Sabra Health Care REIT, Inc.

Good day, everyone. My name is Mandeep, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra second quarter 2023 earnings call. All lines will be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would now like to turn the call over to Lucas Hartwich, SBP Finance. Please go ahead, Mr. Hartwich.

Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations. including our 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 or differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2022. well as in our earnings press release included as exhibit 99.1 to the form ak we furnished 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-gap 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 10Q 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 Caree.

Thanks, Lucas, and good day, everyone. Let me start off with reimbursement. So as everybody knows, the final Medicare market basket was 4% up from 3.7% of the proposed rule. Importantly, though, this is the second and last year of the parity adjustment. Without the parity adjustment, the increase would have been 6.4%, indicating that the formula is capturing increased operating costs, which bodes well for next year's market basket. On the Medicaid side of the business, we're seeing increases well above historical averages, You may recall probably for 10 years or more before the pandemic, Medicaid in the aggregate was averaging about a point and a half percent increase a year. We're anticipating now that in the aggregate for Sabra's portfolio, the increases to this year will be over 5%. We've gotten a number of the rates already in place and some more kind of on the way. So over 5% we think is a good number and would also remind everybody, because of the lag time in the cost report process, as we look forward to next year's rates, we expect them to be even stronger. So, you know, some really nice tailwinds on the reimbursement side there. Moving on to operations, our coverages continue to improve broadly. Occupancy is increasing in our skilled and our AL portfolios. Labor is slowly getting better, all leading to margin improvement in our primary asset classes. None of this is happening quickly, but it is happening. As much as the coverage improved in what we reported, our trailing three EBITDOM coverage for skilled has improved three quarters in a row, and now is at 1.68, excluding PRF, so actually quite a bit higher than even what the trailing 12 shows. On occupancy, occupancy continues to move up beyond a quarter. And that, along with the declining labor expenses, have contributed to that coverage. We have significant upside with the transition of what were the 11 wholly owned and livened AL and memory care buildings to Inspirit. The transition happened more quickly than we anticipated. It was very cooperative. It went really well. No frictional costs. And that portfolio has underperformed the space. For reasons that I think everybody is aware of, and I would remind everybody that prior to the pandemic, that portfolio was in the mid nineties from an occupancy perspective. So it's 76% or so occupancy today. There's really pretty dramatic upside there. And given the size of our managed portfolio, it will have a disproportionate impact as we look at earnings going forward. While we did not provide guidance given the specificity we're looking for relative to timing on the recovery of the managed portfolio and facility transitions, we now have enough visibility to provide a bridge back to earnings growth that we provided in the supplemental and in the investor deck that were released, that were filed yesterday. And while there's no timeframe associated with that, it is a reasonable timeframe and serves as a blueprint that will help us as we get closer to 2024 and put out 2024 Our current acquisition pipeline is light, and as we've said, given our current cost of capital, we wouldn't expect to do much at this time, but that earnings upside demonstrates that there's an opportunity for us to get very active again as we move into 2024. That said, all the factors I've cited that are strengthening the portfolio and providing earnings growth as we look forward to 2024. We do believe, just to emphasize the point, that it will result in the cost of our equity improving. And with that, I will turn the call over to Talia.