Sabra Health Care REIT - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered continued operational recovery: total revenues rose to $182.3M (+11.6% YoY), diluted EPS was $0.19, and Normalized AFFO per share was $0.36; management introduced FY2025 guidance implying ~4% YoY growth in Normalized FFO/AFFO per share.
• Strong portfolio metrics: SNF/Transitional EBITDARM coverage hit an all-time high 2.09x; Senior Housing – Leased coverage held at 1.36x; Managed Senior Housing same-store cash NOI grew 17.9% YoY.
• Balance sheet/liquidity set for 2025 execution: net debt/adjusted EBITDA was 5.27x; liquidity ~$980M, and a $0.30 common dividend (83% of Q4 Normalized AFFO) was declared for payment on Feb 28, 2025.
• 2025 guidance/strategy are catalysts: a larger SHOP-focused acquisition pipeline supported by improved cost of capital and robust deal flow; portfolio strength and reimbursement tailwinds (Medicaid increases already in effect, Medicare market basket to follow) underpin margin/coverage resilience.

What Went Well and What Went Wrong

What Went Well

• Managed Senior Housing momentum: same-store cash NOI grew 17.9% YoY; sequential margin expansion of 50 bps; revenue +3.5% sequential; cash NOI +5.4% sequential.
• SNF portfolio strength: sequential occupancy +60 bps; skilled mix +30 bps; EBITDARM coverage hit 2.09x, “higher than we’ve seen in years” (CEO).
• SHOP traction and operating leverage: same-store occupancy +80 bps sequential; margins +20 bps; management expects ongoing occupancy/rate-driven growth with labor costs stable (CIO/CFO).

What Went Wrong

• Triple-net cash rental income declined by $1.8M QoQ, driven by timing of cash-basis tenant rents and asset sales.
• Pricing competition for stabilized SNF assets remains “frothy” due to strategic buyers valuing ancillary revenue streams, challenging accretive participation for lenders/REITs (pipeline selectivity required).
• Political/regulatory overhang: House budget proposals include large, unspecified Medicaid cuts, creating uncertainty; management views bipartisan/state “guardrails” as mitigating but notes unpredictability in the environment.

Transcript

Operator (participant)

Good day. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the 2024 Sabra Fourth Quarter 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, press star followed by the number one again. With that, I would like to now turn the call over to Lukas Hartwich, EVP Finance. Mr. Hartwich, please go ahead.

Lukas Hartwich (EVP Finance)

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 2025 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, 2024, 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 investor section of our website at sabrahealth.com. Our Form 10-K 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 of Sabra Health Care REIT)

Thanks, Lukas. Appreciate it. Thanks, everybody, for joining the call. We appreciate it. Let me start by sending out love and prayers to the Bibas family. Their bodies will return to Israel today. May the memories of Kfir and Ariel and Shiri be a blessing. Thanks for allowing me that. So moving on to SABRA, first, I want to comment on the promotions that we announced this week for Kara, Lukas, and Anna. We're really blessed to have the three of them as part of our team. They're fantastic, and they exemplify everything that's good and important about SABRA and also exemplify the depth of our team. And just really appreciate them and look forward to working with them in the years ahead. Moving on to the performance for the quarter, SABRA delivered what's been a succession of a number of great quarters in a row.

Our senior housing and skilled portfolio continued to strengthen. Workforce availability does remain a challenge to the sector, but our tenants have been able to implement strategies to mitigate those challenges, and labor has stabilized. Our shop same-store occupancy was up 80 basis points sequentially, with margins up 20 basis points. Our shop cash NOI was up 17.9% for the quarter. Our senior housing triple-net coverage stayed steady at 1.36. Our skilled occupancy was up 60 basis points sequentially, with skilled mix up 30 basis points. Our EBITDA coverage hit an all-time high at 2.09. Our skilled margins are now higher than we've seen in years. Our top 10 had another strong quarter. For 2025, we'll continue to build upon the strategy we successfully executed in 2024, as evidenced by our 7% year-over-year normalized AFFO growth. We would anticipate a higher volume of deals in 2025.

The increased volume we started to see before year-end has accelerated since, with more opportunities than we've seen in quite a long time. The opportunities are primarily shop, but we are seeing more skilled opportunities. The fact that we had nothing new to announce this particular quarter shouldn't reflect on what we think will get done this year. We fully anticipate to have a busy year and a year that will have higher volumes than we had last year. Let me move on to the regulatory and political environment. The political environment's potential impact on our business has been an overhang, but I'd like to make a couple of points. First, the threat of Medicaid cuts. We take that very seriously. While any actions that may be taken are unpredictable, there are natural guardrails in place, and I want to go through some of those guardrails.

As it pertains specifically to Medicaid cuts, Congress has been historically protective of the elderly population, particularly those vulnerable institutionalized folks. The Medicaid budget, inclusive of matching funds, is critical to the governors of all states, both red and blue, and in fact, the red states have been the greater recipients of Medicaid access, the expansion of Medicaid access in recent years, so in addition to the bipartisan support that we've always had in Congress, the governors of the states, again, both red and blue, will be united to protect the elderly in our facilities and the Medicaid budgets that are so critical to them. We have a robust lobbying effort that we expect will be successful, and a couple of other things I think to point out in terms of how much in the beginning of the process we're in.

The House budget has $880 billion of unspecified Medicaid, $880 billion of unspecified Medicaid cuts. The Senate version has no Medicaid cuts and overturns the staffing mandate. So you've got opposite sides of the spectrum. You have no specificity on where those Medicaid cuts are. So a very, very long way to go. Finally, as I noted earlier, I think the final guardrail for us is the strength of our portfolio. Having margins, rent coverage, shop margins where they are, with organic growth still to come in both those segments, I think puts us in a very good position to withstand anything that may happen going forward. And with that, I will turn the call over to Talya.

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Thank you, Rick. Sabra's managed senior housing portfolio had another solid quarter. The total managed portfolio, including non-stabilized communities and joint venture assets at share, had sequential revenue growth of 3.5%, cash NOI growth of 5.4%, with margin expansion of 50 basis points. These statistics demonstrate sequential improvement in operating results that reflect the continued recovery in Sabra's senior housing portfolio. In the fourth quarter, we added one property to Sabra's managed portfolio.

We see opportunities for external growth setting up well alongside internal growth. Sabra's same-store managed senior housing portfolio, including joint venture assets at share, continued its strong performance this quarter. The key numbers are revenue for the quarter grew 7.4% year-over-year, with our Canadian communities growing revenue by 10.6% in the same period. Both of these results are consistent with the growth statistics we reported last quarter.

Fourth quarter occupancy in our same-store portfolio grew by 2.3% year-over-year. Notably, our domestic portfolio occupancy grew 2.8% during that period, while our Canadian portfolio grew 1.2% in the same period. RevPOR in the fourth quarter of 2024 continued to rise with an increase of 4.5% year-over-year, while ExPOR rose a mere 0.6% for the same period. Total expenses for the same-store portfolio rose 3.4% in the fourth quarter on a year-over-year basis. Insurance costs have the largest percentage increase among all expenses, but represent less than 3% of total expenses. Labor costs, which represent more than 50% of expenses, grew 2.1% in the quarter on a year-over-year basis. Cash NOI for the quarter grew 17.9% year-over-year, just above last quarter's results.

In our U.S communities, cash NOI grew 15.2% on a year-over-year basis, while in our Canadian communities, cash NOI for the quarter increased 26.9% over the same period, benefiting from the continuous strong performance of our joint venture properties. Overall, we expect to see revenue growth continue to outpace expense growth, as it has in recent quarters, resulting in ongoing growth in cash NOI. Cash NOI margins should continue to expand across the portfolio as the senior housing industry builds revenue by balancing occupancy and rate, and expenses, especially labor costs, remain stable.

With this as a backdrop, we are seeing significant transaction volume in the senior housing space. Virtually all of the deals are structured to transact as managed rather than leased properties. Our cost of capital now allows us to pursue these opportunities, which can generally be described as newer, nearly stabilized senior housing communities that offer care to residents.

Our net-lease stabilized senior housing portfolio also continues to do well with strong rent coverage, reflecting the underlying operational recovery. And with that, I will turn the call over to Mike Costa, Sabra's Chief Financial Officer.

Michael Costa (CFO, Secretary, and EVP)

Thanks, Talya. For the fourth quarter of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.36. Normalized AFFO totaled $86.9 million this quarter, which is in line with the third quarter. I would like to highlight a few key components of this quarter's earnings. Cash rental income for our triple-net portfolio totaled $90 million for the quarter, which was down $1.8 million due to timing of cash-basis tenant rents and the impact of asset sales. Cash NOI from our managed senior housing portfolio totaled $24.1 million for the quarter, compared to $22.9 million last quarter. This increase was driven primarily by continued sequential same-store growth, as well as the impact of a 92-unit property acquired at the beginning of the fourth quarter.

Recurring cash G&A was $10.2 million this quarter and slightly better than the $10.4 million per quarter run rate we've provided on the last several calls. Normalized FFO per share and normalized AFFO per share were $1.39 and $1.44 respectively for the full year, which represents 7% year-over-year growth. This growth is the result of steady performance improvements in our managed senior housing portfolio, continued stability in our triple-net portfolio, and disciplined capital allocation, three factors that we expect to contribute to further growth in 2025, as illustrated in our full-year 2025 guidance.

Our full-year 2025 guidance on a diluted per-share basis is as follows: Net income $0.67-$0.70, FFO $1.42-$1.45, normalized FFO $1.43-$1.46, AFFO $1.47-$1.50, and normalized AFFO $1.48-$1.51. At the midpoint, we expect both normalized FFO per share and normalized AFFO per share to increase approximately 4% over 2024. It is important to note that our guidance does not assume any 2025 investment, disposition, or capital markets activity. There are a few other important assumptions in our guidance that I would like to point out. Cash NOI growth in our triple-net portfolio is expected to be low single-digit, in line with contractual escalators.

Additionally, our guidance assumes no additional leases are placed on cash basis for revenue recognition. Cash NOI growth for our same-store managed senior housing portfolio is expected to be in the low to mid-teens. As the portfolio gets closer to full recovery, this growth rate may decelerate, and as a result, our guidance assumes the growth rate in the first half of the year will be higher than the growth rate in the second half of the year.

General and administrative expenses is expected to be approximately $50 million and includes $11 million of stock-based compensation expense. The weighted average share count assumed in our guidance is approximately 240 million and 241 million shares for normalized FFO and normalized AFFO, respectively, and is in line with our fourth quarter weighted average share count after adjusting for the timing of ATM share issuances during the quarter. Now, briefly turning to the balance sheet, our net debt-to-adjusted EBITDA ratio was 5.27 times as of December 31, 2024, a decrease of 0.03 times from September 30, 2024, and a decrease of nearly half a turn from December 31, 2023. This improvement in our leverage is driven primarily by the continued NOI growth in our managed senior housing portfolio, accretive capital recycling, and prudent use of our ATM to fund growth.

As of December 31, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $980 million, consisting of unrestricted cash and cash equivalents of $60.5 million, available borrowings under our revolving credit facility of $893.4 million, and $26.1 million related to shares outstanding under forward sales agreements under our ATM program. As of December 31, 2024, we also had $382.8 million available under the ATM program. Finally, on February 3, 2025, 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 28, 2025, to common stockholders of record as of the close of business on February 14, 2025. The dividend is adequately covered and represents a payout of 83% of our fourth quarter normalized AFFO per share. With that, we'll open up the lines for Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, once again, if you would like to ask a question today, remember it's hitting star plus the number one on your telephone keypad. Our first question for today comes from the line of Farrell Granath with Bank of America. Your line is live.

Farrell Granath (Equity Research Associate)

Hi. Thank you so much. My first question is in regards to the occupancy for your SHOP portfolio. Just looking ahead to 2025, what are your thoughts of the pacing of the occupancy, either in acceleration or deceleration, just generally in the senior housing space?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

You know, it's an interesting question because what we're seeing is operators balancing out pushing rate versus occupancy because they can't, not everyone can do both at the same time. And so that's so it's very hard for me to sit here and handicap which is how much occupancy is going to increase versus a focus on revenue increases by driving RevPOR. We have seen very strong increases in our Canadian portfolio, which has now seemed to be stable, ramping down in terms of the rate of growth. But there's still plenty of room in our domestic portfolio. And I think that certainly in IL, it will continue to get pushed. On the occupancy side in AL, I think there's definitely continued, there'll be continued push, but a desire also to raise RevPOR at the same time.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. And Farrell, the only other thing I would add is, so the way I would look at it is there's not going to be a deceleration. It's just a function of how much it's going to accelerate, to Talya's point.

Farrell Granath (Equity Research Associate)

Great. Thank you for that. And also, I know you made some comments on the opportunity set that you're seeing in 2025 and increase in it, both the mix of SHOP and the SNF's. I was curious. Are you seeing any impacts in pricing when it comes to SNF's specifically due to the current environment?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

It's interesting you say that. We were just at the eCap conference a week, 10 days ago. I would say that the transaction market in skilled nursing is robust right now. There is a lot of money chasing deals and opportunities still. Whether lenders and the healthcare REITs are able to continue to participate in that right now in an accretive fashion is the big challenge, how to figure that out.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

So it's the strategic buyers that are chasing the money. That's what the issue is from a competitive perspective. So they're valuing these assets not just based on the nursing facility, but on the revenue it generates for all their ancillary businesses. So they're operating entities, so they're able to pay up. So as Talya said, it's been pretty frothy for those guys.

Farrell Granath (Equity Research Associate)

Okay. Thank you so much.

Operator (participant)

Thank you for your questions. Our next question comes from the line of John Kilichowski with Wells Fargo. Your line is live.

John Kilichowski (VP of senior Healthcare and Net Lease REIT Analyst)

Thank you. Good afternoon. Maybe just to follow up that last question, Rick, just from your opening remarks, it sounds like you feel a lot more confident in the acquisition pipeline this year versus last year. At least you expect an acceleration. I'm curious what you're seeing or what's changed quarter over quarter or from the past couple of months till now that makes you feel confident in your ability to accelerate these deals, given, like you said, it's pretty frothy for some of your competition to bid up on deals.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

So I'll make a couple of comments and turn it over to Talya. First, we're not doing the kinds of deals that some of our competitors are doing. There's been a lot of loan volume. And we're just, as we've talked about in quarters past, and I think you know, John, we're just not interested in pursuing that unless there's a very specific reason that's tied to one of our operators. So if you take all that volume away, it changes the picture for everybody. But just to remind everyone, last year, there were a couple of things. One, acquisition opportunities were just starting to pick up over the course of the year, particularly on the shop side. And our cost of capital was improving over the course of the year.

So this year, we enter into it in a much different place with as much higher deal volume, and our cost of capital allows us to do the deals that we would like to do. Talya?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Sure. I mean, how's this? I'm clearing at least 10 confidentiality agreements a week, and we're only in mid-February. There's just a lot of deals coming into the market, and there's a few sources for them, for the most part. One source is a lot of private equity firms that have assets that either are at funds that are end of life or beyond. Similar to other kinds of investors, there are PE funds that have just decided the price is good enough now, let's just get out. So we're seeing quite a bit of that because there's been enough of a recovery to recoup and just exit. We're also starting to see green shoots on some interesting refinancing, recapitalization opportunities because three months ago, you recall, four months ago, everyone expected interest rates to be declining.

Actually, what's happened is that has reversed, and interest rates have gone up. The 10-year is at about a 4.5 now. Opportunities to refinance and not do much on the cash-in refi to refinance out banks that have loans, that sort of disappeared. Now we're seeing more refis looking for prep equity, mezzanine debt, etc. There's sort of a new stream of opportunities coming in. The recovery, but sort of you can really zoom out here for a sec. There's been enough of a recovery that people that have wanted to exit can finally hit a number that feels okay, and they can exit as opposed to continue to carry. They're really willing to do that. That's really the breakpoint that we've hit over the last few months.

John Kilichowski (VP of senior Healthcare and Net Lease REIT Analyst)

Okay. Got it. I appreciate the detailed answer. And then just one more from me on the SHOP guide. Earlier in the opening remarks, there was a comment made about the back half maybe experiencing some modest deceleration in that growth, just given it gets harder, the comp year over year. How do we pair that with the fact that in this business, there should be greater operating leverage as you hit those sort of higher occupancy marks? And I think you're at 85.8. And kind of once you reach those higher 80 marks, we've always heard in this business, you really start to see the operating leverage of the business shine that maybe should allow for more growth. So could you help us sort of pair those two comments together?

Michael Costa (CFO, Secretary, and EVP)

Yeah. I think it's us trying to be a little bit conservative in those assumptions. I think that's a big component of it. I'm not going to hide that fact. But also, I mean, last year, we saw quite a bit of occupancy growth year over year. We're sitting at about 85.5 as of the fourth quarter. If you think that this thing stabilizes in the upper 80s, low 90s, you're starting to get to a point where those occupancy gains aren't going to be as easy to come by versus where they were a year or two ago, right? So it's just us trying to be conservative on those assumptions and that growth.

Still acknowledging the fact, as you pointed out, and as Talya pointed out, that the operating leverage kicking in is something that not only are we seeing right now, but we expect to see even more so as occupancy continues to get closer to that, call it, 90% level. So that's effectively it. I mean, I don't think there's much more to look into it besides that.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Your point is correct, John.

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Yeah. That's why I noted that Export has increased 0.6%, which is essentially flat, which goes to operating leverage.

John Kilichowski (VP of senior Healthcare and Net Lease REIT Analyst)

Okay. Great. Thank you.

Operator (participant)

Thank you for your questions. Our next question is from the line of Nick Joseph with Citi Research. Your line is live.

Michael Griffin (Senior Equity Research Analyst)

Hey there. It's Michael Griffin here with Nick. Rick, I think in your opening remarks, you talked a little bit about some strategies that your operators have implemented to effectively mitigate costs. Can you maybe expand on that a bit, what some of these initiatives could be? And is there the opportunity within operators in your portfolio to share best practices, just given cost mitigation is going to remain to be a focus?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

I think it's a couple of things. One, in terms of recruiting, they've embraced digital marketing for recruiting in very many cases, which has been really helpful, getting just more people into the door to be considered. The other is I think there's been a complete revamping of the onboarding processes with all of our operators. So the onboarding process has been lengthened. There typically are mentors that are assigned to new employees. And I think that's really helped get some traction with longevity. So I think those are the two main things. Obviously, we saw in 2022 a rebasing of wages. And so that's kind of normalized since then. So we've always competed with the service sector, but I think the rebasing of the wages during COVID has made our operators a more attractive destination as opposed to other service kinds of positions. So it's really those things.

Michael Griffin (Senior Equity Research Analyst)

Yeah. No, that's some helpful context there. Appreciate it. And then maybe just going back to the acquisition pipeline, Talya, you talked a bit about looking at more stabilized product that had a care component. Should we read into that that the pipeline is tilted maybe more toward AL relative to IL within the managed portfolio? And what kind of yields or IRRs are you underwriting to for prospective transactions?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

So I'd say that we're seeing, I think, that assets with care components are by definition doing better now. The recovery has really affected them now because they're able to charge rate. That's part of as opposed to necessarily drive to maximum occupancy. Of course, they have a higher cost structure. But there's been a lot of those built. Oftentimes, they're IL, AL memory care, by the way. So that is, in fact, what we're seeing mostly. We are seeing some standalone IL, but not that much. And I'm sorry, what was the second part of the question? Oh, what are you underwriting to?

Michael Griffin (Senior Equity Research Analyst)

Oh, yields or IRR is what you're underwriting to?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

We're still seeing deals that, going in, might be 7-7.5, but stabilize it above that. That's still happening.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

I would also just note or reiterate, really, strategically, we are focused on increasing our shop exposure. Within our shop exposure, to your point, your question, you should see over time our AL increase and our IL decrease, which should help our growth numbers as well.

Michael Griffin (Senior Equity Research Analyst)

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

Operator (participant)

Thank you.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Thanks, Michael.

Operator (participant)

Our next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is live.

Austin Wurschmidt (Director and Equity Research Analyst)

Hey, everybody. It's Austin Wurschmidt here.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Hey, Austin.

Austin Wurschmidt (Director and Equity Research Analyst)

Hey, Rick. Going back to your comment about kind of full recovery in the shop portfolio, my sense was that was an occupancy comment. I guess, can you kind of share where margins and NOI stack up relative to occupancy and what kind of the full recovery and future upside entails for those metrics as well?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

I think I went through where we are today in my comments. I think there's visibility on getting somewhere close to where we were pre-pandemic here now in senior housing.

Austin Wurschmidt (Director and Equity Research Analyst)

Got it. I mean, are there any?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Particularly. And those assets where you can really drive rate, which is based on location, etc., vintage, things like that.

Austin Wurschmidt (Director and Equity Research Analyst)

I mean, are there any regions or operators specifically that have already surpassed, I guess, the full recovery point and would give you even more confidence about the balance of the portfolio, being able to grow, again, beyond what you're deeming to be kind of full recovery?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. I think we definitely have operators both in our senior housing and our skilled portfolio that have surpassed where they were pre-pandemic. And so we look to do more deals with them. But our portfolio has gotten so strong, and a lot of that happened with some of the steps that we took during the pandemic that all of our operators are on that path. Some are just further ahead than others. But we're at the point right now where we don't have the stragglers that we had pre-pandemic. And it's also why we've been as selective as we've been in terms of the deals that we've done, both in terms of market, operator, and the age of the assets that we're buying.

So we think with everything that we did last year, and actually, we had a lot of volume actually in 2022 as well, we've really enhanced the quality of the portfolio from a market asset and operator perspective.

Austin Wurschmidt (Director and Equity Research Analyst)

And then just last one, Rick, you mentioned kind of you expect to do more investments this year relative to last year. I mean, how significant of a year-over-year increase could we see given all the reasons that Talya highlighted around what's going on in private equity and with higher interest rates today?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Before the pandemic, if you exclude some of the really big moves that we made, we typically did several hundred million a year, and we'd like to get. I'm not going to predict that we'll exactly be there this year, but that's certainly a goal for us, to get back to the level of investments that we did on a routine basis prior to the pandemic.

Austin Wurschmidt (Director and Equity Research Analyst)

That's all for me. Very helpful. Thank you.

Operator (participant)

Thank you for your questions. Our next question comes from the line of Vikram Malhotra with Mizuho. Your line is live.

Georgi Dinkov (Senior Equity Research Associate)

Hey, this is Georgi on the phone with Vikram. Just on the external growth pipeline, can you just talk about what does the competition look like for stabilized assets in the senior housing?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Mostly the healthcare REITs for the nicer assets, the institutional quality assets, I'd say. Below that kind of quality level, I think you've probably got some high net worth. We're not seeing private equity in the space right now, although there are starting to be rumblings of their coming back. It's hard to be a levered buyer right now. There's just not enough spread between cost of debt and cap rate.

Georgi Dinkov (Senior Equity Research Associate)

That's helpful. And I just have one more on the SHOP portfolio. Can you just provide more color on what January rent bumps were compared to last year?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

I don't have the exact numbers for the portfolio with me, but it's sort of in the 4%-5% range is what we're seeing in our larger operators, and they're achieving those.

Michael Costa (CFO, Secretary, and EVP)

Yeah, and the other thing to point out too is that rent bumps aren't all done on January, right? It varies operator by operator, right?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

Some do them on an anniversary date of the lease. Some do them in January. It varies. Mike's right.

Georgi Dinkov (Senior Equity Research Associate)

Great. Thank you.

Operator (participant)

Thank you for your questions. Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is live.

Juan Sanabria (Director of Equity U.S REIT Research)

Hi. Thanks for the time. Just hoping you could talk a little bit about the infrastructure, the platform. Guidance seems to call for kind of flat G&A. So just curious how you guys are investing in the systems. It seems to be a strength of the REITs to have the platforms and the capital to invest behind the business. So presumably, the moat will get wider as that happens over time. And I'm just curious on your latest initiatives around being a leader in shop.

Lukas Hartwich (EVP Finance)

Yeah. I mean, look, we've been in shop for a while now. And we established the infrastructure several years ago when we started our foray into that. So from a systems perspective, from a technology perspective, from a personnel perspective, those are pretty well established to the point where adding additional scale in there, any additional costs are going to be really incremental. It's not anything major to take on larger portfolios or more operators, whatever it may be. And that's where probably the biggest impact, I would say, from a G&A perspective, would be on the shop side. To the extent there's any triple net, we could absorb that without adding any headcount realistically. So does that answer your question, Juan?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. And I would just add, Juan, that from a systems perspective, we're continually upgrading and improving our systems. So the technology that we have in place continues to get better, allows us to provide different levels of support to our operators, to interact differently, to have more visibility, to have more predictability as we start building artificial intelligence capabilities into our systems.

Juan Sanabria (Director of Equity U.S REIT Research)

You said the key word there. Just curious on the 2025, you talked about acquisitions ramping up. But curious if there's any dispositions. You had some sales in the fourth quarter, which we didn't necessarily model. So just curious how we should be thinking about sales and dispositions for 2025.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. So the dispositions that we had in the quarter were sort of ordinary course of business. And I think what we talked about the last several quarters is that we had one SNF portfolio that's still in the process of being sold. That's about $50 million. Other than that, what we've said is that everything else is ordinary course of business. And ordinary course of business for us historically has been sort of $50-$100 million plus a year in disposition. So there was nothing kind of unusual about it. And you can tell by the number of facilities and what was a relatively small proceeds number that they weren't producing very much.

Juan Sanabria (Director of Equity U.S REIT Research)

Thank you.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah.

Operator (participant)

Thank you for your questions. Our next question is from the line of Richard Anderson with Wedbush. Your line is live.

Richard Anderson (Managing Director of Equity Research)

Thanks. Good morning out there. So I want to talk about the.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Thanks, Richard. Rick, I just want to first say to you that a few quarters ago, three quarters ago, I believe, you said, "Can you foresee the day when your coverage is over two times?

Richard Anderson (Managing Director of Equity Research)

So that's all the questions I have. No, just kidding. So on the pipeline, I want to talk about the accretive-dilutive math on that. You look at your trading at around 12 times forward AFFO. That's like an 8-ish type of AFFO yield. I don't know if you'd think about it that way. But would you say you're break-even in the first year of investment and grow from there? Or I'm just curious how you think about that from an accretive-dilution standpoint.

Lukas Hartwich (EVP Finance)

Yeah. I mean, based on where our stock is at right now, as well as where we could issue debt out or use any kind of leverage, somewhere in the low- to mid-7s on a going-in yield is break-even or slightly accretive. We also look at.

Richard Anderson (Managing Director of Equity Research)

You mean a blend? You mean a blended low to mid 7?

Lukas Hartwich (EVP Finance)

Yeah. Yeah. Yeah. A blend of equity at today's prices plus debt. Right? We think we could go in with initial yield of somewhere low to mid 7s and be break-even or slightly accretive. But like Talya mentioned earlier, there's also opportunities that we're looking at where it's around that level, but there is also some growth baked into it. So it's not only just looking at that initial yield, but looking at the long-term growth profile and how that compares to the expectations built into our cost of capital.

Richard Anderson (Managing Director of Equity Research)

Okay. So Michael, if you're due $500 million this coming year, would it be safe to say $250 million of that is funded with equity or more or less?

Michael Costa (CFO, Secretary, and EVP)

The numbers I've been throwing out usually is like 60/40 equity debt just to kind of keep our leverage where it's at or around five times.

Richard Anderson (Managing Director of Equity Research)

Okay. And then, Rick, back to you. Big picture, you mentioned the spread between the House and the Senate in terms of Medicaid, unspecified. Who knows exactly what is actually in that line of thinking from the House perspective. But if it's so wide like that, I mean, isn't there at least a concern that at least there'll be some of it? I mean, to find a middle ground between those two governing bodies. I'm just curious how we get through this and avoid any kind of disruption at all.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

So a fair question. And this is probably not going to sound great because the numbers are so enormous. Anything over a trillion would be some cause to worry. If anything under a trillion.

Operator (participant)

Ladies and gentlemen, we have lost our main speaker line. Please hold, and we'll work to get them back. I'll put you back into hold music until we have them back on with us. Give us one second. We'll be right back on. Thank you.

Ladies and gentlemen, we really appreciate your patience here. Richard, I know you were in the middle of your question here. We'll bring you back up onto the stage. Go ahead.

Richard Anderson (Managing Director of Equity Research)

Rick was in the middle of answering the question. I guess I broke the internet with it. You were saying, Rick, on this.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. So what I was saying was you're talking about really big numbers here. If the number is over $1 trillion, it creates a lot of concern regardless of how the Medicaid cuts are divvied out. So it gets better as big as the $880 billion sounds. But since you're starting it with $0 at the Senate and $880 billion at the House, that number is going to come down. Hopefully, it goes away, particularly when the governors start getting involved in the fight. But it's going to come down. So given how strong the portfolio's performance is with rent coverage and the margins, and it's continuing to improve and it's still got room to grow ahead of it, I think that we'll be okay, even if there's some kind of a hit. So does that answer your question?

Richard Anderson (Managing Director of Equity Research)

Yeah, it does. And how would you parlay that into Medicare? Different forces at work, but just curious.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. It's different forces at work. I think, look, everything's being tested right now at the courts. They can't just do this if they want to do it. They may try to, but they can't just do it. There's statutory issues, and Congress has to be involved. So I actually think that I have less concerns about Medicare than I do about some kind of hit on Medicaid, even though I'm more optimistic than pessimistic about Medicaid or certainly the overall impact of it.

Richard Anderson (Managing Director of Equity Research)

Okay, and much respect to your open comments.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

I mean, you know as well as I do. I mean, you're all over this kind of stuff politically like I am. I mean, we're living in a time that's completely unpredictable, right? So I just tend to fall back on the bipartisan support, the lobbying efforts, the fact that this stuff is statutory, you've got states involved as well as both chambers of Congress. It's just not going to be that simple to hurt people who are most dependent upon government aid.

Richard Anderson (Managing Director of Equity Research)

Fair enough. And just wanted to say much respect to your opening comments on this call, by the way. Thanks, everybody.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Thanks, Rich. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Alec Feygin with Baird Equity Research. Your line is live.

Alec Feygin (Equity Research Associate)

Hello, and thanks for taking my question. I'll echo what Rick said with respect to those opening comments. And to your point, the world's unpredictable in so many different facets. But my question is, do you expect specialty and behavioral coverage to improve as the year progresses?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

I think it's just going to kind of meander around where it is. A lot of the fluctuations are the behavioral hospitals we have, which it's just a really dynamic business. The coverage is fantastic. So there's no sort of concerning trends. But yeah, I think it's just going to kind of meander around where it is. I don't think it's going to be consequential.

Alec Feygin (Equity Research Associate)

Got it. And kind of changing tack, but what is the current size of the cash basis tenant base? And then did the dispositions in the quarter include tenants on cash basis?

Lukas Hartwich (EVP Finance)

So, in terms of the cash basis tenant base, I like to quantify that. I put it in two buckets. The ones that we really focus on are the ones that are not paying us full rent and paying us random amounts month to month, quarter to quarter. And that component of the cash basis tenant pool is a couple of percentage points. I don't know. It's less than 5% of our NOI. And regarding your question on some of the sales that we had in the quarter, yes, that was related to some of our cash basis tenants.

Alec Feygin (Equity Research Associate)

All right. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Michael Stroyeck with Green Street. Your line is live.

Michael Stroyeck (Analyst)

Thanks. And good morning. Maybe one on the transaction market. Is there any recurring theme on potential deals that the company has looked at and then ultimately passed on, particularly within SHOP? Is it also just a function of price, like what you're seeing with SNF transactions, or maybe something else that leads to not closing on these deals?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

I think there are a couple of characteristics that we're focused on. One is the quality of the asset itself, of the real estate. And then we look at vintage of the asset as well. So that's one thing. We look at the market. And we look at, frankly, long-term viability of the asset. Those are critical factors. What we're seeing now generally is high-quality assets. And it's an opportunity, as Rick described earlier, to improve our portfolio over time to add really high-quality assets.

Michael Stroyeck (Analyst)

I guess on those high-quality assets that you're bidding on, is it just a function of different cap rates that you're ascribing versus where the deals ultimately trade at?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

I think the band of cap rates is fairly narrow. Oftentimes, the seller or the operator have an ability to sway who the buyer will be. And so relationships come to bear here. We're also seeing off-market deals where relationships are definitely part of the discussion.

Michael Stroyeck (Analyst)

Got it. Okay. And then maybe one just on SNF coverage levels. The magnitude of the SNF coverage increase during the quarter seemed fairly outsized relative to the actual occupancy gains we saw. Can you just help us understand what drove such a healthy step up in coverages?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. I think it's where occupancy kicked in. It was a big jump in terms of the impact on operating leverage. Really kind of as simple as that. Lucas, do you have?

Lukas Hartwich (EVP Finance)

`Medicaid, too.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. And the Medicaid increases have kicked in. And then the market basket, the market basket as well. Oh, no, not the market basket. I'm sorry. But the Medicaid increases that kicked in in July and August really had the biggest impact. So it's this next quarter, since we report a quarter in areas, that you'll also see impact from the Medicare market basket.

Michael Stroyeck (Analyst)

Got it. That's helpful. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Aaron Hecht with JMP Securities.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Hey, guys.

Operator (participant)

Your line is live. Go ahead.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Thank you. I was just looking at your loan book. It looks like it's around $400 million. Sounded like that's not an area you want to be focused on. And the maturity date ranges are pretty wide. Is there anything coming up soon in terms of maturities? And do you expect those to convert to ownership, or do you just recycle out of those as they come due?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

So there's nothing imminent in that loan pool. I think individually, there are some that we'd like to refine and redeploy the capital and others where we have an opportunity to buy, in which case we'll consider that when that window opens. There's nothing really actionable there at this moment.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Okay. Yeah. I was really looking at the three mortgage loans, and it looks like the first maturity date's in 2026, and that's the big bucket. Is there a big maturity in 2026, or is that more back-end weighted?

Talya Nevo-Hacohen (Chief Investment Officer, Treasurer, and EVP)

There's a maturity at the end of 2026. So it's essentially two years away, just under two years away.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Do you have any scope of size on that?

Michael Costa (CFO, Secretary, and EVP)

Yeah. It's the majority. Yeah. It's about $300 million. It's the majority of that bucket.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

The RCA loan.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Okay. Okay.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

So I mean, that discussion's going to be that they want to take us out, which would be fine. Or they want to have a conversation about flipping it into a triple net. We might have that conversation as well. So that one just remains to be seen. We're happy with how things are going there, the loans performing. So we'll just sort of play it as it goes along.

Aaron Hecht (Managing Director, Senior Real Estate, and REIT Analyst)

Okay. Thanks, Rick. Appreciate that.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah.

Operator (participant)

Thank you for your question. Ladies and gentlemen, if you do have a question, remember it's star followed by the number one on your touch-tone keypad. We have our next question from the line of Omotayo Okusanya with Deutsche Bank. Your line is live.

Omotayo Okusanya (Managing Director, Head of U.S REIT Research)

Hi, yes. Good afternoon, everyone. Great comment at the beginning of the call for sure, Rick. Still sticking on this topic of Medicare and Medicaid, what are your thoughts around if they are eventually to get cut? Are they kind of more impacted to CHIP program versus kind of classic Medicare and Medicaid on the skilled nursing side? Does that all kind of still depend on this trillion-dollar number you're talking about? Or how do we kind of think about that probability?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Say it one more time. Omotayo, you're breaking up a little bit.

Omotayo Okusanya (Managing Director, Head of U.S REIT Research)

Sure. So I was talking about, again, the potential Medicare and Medicaid cuts that we've been discussing on the call. And just thinking through that in terms of the potential amount, is it possible in any way that all the cuts just kind of boil down more towards the CHIP program or to anything else versus cuts to Medicare and Medicaid that will impact skilled nursing? How do we kind of handicap the probability of something like that happening?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Yeah. So I think it's a fair question. And I think the answer is yes, there are other programs out there like CHIP, Medicaid expansion generally that probably get targeted first. Some of the home-based and community programs get targeted first as well. So yeah, I think that's a fair statement, which goes to some of why we feel at least comfortable that even if something does happen, it won't be anything that sort of creates real damage to the space or the portfolio. And the other thing I didn't mention, though, in my opening remarks is depending on what the final number is and what sectors get hit, you may see sectors kind of uniting together in their lobbying efforts.

There may be some common cause here as well. So I'm not even sure that you'll see lobbying efforts that are completely independent of each other. So both from the sectors, from organizations like AARP, there's going to be a lot of activity here around any potential cuts that affect the indigent and the elderly.

Omotayo Okusanya (Managing Director, Head of U.S REIT Research)

That's helpful. One other one. I know it's still pretty early, but any thoughts at this point about how Robert Kennedy may want to run CMS and what the implications are for the industry?

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

I have zero idea how to predict anything about this dude. But ask Elon. Maybe he's got more insight than I do.

Omotayo Okusanya (Managing Director, Head of U.S REIT Research)

I appreciate it.

Operator (participant)

Thank you for your questions. We have no further questions at this time, so I'd like to turn the call back over to Mr. Matros.

Rick Matros (CEO, President, and Chair of Sabra Health Care REIT)

Thanks, everybody, for your time today. Appreciate the support as always, and we'll look forward to seeing many of you at the Citi conference. Have a good day.

Operator (participant)

Thank you. And ladies and gentlemen, that will end Sabra's 2024 Fourth Quarter earnings call. Have a great rest of your day. Take care.