Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q4 2023 Earnings Call Transcript

Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q4 2023 Earnings Call Transcript February 28, 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 Mandeep and I will be your conference operator today. At this time, I’d like to welcome everyone to the Sabra Fourth Quarter 2023 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]. I would now 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 our earnings guidance for 2024 and 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, 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-K, 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. Good day, everybody. I appreciate you joining us. We’re pleased to report continuing stability and organic growth in our portfolio. In our skilled portfolio, occupancy is up 50 basis points sequentially and 290 basis points year-over-year. Our EBITDARM rent coverage is up 0.10 sequentially with similar improvement in our top 10 in the aggregate. While labor is tough, the improvement over the last year is material. Contract labor is down 29% on a patient-day basis and nursing all-in is up just 4.3% on a patient day basis. And the combination of that coming down and our revenue per patient day growing at the rate that it’s been growing in the skilled portfolio has put us in a position where in the aggregate, our portfolio’s margins are pretty much where they were at pre-pandemic.

And so the really good news there is we’re not even a pre-pandemic occupancy. So we see a really terrific opportunity ahead of us in terms of margins improving where they were on a pre-pandemic. We also continue to see improvement in the Senior Housing lease portfolio. Occupancy is up 130 basis points sequentially and DARM rent coverage jumped 0.11. Talya will talk in detail about our SHOP portfolio. For both the skilled and Senior Housing portfolios, we expect occupancy to exceed pre-pandemic levels, as I said. But the reason is different for each of the two different asset classes. So for skilled, it’s the demographic coupled with the declining product. And for Senior Housing, it’s a demographic combined with the negligible new supply for the foreseeable future.

We appreciated that CMS and numerous states have been capturing cost increases and reimbursement rates, and we’re optimistic that we’ll continue at the state level this summer and for fiscal year 2025 for CMS. Our behavioral and specialty hospital portfolio has had stable performance. We have provided full-year guidance for the first time since before the pandemic with 5% and 6% increases in normalized FFO and normalized AFFO, respectively at the midpoint of guidance. We’re also starting to see more investment opportunities, but no clear trends as of yet. And with that, I will turn the call over to Talya.

Talya Nevo-Hacohen: Thank you, Rick. Sabra’s entire wholly owned managed Senior Housing portfolio maintained positive momentum in the fourth quarter with mid- to high-teen percentage growth in revenue and cash net operating income on a year-over-year basis. This was a function of continued occupancy and REVPOR gains coupled with moderating expenses. Quarterly occupancy in independent living, assisted living and memory care in our managed portfolio is the highest it has been since the second quarter of 2020. Sabra’s same-store wholly owned portfolio currently consists of 51 properties, of which 28 are independent living and 23 are assisted living memory care communities. The headline numbers for this portfolio, excluding non-stabilized assets and government stimulus are as follows: Occupancy for the fourth quarter of 2023 was 81.2%, a year-over-year increase of 130 basis points, the highest occupancy for this portfolio over the past five quarters.

REVPOR in the fourth quarter of 2023 increased by 4% over the fourth quarter of 2022. Current increases for asking rents and renewals are in the 5% to 7% range more moderate than prior years as anticipated. Cash NOI for the quarter grew 12.2% over fourth quarter 2022. More recently, in January 2024, this portfolio’s cash NOI posted an increase of more than 25% compared to January 2023. The performance of Sabra’s same-store assisted living portfolio is attributable to strong gains made by nearly every one of the operators managing these communities, while the foundation was set by our Inspirit portfolio, which was transitioned from Enlivant in mid-2023, nearly every operator was able to drive REVPOR while managing ex-POR. The Inspirit portfolio, about half of our same-store assisted living portfolio experienced cash NOI growth of 14.5% sequentially and 21% year-over-year.

We continue to see operational, financial and cultural improvement in these communities since the transition. The same-store pool of properties in our unconsolidated joint venture with Sienna, excluding non-stabilized assets and government stimulus had 2.5% higher occupancy in the fourth quarter on a year-over-year basis with a 159% increase in cash NOI in the same periods. The drivers were occupancy increases and 5.7% higher REVPOR coupled with 9.1% lower ex-POR leading to cash NOI margin expansion of 12.7% in the fourth quarter on a year-over-year basis. Our now leased stabilized Senior Housing portfolio continues to perform well with occupancy well above pre-pandemic levels and steadily improving rent coverage. At the end of the fourth quarter, Sabra’s total investment in behavioral health remained approximately $800 million.

I want to point out that the trailing 12-months statistics in the supplemental, one quarter in arrears for our behavioral health portfolio shows a slight downward trend over the prior quarter for both occupancy and rent coverage. This is largely a functions of changes in the pool of properties including the addition of our Monroeville residential treatment center to the stabilized pool in the second quarter, Monroeville currently operates at a lower occupancy rate than the rest of the pool, but continues to cover its rent payment. And with that, I will turn the call over to Michael Costa, Sabra’s Chief Financial Officer.

Michael Costa: Thanks, Talya. For the fourth quarter of 2023, we recognized normalized FFO per share of $0.32 and normalized AFFO per share of $0.33. During the quarter, we saw an $800,000 decrease in cash rents compared to the third quarter, primarily due to the sale of a portfolio of 13 skilled nursing and two Senior Housing assets during the third quarter. Also during the fourth quarter, we updated our estimates of performance-based compensation, which resulted in an increase to general and administrative expense totaling $5.1 million of which $3.8 million relates to the first three quarters of 2023 and is normalized out of our fourth quarter normalized FFO and normalized AFFO. These amounts were partially offset by a $300,000 increase in normalized AFFO from our managed Senior Housing portfolio as a result of improved rates and occupancy.

This quarter, we are pleased to introduce full-year earnings guidance for the first time since the start of the pandemic. Throughout the pandemic, Sabra and many of our peers did not issue full-year guidance because the uncertain operating landscape in the industry made it difficult to project expected financial performance with a high level of conviction as the industry enters 2024 with a much improved operational environment and as Sabra specifically enters 2024 with the majority of our portfolio transitions and repositioning behind us, we have a much clearer line of sight into the expected performance of our portfolio for the coming year. Our estimated ranges for the full-year 2024 performance 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, normalized FFO, $1.38 to $1.42 and normalized adjusted FFO of $1.39 to $1.43.

As a reminder, our guidance does not assume any acquisition or disposition activity. I also want to point out a few things on our 2024 guidance. At the midpoint of our normalized FFO and normalized AFFO ranges, we expect to realize year-over-year growth of approximately 5% and 6%, respectively, which would be the first year of earnings growth for Sabra since the start of the pandemic. Our guidance also assumes a return to a more normalized run rate of cash G&A of approximately $36.8 million in 2024 compared to $39.5 million in 2023. As discussed on previous earnings calls, we have no floating rate debt outside of balances on our line of credit. Therefore, we expect cash interest expense in 2024 to remain consistent with 2023 with any variability coming from changes in outstanding borrowings on our line of credit.

Our current quarterly dividend of $0.30 per share would represent an 85% payout using the midpoint of our normalized AFFO guidance. Our expected earnings growth throughout our guidance range would also reduce our leverage from current levels and closer to our long-term average target. Now briefly turning to the balance sheet. Our net debt-to-adjusted EBITDA ratio was 5.74x as of December 31, 2023, and as noted earlier and on previous calls, we expect leverage to naturally decrease as the performance in our portfolio continues its recovery from the pandemic. We remain committed to a long-term average leverage target of 5x and are confident we can achieve that target over time without needing to access the capital markets. As of December 31, 2023, we are in compliance with all of our debt covenants and have ample liquidity of $947 million consisting of unrestricted cash and cash equivalents of $41 million and available borrowings of $906 million under our revolving credit facility.

Finally, on February 1, 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 February 29, 2024, to common stockholders of record as of the close of business on February 13, 2024. The dividend is adequately covered and represents a payout of 91% of our fourth quarter normalized AFFO per share. And as noted earlier, this payout percentage is expected to improve in 2024. And with that, we’ll open up the line for Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.

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Q&A Session

Farrell Granath: Hi, this is Farrell Granath on behalf of Josh Dennerlein. My first question, I wanted to ask about the relationship with Ignite. What are you seeing in terms of opportunities going forward with either expanding or deepening this relationship? Or if you can touch on any other relationships you’re hoping to expand on?

Talya Nevo-Hacohen: Sure, I’m happy to take that. We have been working with Ignite since we transitioned several nursing home properties in Oklahoma to them several — before the pandemic, and have always been interested in working with them. We have — we did a small tack-on deal to our Oklahoma buildings. We’ve looked at several other deals. Now we announced the deal that we closed on. last year, and we continue to look for opportunities with them. We are not the only REIT with whom they have a relationship. So — they — I think they balance us all out and look for the best terms they can get, they like to negotiate, but we have tremendous respect for their capabilities as operators and are endeavoring to do more with them.

Farrell Granath: Great. And just — I know you made a few comments on the SHOP business. But I was wondering if you could expand a little bit on how you’re seeing that play out into 2024, either in terms of margins or occupancy?

Talya Nevo-Hacohen: I think we all wish we could see really rapid increases on the revenue side and decreases or no increases on the expense side. What I think we’re what we really are starting to see, however is consistent growth on the top line through both occupancy and REVPOR growth. And I think importantly, we’re starting to see that expenses per occupied room ex-POR is declining. And I think that’s a really key metric, which is why I added it to my talking points this morning. To me, that signals that the breakeven point is being moved over so that we are now starting to get the benefit of operating leverage.

Farrell Granath: Great, thank you for the color.

Operator: Your next question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Elmer Chang: Hi, thanks for the question. This is Elmer Chang on with Nick. Touching on Ignite again in a different way, but you had a fairly active quarter acquiring that portfolio. Could you just talk about whether this transaction was more so a credit-driven transaction versus maybe the operator needing capital to expand? And did you assume any mortgage debt in the process?

Talya Nevo-Hacohen: So we did not assume any mortgage debt. That’s one. Two, it’s not credit driven. It’s really based on operations and their very conservative look forward on what they can do with these buildings. These are newer buildings. They are building that the team at Ignite actually had opened when they were at their prior employer. So there is a tremendous amount of familiarity. The two buildings are very close to one another. So there’s really good geographic coverage there. Does that help you?

Elmer Chang: Got it. Yes, that helps. Thank you. And I guess just on the Senior Housing managed business as well. I know you mentioned maybe seeing increased rent growth in the 5% to 7% range. You talked about seeing occupancy gains, hopefully to pre-pandemic levels. Is that — was that a target for 2024 embedded in ’24 guidance? Or is that more so like a two to three year objective?

Michael Costa: Yes. I mean I wouldn’t say it would be a two to three year objective. I think the best way to think about it, if you look back over the last couple of quarters where we put that bridge to illustrate the remaining upside in our portfolio. a healthy amount of that upside for the Senior Housing managed business, specifically is captured in our 2024 guidance and particularly in the year-end run rate. So by the time we get to the end of 2024, the vast majority of that upside is already captured with a little bit left to capture in ’25 and beyond.

Elmer Chang: Got it, okay. Thank you.

Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt: Great. Thanks. Just wanted to hit back on sort of the Senior Housing managed portfolio and maybe put a finer point on what are you assuming for same-store NOI growth for the year within that segment of the business?

Michael Costa: Yes. So I mean we didn’t disclose that obviously in our release. And I think if you look at what a lot of our peers have put out, I think just general industry sentiment of, call it, double-digit, low teens, even mid-teens growth. I think that feels about right for our portfolio, and I think it’s probably a good assumption to use when you’re looking at our sober-specific portfolio.

Austin Wurschmidt: That’s helpful. And I guess given sort of the acceleration you’ve seen now in the last couple of quarters, does that certainly a good jumping-off point heading into the year. So from here, I mean should we assume something more consistent with historical seasonality levels? Or do you think you can kind of outperform that historic seasonality just given the strength you’re seeing and maybe some of the catch-up from the operator transitions that happened last year?

Talya Nevo-Hacohen: I think that you’re going to — you’re always going to have seasonality. I think one of Rick’s points at the top of the call was about the lack of new supply. So what you have is you had a larger denominator, call it, pre-pandemic. You now have that same denominator and have more people in the cohort and more people moving in. So occupancy is increasing. And what I referenced about operating leverage is really going to be part of the story that leads to what Mike was talking about with respect to NOI growth. In other words, the more you fill the buildings and it’s more — it’s not a completely static pool, but it’s — but the pool of your audience and your resident numbers are moving up and your number of beds available remains — is remaining relatively static at the moment. You’re going to get the benefit of operating leverage because that incremental resident has a much higher pull-through to the bottom line.

Rick Matros: The other point I would make about guidance is, obviously, we felt that we’ve had enough trends in our asset classes to provide full-year guidance, but it’s still impossible to predict as you’ve been hearing exactly how much that — how much or how quickly things are going to improve — continue to improve. So hopefully, if we’ve aired we’ve been conservative in our assumptions.

Austin Wurschmidt: That all makes a lot of sense. And just one last one I wanted to hit on was you referenced sort of coverage is certainly trending positively across the overall portfolio. It does look like Healthmark Group has seen kind of continued to trend lower now for several quarters since they’ve been on that top 10 list? And just wondering if you could share any detail as to what’s driving that and when you might expect that to stabilize or even see a reversal?

Rick Matros: Yes. They had really been benefiting from PRF, and that’s dropped off completely. So that’s actually been a big factor. They’re a really good operator in a really tough environment in Texas. So we don’t have any concerns about them going forward, and we think that things will level out for them and then start improving again.

Austin Wurschmidt: Very good, appreciate the detail. Thank you.

Operator: Your next question comes from the line of Michael Griffin with Citi. Your line is open.

Michael Griffin: Great, thanks. Just wanted to ask about the acquisition environment heading into 2024. I know in the past, you’ve talked about you potentially being a net acquirer in the year ahead, but you didn’t include any acquisition expectations in your guidance. Just wanted to get a sense of how deep the pipeline is and sort of where you see yields for both on the skilled side and then anything on Senior Housing?

Rick Matros: So I’ll start. So in terms of being a net acquirer that is our goal for this year and in all the asset classes and skilled and in Senior Housing and behavioral as those opportunities present themselves. So I want to reiterate that even though we focused a lot over the past year plus on diversifying the portfolio and obviously our skilled exposure is at the lowest point it’s been in our history and will continue to drop. So we’re not going to bypass doing skilled deals. We’re actively looking for skilled deals and because we’re dropping so low on our skilled exposure, we’re really able to do more skilled deals and still have a much more diversified REIT than we’ve ever had before. So everything is really about earnings growth this year. And so we’re not going to put any sort of false guardrails or boundaries around the asset classes that we’re currently in.