Sabra Health Care REIT Inc (SBRA) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Healthcare REIT Third Quarter 2022 Earnings Call. I would now like to turn the call over to Lucas Hotwich, SVP 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 to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2021, as well as in our earnings press release included as exhibited 99.1 to the Form 8-K we furnished to the SEC yesterday. 

We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros CEO, President and Chair of Sabra Health Care REIT.

Thanks, Lucas. Thanks, everybody, for joining us. We appreciate it. I'll start with the North American transition. To start with, there has been a management change at North America and in concert with that change, Management and the Board undertook a re-evaluation of what they wanted to do with the portfolio going forward. They approached us with a couple of options. One option was to downsize the company to the 12 non-sub facilities that they had primary ownership in and the other was a rent reduction. We didn't do the rent reduction, it's something that was necessary given our assessment of the performance of the portfolio, and we're actually happy to accommodate them on their request to downsize in 12 buildings. This is a very good portfolio. We've always gotten inbounds on it. So we knew that we would have some terrific options in terms of transitioning the portfolio. So that's why that occurred or specific to that issue with North American. We have a signed transition agreement. It's a very cooperative transition. They've been terrific on their end with us, and we wish them the best going forward. 

In terms of the bidding process, it was pretty robust. We felt going to Enson and Avanir in Washington was the best possible outcome for us for a couple of reasons. In terms of Avanir, they've been doing -- they've really been doing pretty well since we addressed their issues. Adding these 4 buildings really fills in their market needs, provide some really terrific opportunities for them in the managed care contracting perspective. And when you add these 4 buildings to their portfolio in addition to the recently received 20% Medicaid rate increase in Washington, this makes them a stronger tenant from our perspective. So a really good transaction for us to do with Avamere. As to Entin, everybody knows Enson, they're extremely strong operator. So we see that as real upside.

 The credit quality is obviously quite different from having a private operator, their market equity cap, the corporate guarantee and the transparency from being public, which most investors don't have with the REITs because most of our tenants are private. So we think that can add a plus. The durability of our earnings stream going forward as a result of this transaction, we think has even greater certainty. So we feel great that we've been able to expand our relationship with them. And in our evaluation, we felt like the trade-off to this upgrade in exchange for the 12% reduction on rent woods well work it. And I'm sure we'll get more questions on it during Q&A. 

Moving on to the operating environment. Labor continues to improve. It's still tough, but occupancy is now improving as well as labor has improved. I would note and remind everybody that our triple net occupancy is a quarter in arrears. And while our occupancy was flat in the second quarter, as noted in the release. On the skilled side, June through October, our occupancy increased 180 basis points, which we view directly as a function of labor getting better. And similarly, for our AL portfolio, that was up 190 basis points during that same time frame. So June through October. Our senior housing lease portfolio also continues to improve, and we had a nice bump in rent coverage there. 

Moving on to investment activity. We continue to see opportunity in relatively small senior housing deals and secondarily behavioral deals. Skilled nursing investment opportunities have shown a slight uptick but nothing of note. We're also seeing more activity that we hope to transact on in Canada. From a high level, we continue to view investments through a capital recycling lens. So in other words, our investments will be -- continue to be funded with proceeds from asset sales, and we expect that to continue as we move into 2023. And then finally, a note on ESG, we issued our second report. We've also started a new program called Green Link, which is a small fund designed to give our triple-net operators access to capital to fund initiatives and energy and water efficiencies. These initiatives will be accretive to our operators, and therefore, beneficial to us and our commitment to the Sabra ESG initiatives. And with that, I will turn the call over to Talya.

Thank you, Rick. I will discuss the performance of our wholly owned managed senior housing portfolio and our investment activity in behavioral health Real Estate. The operating results of our wholly-owned managed senior housing portfolio saw continued positive trends in the third quarter of 2022. We have seen tailwinds on occupancy and rate for a few quarters and announcing labor costs start to decline as agency is increasingly replaced with permanent staff, which will both lower and stabilize expenses. The headline numbers for the quarter on a same-store basis are as followed: Occupancy for the third quarter of 2022, excluding non-stabilized assets was 81.5%, driven by a 1.3% point increase in our independent living communities compared to the prior quarter. Comparing third quarter 2020 to the third quarter 2021, occupancy in our assisted living communities increased 2.7% points and 2.5% points in our independent living communities. 

Same-store occupancy has continued to trend up since the Amacom variance surge in early 2022. Revcor for the period, excluding non-stabilized assets, was $6,306 in our assisted living portfolio, a 50 basis point increase over the prior quarter and a 6.4% increase over third quarter 2021. RevPAR for the period, excluding non-stabilized assets, was $2,705 in our independent living communities, a 1.8% increase over the prior quarter and a 5.5% increase over third quarter 2021. Excluding government stimulus funds, cash NOI for the quarter was slightly ahead of the prior quarter. Our independent living portfolio saw a 6.7% increase in cash NOI as most of the increase in quarter-over-quarter revenue went directly to the bottom line. Continued rate increases in our assisted living portfolio offset some of the margin pressure resulting from higher labor costs. 

In the quarters immediately following the vaccine rollout, our need based portfolio experienced an earlier and steeper rebound than our independent living portfolio, which we described at the time. While independent living has been playing catch up on occupancy and RevPAR, the lighter staffing model and lower cost structure has allowed cash NOI to recover at a faster pace. We have seen pricing power across our entire portfolio between 8% and 9% annual increases to rates inclusive of care and positive releasing true. Higher care needs and depth continue to drive elevated new out rates, particularly at our higher acuity property. If we compare the same-store operating results of our Canadian assets with our U.S. assets, our Canadian assets have been outperforming our U.S. communities throughout 2022. On a same-store basis here are some quick statistics. 

Occupancy for the third quarter in our Canadian communities increased 3.9 percentage points compared to the prior quarter and 7.3 percentage points compared to the third quarter of 2021. This compares with our U.S. communities increase of 10 basis points on a sequential quarter basis and 1.5 percentage points compared to the third quarter of 2021. The RevPAR growth in our Canadian portfolio was only slightly higher than in our U.S. portfolio. However, cash NOI for the third quarter in our Canadian communities was 12.2% higher on a sequential basis and 43.7% higher compared with the third quarter of 2021. In comparison, cash NOI in our U.S. portfolio, excluding government stimulus funds dropped slightly on a sequential basis and grew 2.5% compared with the third quarter of 2021. 

Over the past 4 quarters, cash NOI in our Canadian communities grew 9.5% per quarter on a compounded basis. These statistics reflect only our same-store assets in Canada, which comprises 16% of the units in our wholly owned managed portfolio. We believe that the rebound we are seeing in Canada is a function of strong demand emerging after the lifting of COVID restrictions that remained in place longer than in the U.S., essentially the same scenario experienced domestically in the months following the rollout of the vaccine. 

Let me now turn to our behavioral health portfolio. At the end of the third quarter, Sabra's investment in behavior health included 16 properties through mortgages with a total current investment of $756 million. We intend to invest an additional $53 million of capital to complete the conversion of 5 of these properties, all of which have been released to operators as well as another property identified for conversion. At the completion of these conversions, Sabra's investment in behavioral health will total over $800 million. We continue to meet with new operators and explore business relationship within the addiction recovery sector as well as other areas of behavioral health where we see investment opportunities. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Thanks, Talya. For the third quarter of 2022, we recognized normalized FFO per share of $0.36 and normalized AFFO per share of $0.35. Compared to the second quarter of 2022, normalized FFO per share and normalized AFFO per share decreased $0.03, primarily due to lower NOI from the Enlivant joint venture as a result of receiving $3.4 million of government grant income last quarter and lower NOI from tenants whose rent is accounted for on a cash basis. This is a timing issue as the shortfall was received subsequent to quarter end and recognized in the fourth quarter.

 During the quarter, we wrote off roughly $16.5 million of straight-line rental income receivables primarily related to the transition of the North American health care facilities to Ensign and Avamere that we previously announced. These amounts are added back in arriving at normalized FFO and AFFO. Cash NOI for the quarter totaled $115.6 million compared to $118 million for the second quarter. This decrease is primarily as result of lower rents received from cash basis tenants I just noted and is expected to reverse itself in the fourth quarter. Cash NOI for this quarter includes $2.2 million of excess rents paid by Genesis pursuant to the Memorandum of Understanding entered into in 2017 when we began the disposition of a majority of our Genesis exposure. These rents had a burn-off period of just over 4 years from the date the properties were sold and are reaching the end of that burn-off period. We expect the amount of Genesis excess rents we recognized in earnings to decrease to $1.2 million in the fourth quarter of 2022 and be $1.6 million and $328,000 for the full year 2023 and 2024, respectively. 

As of September 30, 2022, less than 5% of our NOI is below 1x EBITDARM coverage. As of September 30, 2022, our annualized cash NOI was $448.4 million, and our SNF exposure represented 60% of our annualized cash NOI, down 70 basis points from the second quarter and down 740 basis points from a year ago. G&A costs for the quarter totaled $9.7 million compared to $8.6 million in the second quarter of 2022. This increase is due to a $1.3 million increase in stock-based compensation expense compared to the second quarter of 2022. As a reminder, last quarter, we made an adjustment to the payout estimates on performance-based awards that were set pre-pandemic, which resulted in a reduction to stock-based compensation expense in that quarter. Excluding the stock-based compensation expense adjustments I referenced earlier, recurring cash G&A was $7.6 million compared to $7.8 million in the second quarter. During the quarter, we recognized $60.9 million of impairment of real estate related to 6 SNFs that are under contract to sell as part of our capital recycling efforts. 

Now turning to the balance sheet. Our balance sheet continues to be an area of strength for Sabra with no material maturities until the second half of 2024, and no floating rate debt outside of the balance of our revolving line of credit, which we expect will be repaid by the end of the year with proceeds from in-process dispositions. Our proactive approach to hedging our variable rate exposure has proved highly valuable in this current rate environment, where we have seen short-term rates increase significantly in a short period of time. Because of our hedging activities, our annual interest expense is nearly $8 million lower than otherwise would be at today's market rates. We are in compliance with all of our debt covenants and our liquidity as of September 30, 2022, totaled approximately $890 million, consisting of unrestricted cash and cash equivalents of $26.3 million and available borrowings of $861.4 million under our revolving credit facility. 

As of September 30, 2022, our leverage was 5.5x. As we have stated the last few quarters, this leverage level is above our long-term average target, but we view this as simply a short-term timing mismatch. During the quarter, we repaid $18.8 million of borrowings under our credit facility and expect to pay down our revolver by the end of the year as we receive proceeds from completed and pending dispositions, which are expected to generate roughly $200 million in gross proceeds. Once these proceeds are received and we repay our revolver borrowings, we expect leverage to be closer to our long-term average leverage target. We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable, and we are well positioned to do just that. 

On November 7, 2022, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30, 2022, to common stockholders of record as of the close of business on November 17, 2022. The dividend represents a payout of 85.7% of our normalized AFFO per share of $0.35. Lastly, as we have communicated in the past several quarters, we did not issue earnings guidance this quarter. While we are encouraged by the continued, albeit slow recovery in the labor markets, which we view as a key barrier to occupancy recovery, the timing and velocity is still a question mark. This uncertainty against the backdrop of macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time. And with that, we will open up the lines for Q&A.

Thank you. (Operator Instructions) One moment, please for our first question. Our first question will come from Austin Wurschmidt of KeyBanc Capital Markets.

Rick, I was just hoping, first, you could provide a little bit more detail on the terms of the new leases of the transition assets as far as lease duration, escalators that are baked in there and if there's any sort of fair market rent resets in the coming years?

Yes. Those are actually in the press release, Austin, but for Avamere, the annual rent escalator is 2.75%. For Entin, the annual escalators, our CPI base now to exceed 2.5%. The duration of the leases for Ensign are like 18...

There's, yeah, 18. There are 2 non-release, one is 18 years, one's 20 years in initial term.

And then separately, I was wondering if you could provide an update on the 17 in-process transitions that you announced last quarter and if there's been any change in cash rent contribution versus what those were contributing in 2Q? And when do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence over time?

Yes. So I think the quick answer is there's no changes to what we put in our investor presentation, excuse me, last quarter. Those transitions are still in process, and the timing is unchanged. We expect those to stabilize between now and the end of '24.

And then with the 8 that are already transitioned, have those stabilized at the $4.8 million quarterly run rate?

They're progressing as we had expected. I do think it's the exact number of where they stand relative to what were stabilization is, but they're progressing as we expect.

But we expected those to take a number of months before they stabilize so well into 2023. So they're on track, but a similar time frame to the other '17.

Thank you. One moment, please for our next question. And our next question will come from Juan Sanabria of BMO Capital Markets.

Just Rick, hoping you could talk a little bit more about the transition and why the need to reduce the rent if the coverage on the assets that was in place was seemingly pretty healthy from the outside looking in. Maybe the T3 coverage was a lot worse than that necessitated a rent -- a lower rent for the new operators. So just hoping you could talk through why there's some dilution coming in with the transition.

Well, it's just really a function of negotiation. I think from the cash flow stream was pretty steady. And once -- every once in a while, you can transition to portfolio and get an increase in rent, and we've done that with smaller portfolios historically. But in most cases, people know that you have to transition. And so it just becomes a part of the negotiation. And in this case, we didn't see the 12% reduction as being significant enough to offset the positive aspects of moving to Ensign. And frankly, there were offers that were slightly higher, but we thought the attributes of going with Ensign and strengthening Avamere more important than some incremental difference on the rent. It's still even lower in North America, but maybe not just as well.

And then as you highlighted some transitions that you were doing, and I guess, we're still in process, 25 assets, I believe. And so this was in addition to what you talked about that had upside that this obviously is an offset. Is there anything else that...

There's nothing else, Juan. The $25 million that we had previously announced were a function of ongoing discussions with our operators. So a lot of transparency and a lot of productivity relative to those transactions. This was different. There was a change in management. That's their Board's decision. We had a great relationship with the prior management team, and they did a strategic re-evaluation and came to us late in the summer. So it was a unique circumstance, and nothing should be extrapolated from it relative to the rest of the portfolio.

Okay. And then just one last one for me. For the dispositions, the $200 million that you have targeted, any sense on what that means from a modeling perspective in terms of cap rate and rent associated with that? And do any of the buyers, any issues with financing some of that given the capital market dislocations we're all living through?

I can talk to that. So we're still looking at a year-end type of closing on most of those transactions. So to get to that $200-ish million. The financing challenges that are hitting -- that have hit everybody are, as you know, have been pretty recent. And one of the portfolio, the largest component of that $200 million has been something that's been underway for a fairly lengthy period of time. So they have their financing organized and committed prior to the recent -- most recent rate hikes. Does that answer your question?

Yes, any color on kind of the yield implied on the $200 million?

It's single. It's low single. Mid-to-single digits?

Yes, mid-to-low single digits.

Thank you. One moment, please our next question. Our next question will come from Stephen Valiquette of Barclays.

Just 3 questions here. The last quarter, you guys had a pretty useful slide on the stats on some of the dedicated data among your top 10 stage 3 operators with a couple of presence. Just looking for any updates on any key states and the evolution of some of the state rate updates? Any color you could give would that be helpful.

So we didn't include that chart this time because there's been -- there's been no change or no updates. So I think the one state that we all are anxious to find out about is Texas. And our operators on the ground are cautiously optimistic that they'll be successful with getting a rate increase next year, we'll see. Other than how Texas handled FMAP, which was appreciated, as you know, Medicaid rates have been historically low there, and really the industry has been underfunded. So I think the reason for the optimism is not just the dialogue that operators are having with legislators. But the fact that the pandemic demonstrated some real issues in the system there. So that's the one that we're really waiting for. But no other updates, Steve. That's why we didn't put in other chart.

Okay. One other quick one. What's the skilled mix in the properties going over to enzyme, the kind of the notorious for being able to improve that pretty dramatically. But I'm wondering if that's a big part of their improvement plan as far as the operations within that, but just for the starting point and where that is right on the bed.

Yes, their skilled mix is one of the 2 highest in our portfolio. It's in excess from a revenue perspective of 60%. And so skilled mix is already high. We'll see whether Ensign can make that high or not. There are huge opportunities on the expense side. The facilities has historically been allowed to sort of do their own thing when it comes to expenses. So Ensign believes they have a lot to bring to the table from an expense perspective and of course, there are corporate synergies as well. So I think any changes in skilled mix probably will be incremental, but there'll be much bigger pickups on the other 2 areas. So the improved rent coverage as a result of this deal that we noted in the release is, we expect that to continue to improve, not just because you're recovering from the pandemic, but because of the programs that Ensign will be putting in place there that have been -- that have brought them so much success in the remainder of in the rest of their portfolio.

Thank you. One moment, please for our next question. And our next question will come from Joshua Dennerlein of Bank of America Maryland Lynch.

I appreciate the color around North American, but maybe was there any discussion of 12%, like I feel like I normally like for my lease I would have to kind of cover the difference between whoever comes in and takes my apartment versus what I was supposed to pay. So is there any discussion on North American covering that 1% for introduction or a rate fee?

No, because it wasn't that kind of negotiation or it wasn't that kind of leverage in place. So they were sincerely interested in sizing down. And so yes, it just wasn't that kind of leverage to negotiate that. Our rent is fully covered at the current contractual level through the February 1 transition date, though.

So was there -- I don't understand why there was a leverage of a landlord versus tenant here. Are they typically responsible for the full term of the lease due to end of the agreement or was it coming due on February 1?

No. Well, I'd say a couple of things. First, we have a confidentiality agreement. So there's not a whole lot I can say they're specific to actual negotiations that we went through. But once we made the decision to transition and so that they can move down to 12 buildings as opposed to honoring their request for reduction that removed any of those other leverages.

All right. Is there -- are there any other tenants who could kind of walk away like this or lease structure?

No. As I said, this is very -- it was a unique situation and it had a lot to do with the Board's involvement and the changes in management and the re-evaluation of the portfolio. We're not seeing this elsewhere in the portfolio. So all the statements we've made about the portfolio, generally, historically remain today. Sometimes things happen that are unique, and you don't anticipate, but you shouldn't extrapolate -- no one should extrapolate this to any other aspects of the portfolio.

Okay. One final question for me. When did these conversations start between North America and your team?

Somewhere around the middle of August.

Thank you. One moment, please for our next question. And our next question will come from Michael Griffin of Citi Research.

I guess, pro forma for this transaction, Ensign and Avamere are now some of your largest tenants. You've spoken pretty positively about both of them. Would you expect to continue to grow these relationships? And how great could we see them become as a percentage of your tenant base?

No. I think we've -- ever since we did the merger, we've been pretty committed to trying to keep everybody below 10%, so that we're not overexposed to any one tenant. So I put it this way, if Ensign and Avamere bought additional facilities to us that we just thought were fantastic things to execute on, we would happily do that. We're not going to set as a goal that we're going to continue to grow and get them to x percentage higher than they are now. I still think we're better off regardless of how good the operators are having as much diversity in our portfolio as possible.

And then the commentary you were saying around Canada seemed, I guess, relatively more positive, should we maybe see an increase in investment from you in Canada or is this more kind of just tactical opportunistic approach?

So a couple of thoughts. One is, we've already acquired more in Canada this year prior to this past quarter. So that's already. And those assets were on in the numbers that I provided because I used only same-store sales numbers over time. The environment in Canada for the past year, maybe has been very interesting. There's some generational shifts occurring and groups are selling assets and portfolios and everybody that you cover for sure has been active in that market. And we have had some good fortune in executing some transactions this year. I think you'll continue to see us trying to be active there. I think the biggest challenge for anybody in the acquisitions world right now is, a, capital and Mike earlier talked -- spoke about our focus on recycling capital, that's one. And two the bid ask spread that is in place today and trying to get to a place where acquisitions are actually accretive, if not the first year than surely thereafter.

Thank you. And one moment for our next question. Our next question will come from Vikram Malhotra of Mizuho Securities.

So just I wanted to just follow up on the transition of these assets. You said it was a unique circumstance where the Board decided to change, I guess, what the strategy of the firm and that led you to having to renegotiate. But I'm just trying to get a better understanding of the leverage you say sort of went away versus Ensign saying we can take costs out, et cetera, or just the outlook that both these operators had and how that squares with this lower rent level that they wanted or required to operate these facilities. -- doesn't -- when you say there's no read across, I'm almost wondering like these are very well-regarded operators. Would that not suggest other operators would also say, hey, as we negotiate things when leases come due or in this environment, we would also like a lower rent level, even though there are synergies down the road? I'm just trying to square away like these are the well-regarded outages. You said there's better credits. So I'm just not sure how that squares with -- and they have an ability to take out costs, how does that square with lower rent?

Well, first of all, I appreciate the question. First of all, a lot of transitions, that is the case. You do wind up negotiating a lower rent because you're making a transition and people feel like they are in a position of strength. So that does happen, that's not unusual. It's not a function of the quality of this portfolio or the projections of the earnings going forward. But I'm not sure how much is appreciated how brutal the last 3 years have been. And this recovery is taking much longer than possible than any of us ever expected. And everybody is taking a much more conservative -- everybody that we're aware of are taking a much more conservative approach to how long recovery is going to take and just having more breathing room within leases. That's it's been -- this industry has never gone through anything like this. So I think there needs to be a lot more weight put on the realism of the disaster that the last 3 years have been. And we're still probably a lot over a year away from recovery from an occupancy perspective and a little bit more so from a margin perspective. So everybody is being trying to give themselves more breathing room. I think that's really understandable.

So then is it safe to say like looking forward with how maybe labor has surprised in terms of persistency remaining high in cost and shortness of labor. In your underwriting going forward to the portfolio, you are now baking in more rent adjustments just given the situation? Because in the past, you've said we're not baking in any more rent reductions?

No, we're not baking in any more rent reductions because with our portfolio, we are where we are as we look at new acquisitions, we're putting levels in place that reflect where they currently are. And so that gives us room to grow going forward and gives us more certainty and gives us more room as well. So no, that's not the case that we'd be looking at more reductions. We're factoring that into new acquisitions.

Okay. Yes, because again, I was just going back, like last quarter, we would have looked at these tenants and said, "Oh, they're over 1.4x covered no issue. And so just -- I know this was a unique circumstance, but it naturally makes one wonder like, hey, given -- what you just described is the one port coverage. Is that -- does that have enough buffer from here on? Or do you need to create a buffer just given how the environment has unfolded, I just give more a comment and a question. But one last thing. I just want to make sure I understand the behavioral portfolio and kind of what appropriate coverages are here. But in the top 10 tenants, the behavioral coverage did fall. And so I'm just wondering, on a spot basis, where does that stand? Is there anything we should be concerned about in terms of restructuring?

I'll take the first part and kick over behavioral Italia, but there is no concern, we say that. On the 1.4 that you referred to, that's on an EBITDA basis. When we underwrite, we underwrite on an EBITDA basis. So we underwrite 1.4% to 1.5% on an EBITDA basis. So that's obviously a big difference because there's something like a 40 basis point differential between EBITDA and EBITDA. So the 1.4 coverage was EBITDAR, we will continue to underwrite on a 1.4 to 1.5 basis on an EBITDA basis. So from an EBITDA basis, we are comfortable on a go-forward basis as we have been historically that 1.4 to 1.5 coverage will be sufficient for skilled nursing.

On the behavioral health side. I don't have that spot occupancy for you. But that specific operator has actually had to had some pressure on its occupancy. It hasn't been able to have a mission limitation due to not being able to get enough staff, and that's actually what drove a slightly lower NOI and therefore a little pressure on coverage. We have other operations sector that operate smaller buildings in other parts of the country, and they are covering it upwards of, I don't know, 5 times. So it really varies as to the operations, et cetera, of these buildings and what fundamentally is going on inside the buildings. We typically underwrite at about 2 to 2.5x at new acquisitions in the state.

The other point I'd make is even though labor issues kind of affect all the asset classes to one extent or another, the behavioral facilities, the economic model of those facilities, the breakeven point is much lower from an occupancy perspective than it is for skilled nursing and senior housing. So it's actually more breathing in there as well.

Thank you. And one moment, please for our next question. And our next question will come from Tao Qiu of Credit Suisse.

Just along Vikram's line of questioning, again, this idea of are there any additional watch list tenants that you guys may kind of have your eye on? And I ask that in the context of just again, the rent coverage on the senior housing portfolio is still pretty tight at this point and fundamentals of their stores still pretty tight even with the recovery. So just kind of curious how you're kind of thinking about that kind of at this point given kind of underlying fundamentals in both skills and senior...

Sorry, Tao. Can you repeat the last part of that question?

Sure. Again, so it's this idea of you was like between last quarter and this quarter, kind of your watch list tenants if -- again, if there's any real change in the list. And I just asked that in the context of rent coverage on your senior housing portfolio is still pretty tight. And I think fundamentals and skills and senior housing are still pretty challenging.

Yes. So a couple of things. Our watch list is the same as it's been. -like I mentioned in my prepared remarks, our sub-1 EBITDARM coverage is about -- is less than 5% of our overall NOI. I think the other thing to point out is on the senior housing piece for the triple net, it's a very small portion of our portfolio. I understand your question on the coverage, but it's the smallest piece of our triple net portfolio.

And the only other point it makes, Tao, is even though it is tight, it's at least improving. So it went from 109 to $1.13. So that's certainly not where we want it to be, but they are showing improvement. So as we've been saying kind of all along, the recovery may be taking longer than we'd like, but we all believe that we've been through the worst of it. And I think the worst of it really was when Omicron hit and it exacerbated all the labor issues and kind of reversed all the occupancy gains and all that kind of thing. So I think we're well past the worst of it. And we're not seeing COVID today, and I mentioned this on the last call, it continues to be true. We're not seeing COVID and of itself impact the business. The vaccinations have been highly effective as have been the boosters. Most of the staff is back as well. So the business is holding up really well relative to current COVID cases. They're pretty negligible.

And then on the Enlivant front, I know we've always -- the last thoughts around it was before you do anything with TPG, kind of wait for this thing to recover and then maybe there could be conversation at that point. Just looking at occupancy today, it looks like 85%, which is pretty high relative to kind of where the industry is. Is now an appropriate time to start looking at the JV again? And what could be the potential outcome?

Yes. So your occupancy isn't 85%, but it's in 75%, 76%. But that said, the portfolio is going to be marketed soon from the bankers' perspective and TPG's perspective and which we agree. At this point, you need to go out with 23 numbers that are believable in order to market the portfolio. And so that's what will happen. So the management team is completing their budget process that will be presented to the Board. We'll sign off on it. And sometime before year-end, the marketing process will be kicked off by the bankers.

Yes, Tao. On that 85.5% that you're looking at, that's for our Sienna joint venture. Got you.

Thank you. One moment, please for our next question. Our next question will come from John Pawlowski of Green Street Advisors LLC.

Michael, with regard to the statistic you shared with percentage of tenants below 1x EBITDARM coverage, could you share the same statistics on EBITDAR?

Yes. So it's -- I can get the exact number for you. And as you recall, we don't talk about -- we don't disclose EBITDAR because of the various ways that our peers reported, and it just becomes a noncomparable number. But in terms of EBITDAR coverage, I'm pulling it up right now, it's consistent with what we've disclosed in the past. And it is just about -- just under 6%.

Sorry. So the same percentage of tenants are below 1 on both EBITDARM and EBITDAR roughly.

It's like a 2% difference. We were below 5% on EBITDARM and just below 6% on EBITDAR.

A quick question on the McGuire Group. I believe you extended a working capital loan to them, but their EBITDARM coverage is almost 2x. So just from an outsider's view, they shouldn't need cash, but they need cash. So can you just give us a sense for what drove the working capital loan? And do you expect to extend additional loans to operators in the coming quarters?

That is tied to a transition of a portfolio that they took on for us. So that's what that's associated with. We have provided very few working capital loans in general to our operators. If we need to, they usually are very short term in nature and they're really to expedite a transition and make it happen faster.

But that said, we've been pretty consistent saying that because this recovery is taking as long as it is that we believe that we will need to help people -- help tenants out on for some period of time. And whether -- and that can come in a number of forms that may not be tied to transitions. So that could be in the form of rent relief for a period of time, partial or full or it could be a working capital loan as well. So we leave the door open to step up and help our tenants as they try to get to the other side of this whole 3-year experience.

Thank you. And one moment for our next question. Our next question will come from Daniel Bernstein of Capital One Securities.

A quick question here. Are there any part -- Are there any purchase options that were given to NSN or Avamere and part of that the transition of those North American assets?

No.

Okay. And then another question I had here was, obviously, the flu has been in the headlines. What has been the flu vaccine uptake, I don't if you have any information on this versus a historical pre-COVID levels. I mean have -- are residents and employees getting the flu vaccine at higher levels than pre-COVID. Just trying to get a sense of...

I do not have good data on that, Dan. I would be surprised if it was higher than recovered levels. There's usually a pretty concerning effort to get residents vaccinated for the flu. For employees, it's always kind of been then doing their own thing. And I think there's never been much of a concerted effort in the past for employees like there was with COVID. But I don't have good data on that, but I would be surprised to see if there was an uptick. We're not seeing any impact yet. I know that there's been sort of this triple concern between COVID and FLU and RSV, which is mostly impacting little kids and older adults. But we're not seeing that hit the business at this point.

Just wondering whether there was a cultural change or not, but I guess there's not enough data. And then the last question, I don't know if you went over this earlier in the call or not, but what was the cash NOI shortfall from those tenants who paid in 4Q instead of 3Q? Just was it asset base... Or on purpose...

Yes, it was somewhere in the neighborhood of, call it, $2 million, somewhere in that range because as far as our cash NOI goes, yes, it dropped by about, call it, $2.4 million, and that's roughly the number we're looking at.

Okay. And that was all paid early in 4Q?

Correct.

Thank you. And one moment, please for our next question. Our next question will be coming from Richard Anderson of SMBC Group.

So I have a question on sort of the irony of cutting rent and giving a portion of that portfolio to an operator where you just cut rent, Avamere. So I wonder if that weighed into your thinking at all in terms of where these 24 assets would go and how, given the history we have here, I assume you're feeling much better about them at this point given the restructuring. But how does those 4 assets marry with the existing Avamere portfolio in terms of coverage and rent? And is it perhaps a precise reflection of what you had in place already there?

Yes. So let me order to, I think, better answer your question since you used the word iron. Just a little bit of history. So Avamere, obviously, we got Avamere as part of the merger. Avamere was the one tenant that we didn't do anything for. Their rent coverage was always really tight, but we chose not to do anything to them when we took care of all the other operators that we did or sold assets or whatever it was because they had other revenue sources with some of their ancillary businesses. Once the pandemic hit, they still continue to manage through it, but given how long the pandemic went on, it sort of became too much. So we felt like we really needed to do something for them at that point, but we put that recapture mechanism in because we thought that they could, over time, get back to a higher rent level.

And so where some of this fits into all that thinking is by giving them the 4 additional facilities, it's going to make the portfolio that much stronger overall. And particularly when you add the 20% Washington State Medicaid rate increase. So the acceleration of the rent recovery there will happen even more quickly than we anticipated. And the Washington is a key market for them. And so that made a lot of sense. Ensign, I think just has 2 buildings in Washington, maybe I might do off a little bit, but they don't have much of a presence up there. So it made a lot more sense and they preferred just to do the California portfolio as well. So does that answer your question?

Well, I guess the 4 assets, the coverage on them is it a reflection of what the new existing coverage is with Avamere? Is it higher or low?

No, I think that's a good estimate there.

Okay. Second question, you said that there was some huge expense opportunities for Ensign in particular because of the quality of the company, perhaps, but also just the national portfolio. But was that -- is that upside at expense opportunity for them, a function of them, Ensign, or was it a function of the existing way by which the portfolio was being managed a combination? I'm just curious to what degree there was an under management situation that Ensign can exploit.

Yes. It was more a function of how North American operator. There's a lot of autonomy at the facility level relative to purchasing, where Ensign, everybody knows, their local operators do have a lot of independents and a lot of authority, but Ensign does take advantage of its scale when it comes to group purchasing and getting discounts as a result of that. So that's a completely different philosophy. I'm not saying one is right or one is wrong. There are different reasons for companies doing that. But Ensign bringing that philosophy to bear will keep positive results on the margin for this portfolio.

Okay. And is there a similar expense opportunity for the foregoing to Avamere? Or is that sort of just status quo?

No. The Avamere opportunity is more on the revenue and occupancy side. Because of the geographic distribution in Washington prior to getting these 4 buildings, they've had some difficulty in getting the managed care contracts that they want at the rates they want. These 4 buildings, and it may sound whatever because it's only 4 buildings, but it actually densified their markets in their urban communities so that -- and they've already had conversations with the insurers. So they believe that this opportunity will allow them to not only get additional managed care contracts, but get better rates because of the volume that they're going to be able to provide from a service perspective to those insurers around the Seattle market.

Thank you. And I'm seeing no further questions in the queue. I would now like to turn the conference back to Rick Matros for closing remarks.

Thanks, everybody, for your time. I know it was a lot to digest. And hopefully, we've answered your questions. If you have additional follow-up, the team is available, as we always are to have additional discussions. Thanks, and take care.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.