Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q1 2024 Earnings Call Transcript

Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q1 2024 Earnings Call Transcript May 9, 2024

Sabra Health Care REIT, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day everyone. My name is Katherine and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Health Care REIT First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Now I would like to turn the call over to Lukas Hartwich, SVP Finance. Please go ahead Mr. Hartwich.

Lukas 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 reiterating our earnings guidance for 2024, 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, 2023 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.

Rick Matros: Thanks Lukas. Thanks everybody for joining us. Hope you all have a good day. So this quarter is really just a continuation of the last couple of quarters. Our operating performance continues to improve. Our balance sheet strength has us in a position to grow. Our skilled nursing EBITDA and coverage continues to nut job exceeding pre-pandemic coverage. Our senior housing triple net lease coverage continues to improve that is near pre-pandemic levels. Our top 10 is stronger than it’s ever been. Our skilled occupancy is up 110 basis points sequentially and our skilled mix is higher than it’s been in several quarters. Our senior housing triple net occupancy is higher than pre-pandemic occupancy. Our SHOP growth continues with occupancy higher than it’s been since the early months of the pandemic.

Contract labor continues to improve dropping to where we were three years ago, well-below peak levels although still higher than we want to see. Our deal flow is improving and notes primarily SHOP we are finally starting to see some skilled nursing opportunities. In both Skilled and SHOP sales pricing has moved towards buyers. While we don’t have new investments to announce this quarter based on current activity, we expect to be in a position to announce new deals on our second quarter earnings call. We are running better than anticipated on our forecast including our SHOP performance. But since it’s still very early in the year we’re going to wait until Q2 to reassess our guidance. And with that, I’ll turn the call over to Talya.

Talya Nevo-Hacohen: Thank you, Rick. Sabra’s managed senior housing portfolio including joint ventures at share continues to perform well. The portfolio grew by five communities during the quarter and seven communities year-over-year, which were all properties previously leased to other operators and I underscore leased. While the added community has had a limited contribution to the total, Sabra’s managed portfolio saw a 16.5% quarterly revenue growth and just over 26% quarterly cash net operating income growth on a year-over-year basis. This was driven by the trends that we’ve been noting for the past several quarters. Growing demand at driving occupancy and REVPOR gains and moderating expenses. Wage growth has decelerated as open positions are filling together, reducing overtime needs and even eliminating agency usage.

Sabra’s same-store manage the inner housing portfolio including joint ventures at Chair [ph] includes 64 properties, 43 of which are in the US and the balance in Canada. Excluding non-stabilized assets and government stimulus, the headline numbers are same-store portfolio revenue for the quarter grew 5.8% year-over-year with our Canadian communities growing revenue by 9.2%. Cash NOI for the quarter grew 9.5% over the first quarter of 2023, skewed down by a lower than usual expense item in the first quarter of 2023. Cash NOI for the quarter increased 16.7% in our Canadian communities. REVPOR’s first quarter of 2024 increased by 3.4% year-over-year with REVPOR in our Canadian portfolio growing by 5.1% in the period. The senior housing recovery in Canada has been lacked in the US and is now catching up.

Drivers of revenue growth in our Canadian community outpaced our US communities this past quarter on a year-over-year basis while expense growth has come into line with our US community particularly on a sequential quarter basis. Our net lease stabilized senior housing portfolio continues to thrive with occupancy for the past quarter at about 90% as Rick said above pre-pandemic levels and steadily improving rent coverage. Sabra’s total investment in behavioral health remained approximately $800 million as we provide time for our assets to complete conversion and lease up and reach stabilization. You will note that we have combined specialty hospitals and behavioral health in our coverage disclosure in our supplemental because combined these categories represent 21 stabilized properties contributing about 10.5% of Sabra’s NOI with only six behavioral properties in there.

And with that I will turn the call over to Michael Costa Sabra’s Chief Financial Officer.

Michael Costa: Thanks, Talya. For the first quarter of 2024, we recognized normalized FFO per share of $0.34 and a normalized AFFO per share of $0.35 both up $0.02 from our fourth quarter 2023 results. Year-over-year both normalized FFO per share and normalized AFFO per share increased 3% representing the first year-over-year increase in both since before the pandemic. This sequential increase was driven by the following: a $1.8 million sequential increase in cash rents received with the majority coming from stronger collections from cash basis tenants compared to the fourth quarter. A $1.3 million reduction in normalized cash G&A expense primarily related to performance-based compensation true-ups that occurred in the fourth quarter.

$900,000 of business interruption insurance income related to a property that suffered fire damage last year and a $600,000 improvement in NOI from our managed senior housing portfolio due to improved performance as well as the transition of five facilities to our managed portfolio that were previously leased on a triple-net basis. This was partially offset by a $500,000 increase in cash interest expense due to higher outstanding borrowings under our revolving credit facility. As Rick noted earlier, our first quarter performance came in slightly better than what we had forecast in our 2024 guidance estimate. While we are pleased with this out performance given that it’s early in the year, we feel it’s most prudent to reaffirm our full year 2024 guidance ranges at this time and we will revisit these ranges for our second quarter earnings call.

Our full year 2024 guidance ranges on a diluted per share basis are as follows: net income $0.53 to $0.57 FFO $1.33 to $1.37 Normalized FFO $1.34 to $1.38 Adjusted FFO $1.38 to $1.42 normalized adjusted FFO of $1.39 to $1.43. As a reminder our guidance does not assume any acquisition or disposition activity. Now briefly turning to our balance sheet. Our net debt to adjusted EBITDA ratio was 5.55x as of March 31, 2024. As our portfolio continues its recovery from the pandemic, we expect this to result in improvements to both our earnings as well as our leverage. As of March 31, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $914 million consisting of unrestricted cash and cash equivalents of $60 million and available borrowings of $854 million under our revolving credit facility.

Finally, on May 8, 2024, Sabra’s Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on May 31 2024 to common stockholders of record as of the close of business on May 20, 2024. The dividend is adequately covered and represents a payout of 86% of our first quarter normalized AFFO per share and this payout percentage is expected to improve over the course of 2024. And with that, we’ll open up the lines for Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Austin Wurschmidt from KeyBanc. Please go ahead.

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Q&A Session

Austin Wurschmidt: Hey good morning everybody. Just wanted to hit on the SHOP and just with respect to that I wanted to clarify the low to mid-teens that you said kind of felt right last quarter. I know you didn’t provide explicit guidance but kind of pointed towards that low to mid-teens growth does that include the contribution from the unconsolidated joint venture portfolio? And is that a same-store figure?

Michael Lourenco: It does include the contribution from the joint ventures and it’s not a same-store number. It’s a year-over-year number on a comparative basis.

Austin Wurschmidt: Got it. So, this includes the benefit from the transition of these from AAA lease to facilities that are now moved from a triple-net lease to the RIDEA structure?

Michael Lourenco: That’s right. And if you also think about it these were triple net assets before that we transitioned. They weren’t performing a triple net assets. They weren’t contributing anything to our NOI in 2023.

Austin Wurschmidt: Got it. That’s helpful. And then just another one for me clarification. So, has there been any change to the cash NOI contribution from Signature Healthcare? It looked like the quarterly cash NOI number came down a bit. So just curious if there’s anything there.

Michael Lourenco: Yes. It was just a timing issue really. It was just a timing issue in the first quarter. Since we’re on a cash basis we recorded revenues when the cash comes in the door. And part of the March payment came in shortly after March 31 that simply as.

Austin Wurschmidt: So, there’ll be a catch-up payment that gets them on par with the prior kind of quarterly run rate in the second quarter that we should expect?

Michael Lourenco: Yes, got it. Thank you.

Operator: Your next question comes from the line of Joshua Dennerlein of Bank of America. your line is open.

Joshua Dennerlein: Rick just wanted to kind of get your take on the final minimum staffing ruling from the CMS. How do you think this plays out from here? And then just curious like how we should I know it’s a couple of years out with the phase and just like how should we think about potential impact on your portfolio?

Rich Matros: Okay if it doesn’t get over-turn I think the same as we’ve been saying all along and that is the rule is ludicrous on the space simply because the labor isn’t available. And as I think — as I’ve stated in the past that now it’s been publicly stated by the industry and the trade association you can expect to see both legal legislative action to overturn this.

Joshua Dennerlein: Okay. And if it doesn’t get overturned or like stays as is like is there any kind of thought process on how it might impact like your portfolio your operators? Or are you just saying they just like won’t be able to even find the labor?

Rich Matros: Well it depends on the market. Most of our buildings are actually in pretty good shape relative to it and I think higher than national average from a staffing perspective. But as you noted even if we sort of stay in place it’s a phase-in process that’s not going to start for two years. It’s — you’re not too for another couple of years. And labor has been improving certainly contract labor as I noted has improved dramatically. And so presumably things will improve more. So it’s a little bit hard to anticipate. But it isn’t just a matter of putting a number out there that’s going to be a lot of operators in certain markets completely unable to fill positions. And so it’s — really got nothing to do with quality of care.

It’s got everything to do with punishing nursing books. That’s what that’s really what it’s about. And the other point that’s really critical here is it’s a one size fits all. And even in the final rule they really didn’t address the criticisms about the lack of inclusion of LPNs, which are a backbone to every operator in the business. This they left that one number out there that you could fill with LPN, but that’s not the same thing. But operators staff buildings based on acuity both in terms of total hours and in terms of the mix of those hours between RNs, LPNs, nursing assistants you’ve got facilities that bring in NPs. So — any evidence that you look at we’ll tell you pretty clearly that one size fits all does not work and does not lead to better quality outcomes.

So just — and in addition to that, putting an arbitrary number of what staffing should be does not — there’s no correlation between that and quality outcomes as well. So that’s probably more than you needed to hear. But and what make sure, I covered all aspects of it.

Joshua Dennerlein: Yeah. Good color. I appreciate the time. I’ll jump back in the queue. Thanks.

Operator: Your next question comes from the line of Michael Griffin of Citigroup. Your line is opens.

Michael Griffin: Great. Thanks. I wanted to touch a bit on the acquisition pipeline and sort of what you’re seeing out there. Obviously you’re not giving any speculative acquisitions in guidance. But if you annualize the midpoint of earnings this quarter gets you to kind of that low-end. So how are you thinking about acquisitions whether from a yield perspective? And how much do you think they contribute to earnings on a stabilized basis this year?

Talya Nevo-Hacohen: Well, I’ll tell you what we’re seeing, just to elaborate on what Rick, had said earlier. Deal flow is phase back up, but we’re seeing a lot. I think we’ve said this in the past that, the best deals we’re seeing are the ones that are coming to us off market. And I suspect that’s true for our peers as well. We are focused more on the acquiring assets although we’re open to doing some loans. That’s not where we’re focused. So we’re seeing quite a bit, and we’re seeing quite a bit from operators who we’d like to do repeat business. And that’s really the key piece. How much we get done and wait to be seen. We’ll keep everyone apprised of that. But we’re — but the contribution to 2024 is really going to be dependent on when we close in anything else.

Rick mentioned that buyers’ and sellers’ pricing expectations have come much closer. That’s generally true. And so the opportunity to deals exists and we’re managing our balance sheet carefully, but we see opportunities that are worthwhile.

Michael Griffin: And then ….

Rick Matros: So the earlier…

Michael Griffin: Oh, sorry, go ahead Rick.

Rick Matros: The only other point of emphasis, I make is that our guidance as you know doesn’t include any assumptions about acquisitions in my statement, in my opening remarks about revisiting guidance in the second quarter, because we’re ahead of where we thought we’d be already has nothing to do with any assumptions about acquisitions this year. So that would just be great on top of that. But to Talya’s point the reality is, if you’re closing most of your stuff over the last five or six months of the year it’s going to have more of a muted impact and just serves more to fuel growth going into 2025.