Sabra Health Care REIT - Q2 2024

Transcript

Operator (participant)

One. My name is Christina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sabra Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, you can press star one again. I would now like to turn the call over to Lukas Hartwich, SVP of Finance. Please go ahead, Mr. Hartwich.

Lukas Hartwich (SVP of Finance)

Thank you, and good morning. Before we begin, I want to remind you that we'll 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 that 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 investor section of our website at sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the investor 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 (CEO, President and Chair)

Thanks, Lukas. Good day, everybody. Thanks for joining us. We appreciate it. As noted in our press release, the quarter demonstrated progress in all key areas. Guidance was increased. Our SHOP cash NOI growth was 17.7%. Our senior housing and skilled nursing occupancy increased. Our EBITDA and rent coverage increased on both senior housing leased assets and our skilled nursing portfolio. Our skilled nursing portfolio continues to surpass pre-pandemic levels. And in fact, coverage is higher than when we hit our occupancy high in 2019, which was approximately 200 basis points higher than it is today, all of which bodes really well for the future. Nine of our top 10 operators had improved rent coverage, with McGuire being the only one that didn't, but came in at a strong 1.79 EBITDA coverage with no concerning trends.

Leverage ticked down. We announced approximately $136 million in new investments. Medicaid rate increases on a weighted basis are estimated to be roughly 7%, which is 200 basis points higher than last year's increases. 71% of Sabra states have new effective Medicaid rates on July first of every year. The other six states are spread throughout different months of the year. The Medicaid rate increase for our top five SNF tenants was actually 10.6%. And then, of course, Medicare has finalized its market basket increase at 4.2%. Additionally, our skilled nursing mix was up 110 basis points. Our labor costs, including contract labor for that asset class, are now at their lowest level since March of 2021, and agency is now down 50% from a year ago.

Our skilled nursing EBITDA margins are now higher than pre-pandemic margins, and again, that's with occupancy still about 200 basis points lower than pre-pandemic occupancy. So we would fully expect to see margins and coverage continue to improve. One comment I wanna make on our Behavioral segment, our rent coverage was down, but if you look at the last five quarters, it's always up and down in the Behavioral segment. You have to think about it a little bit differently than skilled nursing and senior housing, which are actually very predictable businesses, pandemics notwithstanding. The Behavioral business is very dynamic, much shorter length of stay, but also has a break-even point at much lower occupancy. And the coverage is still quite strong at 3.69%, so there's a lot of breathing room there.

So we have no concerns about that, and you should expect going forward to see that move up and down a little bit more than you would expect to see in our skilled nursing asset class or our senior housing asset class. In terms of our investment pipeline, we're starting to finally see some skilled nursing opportunities in the pipeline and expect to increase over the course of the coming months. We're also seeing an uptick in the behavioral space, and with SHOP cap rates much more attractive relative to our cost of capital, we'll continue to invest in the SHOP, in SHOP as well. At this point in the year, we expect to continue to execute on the course we set before the year began and create a much stronger base from which to grow in 2025.

With that, I'll turn the call over to Talya.

Talya Nevo-Hacohen (Chief Investment Officer)

Thank you, Rick. Sabra's 82-property managed senior housing portfolio, including joint ventures at share, had a very strong quarter. On a sequential quarter basis, the managed portfolio in total, including non-stabilized communities, had 9.3% quarterly cash NOI growth and 1.7% cash NOI margin increase, and that's sequential. This is a product of flattening expenses and continued occupancy and RevPOR gains, the trends we have been noting for the past few quarters.... Sabra's same-store managed senior housing portfolio with joint ventures at share includes 70 properties, 46 of which are in the U.S. and 24 in Canada. Excluding non-stabilized assets, the headline numbers are same-store portfolio revenue for the quarter grew 6.8% year-over-year, with our Canadian communities growing revenue by 9.6%.

Cash NOI for the quarter grew 17.7% year-over-year, and 9.9% sequentially. In our Canadian communities, cash NOI for the quarter increased 23.9% over second quarter of 2023, and 20.1% sequentially. RevPOR in the second quarter of 2024 increased by 3.1% year-over-year, while ExPOR decreased by 70 basis points, a function of stabilizing expenses and growing occupancy in both the US and Canada. Canada's senior housing recovery has accelerated, with occupancy exceeding 91% this past quarter and cash NOI margin at nearly 32%. While occupancy has been strong for several quarters, expense control has moved into focus as the path to gain margin and grow cash NOI. Domestically, the story is similar, but the opportunity to reap the benefit of operating leverage is even greater given the potential of occupancy growth.

As Rick mentioned, our net leased stabilized senior housing portfolio continues to thrive, with consistently rising rent coverage reflecting the underlying operational recovery. Sabra's total investment in behavioral health remains relatively static this quarter. We've begun to see more interest in this asset class, as Rick mentioned. Investors and operators are increasingly interested in the segment, and brokers have committed focus and are accelerating activity. With that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Michael Costa (CFO)

Thanks, Talya. For the second quarter of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.36, both up $0.01 from our first quarter results. The sequential increase was driven by the following: higher cash rents collected of $4.5 million, primarily related to first quarter cash basis rents that were collected in the second quarter, and $1.8 million of improved NOI from our managed senior housing portfolio. This was partially offset by a $2 million increase in cash G&A as a result of truing up performance-based compensation expense estimates and a $900,000 increase in cash interest expense due to higher outstanding borrowings under our revolving credit facility during the period. Additionally, last quarter, we recognized $900,000 of business interruption insurance income that was non-recurring.

While there were various moving parts in our numbers this quarter, many of which are non-recurring, which shines through, is that the earnings growth we've experienced over the last two quarters was driven by the continued improvement in our managed senior housing performance, which translates to 6% year-over-year growth in both normalized FFO and normalized AFFO per share. Because of this improvement and the continued stability in our triple-net portfolio, our outlook for the remainder of the year has improved, resulting in an increase to our 2024 normalized FFO and normalized AFFO per share guidance.

Our updated full year 2024 guidance ranges on a diluted per share basis are as follows: net income $0.52-$0.55, FFO $1.33-$1.36, Normalized FFO $1.36-$1.39, Adjusted FFO $1.39-$1.42, and Normalized Adjusted FFO $1.41-$1.44. I would like to highlight a few data points that are embedded in our updated guidance. First, our triple-net cash NOI run rate for the second half of the year is approximately $90 million per quarter, which is consistent with the actual results of the first half of 2024.

Second, our recurring cash G&A run rate for the second half of the year is $10.4 million per quarter, which is also consistent with the actual results for the first half of 2024. Excluded from recurring cash G&A is stock compensation expense, which we expect to be approximately $2.5 million per quarter in the second half of 2024. Lastly, our guidance assumes year-over-year same-store cash NOI growth for our managed portfolio to be in the mid-to-high teens. Our guidance incorporates all announced investment and disposition activity, as well as the announced activity under the at-the-market equity offering program, and does not assume additional investment, disposition, or capital transactions beyond those already disclosed. Now, briefly turning to the balance sheet.

Our net debt to Adjusted EBITDA ratio was 5.45x as of June 30, 2024, a decrease of 0.10x from March 31, 2024. As of June 30, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $906 million, consisting of unrestricted cash and cash equivalents of $36 million and available borrowings of $870 million under our revolving credit facility. With the recent improvements in the cost of our equity capital, we utilized our ATM during and subsequent to the quarter to source capital to fund our announced investing activity.

Year to date, we utilized the forward feature under our ATM program to allow for the sale of up to 4.7 million shares at an initial weighted average price of $14.72 per share, net of commissions, and currently have 2 million shares with an initial weighted average price of $15.11 per share, net of commissions, that are available to use to match fund our investment activity. Finally, on August 7, 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 August 30, 2024, to common stockholders of record as of the close of business on August 19, 2024. The dividend is adequately covered and represents a payout of 83% of our second quarter normalized AFFO per share.

With that, we'll open up the lines for Q&A.

Operator (participant)

Thank you. At this time, I'd like to remind everyone, in order to ask a question, press Star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Yulico from Scotiabank. Your line is open.

Elmer Chang (Equity Research Associate)

Hi, thanks for the questions. This is Elmer Chang on with Nick. We appreciate more explicitly communicating your seniors housing managed same store and ROI growth expectations. You mentioned in your remarks that operating leverage seems to be improving, but is there any more color you can provide around the occupancy ramp expectations you have for the segment in the second half of this year, and how that might impact RevPOR or ExPOR expense growth at operators?

Talya Nevo-Hacohen (Chief Investment Officer)

Well, I can tell you that we're continuing to see some consistent growth in both AL and IL across the portfolio. And in fact, together, they're at about currently at around the same occupancy. I know our Holiday portfolio hit 83% at the end of July, and that puts them 200 basis points below where they were in at the end of 2019, right before the pandemic, when we were all worried about increasing supply and what we were gonna do with all that supply. So I think the momentum is there. We're seeing similar momentum on occupancy in our in Canada, where I think our Canadian portfolios have together is at about 93% occupancy, ahead of the number I gave you for second quarter.

And we're seeing it also in our leased portfolio, where of the call it just under three-quarters of our operators in our lease portfolio are at 85% or higher occupancy. So it's really looking good. It just seems to be growing. And the additional supply that I alluded to, which is really substantial, what came on the market, kinda going into the pandemic and through and throughout the pandemic, that's being absorbed, and that's you know in excess of 10% increase in supply in senior housing in total. So it's a big number, and yet these numbers are going up.

Elmer Chang (Equity Research Associate)

Got it. Thank you. Appreciate that. And sticking to the managed segment as well, on the investment side, what is the... Are there any high-level numbers you could put around the investment pipeline and what that might mean for transaction activity? I know you mentioned, you know, you're seeing more activity across the board, all of all segments. And then in terms of pricing, do you know that 8% initial cash yield, is that representative of deals that you're seeing today?

Talya Nevo-Hacohen (Chief Investment Officer)

Okay, I'll take the second question first. So I'd say in the market today, in general, for senior housing, cap rates are gonna start at seven. And if you're looking at active adult, it's gonna be lower than that. It's my guess is, it's in the sixes, but we are not pursuing active adults. So sevens, 7.5-ish on senior housing, going to eight. The assets that we've been able to acquire for an 8% yield initially or 8% cap rate going in are relatively new. They're kind of five years old or younger, so they're completely modern, and they're well leased up, and they're in good locations. I think that's where the market is because that's where the debt markets are, frankly.

So the competition that used to outprice us, or who drove pricing down, was really based their pricing on, on debt and availability of debt. So it's the cost and availability. In terms of our pipeline, we are seeing a significant amount of deal flow. I would tell you right now, there's probably $750 million of deals under review. That does not mean we're committed to them or have LOIs out on them. It just means that's what we're looking at. A small portion that will proceed to LOI submitted, and then, we're being very selective of where we're placing our capital, because, because our intent is to make those investments, in a way that really enhances and improves Sabra's portfolio.

Michael Costa (CFO)

The only other comment I'd make on the SHOP cap rates is that those are going-in yields, and the business is still recovering from the pandemic. So, we're looking forward to really nice growth in all those investments that we've announced.

Elmer Chang (Equity Research Associate)

... Got it. Okay, thank you.

Operator (participant)

Question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt (Director and Equity Research Analyst)

Great. Thank you. I think you alluded to the SHOP segment, kinda, you know, in stability and triple net, you know, overall driving the guidance increase. But, just curious if SHOP was the sole driver of the guidance increase, or did any of the investment activity have a positive impact on this year's outlook as well?

Michael Costa (CFO)

Yeah, I would say the investment impact is probably, is pretty muted for this year, given that, you know, most of it is in the second half of the year. So you're not gonna see a lot of uplift in our 2024 full year numbers as a result of this. You'd expect to see more of that impact going into the 2025 and beyond. So yeah, I would say the performance in our core portfolio, our same store portfolio, that, you know, again, combined with stability in our triple net portfolio, is really what's driving our, you know, our optimism for the back half of the year.

Austin Wurschmidt (Director and Equity Research Analyst)

Got it. And then, you know, you guys were previously a little reluctant to provide, you know, the same store NOI growth guidance, for the senior housing managed assets. You discussed this mid-teens growth. I guess, what's giving you the confidence to incorporate that into your assumptions more formally? And how should we think about that, you know, mid- to high-teens growth versus whatever was in the initial outlook?

Rick Matros (CEO, President and Chair)

I'll take the first shot at it. I just think that more time has passed as we've recovered from the pandemic. It's really as simple as that. You know, this is a business that, as I mentioned in my opening remarks, pre-pandemic, was an extremely predictable business. That predictability, as we all know, disappeared, but it's starting to come back now. So it's really just a function of time giving us more confidence.

Austin Wurschmidt (Director and Equity Research Analyst)

So should we expect, going forward, that you'll, you'll be willing to kinda give up the, the outlook on an annual basis for the SHOP portfolio, given things have stabilized a bit?

Michael Costa (CFO)

I mean, to the extent the portfolio is stabilized when we, you know, put out our next guidance, you know, for 2025 or anywhere beyond that. If the portfolio is stabilized, it becomes a lot easier to predict that. And that would. If we could easily predict it or more easily predict it, you know, I think it's something we'd definitely consider.

Talya Nevo-Hacohen (Chief Investment Officer)

I'm gonna add one more thing to the response, and that is, operating leverage in our senior housing managed portfolio is particularly relevant, and that's why it's a little tough for us to give you a great, you know, a very detailed and specific and narrow answer. Because we're at the cusp of hitting operating leverage in many of the assets in the SHOP portfolio. In some of those we've already passed it, which is I think why you're seeing the incredibly strong numbers in the Canadian portfolio that I outlined. In the U.S., we're sort of on the cusp of that as well, and that's gonna be the driver of the significant EBITDA contribution from incremental occupancy growth.

Austin Wurschmidt (Director and Equity Research Analyst)

That's helpful. Just last one, kinda along the similar lines for the operating leverage. These assets that you're seeing at 8% cap rates on the senior housing managed side, are those assets similarly where the in-place portfolio is from an occupancy and margin perspective, or do you see outsized opportunity? Just trying to understand where they are in the life cycle of the recovery, to where you're stepping in. Thank you.

Talya Nevo-Hacohen (Chief Investment Officer)

They're in line. Some of them are doing somewhat better than others. But there is, as Rick mentioned before, significant growth opportunity there as well, over the next couple of years. So we're not underwriting to an 8% stabilizer. We're underwriting to an 8% going in with upside.

Rick Matros (CEO, President and Chair)

The other thing I'd point out is that the investments we announced post-quarter are with Leo Brown Group, who's one of our strongest operators. We've been doing business with them for years, both from a development and an operating perspective. And so to enter into these, these new investments with an operator that is so familiar to us and has had so much success, I think bodes well for the growth going forward as well.

Austin Wurschmidt (Director and Equity Research Analyst)

Great. Thanks, everybody.

Operator (participant)

Your next question comes from the line of Juan Sanabria from BMO Capital Markets. Your line is open.

Robin Handel (Research Analyst)

Hi, this is Robin Handel, sitting in for Juan. Just curious, what would make you more inclined to pursue portfolio acquisitions?

Rick Matros (CEO, President and Chair)

You know, at this point, we're just not seeing quality portfolios out there, and we're not willing to take on anything that's gonna create a lot of work or a lot of noise. You know, we've made a commitment to our shareholders that we are gonna be predictable and disciplined and rigorous in everything that we do. And we're more than happy to do smaller digestible deals and do as many of those as possible, than to take on a portfolio that at least based on what we're seeing out there, tends to require some work.

Robin Handel (Research Analyst)

Okay. And, on Medicaid, what's the expectation for increases next year now with inflation coming down significantly? I guess, asked differently, is there, is there any catch-up left on inflation?

Rick Matros (CEO, President and Chair)

Yeah. So I think my guess is we may have hit a high point, this year. I think next year we'll still be capturing inflation, so I think we'll still have outsized Medicaid rates next year. But certainly over the next few years, assuming inflation moderates, those rates will moderate as well. But I think we still have some outsized rates, ahead of us.... And just the last one on the pipeline. How should we think about funding investment growth, and, what can we expect that from a debt to equity split?

Michael Costa (CFO)

Yeah. So as I mentioned in my prepared remarks, given the strength we've been seeing and continue to see in our cost of equity capital, you know, that is an available and viable source of funding where we could go out, use the ATM, use our revolver, match fund investments on a leverage neutral basis, and still make very accretive investments to Sabra, no matter how you define accretion, whether that's from earnings, NAV, so on and so forth. So as long as we have that cost of equity capital, and that attractive cost of equity capital, you should expect to see us use that with our revolver, to fund these.

You know, we had some dispositions we pointed out in our earnings release that closed subsequent to quarter end, which are very attractive sources of capital, and you can make a lot of accretive investments of that. It's a limited source of capital, we acknowledge that, but yet it is a source of capital we could use to combine with those other two sources that I laid out. So as long as we have the cost of capital to be able to go out and find investments that we like, you know, there really isn't a cap on it necessarily.

Robin Handel (Research Analyst)

Got it. Thank you.

Operator (participant)

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

Joshua Dennerlein (Equity Research Analyst)

Yeah. Hey, guys. Thanks for the time. Yeah, I wanted to go back,

Michael Costa (CFO)

Yep

Joshua Dennerlein (Equity Research Analyst)

... I think in the opening remarks, there was a comment on the Behavioral space, EBITDA coverage or EBITDA coverage. I think you said-

Michael Costa (CFO)

Yeah

Joshua Dennerlein (Equity Research Analyst)

... 1.79, but could you confirm what that is today? And then what was it, prior quarter?

Michael Costa (CFO)

I said 3.79.

Joshua Dennerlein (Equity Research Analyst)

3.79. Okay. All right, that makes more sense. Thank you.

Michael Costa (CFO)

Yeah, and how-

Rick Matros (CEO, President and Chair)

3.369, actually, but if you look at the last five quarters, it does move around some. And as I stated, it's not as predictable a business because you have, you have a much shorter length of stay with the residents in these facilities than you do in senior housing or skilled nursing. But you also have a break-even point on occupancy at about 50%-60%. So it's a much different economic model, and I understand that this is new to everybody. And so, and I think the comments and some of the notes reflect that newness, that folks aren't yet looking at it differently than senior housing and skilled. But look, I'll take—we'll take any coverage that's hovering around 3.7, right?

Joshua Dennerlein (Equity Research Analyst)

Okay. And that 3.79, that's stripping out the specialty hospitals and other?

Michael Costa (CFO)

No, it's included in there.

Joshua Dennerlein (Equity Research Analyst)

Oh, okay.

Michael Costa (CFO)

It's what we disclosed in our supplement, Josh.

Joshua Dennerlein (Equity Research Analyst)

Oh, okay. Is there big variability between those kind of three categories?

Rick Matros (CEO, President and Chair)

Yeah. So the specialty hospitals have much higher coverage, but we underwrite the addiction treatment investments at 2x or more. So we underwrite them at a much higher level than we do with either skilled nursing or senior housing. So there's always gonna be some nice breathing room there, particularly given where the break-even point is with occupancy.

Joshua Dennerlein (Equity Research Analyst)

Okay. And why is the break-even point so much lower, that, that 50% level?

Talya Nevo-Hacohen (Chief Investment Officer)

Because the rates on in addiction treatment are far higher than what you have. Your cost structure is... Then what-- Let me finish the sentence. The rates are far higher than you would have in senior housing or skilled nursing. It's like super-- It's like a super high Medicare rate for everybody, but you're turning people over. Average length of stay is, call it 20 days, 19 days. So that's one. You have less clinical staff. You have similar fixed costs, but you tend to have more, more beds without you have greater scale over which to amortize those fixed costs. You don't have very much variable costs. And your biggest cost really is a centralized customer acquisition model, which is over the whole portfolio of any recovery company.

So we underwrite, we underwrite a much higher, so-called imputed management fee, on our behavioral assets.

Joshua Dennerlein (Equity Research Analyst)

Okay. Interesting. Thank you.

Rick Matros (CEO, President and Chair)

Happy to spend more time with you on offline, if you'd like.

Operator (participant)

Thank you. And your next question comes from the line of Michael Griffin from Citigroup. Your line is open.

Michael Griffin (Analyst)

Great, thanks. I wanna go back kind of to the acquisition opportunity set. If you could give us a sense, sort of, of what the accretion spread is between your acquisitions and your weighted average cost of capital. And then, Talia, I know you made some comments on debt capital markets. Are lenders open to lending again on both seniors and skilled nursing?

Talya Nevo-Hacohen (Chief Investment Officer)

So there are loans available. Certainly, the agencies are somewhat open. If nothing else, they've been open to the extent that you could meet the criteria. But it's still a challenge to get for people to refinance existing debt, and I think that's the single biggest challenge, just because of debt service coverage, loan-to-value. Cap rates moving up means that in-place values today are not, even if your building is stabilized, what it was five years ago when cap rates were six. So it's just, you know. And no one's gonna buy at a 6% cap rate when their borrowing rate's gonna be 6.5-7.5, right?

There's not a lot of equity pickup, not a lot of positive leverage from the debt there.

Michael Costa (CFO)

Yeah, in terms of accretion, your question on that, you know, based on the funding sources that we've sourced to date, which we all disclose, what we disclose in our filings with the ATM, which is we did that at a lower price than we're trading at today, the sales proceeds, so on and so forth. You know, these investments that we've announced are over 100 basis points accretive, right? So there's some spread there to be had, and I would expect that spread to be better as we, you know, are able to use ATM at more attractive prices. Great color, appreciate it.

Rick Matros (CEO, President and Chair)

As the businesses continue to improve post-pandemic.

Michael Costa (CFO)

Right. Yeah, 'cause that's a good point, 'cause the 100 basis points, over a 100 basis points that I quoted was just on going-in yields.

Michael Griffin (Analyst)

That sounds good, guys. Really appreciate the color there. And then I'd just be curious to get your thoughts on the skilled mix increasing. Is this a deliberate action taken by your operators, or are there seasonality or other factors impacting this, and would you expect it to continue to increase in the future?

Rick Matros (CEO, President and Chair)

Yeah, so we still haven't hit our high on skilled mix. So I would expect it to increase. Seasonality may affect it a little bit, but basically, I think what's happening is, as occupancy continues to improve, operators are able to be more selective in who they admit. So, turning it around the other way, when you've got really low occupancy, everybody wants to get their beds filled. And they may—you may see a bigger increase in Medicaid census than you do in Medicare census in those circumstances. But the operators that we have in our portfolio are all high-acuity operators. Some obviously more than others, but they all focus on the high-acuity model, which is really what positions them really well for the future, particularly when you think about value-based reimbursement.

So, they just are becoming more able to be more selective in their admissions because occupancy is continuing to recover.

Michael Costa (CFO)

Yeah, the other thing I'll add to that, too, is that skilled mix stat that we put out is based on revenue, and for this quarter, you have six months' worth of the Medicare increase that went into effect last October. So that's benefiting it as well in addition to all the points that Rick laid out.

Michael Griffin (Analyst)

Great! That's it for me. Thanks for the time.

Rick Matros (CEO, President and Chair)

Thank you.

Operator (participant)

Your next question comes from the line of Vikram Malhotra from Mizuho Securities. Your line is open.

Vikram Malhotra (Managing Director)

Afternoon. Thanks for taking the question. I just wanted to maybe get some clarifications on the 100 basis points spread you mentioned, would imply your cost to capital is 7%. I'm just wondering, just do you kind of take an inverse of AFFO, or do you use some other methodology to calculate cost to capital? And can you give us some context on how that 100 basis points compares to what you've achieved historically on deals?

Michael Costa (CFO)

So in terms of how we come up with that over 100 basis point number that I quoted, you know, it's a combination of looking at what's the AFFO expectation, in baked in consensus, baked in our guidance, and a couple different estimates there. It factors in the dispositions that we announced as well, and the, the cost, if you will, related to those, and then the cost of our, our credit facility. And, you know, when we do that, again, we're doing it on a leverage-neutral basis and, you know, we're looking at it vis-a-vis the market expectation for our earnings and what those investments incrementally, or I guess, on a standalone basis, produce on a per-share basis, and it's very accretive, on that, on that measure.

Vikram Malhotra (Managing Director)

Then just how that 100 basis points compares to what you may have achieved historically, just so we can model out the ramp into 2025 and 2026.

Michael Costa (CFO)

I think the best way to think about it, Vikram, is whenever we've been in a position where our cost of equity capital was trading at, you know, a premium to our NAV, in the past, and we were able to execute on transactions, you know, at a similar point in time, you know, I would expect that the accretion is probably somewhere in that same neighborhood.

Vikram Malhotra (Managing Director)

Got it. And then just, maybe a higher level, question for, for you or for Rick. I guess, now that, you know, we're clearly past COVID, and you're starting to grow again, tenant health is no longer as much of an issue, I'm just wondering... Just three to five years, how the AFFO growth trajectory may differ from, from history. And I know in the past, we've talked loosely about a 5% AFFO growth trajectory over a multi-year period. I'm just wondering, is there anything that would change that, higher or lower going forward?

Michael Costa (CFO)

You know, I think once our managed portfolio, you know, fully stabilizes and it becomes more predictable in terms of its growth prospects, you know, that AFFO per share growth and absent any additional investments, of course, that'll contribute to it. You know, absent any additional investments, I think that, you know, 5% is probably not an unreasonable expectation for a steady state portfolio. But keep in mind, neither Sabra nor our peers are steady state portfolios, we're constantly in the business of looking for additional opportunities to increase that. So we can't sit here and say it's gonna be 5%, you know, because things are gonna change that. But I think that's an okay assumption on a steady state portfolio.

Rick Matros (CEO, President and Chair)

The other point that I'd make is, remember, we're at a very different inflection point with these asset classes. There's no new supply. Occupancy is gonna exceed pre-pandemic levels. Margins should exceed pre-pandemic levels. We've already seen that on the skilled nursing side. So, and we're gonna, in addition to doing skilled nursing investments and some behavioral investments, we're gonna continue to do shop investments. And so that particular component of our portfolio is gonna continue to have a disproportionate impact on our earnings growth. So, so we're, you know, we're pretty optimistic about it without putting sort of a fine point on what exactly the number may be.

Vikram Malhotra (Managing Director)

Okay, thank you.

Operator (participant)

Your next question comes from the line of John Kilichowski from Wells Fargo. Your line is open.

John Kilichowski (VP of Equity Research)

Hi, thank you. Maybe could you give us the cap rate on the purchase option for the loan you made this quarter? And then of the $750 million you mentioned under review, what percentage of those are under the loan-to-own structure? I know recently that hasn't been much of a strategy, but curious if those deals are starting to get more attractive here.

Talya Nevo-Hacohen (Chief Investment Officer)

The only loan with a purchase option we currently have is the one that we just closed, that was-- that you mentioned. This-- We're not in the business of making those. That was an off-market situation, that is with an operator, with whom we've had a great deal of success, who came and wanted to operate these. They make sense from a strategic perspective from us as an investment, both from the location, from the state of that situation as well, and the operator themselves. Cap rate is hard to say because, it'll be upwards of 9%, I expect, based on the lease structure that we anticipate having.

Rick Matros (CEO, President and Chair)

And the other point I make, just to reiterate our position, is, one, we totally get why some of our peers are putting so much capital to work on loans, but unless there's a strategic value to us, we're just in a different place, that's all. And all of our investments are gonna be focused on contributing to earnings growth. The loans for us at this point, in our organization's stage of development, it's basically short-term money that's got no growth to it, and really there's only downside there. So, you're just not gonna see us putting money to work in that fashion.

John Kilichowski (VP of Equity Research)

Got it. And then maybe jumping to G&A here. I think originally in Q4, you gave a guide that cash G&A was gonna be near $37 million for the year. And based off the stock based comp numbers you gave, and what's happened so far in the first half of this year, I think it implies a roughly a $40 million number for cash G&A.

Michael Costa (CFO)

Mm-hmm.

John Kilichowski (VP of Equity Research)

I'm curious what is causing the acceleration there?

Michael Costa (CFO)

Yeah, so this quarter, we had a true up of performance-based compensation expense, and that ties in with the fact that we increased guidance, right? We expect the year to shape up better than we had originally estimated, and that resulted in an increase there. So that increase, that's why I was focusing, if you noticed in my prepared remarks, on the first half of the year. We, we trued up, you know, two quarters worth, if you will, of that expense in the second quarter. But the first half of the year run rate is, you know, a good run rate to look at for the, the back end of the year.

John Kilichowski (VP of Equity Research)

Got it. Thank you.

Michael Costa (CFO)

Mm-hmm.

Operator (participant)

Your next question comes from the line of Rich Anderson from Wedbush Securities. Your line is open.

Rich Anderson (Managing Director)

Hey, thanks, and good morning out there. On the ATM, you have this forward component in the high 14s, and you mentioned, you know, the stock's trading well above that. I understand why you did it, just looking at your stock chart over the course of the quarter. But, you know, what's the strategy and, and to what- how fast do you have to settle these forward contracts, and, and move on to, you know, a better stock price to raise equity?

Michael Costa (CFO)

So these contracts, generally, and I don't think this is atypical, in fact, I think it's pretty standard, that you have a year to settle those contracts.

Rich Anderson (Managing Director)

Yeah.

Michael Costa (CFO)

I don't foresee us holding on to those proceeds or those potential proceeds for a year, just given, you know, the pipeline that we've been talking about. 'Cause again, it's not a huge amount of dollars we have that's unsettled. I think it's somewhere in the neighborhood of just under $30 million. So I could see that being unwound, you know, in somewhat relatively short order as we see deal flow come through. But in terms of strategy, you know, I don't want to ever be... I don't think any of us ever want to be in a position where we find an investment that we really like, and our stock is trading at a place where it doesn't make sense.

If we have the ability to lock in some of that cost of capital, obviously within reason, but if we have the ability to lock in that cost of capital at a price that makes sense today, then we'll look to do that and find ways to, and you know, ultimately deploy that into something we really like. I just don't want to be in a position to find something and, you know, can't transact on it because we picked a bad day in the market.

Rich Anderson (Managing Director)

Okay. What about raising regular way ATM equity and putting it into, like, a interest-bearing account? I mean, I imagine it would be still dilutive, but-

Michael Costa (CFO)

Yeah

Rich Anderson (Managing Director)

... maybe that's a way to approach that strategy, so you lock in better priced equity. It's still making you a little bit of interest income while you're waiting to deploy it. Is that something you think about?

Michael Costa (CFO)

Yeah, we have thought about it. I just think the trade-off doesn't make sense for us. I know some of our peers have done that, because they trade at, you know-

Rich Anderson (Managing Director)

Better

Michael Costa (CFO)

... 50%+ premiums to NAV, and, you know, their dividend yield is, like, 2%. You know, if, if we're in that place, yeah, it may be something we consider. I just think, given where our stock trades today, it probably isn't the best trade-off for us, but, you know, I'd love to be in that position, Rich.

Rich Anderson (Managing Director)

Okay. Michael, you mentioned some non-recurring events in the second quarter, and I think you did a good job sort of getting us, you know, on a run rate for the rest of the year. But you also mentioned cash-based tenants paid you, you collected in the second quarter. So because it's cash-based, I, you know, it hit the second quarter, not the first quarter. How should we be adjusting that line item specifically for that? How much of that really happened, where that you collected first quarter rents during the second quarter, and so it sort of skewed things?

Michael Costa (CFO)

Yeah. I think the number I laid out was somewhere around four point five million, somewhere in that range of that to account for that timing. Well, four point five was the increase in the cash triple net rents, and that was because of timing. I think the best way to think about it, Rich, is, you know, $90 million a quarter going forward, is the run rate you should expect. And if you look at the first half of the year, it roughly blends out to that. There's always noise there because we had. You know, there's always gonna be some volatility in the cash basis tenants, of course. We also had sales, too, so that's gonna mess with that number a little bit.

So that's why I laid out the $90 million per quarter as our run rate for the back half of the year.

Rich Anderson (Managing Director)

Okay. Maybe Rick, absent from every single conference call this quarter has been minimum staffing. Just want to get on record here with the Chevron ruling. Is this essentially over with? Can we say that officially, almost?

Rick Matros (CEO, President and Chair)

Well, you recall that I said it was over with before the Chevron ruling.

Rich Anderson (Managing Director)

All right, so I guess that's the answer to that. And then finally, on, on, you know, investing in SHOP, do you need more people, if you get, you know, meaningfully larger on the SHOP side? Or, or do you have the scale to, to do a SHOP execution with a fair amount more, and, and you don't need to hire more people and get them thinking about the G&A line? Thanks.

Rick Matros (CEO, President and Chair)

We're in, we're in pretty good shape from an infrastructure perspective, so we can scale up pretty nicely. Anything we would need to add going forward, because all the basic infrastructure in terms of people and systems are in place, would be pretty incremental at that point.

Rich Anderson (Managing Director)

Okay. Thanks very much.

Rick Matros (CEO, President and Chair)

Yep.

Operator (participant)

Your next question comes from the line of Michael Stroyeck from Green Street Advisors LLC. Your line is open.

Michael Stroyeck (Analyst)

Thanks, and good morning. I appreciate the comments surrounding the behavioral health occupancy and coverage, but maybe one on NOI, since I saw a sizable decline during the quarter, despite no real change in property or bed count. But forward NOI is essentially unchanged from last quarter. So I guess just what's driving the delta there, and just so we can better understand the cadence and volatility of NOI in that business.

Michael Costa (CFO)

Yeah, I think, you know, if you look over the last couple quarters, even though the property count in that segment's been the same, NOI jumps around, you know, quarter to quarter, so I don't think this quarter is necessarily an anomaly. You know, there's various reasons for that. There's, you know, percentage rents, there's lease up. There's all kinds of factors that go into it. So I would just say, like, the lumpiness you're seeing is not atypical for that segment.

Rick Matros (CEO, President and Chair)

Yeah, I think that we've gotten, because we've been doing it for quite some time, and for what it's worth, I was doing it in my life before this as an operator. The lumpiness is something that we're just accustomed to. We do deep dives to make sure there aren't any trends that are concerning, and we're not seeing that. So the lumpiness is something that's a lot more normal than it is in some of the other business lines.

Michael Stroyeck (Analyst)

Okay, that's, that's good to know. And then maybe one on the senior housing managed business. What do you think is driving the slowdown of RevPOR growth we've seen in recent quarters for the sector? Just with market vacancy declining, you'd think street rents should be seeing greater traction, all else equal, but that doesn't seem to be the case.

Talya Nevo-Hacohen (Chief Investment Officer)

Customer willingness to pay 10% year-over-year increases. I think, I think senior housing operators are doing a, are, are really trying to manage occupancy growth versus RevPOR growth.

... At some point, it's—you're gonna—you wanna fill up your building and have it fuller, even if it means you're not taking really high increases. In the past couple of years, and that's probably too long a period that I'm using, there was an underlying justification, particularly in assisted living and memory care, to ask for higher increases because labor was so much, and care labor was so much a part of the equation. As rates have stabilized there and labor has stabilized overall, and pricing in general throughout the economy, while it might still be going up to some extent, is not rising at the levels it was before, frankly, it's much harder to justify the 10%+ increases year-over-year that were being demanded.

I think a year ago, even I was saying that our expectations were that we were gonna be seeing 5%-7% annual increases, and that is what we're in fact seeing for in-place residents. The balancing point is getting people to come in, to move in as residents and making 'cause you wanna continue to grow occupancy. What operators are also trying to avoid is having a situation where they're losing residents because of financial reasons. Right now, more than 50% of residents who move out are moving out, that's a euphemism, I guess, because they either have passed or they're moving to higher acuity facilities, i.e., skilled nursing and such. That's what. That's... You wanna maximize length of stay, and so that's the balancing act.

Michael Stroyeck (Analyst)

Got it. Thanks for the time.

Talya Nevo-Hacohen (Chief Investment Officer)

Sure.

Operator (participant)

Your next question comes from the line of Alec Feygin from Baird Equity Research. Your line is open.

Alec Feygin (Analyst)

Hi, thank you for taking my question. First one for me is, how much does Sabra have left for disposition candidates where the property is not generating stabilized NOI?

Michael Costa (CFO)

I don't know. I mean, $50-ish million, maybe, something like that?

Rick Matros (CEO, President and Chair)

50, $50+ million, something where-

Talya Nevo-Hacohen (Chief Investment Officer)

Of asset value.

Rick Matros (CEO, President and Chair)

Right, of asset value.

Michael Costa (CFO)

Yeah.

Alec Feygin (Analyst)

Got it. And, number two is: What drove the impairment in the Behavioral health segment this quarter?

Michael Costa (CFO)

Yeah. So subsequent to quarter end, as we announced, we made some sales, made some sales during the quarter as well. There was a few properties where we were planning on converting those at some point to behavioral. They were shuttered facilities. Our initial plans were to convert those properties and make them in behavioral, based on, you know, based on the market, based on those locations, we decided, you know, it wasn't gonna work out in that fashion, so we, you know, are selling those buildings. That's exactly what led to it. So it wasn't like it was open or operating facilities that were sold. These were shuttered buildings that we were looking to convert.

Alec Feygin (Analyst)

Okay, that's helpful color. Thirdly is related to the Avamere portfolio and the options Sabra has on it. Is the company capturing any upside now or expect to over the next 12 months?

Michael Costa (CFO)

I think you're referring to our option to reset that lease. Is that what you're referring to?

Alec Feygin (Analyst)

Yes.

Michael Costa (CFO)

Yeah. So that option kicks in, I think, beginning early next year, and there's, like, a three-year window, I wanna say, to do that reset. That portfolio has been performing really well. We have re-recognized percentage rents on there, as we had anticipated when we restructured that lease a couple of years ago. So when we get into next year and in that three-year window, we're gonna evaluate where the earnings stream is looking like for that portfolio and see where it makes sense to reset that rent. But to answer your question, we have been receiving percentage rents to help, you know, recoup some of the rent cut that we gave them several years back.

Alec Feygin (Analyst)

Got it. Thank you for that, and that's it for me.

Rick Matros (CEO, President and Chair)

Thank you.

Operator (participant)

Once again, if you do have a question at this time, you can press star one on your telephone keypad. Again, if you do have a question, please press star one. Thank you. There are no further questions at this time. I'll turn the call back over to Rick Matros.

Rick Matros (CEO, President and Chair)

Thank you all for your time today. We appreciate the support. And as always, we're available to all of you for offline conversations. And have a great day. Thanks.

Operator (participant)

Thank you. This does conclude today's conference call. You may now disconnect. Have a great day.