Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Transcript 2021-Q2

[Operator]

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

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

[Michael Costa, EVP of Finance and Chief Accounting Officer]

Thank you. Before we begin, I want to remind you that, we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including the expected impacts of the ongoing COVID-19 pandemic, our expectations regarding our Enlivant join venture, our expectations regarding our tenants and operators, and our expectations regarding our acquisition, disposition and investment plans.

These forward-looking statements are based on management's current expectations, and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2020, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished with 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 the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results included in the financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release, and supplement, can also be accessed in the Investor section of our website.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

[Rick Matros, Chairman and Chief Executive Officer]

Thanks, Mike, and thanks everybody for joining us today. First, let me start by once again thanking our operators and all the team members that work at the facilities. It's been a really tough 18 months, the worst is over. But there are still some challenges ahead. And for myself, as someone who spent most of my career as an operator, I still can't even imagine what it was like these last 18 months dealing with COVID in the facility. So they continue to have our thanks, our appreciation, and our admiration.

As you saw in the separate press release, we did Harold Andrews, our CFO is going to be retiring at year end, he'll stay on in a consultation role for the two years following his retirement, which essentially means that Harold's is going to be available to us for whatever we need in an advisory capacity, and I'm sure Mike will be accessing him as well. And with that, we're really pleased that Mike Costa will be promoted to the CFO position.

Mike's been with us since inception. In fact, our whole team has been together since inception. So it's a really smooth transition for us, keeps us culturally intact. And we'll have - we anticipate having Mike's position replaced. Our goal is early in the fourth quarter, so we've got a few months of overlap between Mike, Harold and the new individual.

Next move on - moving on to the Enlivant exit. I know some of this was expected. A couple of comments that I want to make. One, our exit from Enlivant is specific to Enlivant. We're completely committed to continuing to grow in senior housing. I want to note and express my appreciation also to the management team, at Enlivant and our desire with a wholly-owned portfolio to continue to work with them and to continue to grow with them, after the sale of the joint - of the joint venture.

There were a couple of things that really happened. And just to go back a little bit in history prior to the pandemic, we were getting pretty close to wanting to exercise the option on 51% that TPG owns, that the pandemic really changed everything and two things specifically impacted our decision making.

One is the leverage, while the leverage was high as it is most PEO [ph] in companies prior to the pandemic at somewhere around nine times. It wasn't unreasonable and the size of the check that we'd have to write to bring leverage down to levels that were accessible wasn't an overwhelming amount. Because of the pandemic, the impact on occupancy and NOI, that leverage is now 20 times.

The other issue is the operating company platform, which was really built to support a much larger and growing enterprise in order to accommodate that. And again, that was impacted by the pandemic as well. And current management fees no longer support that platform. The structure of the management agreement and the fee structure specifically would have to be increased pretty dramatically to a point that we think is not market.

And so those two - the combination of those two items, just makes this something that would be extremely diluted, probably over the next couple of years, at least. And it's something that if, from our perspective, as much as we'd like the portfolio, we're better off moving forward, it's immediately delevering in accretive, and it simplifies everything about our company and our reporting, which we'd like as well. And so it's really - it really comes down, to those issues. So TPG, at some point will start the process, and we'll tag along with that. And, that'll be that.

And the other final point I would make is, when we exited 2018, we had finished all the restructuring early in 2019, that was related to CCP, along with the sales of Genesis as well, and senior care centers. And we were really focused and committed to our shareholder base on not having noise. And certainly, even though the merger accomplished a lot of what we wanted to have happen, certainly, there was a lot of noise over that 18 month period.

And over the course of 2019, we stay true to that. And I think people were rewarded as a result of that. We did our first two investment grade note offerings, which really successful than the pandemic hits, but our commitment doesn't change. We want to avoid noise. And we just want to move forward and do deals that are more predictable, and understandable and just focus on growing the company. The result of our exiting enlightenment puts us in a position that we've actually never been in with lower leverage, and the optionality that that comes with lower leverage that we've never had before.

Let me make some comments now about COVID and the current reimbursement environment. So at this point, we're not seeing trends with a variant and the facilities. And the vaccination rate, as we've been talking about the last couple quarters is exceedingly high for patients and residents throughout the Sabra portfolio, well, over 90%, many of our operatives are over 95%. The workforce isn't where and we would like it to be, but it's certainly much higher than the general population, north of 70%, in the aggregate over this.

Unlike residents and patients with a result much disparity between the uptake rate on patients and residents, there is disparity with employees. So - but 70 to 75%, in the aggregate is pretty much where we are vaccination status for employees.

May - you may have just seen that Massachusetts is now mandating vaccinations for all healthcare workers. We think that's a good thing. We have several operators that have mandated vaccinations for employees, not very many have. I think their primary concern with all the pressures on labor, which I'll get to in a minute as well, is that [indiscernible] employees.

But I will tell you that for those of our operators, that did mandate vaccinations, they did lose employees. And if they had to do it again, they do the mandate. Again, from their perspective, it was completely worth it. It created a much more comfortable atmosphere, in the facilities and in replacing the employees that they lost.

Unfortunately, we've got other actions happening, other states you may have seen in Texas, that even if operators want to mandate vaccines they cannot. So that's really, I find that distressing and real head scratcher. So it just puts operators in Texas, a little bit more difficult position.

But I would say that one of the reasons we're not seeing breakout trends, we have COVID here and there, obviously with the Variant, but we're not seeing trends because the operators are humans protocol. So people are wearing masks, and when they come into the facilities, both workforce and visitors, so that's helping quite a bit, as well. So we feel pretty pleased with where we are, with COVID in the facilities.

Out of all of our buildings, we only had 10 facilities that are completely clear COVID. We actually have one operator that is reopening a COVID unit, because was one of their primary hospital partners are overrun with COVID. And so they're doing that to help out of the hospital. So we may see a little bit more of that as well.

In terms of the provider Relief Fund, it's now at 43 47 billion. It's increased, as I noted, it would be last quarter because of money - monies that have been returned by the hospitals. And stay for distribution has been delayed. Really there were a couple of reasons it was delayed, but most recently it was delayed because of the debate around infrastructure and pay for us. The PRF fund is now protected. And so now we fully expect that there will be an announcement on the amount of timing and methodology. But we don't know what it is, at this point.

PHE was extended through mid October, if not, has been extended through December 31, ‘'21. And the final rule from CMS, the market basket came in at 1.2%, so pretty much where it was expected. And there was no parity adjustment to PDPM this year. I would note that, I’ve seen some of the commentary, after CMS made the announcement that some of the analysts out there, we're expecting that there will be an adjustment next year, so October 22, for fiscal year 2023. But we don't know about that either.

CMS did note that this year, obviously, was a tough year to use anything as a database, because COVID really impacted all the numbers and really drove up acuity. So we don't even know if the 5% is a real number.

Secondly, with the variant affecting operators to some extent, and we don't know how that's going to play out over the next few months. CMS is unsure how good the database is going to be in fiscal year ‘'22, either, so we'll see.

But however, it turns out, one of the things that we do feel very good about and in terms of the relationship with CMS is that they don't want to disrupt the industry. So anything that they feel they need to do, I think we'll be spread out in a way over time, that doesn't impact our operators.

And the fact of the matter is, increase Medicare revenue should come from the smart operators who will move in acuity on, and not be dependent on market basket and other things.

Now we move on to our acquisition profit pipeline, our acquisition pipeline is in excess of $2 billion, it's actually easier than it's ever been. So I'm talking pre-pandemic ties. It's still primarily senior housing, but we're starting to see some skills, and some more behavioral opportunities.

And just a reminder that when we discussed in our pipeline, those are potential deals that we're actively reviewing. They're always continually coming in and out. And, a lot of these will fall off as well. But when we talk about the amount that we have in the pipeline, it's just it's not the amount that hits our desk, it's the amount of that hits our desk. And after review, we decided to actually spend some time on do some underwriting analysis, et cetera.

In terms of our strategy going forward, we'll continue to be opportunistic within the asset classes that we're in. And while we would like to find some larger opportunities, we're only going to do larger deals, we're not going to be taking on larger deals that require restructuring or any of the cleanup that will prolong sort of noise around the company.

And so we'd rather stretch a little bit for a portfolio that's real, that has a quality that really good about and has clear upside and is accretive, as opposed to paying something less for a troubled portfolio.

Beyond that, we're laser-focused on sort of the bread and butter deals, $30 to $80 million deals and even less than that, and, obviously more than that, because those are the deals that are easily adjustable, the team's really focused on it, and cumulatively will provide some good growth for solver going forward. So, regardless of any time we may spend looking at larger opportunities, we never take our eye off the smaller opportunities.

Turning to occupancy trends , our eight skilled operators, which is 71% of our NOI, since the end of December 2020 bottom, are up 601 basis points in the aggregate. Skill mix, while lower than the several high as acuity continues to normalize is 144 basis points higher than pre-pandemic levels. We're seeing similar trends in the remainder of our skilled portfolio.

Talya, will discuss our senior housing occupancy trends, with Al improving more quickly than anticipated. I noted earlier, I made a comment about labor challenges. That's really the biggest challenge right now, until the pandemic related benefits run off in September. And you see - I know you all are seeing this in all sectors, people just aren't coming back to work. And so that's put stress on operators in areas that we haven't seen stress before.

So nursing and therapy are one thing because there's always a shortage there. But we're seeing labor stress and in departments like dietary and housekeeping and laundry and use a temporary agency in some cases.

So we expect that to improve as we start moving into the fourth quarter, but that's still - that's very tough right now and it's going to be tough for a while and it does have some impact potentially on the trajectory and the rate of recovery for occupancy because depending on what your staffing levels are, at any particular time, you may not be able to accommodate every admit, we all have operators that have had to close off admits so everybody's admitting.

But for example, if you've got seven admits that you'd like to do in the next week and a half, you may only be able to do five. So, occupancy growth is continuing to happen. But here and there could get impacted by some of the labor stress.

The scale portfolio EBITDA loan coverage is flat sequentially on an EBIT - on an EBITDAR basis remains above one time. When excluding provided relief funds. The triple net senior housing portfolio is down to 1.12 from 1.23 sequentially. And that was purely a function of a strong pre-pandemic quarter dropping off, and that was replaced by a severely impacted quarter coming out and the difference in occupancy between the quarter that dropped off and the quarter that came on with 780 basis points.

Out other acute and post-acute [ph] operators had a 11.6% of NOI continue to perform at a high level with coverage and occupancy higher. We continue to be strategically focused on growing the behavioral and eviction segments. And with that, I will turn the call over to Talya.

Talya Nevo-Hacohen

Thank you, Rick. Sabra senior housing wholly-owned managed portfolio continued on the path of rebuilding occupancy and net operating income after the successful distribution and implementation of the COVID-19 vaccine, late in the first quarter of this year.

The headline numbers for the wholly owned managed portfolio are as follows. Occupancy at the end of the second quarter of 2021 was 78.4%, up 322 basis points from 75.1% at the end of the prior quarter, same store rev core excluding non stabilized communities was slightly higher than the prior quarter at $3,230, compared to $3,205 and in line with rev core in the second quarter of 2020.

Same store cash net operating income increased by 34% sequentially, and margin increased by 5.9% compared to the prior quarter, in large part because of the occupancy rebound in our wholly owned Enlivant portfolio, as well as reduced pandemic related operating costs such as additional labor, PPE and supplies with a small boost of $519,000 of COVID grant income in the second quarter of 2021.

When we look at sequential operating results on a more detailed basis, we see that the pandemic was not uniform and its impact on occupancy, with higher acuity assets experiencing greater declines and faster recovery in vaccine clinics being pivotal to this turnaround.

Sabra's was wholly owned, managed assisted living portfolio excluding acquisitions made during the quarter has continued the occupancy recovery that began in the second half of March, driven primarily by our wholly owned Enlivant assets, which comprise about half of the units. From March 2021 to April 2021 occupancy increased by 160 basis points to 69.5%, from April to May 2021, occupancy increased 214 basis points to 71.7% and from May to June 2021, occupancy increased 39 basis points to 72.1%.

From the low in March through mid July, occupancy increased 425 basis points to 71.8%. This trend was driven by our wholly owned Enlivant portfolio, which had spot occupancy of 72.1% at the end of July, 200 basis points above June.

We are seeing leads and torques consistently well above 290 levels indicating the pent up demand for needs based communities continues. With no current infection outbreaks in this portfolio move as volume has reverted to normal trends allowing occupancy to rebuild.

For comparison, Sabra’'s net lease assisted living and memory care portfolio has shown continued occupancy recovering increasing 246 basis points in the second quarter compared to the prior quarter. During the quarter the increases resetting from March to April 2021. occupancy increased by 84 basis points to 75.7% from April to May 2021 occupancy increase 71 basis points to 76.5% from May to June 2021. occupancy increased 63 basis points to 77.1% and from the low in February, through mid July occupancy increased 505 basis points to 77.6% because we report EBITDA coverage one quarter in arrears, this portfolio of lower coverage reflects declining occupancy from the pandemic over 11 months, with only March reflecting the post vaccine recovery.

Sabra's is managed Independent Living portfolio experienced less occupancy loss in our assisted living portfolio and its recovery has been more gradual. In addition, it has been impacted by deferred move out, lack of prioritization for vaccine distribution in the US and delayed vaccine distribution in Canada.

From March to April 2021 occupancy increased by 31 basis points to 77% from April to May 2021, occupancy decreased 52 basis points to 76.5% and from May to June 2021, occupancy increased 166 basis points to 78.2. From the low in May, through the end of July occupancy increased 212 basis points to 78.6%.

In higher acuity settings initial vaccination clinics began in January and were completed in February, in independent living vaccination clinics began in March and continued into April. In both cases, we see the timing of vaccination in the communities as pivotal to increasing occupancy.

Unlike our higher care portfolio of communities Independent Living experienced a higher rate of move out in May residents and independent living requiring higher levels of care deferred moving during the pandemic resulting in pent up move out gimmick volume, a trend that has reverted to normal levels by this quarter end, this past quarters end. Together these factors delay the occupancy recovery.

Demand for Independent Living appears to be strong, as holiday leads are tracking 10% higher than in 2019 and movements are tracking at nearly 20% higher than 2019. Importantly, the rate of lead to lease conversion is higher than in 2019.

Well, occupancy gains began to be felt in the second quarter across our wholly owned managed portfolio, pandemic related expenses also dropped 6% quarter over quarter., the decline would have been even greater but for ongoing workforce challenges being faced the same challenge affecting all industries and a vaccine mandate enlivenment as of June 1, resulting in temporary increased agency utilization and permanent staff is recruited.

In our portfolio, were seeing nearly all community residents and patients vaccinated, staff participation has been lower and the head of industry rate of the industry rate of 67%. In communities where operators have mandated employee vaccinations, we are seeing participation at the same level as residents.

There is a cost of this mandated staff refusing the vaccine must be replaced with temporary labor until permanent employees can be hard. Even in this challenging labor market, we expect vaccine mandates to become increasingly commonplace across all segments of the healthcare industry. Considering the current concerns over the Delta variants spread.

Enlivant among other operators has already mandated vaccinations and holiday is requiring it of new hires. Our operators continue to put resident safety first. And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

[Harold Andrews, CFO]

Thanks, Talya. And first, let me just say it's been a real pleasure working with all the investors and all the analysts these past 11 years. And it's been a blast and really a blessing working with Rick, Talya Mike and the whole Sabra team. It's tough to leave the greatest gig of all time for me. But I do know that Mike will continue to do amazing things for Sabra as CFO and I'm thrilled for him to have this opportunity.

So let me now get quickly into the quarter. I'll give a quick overview of the numbers for Q2 and then provide additional color on our 2021 guidance. But first I want to provide some additional color on the decision not to acquire TPG's 51% interest in the Enlivant joint venture without an exit the investment when the opportunity so arises

And for clarification, sales process will be handled by TPG. We expect to exercise our tagalong rights to sell our interest if and when that fail occurs. As Rick noted, the decision was not an indication of a lack of belief in the management team or recovery prospects for the portfolio at some point in the future, rather than pandemic has had not only a significant impact on the expected near term financial performance of the portfolio, but it also had impacted our cost of equity capital as compared to late 2019 when we contemplated exercising our option to purchase the portfolio.

These two factors, along with a current debt to EBITDA of 20 times as of June 30 2021 compared to the historical 9.5 half times leverage has significantly increased the cost to Sabra, to buy our TPG and rightsize leverage on the portfolio to match our balance sheet targets.

Additionally, expectations of the need for a higher management fee on the portfolio will further reduce the long term earning prospects below our prior expectations. These factors will result in an extended period of earnings dilution for us if we were to acquire the 51% interest at what we believe to be the fair market value of the portfolio.

This decision has resulted in our recognizing an impairment on the investment during the quarter of $164.1 million, reducing our carrying value to an estimated fair market value of $114 million.

Finally, we currently have our net debt to adjusted EBITDA approaching the lowest level we have seen in our history at 4.75 times excluding the Enlivant joint venture debt. I would like to point out, that the calculation excludes our share of the Enlivant joint venture debt and only includes actual cash distributions from the joint venture to Sabra in that EBITDA calculation, since this is the proper measure of cash available for us to repay Sabra consolidated debt.

This current 4.75 times leverage includes only $5.7 million of cash distributions from the joint venture in our adjusted EBITDA amount as a joint venture suspended distributions to preserve cash during the pandemic.

As a result, our leverage will likely be positively impacted by the sell of the portfolio. As an example, if we receive proceeds equal to our new carrying value of $114 million, our net debt to adjusted EBITDA would decline on a pro forma basis by 0.9 times to 4.56 times. The benefit of the potential further delivery are significant to our strategy to maintain a long, excuse me a strong balance sheet, and provide us with significant optionality in how we think about funding future growth.

And now for the numbers for the quarter. For the three months ended June 30 2021, we recorded total revenues, rental revenues and NOI of $152.9 million, a $110.8 million and $121.3 million, respectively, as compared to $152.4 million $113.4 million and $121.3 million for the first quarter of 2021.

This decrease in rental revenue of $2.6 million is primarily due to a decrease in collections related to leases accounted for on a cash basis. Note that rental revenues can fluctuate quarter over quarter due to the timing of collections and recording of cash based rental income, as demonstrated by our first quarter rental revenue increasing by $2.7 million over the fourth quarter of 2020.\

Total revenues in NOI were also impacted by a $3.1 million increase in revenues from our wholly owned senior housing managed portfolio compared to the first quarter. The increase is due $0.5 million in government grant income, as well as two senior housing management [indiscernible] we acquired in 2021.

NOI was further impacted by the result of the Enlivant joint venture, which generated $2.3 million of cash NOI during the quarter. This was lower compared to the first quarter due to a $2.5 million onetime support payment to joint venture made to the management company to support its cash flow needs. Excluding this onetime payment, cash NOI increased by $1.7 million over the first quarter of 2021.

Finally, COVID related costs in our senior housing managed portfolio, excluding the joint venture totaled $0.4 million for the quarter, a $0.5 million decrease compared to the first quarter.

FFO for over the quarter of $85.7 million in a normalized basis was $88.4 or $0.41 per share. This comparison normalized FFO of $85.5 million or $0.40 per share in the first quarter of 2021. FFO excludes from FFO certain non cash revenues and expenses was at $83.9 million, and on a normalized basis was $86.6 million or $0.40 per share.

This compares to normalize AFF o of $83.2 million or $0.39 cents per share in the first quarter of 2021. The primary normalizing items for FFO [indiscernible] with the elimination of the onetime support payment made by the Enlivant joint venture to the management company. The increases in normalized FFO and normalize AFFO are primarily related to increases in NOI previously discussed.

For the quarter we recorded a net loss attributed to common stockholders of $132.6 million or $0.61 per share is impairment charge related to the environment Enlivant venture.

G&A costs for the quarter totaled $8.8 million, compared to $8.9 million in the first quarter of 2021, and included $2.3 million of stock based compensation expense in both quarters.

Recurring cash G&A cost of $6.2 million or 5.1% of NOI in line with our expectations. We continue to have very strong liquidity position as of June 30, with approximately $1.1 billion of cash and availability on our line.

During the quarter, we acquired one senior housing managed community and acquire land for one skilled nursing transitional care facility for an aggregate purchase price of $33.9 billion, with a weighted average estimated stabilized cash yield of 7.78%.

Additionally, the skilled nursing transitional care facility is currently under construction, with a budget of $19.6 million as estimated to be completed mid 2022. We also made an $11 million preferred equity commitment on 150 units senior housing development during the quarter. This preferred equity investment earns a preferred return of 10% per year. And as of June 30 2021, we had funded $3.0 million of this commitment.

Our year to date investment activity totaled $75.5 million, with an average weighted average estimated stabilized cash yield of 7.94%. We completed the sale two skilled nursing transitional care facilities for aggregate net sales proceeds of $5.9 million. These sales resulted in an aggregate $3.8 million net loss on sale.

We issued 4.9 million shares of common stock under our ATM program during the quarter and an average price of $17.76 per share, generating net proceeds of $85 million.

As of June 30 2021, we have $75.8 million available under the ATM program. With our decision to no longer consider the acquisition of TPGs 51% majority interest in Enlivant joint venture, we believe we have positioned ourselves well to focus future equity issuance opportunistically in financing growth, rather than ensuring that our leverage does not exceed our target maximum ratio of 5.5 times.

We were in compliance with all of our debt covenants, and continue to have strong credit metrics as of June 30 2021, as follows leverage 4.75 times, interest coverage 5.2 times, fixed charge coverage 5.03 times, total debt to asset value 33%, unencumbered asset - unsecured debt 300%, and secured debt to asset value just 1%.

On August 4 2021, the company's board of directors declared a quarterly cash dividends of $0.30 per share. This dividend will be paid on August 31 to common stockholders of record as of August 17. Dividend represents a payout of 75% of our normalized AFFO per share.

And now a few quick comments about our 2021 guidance. We expect amounts per diluted common share for the full year 2021 as follows, net loss $0.15 to $0.13, FFO $1.53 to $1.55, normalized FFO a $1.56 to $1.58, AFFO a $1.51 to $1.53 and normalized AFO a $1.53 to $1.55. The above estimates are based on certain key assumptions spelled out in our supplemental, I'll bring attention to just a few of those.

The estimated amount above do not include any anticipated funds from the Provider Relief Fund for our senior housing managed communities. The Enlivant joint venture is expected to be held through the end of 2021 and contribute normalized FFO and normalized AFFO during the second half of 2021 of the $24.4 million and $5.4 million and $3.3 million and $4.5 million, respectively.

The senior housing manage portfolio average quarterly occupancy, excluding the JV is expected to fall within a range of 76.8% and 78.9%. During the second half of the year, we expect to close investments totaling $111 million with a weighted average initial cash yield of 8.2%.

Disposition and loan repayments for the second half of 2021 are expected to total $95.6 million, with associated annualized cash NOI of $6.4 million. We anticipate funding these identified investments with cash on hand and the revolver. Any incremental acquisitions not identified here would likely be funded with revolver and with match funding the equity component using the ATM program.

And finally, I'll leave you with this, our expectations for the second half of 2021 imply an expected decline from the first half of 2021 at the high end of the normalized FFO and normalized AFFO ranges of $0.04, and $0.03 per share, respectively.

The vast majority of this decline is due to higher weighted average shares outstanding during the second half of 2021, as compared to the first half, along with lower cash rental revenues, due to the transition of one operators assets discussed on our first quarter's earnings call, which represents approximately one penny of the decline.

These declines are partially offset by higher earnings expectations for the managed portfolio in the second half of 2021, as compared to the first half.

And with that, I'll open it up for Q&A.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Rich Anderson with SMBC. Your line is open.

[Rich Anderson, SMBC]

Hey, thanks. Good morning. So, Harold, you, you talked about the new carry implies the previous carry on the JV was 278. I think I have my math, right. And, full value of 567, at 49%, I recall talking about the 51% being a kind of a $400 million type of nuts. Can you just sort of connected dots to how the, the value of the Enlivant portfolio and the JV has changed over time. In particularly now with the impairment because, that sounds a lot like distress. And I don't know how much meaningful distress that we've seen really, in the transaction environment for the senior housing business overall. So I just wonder if you could just connect Enlivant situation with kind of the broader observations about senior housing?

[Harold Andrews, CFO]

Sure. Well, I'll start by just kind of giving you a little bit of insights into – and how that valuation is determined. We talked a little bit about it, you see some details in our in our 10-Q about the calculation, but it is based on a discounted cash flow model, obviously, we don't have any offers to look at from a valuation perspective.

And is taken into account, not only the fact that there has been a decline in the performance of the portfolio, but also takes into account some assumptions around right sizing the management fee for the portfolio.

So I think, when you look at what's out there in the market today and some of the pricing, I think that was very informative for our valuation calculations, we utilized a professional firm to help us with that calculation. And certainly the recent deals provided data points, which were helpful.

And I would say, I don't view it as a distressed valuation as much as it's highly levered, and therefore the equity value, there is some amount of risk associated with the discount, utilizing the discounting calculation, we built into it to be conservative, but I don't view it as a distress valuation at this point, I think it's a conservative valuation.

But I think when you factor in a justice to the management fee [ph] you factor in the amount of debt is on the portfolio, it gives a fair, a fair number for consideration and puts us in a position where, we're not likely to have to see much of a change one way or the other once the asset – once the portfolio actually sells.

[Rich Anderson, SMBC]

Okay. And then on the process of getting it sold, describe the sort of them, the lack - the motivation of TPG to get it done. I mean, you're so kind of sit there waiting. Now, what's the chance that this can sort of stay with you, well through 2022?

[Harold Andrews, CFO]

Well, I think this is a vintage fund for TPG. And they've done pretty well on it. And I think they were willing to hang in there pre-pandemic. For a while the company was starting to really do well. And as I stated in my opening remarks, we're really getting closer to wanting to do something with 51%. But the pandemic changed everything including changing everything for the fund in terms of your how long everybody wants to sit around and wait for things to recover.

So in terms of timing, it is going to be with us, I would say through at least the first half of ‘'22, simply because if it takes a few months to find a buyer, it's going to take another up to six months to close the transaction. So yes, it's going be there for a while. But that's why we wanted to make the announcement now cleanse the supplemental, take the write down.

And so from our perspective, it's behind us, we'll always be happy to answer questions or talk about what's happening with that component of the portfolio relative to occupancy, recovery and things like that and if people have questions, the visibility for it is gone as far as we're concerned.

[Rich Anderson, SMBC]

Okay. Well, thanks for that. And congrats to Harold and Mike.

[Harold Andrews, CFO]

Thank you.

[Operator]

Thank you. Our next question comes from Nick Yulico with Scotiabank. Your line is open.

[Nick Yulico, Scotiabank]

Thank you. I just want to go back to Rick, you talked about getting out of the Enlivant JV is being de leveraging that that's clear, very clear, but maybe you could talk a little bit more about, he said, the assumption that you think it's also in a creative transaction for you.

[Rick Matros, Chairman and Chief Executive Officer]

Yes, I think the way to think about that is, we can't stand pat with where we're at, with your vision. In other words, TPG wants to sell the portfolio. So we've either got to buy it, or we've got to exit at some point. And so for us to go and invest money to acquire, it will be extremely diluted for us. And so it's accretive for us, given the situation that we have right now, we either have to buy it and be diluted or sell it, which would be accretive to that on that comparative basis. Does that makes sense.

[Nick Yulico, Scotiabank]

Okay, got it. All right. The other question was, in terms of the guidance, I know you did mention the, the cash basis tenant last quarter. And I thought the annual rent for that was less than $4 million. And yet, the guidance now is, a little bit higher than that in terms of the cash basis tenant impacts, are there - is there, am I missing something? Is there another tenant that is creating an issue?

[Rick Matros, Chairman and Chief Executive Officer]

Well, get a little more into the leap about it, that that portfolio - you're right, it's just under $4 million in cash revenues. And they paid rent basically through the end of June. So that's $2 million in the first half of the year. And we're not expecting to get any rent in the guidance for the second half of the year, it's going to take months to get that portfolio transition a new operator up and running.

So that $2 million of that penny, I referenced in my comments around the decline, as it relates to comparing, first half of the second half, we also, had received 100% of the rents from Genesis, and in our previous guidance numbers, we assumed Genesis would, at some point, we would strike a deal with those guys and reduce rents on some, on some level, even if it were just the rents that are going to be going away here in a few months, or I should say that in about 18 months.

So now we're assuming that those rents get paid fully through the end of 2021. So that's why the cash basis rents are going up or staying pretty solid. But we are saying that $2 million decline from one operator.

[Harold Andrews, CFO]

And Nick, this is also specific to New York. It's just a process that we have to go through there. There are other states where the transition would have been a lot smoother. And we wouldn't have gone the number of months that we're contemplating without getting a new operator in and pick me up or anything. And so that's really just the New York issue, which is timing.

[Nick Yulico, Scotiabank]

Okay, thanks. Just one other quick one is on the senior housing occupancy guidance. It looks like it doesn't assume that much of a pickup in the back half of the year. Maybe you just talk about kind of what underlies that assumption, how much you're just being conservative based on, Delta variant, issues may be coming back because it sounds like the move and activity, everything else follow Talya's point earlier was pointing in the right direction.

[Harold Andrews, CFO]

I think that's exactly right, Nick, in the absence of the Variant given how well the recovery has been going, particularly on the Al side, as Talya pointed out, we would have felt more bullish. And while we're still pretty optimistic, we're just going to be conservative on those assumptions for guidance purposes. There's only…

[Nick Yulico, Scotiabank]

Got it. Thanks.

[Operator]

Thank you. Our next question comes from Juan Sanabria with BMO Capital. Your line is open.

[Juan Sanabria, BMO Capital]

Hi, guys. Just hoping to ask another question on the Enlivant JV on the sales process. I guess when do you expect that to start? And how should we think about the OPCO issue here, in terms of would it be - it's been a lack of profitability because of the collapsing cash flows because of the Coronavirus? Or is it - was there a feasibility issue kind of before all this happened just because it didn't expand maybe as an OPCO, as was previously anticipated?

[Rick Matros, Chairman and Chief Executive Officer]

So we believe TPG is going to start talking to folks after Labor Day. So I'm not sure that they, exactly formulated and settled on that. But that's our understanding. In terms of OPCO kind of, it really goes back to what I what I said earlier. And that is, the platform was built to support a company that was going to continue to get larger, at TPG, continuing to make investments in the senior housing space, and outside of the JV.

And so, the pandemic just put a halt to all of that. And so, if you've got the combination of the impact of the pandemic, on occupancy and NOI, and the fact that that portfolio isn't going to be growing, I mean, their focus as it should be, is on recovery. It's a really well run company. And so they've just got to get back to where they were from a recovery perspective.

And so - and, remember, these are, these are smaller facilities. And so you can't - it's smaller facilities are more dependent upon corporate support, than, say, larger facilities where you can actually have more infrastructure in place. The whole - our wholly owned portfolio, for example, those are larger facilities, those are the original ALC facilities, they also happen to have quite a bit more memory care as well.

So it's really a combination - a combination of those things, and whether there'll be changes to APCO as a result of the process. We could all just speculate, speculate about that. But that's really what the issue is. Does that make sense?

[Juan Sanabria, BMO Capital]

Yes, it does. Thank you. And then just start Genesis. So I'm assuming it sounds like they continue to be current. I mean, have you had any discussions with them about their assets that they're running and about their ability to continue to pay rents the coverage level there for that?

And if you could, just to remind us how much is under that, that kind of top MOU type income? And you're booking quarterly now, when does that come off again?

[Rick Matros, Chairman and Chief Executive Officer]

So I'll take the first part. And Harold take the last part, the we haven't had any discussions with them. Really, since the new management team has been in place. They're aware - they're aware of the fact that we have other operators that are prepared to take over those eight facilities, if necessary, but they are they're paying the rent in is, as Harold mentioned, they're paying the base rent, plus the excess rent. They're both similar amounts, and that excess rent, about $10 million burns off at the end of ‘'22.

[Juan Sanabria, BMO Capital]

Thank you.

[Operator]

Thank you. Our next question comes from Nick Joseph with Citi. Your line is open.

[Nick Joseph, Citi]

Thanks. First of all, congratulations, both Harold and Mike. Rick you mentioned being committed to the senior housing growth. Obviously, you've seen a few large deals in the space. So I'm wondering how many opportunities you're seeing that that really fit exactly what you're looking for>

[Talya Nevo-Hacohen]

Hi, its Talya. We're still continuing to see opportunities that we're taking a run at where we are - we have economic solutions that make sense to groups. Some of the some of the large deals that you've probably heard about their come to market have been a feeding frenzy, because there's still quite a bit of capital that's looking to put out sizable investments into the senior housing space, they're not going to do it by doing one-sies and two-sies. They're going to do it by doing half a billion or more three quarters of a billion at a time. So they're gunning for those deals.

And frankly, where we're making sure we're in the mix where we want to be. And we're dutifully pursuing a lot of other transactions that are smaller scale, and seeing our supplemental, we are getting things done. It's, not splashy headlines, but that's okay. We're just trying to just keep doing what we know how to do and do it well. And make those deals creative.

[Nick Joseph, Citi]

Thanks. And then as you think about kind of the overall portfolio, I guess, post COVID, whenever that is, there are geographical differences already, particularly on the skilled side. But, when we come out of that's how we think about kind of positioning the portfolio from a geography perspective, are there any markets that may be a little more active in trying to either exit or lessen exposure, just given the lessons learned over the past 18 months?

[Rick Matros, Chairman and Chief Executive Officer]

So we're spread out pretty nicely right now geographically, and, we haven't had tenant issues. So, we really feel like we addressed the things that we needed to address through the merger with Genesis and things like that.

So, from a disposition perspective, anything that we do going forward is going to be kind of normal stuff, you'd like to suppose the stuff in here there, if the circumstances call for it in a certain market. But we just, we just don't have that much exposure to problematic markets at this point. I think we've set ourselves up pretty well going forward.

[Nick Joseph, Citi]

Thanks.

[Operator]

Thank you. And there's no further questions in the queue. I'd like to turn it back to Rick Matros for closing remarks.

[Rick Matros, Chairman and Chief Executive Officer]

Thank you all for joining the call today. And if you all have any things you want to follow up on, as always, were readily available and take care of thanks again, be safe.

[Operator]

This concludes today's conference call. Thank you for participating, you may now disconnect everyone. Have a great day.