, one -- the one that you bought in Q1 and then you've already bought one in Q2 are pretty high in the high 7s, but they -- it sounds like they include earnouts. Do you have more of a year 1 kind of initial going in yield?

So far, we've just included what we think is a stabilized number, which includes an earnout.

Okay. And that would be more once that gets stabilized in year -- gosh, after 12 months?

Yes. It's sort of a 12- to 18-month window for both of those assets.

Our next question comes from Joshua Dennerlein of Bank of America.

Rick, last quarter, you kind of provided your thoughts on when you thought SNF and senior housing occupancy would return to pre-pandemic levels. Any updated thoughts on that front you could share?

Yes. I actually still feel the same way with the caveat being that, my guess is as good as anybody's, and we don't have enough time yet to really have a trajectory that we can project over a number of months, but I still believe that on the skill side, sometime in the first quarter of '22, we will be either back to pre-COVID occupancy levels or pretty close. For senior housing, likewise, I still think it's going to be the latter half of '22. When I say pretty close on either asset class, I mean close enough that the market is going to feel like, yes, we're going to get there.

Okay. Okay. And do you think it will be choppy? Or do you think it's kind of steady? Or do you see, like, acceleration over the summer? Or any kind of color there?

Yes. So that's a tough part because you've got some different factors. One, how much is pent-up demand impacting it? When you look at a pretty significant increase with our top operators, it feels like there's some pent-up demand in there, right? The other piece of it is has acute -- it's going to take some time for the acuity to sort of normalize because we're still getting people that are somewhat sicker than they used to be. That may impact length of stay and shorten it a little bit. So [that] pent-up demand, which is helping where you've got potential pressure on length of stay.

All of which to say is, yes, I think it's going to be a little choppy. I would expect that in the summer on the skilled side, as you know, we normally have a dip in occupancy. But given where we are and given all the delays in surgeries and things like that, I'm not sure we're going to see that same dip. So my hope is that sometime in the summer months, it will be kind of steady growth that you can really start projecting off of.

Okay. And on the SNF side, how are you thinking about like skill mix going forward? Like do you think we see more Medicare patients come back first because they're being discharged from the hospitals and maybe before, they weren't? Or is there some other kind of [crosswind] going on?

Okay. So first of all, on this, I don't want to get too technical. They're all Medicare patients when they come in. We have very few operators that take Medicaid-only patients. So they're dual eligible, Medicare and Medicaid. So they come in, they come in under as a Medicare patient. And with changes over time, let's say, it's a Medicare rehab patient, they may go home after 20 days, okay? But if it's a patient that's come in under Medicare initially that has a lot of complex nursing issues, which is what PDPM was set up to service.

Then once they stabilize, they still have too many other health issues to get -- leave the skilled nursing facility. They're going to be there for the long term, and they will convert at that point from Medicare to Medicaid, and they'll be in the facility for however long they're in the facility. So that's kind of how that works.

Our next question comes from the line of Omotayo Okusanya of Mizuho.

I wanted to talk about the 5.5 kind of leverage target that you guys have set up for yourselves. Is that something that high set in stone by the credit rating agencies in order for you to maintain your investment-grade rating? Is there some flexibility around that? Like I understand EBITDA going up as things improve, that gives you a little bit more flexibility. But the target itself, that 5.5 limit, like where does that come from? And why do you kind of limit yourself that way?

I'll take that, Tayo. It is not a hard limit by all the rating agencies, but it is what Fitch has identified for us as their target leverage at or below that level for us to maintain our current credit rating. So if we were to move into an area where we had sustained leverage above that level, then they would downgrade Sabra, absent other factors. But kind of with our profile today, if it went above that and was sustained at that level, then they would downgrade us. And if you'll recall, they have put us on a negative outlook, and that negative outlook was specifically because our leverage was above that level.

And so they were telegraphing that if we didn't get it down within the next 12 to 18 months, they were going to downgrade our credit rating. And that's why we got so focused on it in 2019 and got it down below that level just before the pandemic. And so when the pandemic hit and we started seeing issues with our performance in the managed portfolio, we knew we had to manage at that level and, frankly, had no expectation that Fitch would do anything with our ratings outlook until after the pandemic was behind us. But because we took such an aggressive stance on that, they actually removed the negative outlook because we demonstrated to them our commitment to maintaining it below that level.

So in the near term, it's going to be where we keep our leverage below. I will add that when they look at that level, it is exclusive of the joint venture. In other words, we're actually a fair amount below that today. But until we determine the course of action around that joint venture, then we're going to maintain, including that joint venture, the level below that. But let's say we got out of that joint venture, then our leverage would drop pretty significantly immediately. And we would, obviously, then to have more flexibility in funding acquisitions. On the flip side, if we go ahead and are able to buy that portfolio, there will be some need to further delever because we'll take on the 51% of that portfolio that is more highly levered, even excluding the pandemic impact.

So we're just maintaining it today with the current structure, with the current ownership in that joint venture to give us, obviously, the sense from the rating agency of our commitment to do that. And then as we've said over and over the last several quarters, if we determine to exit, then we're going to have a lot of flexibility. And part of the decision to make that investment and take the ownership of the JV up to 100% is going to be that there's a clear path to strong growth in earnings, including maintaining leverage where it needs to be. So...

And Tayo, the other comment I would make is one of the key words that Harold used was sustain. So look, they're realistic. They know there's going to be some ups and downs as you do acquisitions once you're really in growth mode and all that, and that's not an issue. They just don't want to see it at a higher level on a sustained basis. And what we've demonstrated to them is the commitment and consistency in not doing that. So it's not as if you pop up for a quarter because you've had a lot of activity and then you're going to do some other things to get it back down. It's going to be problematic. Sustain is really the keyword.

Got you. Okay. And then I apologize if I missed this earlier on, but Rick, I mean, in regard to just states and [local] government kind of stepping up in regards to providing government support, local government support for the skilled nursing industry, could you talk a little bit about just what you're hearing out there, whether it's kind of still too early for states to make any major moves, just kind of given the sense that the federal government is probably going to be moving away from this over time?

Yes. So one, it is too early. However, the dialogue and tone have changed. I think there have been a couple of reasons for that. One, the state budgets just didn't take the kind of hit and have the kind of deficits that were projected at the beginning of the pandemic. And so when they get all this Medicaid in from the federal government, even though it may not be targeted to skilled nursing, it really provides them even additional relief, which gives them more room to do things for us. And I think if you look at the number of states that did the FMAP increases, I think it's about half the states, might be off a little bit. We felt really good about that, that they looked at their states and chose to do that.

So there does seem to be an awareness. That shouldn't be new, but it seems to be that Medicaid has been historically underfunded in most states. So I think tone and dialogue has changed, but it's definitely too early to anticipate what might happen.

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

Thank you. Thank you all for joining us. I appreciate your time today and your support. And as always, we're available for follow-up. And I hope everybody has a good weekend and continue to stay safe out there. Thank you.

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