Sabra Health Care REIT Inc (SBRA) 2021 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Sabra Health Care Third Quarter 2021 Earnings Call. (Operator Instructions) As reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Michael Costa, Executive Vice President, Finance and Chief Accounting Officer. Please go ahead, sir.

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 impact of the ongoing COVID-19 pandemic, 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 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 www.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, Chair and CEO of Sabra Health Care REIT.

Thanks, Mike, and thanks, everybody, for joining us. I'd like to start today actually with a quote that Talya shared with me. It's the dedication in general on the Crystal's new book, which is called risk a user's guide. To the health care and other essential workers who, when faced with risk that is often difficult to effectively assess and impossible to completely mitigate, respond with quiet courage and too often sacrifice themselves for others. So once again, I want to thank all of our workforce out there for everything they're doing on a day-to-day basis. Let me move on to labor now because that's, I think, foremost, obviously, in everybody's minds.

First, I'll start by saying labor pressures are really different by market. So there's not sort of a simple answer or something I can say in the average in terms of trends. So for example, in California, the Northeast states in Texas, the labor shortage just hasn't been as bad as in other markets. It's also better in states that have kept up with wage increases. Florida and in the Southern state, for example, are far behind on wage equity. And so our operators in those states are having more difficulty with labor than in other states. So it really is all over the place. We also see a difference in labor pressure and the culture of our operators. So that does make some difference as well. And that part is actually quite good because the fact that culture can affect retention and recruitment is helpful, and we're trying to share best practices with our tenants as it pertains to that.

Our operators do have some level of optimism that those who have not come back into the workforce will do so as they start spending off on holidays and have a less strict environment with COVID receiving and the vaccination uptake improving and creating a safer work environment. Currently, 40% of our operators have mandated. And I don't know if everybody has seen the news today, but the new mandate with CDC and OSHA is effective on January 4. So by January 4, all health care workers as well as others, will have to be vaccinated, and there's not going to be any allowance for testing in the absence of being vaccinated.

In terms of the workforce amongst our operators, just under 80% of the workforce is now vaccinated. So that's really a nice improvement since the last quarter. It's above industry average and certainly above the national average in general. So we feel pretty good about that. I would say that for those that haven't mandated, there still is a fear that they're going to lose too many employees if they mandate. But the data just really hasn't supported that. All the operators that we're aware of that have mandated simply haven't lost that many employees. And they've actually been able to use that as a recruiting tool because they do have a safer environment. So -- but nevertheless, we understand the concerns that operators have, but now they're just going to have to mandate whether they like it or not. And we think that's a good thing.

And these labor issues are the primary impediment in the pace of the recovery. That said, our tenants have operated for incurring additional labor costs such as temporary agency in order to continue to push occupancy increases as much as possible. So in other words, we don't have tenants that are saying we're just not going to admit because we have labor shortages. They'd rather spend more on labor and get revenue in and keep those relationships as they commentators. Again, that's something that we favor because the demand is clearly there. In terms of funding, COVID-19 public health emergency act has been extended again for another 90 days with Medicare sequestration effective through year-end, and we have optimism that, that will be extended again. FMAP funding increases extended through the end of first quarter '22.

I'll move on to investments now. Our investment pipeline continues to be very active. We have approximately $2 billion in the pipeline, still not much Skilled Nursing. 75% of that $2 billion are potential investments that are in excess of $100 million. To date, we've closed approximately $400 million with a weighted average cash yield of 7.55%. And I want to note, we did announce the closing of the first tranche on the RCA loan, and that's a deal that we feel really good about. We felt it was important to be a good capital partner. There aren't that many strong operators yet in the addiction space. So we want to be there for those who are. And that commitment to RCA was also a commitment to the sector relative to our intent going forward.

So a quick comment on the balance sheet. I know Harold will talk more about that. But the 2 offerings that we did, both the debt and the equity offering, both serve to strengthen the balance sheet and put us in really good shape on a go-forward basis with a level of optionality when it comes to funding acquisitions that we haven't had historically. Moving on to operations. Excluding PRF, skilled, rent coverage is down sequentially on a trailing 12-month basis, primarily due to the second quarter of 2020, being replaced with the second quarter of 2021. And on a quarterly standalone basis, a sequential drop, which wasn't significant, but nevertheless, the sequential drop was due specifically to higher labor costs.

Our skilled occupancy, which lost momentum late summer, is now showing some improvement recently. The biggest turnaround has been Avamere. Avamere had actually fallen 300 basis points lower than the December low. But since opening the COVID unit, it increased our occupancy 400 basis points in the spend in the last few weeks. And even though those COVID units won't be around forever, that should certainly buy them a long time as a more fund saving occupancy on a longer-term basis throughout invest Avamere portfolio.

And with that, I will turn it over to Talya, and then she'll turn you over to Harold, and we'll go to Q&A. Talya?

Thank you, Rick. In the third quarter, Sabra's wholly-owned Senior Housing Managed portfolio continued to build on the recovery that began late in the first quarter. Nationwide labor shortages, coupled with the rise in COVID-19 infections from the delta variant slowed the speed of the recovery during the latter part of the third quarter. We see clear signs of demand for Senior Housing and believe that the operators will mitigate labor shortages through initiatives on compensation, culture and safety. As we stand here today, the recovery of occupancy feels on track, but the solution to the labor shortage remains blurry.

The headline numbers for the wholly-owned managed portfolio are as follows: occupancy in the third quarter of 2021, excluding non-stabilized communities was 78.8%, a 150 basis point increase from 77.3% in the prior quarter. REVPOR, excluding non-stabilized communities was 3,272, essentially flat to the prior quarter's 3,263. REVPOR has remained stable over the past 5 quarters across both independent and assisted living despite surges in pandemic. Cash net operating income declined by 11% sequentially, and margin decreased by 3.4% compared to the prior quarter, in part because no COVID grant income was received in the third quarter compared with just over $500,000 of grant income in the second quarter. Excluding the grant funds, cash net operating income declined 6.2% and margin decreased only 2.4%.

Operating expenses in Sabra's assisted living and memory care properties, including the wholly-owned Enlivant portfolio, skewed higher in the third quarter, mostly in September because of contract labor costs. Across the wholly-owned managed portfolio, we are seeing leads at 20% to 50% above 2019 levels across the quarter and conversion rates higher than in 2019. The delta variant appears to have delayed some move in volume during September as well as slightly increased move-outs. Communities are beginning to recover from the effect of the delta variant with move-outs normalizing and moving velocity picking up. While the focus remains squarely on rebuilding occupancy in order to rebuild revenue, the shortage of labor and utilization of contract labor at higher cost have become a critical element in the path to economic recovery. Higher acuity communities have more staff. Therefore, we have seen contract labor impact assisted living and memory care much more than independent living.

Sabra's wholly -wned managed assisted living portfolio has continued the occupancy recovery that began in the second half of March, gaining 234 basis points from the end of the second quarter to the end of the third quarter. From June 2021 to July 2021, occupancy increased by 166 basis points. From July 2021 to August 2021, occupancy increased 53 basis points. From August 2021 to September 2021, occupancy increased 89 basis points. From the low in March through mid-October, occupancy increased 457 basis points to 73.9%. This trend was driven by our wholly-owned Enlivant portfolio, which had occupancy of 73.7% in September, 400 basis points above June occupancy.

For comparison, Sabra's net lease assisted living and memory care portfolio has shown continued occupancy recovery, increasing 303 basis points in the third quarter compared with the prior quarter. Note that in the supplemental information materials, we show this portfolio statistics one quarter in arrears, which currently includes the periods immediately prior to and then immediately following the distribution of the vaccine to Senior Housing communities. While revenue in our wholly-owned assisted living portfolio grew 3.6% quarter-over-quarter, excluding grant income, revenue grew 7% quarter-over-quarter. Cash NOI margin compressed to 15.1% compared with 21.7% in the second quarter, excluding grant income. About 70% of this change is attributable to an increase in contract labor costs in our wholly-owned living portfolio, of which more than half was incurred in September.

Sabra's managed independent living portfolio experienced less occupancy loss than our assisted living portfolio and its recovery has been more gradual. Throughout the duration of the pandemic, we have seen that move-outs have been driven by the need for higher care, and we continue to see that this quarter. From June 2021 to July 2021, occupancy was flat. From July to August 2021, our occupancy increased 183 basis points. And from August to September 2021, occupancy increased 30 basis points. Cash NOI in the wholly-owned independent living portfolio grew 4.2% quarter-over-quarter and margin expanded by 0.8%, while occupancy pressure at 2 of our Canadian retirement homes and catch up on maintenance deferred due to the pandemic, offset some of the gains made, availability and cost of labor was not a meaningful factor.

And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

Thanks, Talya. I'll give a quick overview of the numbers for Q3, discuss recent balance sheet activity and briefly discuss our 2021 guidance. Before doing so, let me make a couple of remarks about the change in accounting for our Avamere lease. As we noted in our September 13, 2021 business update, Avamere has experienced cash flow constraints over the past several months from census declines as a result of the spike in COVID-19 cases in Oregon, Colorado and Washington, together with admission limitations in these states as well as from increased labor pressure. We have been using their letter of credit to satisfy their rent obligations beginning in September 2021 to help with these cash flow constraints. This letter of credit is expected to cover the rent obligations through a portion of their December 2021 amounts due, and we expect the full amount of rents due to the end of 2021 to be paid. However, even with the encouraging pickup in census they have seen since the opening of COVID specific units in Oregon, we concluded that the lease no longer meets the high threshold to continue accounting for it on an accrual basis.

As a reminder, we must conclude that it is more than 75% probable that we will collect 97% or more of all payments due over the life of a lease to continue accounting on an accrual straight-line basis. The Avamere lease does not mature until 2031. Given the less than optimal EBITDARM coverage historically for this lease, the 10-year remaining term and the uncertainty of the future stabilized performance level for these operations, we concluded that some level of rent adjustment in the future may be necessary. We expect this determination will not be made until sometime during 2022 as we begin to get additional clarity on future stabilized performance expectations. We consequently wrote off $25.2 million of straight-line rent receivable balances related to this lease. We continue to have $19.1 million above market lease intangible assets associated with the Avamere lease on our balance sheet. Any future lease amendments may result in the write-off or acceleration of the amortization on all or a portion of this balance.

And now on to Q3 results. For the 3 months ended September 30, 2021, we recorded total revenues, rental revenues and NOI of $128.6 million, 85.4 and $96.3 million, respectively. Included in these amounts is the write-off of $25.2 million of straight-line rent receivables noted previously. Excluding this amount, total revenues, rental revenues and NOI was $153.8 million, 110.6 and $121.5 million, respectively, as compared to $152.9 million, 110.8 and $121.3 million for the second quarter of 2021. While our NOI after normalizing the Avamere write-off was essentially flat being just $200,000 higher than in Q2. There were some notable changes in each direction in our managed Senior Housing portfolio and the Enlivant joint venture that landed us there. NOI from our managed Senior Housing portfolio decreased $1.2 million to $9.1 million due primarily to the fact that we received no government grant income this quarter compared to $500,000 last quarter as well as the impact of higher COVID-19 expenses and labor costs, as Talya discussed in her prepared remarks.

NOI from the Enlivant joint venture was $3.5 million, which is $1.2 million higher than in the second quarter, primarily due to the second quarter NOI containing the $2.5 million onetime support payments the joint venture made to Enlivant. Excluding this amount, NOI from the joint venture decreased sequentially by $1.3 million. Revenues from the joint venture increased by $1.3 million due to increased occupancy of 2.2% to 71.9% for the quarter compared to the second quarter, offset by higher labor and COVID-19 expenses. On the expense side for Sabra, the G&A cost for the total -- for the quarter totaled $8.7 million compared to $8.8 million in the second quarter of 2021. G&A costs included $2.4 million of stock-based compensation expense for the quarter compared to $2.3 million in the second quarter.

Recurring cash G&A costs of $6.4 million were 6.7% of NOI and in line with our expectations. Interest expense totaled $24.2 million for the quarter, remaining effectively unchanged from the second quarter. The result of this activity is FFO for the quarter of $59.9 million and normalized FFO of $85.3 million or $0.38 per share. FFO was normalized primarily to exclude the Avamere straight-line receivable write-off. This compares to normalized FFO of $88.4 million or $0.41 per share in the second quarter of 2021. AFFO, which excludes from FFO certain noncash revenues and expenses, was $84.8 million and normalized AFFO was $85.2 million or $0.38 per share. This compares to normalized AFFO of $86.6 million or $0.40 per share in the second quarter of 2021.

For third quarter, we recorded net income attributable to common stockholders of $10.2 million or $0.05 per share. Under the balance sheet, we issued $800 million of 3.2% senior unsecured notes due 2031. The net proceeds were used to repay $345 million of our U.S. dollar-based term loans. And subsequent to quarter end, we deemed all $300 million of our outstanding 4.8% senior unsecured notes due 2024 and to fund a portion of the RCA mortgage loan. This issuance allowed us to improve our weighted average debt maturity by 2.4 years to 7 years and reduced our cost of permanent debt by 23 basis points to 3.58%. Again, we were in compliance with all our debt covenants as of September 30, 2021, and continue to have strong credit metrics as follows, all of which are pro forma for the redemption of our 2024 notes, which occurred on October 7.

Our leverage 4.8 one times, interest coverage, 5.3 2 times, fixed charge coverage, 4.9 times. Total debt to asset value is 34%; unencumbered asset value to unsecured debt 289%, and secured debt-to-asset value of just 1%. We continue to have a very strong liquidity position after giving effect to the redemption of $300 million or 4.8% senior unsecured notes that were due in 2024. As of September 30, 2021, we had approximately $1.2 billion of cash and availability on our line. On October 15, we completed an underwritten public offering of 7.8 million newly issued shares of our common stock at a price of $14.4 per share and received net proceeds before expenses of $112.6 million. These proceeds were used to fund a portion of the RCA mortgage loan. On November 3, 2021, 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, 2021, to common stockholders of record as of the close of business on November 16, 2021. The dividend represents a payout of 79% of our normalized AFFO per share.

Finally, a couple of comments on our 2021 guidance. We reaffirm our previously issued guidance range for normalized FFO of $1.56 to $1.58 per share and normalized AFFO of $1.53 to $1.55 per share. Our previously issued guidance did not include the impact of 2 matters that affected our full year 2021 per diluted common share guidance for net loss, FFO and AFFO. The first is the avenue straight-line with receivable write-off, which had an $0.11 per share impact on net loss and FFO; the second is the debt extinguishment costs related to the 2024 note redemption early in the fourth quarter that resulted in a $0.17 per share impact on net loss and FFO and a $0.16 per share impact on AFFO. The impact of these 2 transactions are added back in arriving at our expected normalized FFO and normalized AFFO numbers.

And with that, we'll go ahead and open it up to Q&A.

(Operator Instructions) Our first question comes from the line of Richard Anderson from SMBC.

Harold, I think this is your last call. So congrats on that. So just remind me, Rick, is the mandate -- January 4 mandate, that's just unskilled, right now. The Senior Housingis not a part of that. Is that correct?

So I was clear on that before. I'm a little less clear on the news this morning because it says all health care workers. The original mandate was health care businesses that received threefold federal money, and that's not the case with Senior Housing. So I'm assuming that you're correct that Senior Housing still carved out. But our guess is that, that we will -- that the Senior Housing providers we cover because a lot of them really want a mandate. So I think we'll see more Senior Housing operating mandate anyway, but I think that's correct.

Okay. In terms of Avamere, it's nice a little bounce on the occupancy side. And I know you got to reserve some time to figure out what you're going to do with that longer term. But what would it take for you to not have to do something? I mean, if we get 400 basis points of occupancy gain, god willing, with some sort of regularity. Is there a scenario that you could get back, assuming COVID cases decline and all the good things that hopefully will happen in the future that maybe nothing will have to happen?

Yes. So I think -- so the way we think about it, Richard, and I know you'll recall that prior to the pandemic, Avamere had the lightest coverage of any of our material tenants. And so hitting this kind of problematic period of time in the last 19 months and starting out with rent coverage just made it even that much more difficult for them. So I think we're inclined to want to do something for them. We just want to see what that is once things stabilize, but we don't expect that it's not going to have a material impact on the company, on numbers or anything like that. But I think we would like them to have a little bit more breathing room just because you never know, and I think this demonstrated that. If you -- and I know -- I mean, we have a lot of conversations with you over the course of all the restructurings we did related to the merger and all the things that we did for those other tenants have actually held up really well during the pandemic. I mean this is the only tenant that we really had an issue with the entire time, and it came pretty late in the game. So yes, I think we're inclined to do something next year for them. We just need things to stabilize a little bit more and get a better sense of kind of where they land. But again, it won't be material.

Okay. Last question for me, and I'll yield the floor to my peers. But any update on the time line to Enlivant and TPG and an actual exit from that portfolio?

Not really. They were -- TPG wants to give it a little bit more time before they really run sort of a full-blown process. And that's really because things have been rebounding pretty nicely there. And I think their thought process is, I want to be careful here because I don't want to speak for them. But I think the thought process is as the portfolio has been recovering, it will just make the opportunity to get a better valuation that much greater. So my guess is it's not really going to start in earnest until after the first of the year. And then the way to think about it is however long it takes to find a buyer, it's going to take several months for regulatory reasons to get it closed. So I don't think we're looking at anything sooner on a close than mid year '22, it could be later in the summer. For us, it doesn't really make a difference. It kind of is what it is now. And to the extent that they're smart. And so to the extent that they in by ratings, other than evaluation, that improves to our benefit anyway.

Our next question comes from the line of Nick Joseph from Citi.

Maybe just following up on the Avamere question. So if the letter of credit runs out in December and recognizing that once things are stabilized, maybe you can make a decision kind of longer-term on the lease. But what happens in that intermediate time frame, maybe beginning in January, assuming the business hasn't kind of fully recovered to a coverage level that would allow them to pay the rent?

Well, right now, we think we're okay for the couple of months or so following the expiration of our ability to use a letter of credit. They were able to access sort of upfront funds, which is really going to help their liquidity, obviously COVID unit 3, they negotiate it with the state of Oregon, and they're in the process of some other negotiations as well, which we think are health. So we're not really concerned about rent in the short-term right now, even after the letter of credit runs out sometime in December.

Okay. That's helpful. I think you've obviously repositioned the balance sheet to be in a good position. I think you mentioned the acquisition pipeline maybe $2 billion. How are you thinking about your cost of capital, I guess, specific cost of equity and the ability to kind of execute on that acquisition pipeline, just where our shares trade today?

So I think a couple of things. One, on the skilled side, behavioral and addiction, clearly, we can be competitive. And what we're finding on Senior Housing is it's clearly difficult to compete on large portfolios with PEs out there, given where our equity currently stands. But on the small ideas that we have been executing on this year, about $75 million of them so far. Those are deals that aren't on the radar of some of the more competitive players. And there are deals that we can get done, and we can be creative with those deals, whether that's earn-outs or things like that because of some of the issues that some of us a particularly smaller Senior Housing providers have had in. We're really good at doing those kind of deals and doing smaller deals like that really don't hit the radar as far as you all are concerned in terms of us taking on some difficult things, but it allows us to get more things down the Senior Housing side if we focus on the small things. Talya, I don't know if I missed anything on that?

No, I think that's exactly right.

Our next question comes from the line of Juan Sanabria from BMO Capital Markets.

Just hoping to spend a little bit more time on Avamere. Is it possible you guys could give us a sense of how that portfolio's EBITDAR has trended over time? I don't know if you can give like a T3 or T12 kind of pre COVID unit today? Just to give us a sense of the degradation in cash flows and kind of what is potentially possible to get back to, to try to gauge how much rent could be cut and just the level of confidence in not having a material effect, given it is your largest tenant?

Well, they were actually trending up prior to COVID. They were trending up just because of some -- well, for 2 reasons. They were trending up because of some operational initiatives that were taking home, and they were trending up because of PDPM, just like all the rest of our tenants. So they are actually on the upswing. And really, when you think about that, they made it through 16 months or so of the pandemic and had their low point in occupancy in December of 2020 was 70%. They improved to about 74.5% going into the summer. So they had some pretty decent gains. And then you have these really severe admission restrictions that we haven't seen anywhere else in the country, in Oregon, in Washington and really unrelated to how much COVID was actually happening. It was just sort of a visceral reaction that the states had. And they dropped from 74.5% to 67%, just under 67%, so over 300 basis points lower than they're low in December. So that really just through them for a loop.

Up until then, they were holding serve. So I think these COVID units in the pop and occupancy by in the time, hopefully, if they need to get back. So our whole focus is they were light on coverage before, but they were able to hold serve through the pandemic until the sort of recent events. And so that's why we said on a go-forward basis when we make a final determination, that it's not going to be material because they were able to hold serve. And we just want them to have a little bit more breathing room because there are always going to be some bumps in the road.

Any color on kind of where the coverage is on a Q3 basis? And what do you think is a healthy coverage?

I get that they can get by it, like just to keep them at a healthy level.

How big the rent cut could be is what we're trying to get?

I don't want to comment. I don't want to negotiate with Avamere on the phone right now.

Fair enough.

Okay. So we'll get there. I think before the pandemic and before they're sort of trending upwards with PDPM, they were around -- just slightly above one time. And so you want them to be a little bit higher than that. But we're not going to give them an adjustment that takes them to 1.5 times or something like that. That's not going to happen.

Okay. And then just with regards to the seniors housing business overall, given the labor cost pressures, what kind of flow through to NOI? Do you expect from incremental occupancy given the cost pressures? Or said differently, how do you think about margins getting back to where they were previous to the pandemic?

Well, I think -- so there's a lot of math that goes into this. So you've got occupancy and you've got rates on the revenue line. And the rate is where operators are really thinking what they can manage, what they have to manage now in order to cover labor cost. In other words, passing through labor costs and labor increases. And what we're hearing is everywhere from what we would expect to hear on rate increases, which are, call it, sort of the 5% annual rate increase to something more substantial. It really is going to depend on the type of building and the level of maturity and the length of stay in those buildings. But there is a sense, I just came back from 1.5 days at the NIC conference in Houston, and there is definitely a sense among the operators with whom we spoke that some portion, if not the entire portion of these labor costs can be put through to residents, particularly coming in, we're seeing consistently that -- we're seeing positive leasing spreads. In other words, new leases are being written at higher than in place rents. So that's the good news. So there appears to be an ability to do that. That suggests that you're not going to eat -- the operators are not going to eat the entire cost of labor and have it come out of their margin. How much they'll be able to offset by the top line is going to be a function not just of rate but of continued occupancy increase. That's why I said there's a lot of math here. But that's the best math I have right now.

The other point I would make, Juan, is that our operators aren't doing anything deep discounts like some of the competitors are. So they're -- and you see on the rates that we put in the supplemental, that's all held up really well. So they're making -- they've given Talya this feedback, knowing that they're actually able to build occupancy without sacrificing rates to get that occupancy back up.

Okay. So just to confirm, the positive lease spreads that you're seeing versus in points that, I think that's new and that historically hasn't been a case because someone typically leaves it is more acute. But are you seeing street rates for new customers moving up? Or is that kind of holding flat at best?

I'm sure asking rates are moving up in general, certainly with the operators with whom I spoke. There are operators that are providing discounts to build occupancy. You can see from the steady increases in occupancy, at least within our portfolio that we're seeing good traction on occupancy increases as well as high -- what I would -- I'd characterize as the pent-up demand, significant inquiry increases versus pre-pandemic period, higher conversions to move-ins compared with 2019. So there is positive momentum on the lease-up and everything indicates that, that is continuing at least so far. So there's a sense you can actually start to push rates more than has been pushed. Is sort of the typical was more like the 4% to 5% prepandemic. Now we're seeing hearing operators say this is they can do more.

And going back, Juan, just to change a little bit back on Avamere. The other thing I forgot to mention is that the Phase IV funds haven't come in yet as well. So in addition to the money that they're able to access off the new COVID units, they'll have the Phase IV funds as well, which goes to our comfort with receiving rent after the LC is done.

Our next question comes from the line of Amanda Sweitzer from Baird.

It looks like you granted another small tenant deferral request in September. Can you provide more information on the outlook for additional near-term rent deferrals outside of Avamere? And then is there any security behind the deferred amount?

Well, one, there's always secured behind them. But the only other thing that we've done are really just short-term in nature with nothing long-term anticipated just to buy them a little bit of time. So it's been really nominal. And we don't see anything else right now on the horizon.

Okay. So in terms of rent deferrals in October, you wouldn't expect a meaningful uptick?

No.

That's helpful. And then in terms of additional Skilled Nursing support, are there any incremental state initiatives you're watching or finding horizon?

There aren't specific state initiatives that the -- most of the states are pretty flush right now on the Medicaid side. They're really in good shape from a budget perspective. So as we get into the first part of next year, and they start having discussions about annual rate increases, the narrow has been a little bit more positive there because there's more money to work with. And only about half the states allocated if not directly to skilled operators, so there's a chunk of money that a lot of the states are holding on to there as well. So no specific initiatives. The other thing, though, that if we try to anticipate that we may see is some more negotiations like we saw in Connecticut to increase wages and use the Medicaid program as a pass-through. So for those on the call that are familiar, the industry work with the union data Connecticut to negotiate wage increases for the employees in that state, and it was all done as a pass-through in the Medicaid program. And most of the 50 states have Medicaid programs that will allow for that. We've seen it happen in California a number of times. And it's a negotiation that's easier -- I don't want to say it's easy, but easier than some other negotiations because none of that rate increase can never get pocketed by operators. It has to get passed through directly to employees and it's audited as such. So I would expect there to be more of those kind of negotiations as we go into 2022.

Our next question comes from the line of Steven Valiquette from Barclays.

So just a question on the overall skilled labor environment. I found that really across the entire post-acute health care provider spectrum. We've gotten some mixed signals at different stages of the pandemic, which business models may or may not be competing for the same type of skilled labor. When you think about the home nursing or Home Health versus SNFs versus inpatient rehab facilities or IRFS. I guess I'm just curious to get your thoughts on the SNF sector, in particular, where there's overlap on competition for skilled labor across post acute? And also whether or not the acute care, hospital sector is also part of that competition for the same type of skilled labor or not? Thanks for any thoughts around that.

Yes. I think most of the competition is on the high acuity, post-acute space. So I think LTACs and IRS, it isn't as competitive on the -- when you talk about the skilled labor, it is the certified nursing assistance. But on the skilled labor, it's not as competitive with Senior Housing or Home Health, simply because in Home Health, you're not looking at the same kind of staffing level requirements, that even on IRS and LTACS. LTACs are only in a handful of states, IRS are in a lot more states, but they have a big presence -- and then a big presence -- they always have big presence. I think they are best in Northern States. So I think that the larger concern is how many health care workers have just left the workforce. That's really the larger concern. And I think for people that haven't come back to the workforce because the pandemic-related benefits, I think there's a lot of optimism there that folks will come back in, and that's where we've seen shortages in areas that we haven't ever seen shortages before, even dietary and housekeeping and laundry and things like that. But it's more about the workforce. And time will tell that thereare people that adverse out whether have to take a break, particularly since they spent so much time, schooling and having this career that they don't come back. And that's something that affects everybody. And it affects skill just because of the number of employees that you have in a skilled facility versus any of the other settings like home, obviously, or AL.

Okay. Now it's definitely helpful. I appreciate the filler.

The other thing I would just point out, you all may have seen some of these trends, but the workforce issues look like they had peaked at the end of 2020 and started to get better because there was a lot of optimism on the part of employees that now the vaccine was in place, things would get better. But as it turned out with the percentage of people that chose not to get vaccinated, then everybody starts going through it again, and that's really when a lot of the burn out really got worse. And so if you look at the trends the last several months, the peak of the burn out was worse than it was at the prior peak because of that. So I think that's why people are at least somewhat hopeful that once folks have a chance to take some time off. And particularly once everybody's vaccinated network in the facilities that they'll come back to the workforce. So we'll see.

Our next question comes from the line of Tayo Okusanya from Credit Suisse.

Harold, again, congrats, and good luck. I appreciate that guys. My question is really more on the Smith reimbursement side. I mean, you guys gave some good color in regards to FMAP and sequestration and when some of those things could end. But I'm very curious what you're hearing about in regards to the following 3 things: scaling in place, also the $10 billion emergency fund from the CARES Act, is there anything left in that? Could you guys certainly get money from any of that? And also potential PDPM review by the new head of the CMS?

So on skilling in place. I think there will be an initiative and I think there have already been some discussions on the part of the trade association that represents the space to try to make that permanent. And hopefully, given the benefit that everybody saw with going in place and the lack of financial -- the absence of financial impact on the acute space who always sort of thought it, hopefully, we've got a good shot at making that permanent. I mean it's not a big issue, but it certainly helps on the margins and everything helps in the models, right? So there'll definitely be a key focus on that. On the fund, after Phase 4, there is quite a bit less in the fund. And so there's some optimism that if this stretches out longer and there needs to be access to additional funds, that there are those monies in there. There's been about $8 billion. That's been returned from providers, particularly in the acute side that didn't need it. And if there was nothing left in the fund, I think there wouldn't be much optimism because given everything that's going R&D to negotiate, new money going into the fund. I think no one believes that would happen, but there is going to be money after that. So I think it's somewhere around -- I'm just rounding somewhere around $20 billion or something like that, it could be a little bit less, maybe $17 billion, but it's a pretty decent number. And then on -- what was your third one?

PDPM.

PDPM. Yes, I think the -- nothing is being discussed right now about any changes review to PDPM. I think that initially, because everybody felt like we peaked with the December surge, it looked like maybe 2021 would be a good base year to use to try to assess -- if everybody was recovered -- to try to assess what PDPM real sell-out relative to expectations. But given how tough things have been in 2021, I don't know if that's going to be a good base here or not. So just stay tuned on that one. We don't have any reason to believe that the new Head of CMS, who we were supportive of getting that position, it's going to be any less reasonable with the industry on PCM than the previous leadership.

Our next question comes from the line of John Pawlowski from Green Street.

Great. Could you provide some details around the sequential deterioration in North American health care's coverage? Where is their occupancy today? And has it trended up or down in recent months?

Yes. That's just a matter of one quarter falling off and another quarter getting picked up. They're actually doing well. Their occupancy is recovering. They have the best skilled mix, or the 2 best skilled mix of any of our operators in the business. So yes, we feel good about North America. And we don't have any issues there. There were just in-timing issues there with quarters dropping off and new quarter coming on. And California has got less -- I don't want to say there aren't labor pressures, there are. But wage equity has been pretty good in the state of California. So there are less issues, as I mentioned in my opening remarks and in a number of the other states.

Okay. Maybe on that point, just looking down your top 10 operator list, is geography just kind of the biggest driver in the divergent outcomes and divergent changes in these coverage levels? You see North American Avamere, Genesis declining sequentially, but some other operators are stable or increasing. So what are the biggest 1 or 2 factors that are driving this divergence across operators?

Right. So the 2 consistent factors were Q2 2020 dropping off and Q2 21 dropping on. The second consistent factor was a decrease in PRS being recorded in the current quarter. But the third is absolutely geography. And so Genesis with the facilities that we don't have very many facilities like Genesis, just the 8 buildings, but they've had real labor pressures in those facilities. And that was a factor that really impacted their coverage. So yes, geography is kind of everything right now when it comes to labor pressures, at least the degree to which you are experiencing those facts.

Okay. And maybe last one for me. I won't hold you to a point estimate, but just some thoughts on. So if occupancy just kind of continue to improve, but the full impact of recent labor resets finally flow through these trailing 12-month numbers. A year from now, what does coverage look like across the portfolio? I'm struggling with such a lagged concept of EBITDARM right now?

Yes. So we like to see our EBITDA coverage normal of $1.4 million in the aggregate. And we were pretty much around there on the aggregate before the pandemic. But if the labor pressures don't abate to the extent that we would like to see abate, the new normal could be $1.3 million EBITDA coverage on skilled. So that just remains to be seen. We don't believe it's going to get down to 1x or anything like that. And that's primarily because there are too many dynamics at work right now that it will just push occupancy up. The number of skill beds continues to decline. The pandemic is actually going to accelerate that. You've got the demographics, which we're all aware of. I mean, you basically have a space that prior to the pandemic, was projected to be fully occupied by about the middle of the decade. So -- and so that's going to put the industry at a place that it hasn't been at in decades really from an occupancy perspective. So I think that's going to help quite a bit on the labor pressure -- on the labor pressure side. And it's because people are going to be able to pay more for labor, that's going to help the labor issue as well. So yes, over the long haul, maybe coverage is a little bit lighter, but it's not going to get to a point that either dangerous or it's going to call us, all of us to do some significant restructurings and long-term rent reductions, just don't see that.

Our next question comes from the line of Daniel Bernstein from Capital One.

I guess the only question I had, I wanted to go back to the vaccine mandate. When you say that 80% of your -- I guess, the operators, 80% of the employees are vaccinated. It seems like it's a large number that you could potentially lose. So do you have any specific examples where your operators actually put in a vaccine mandate and what the attrition was from the employee standpoint, maybe they did that in conjunction with wage increases or some other mechanisms to retain employees. I just want to -- just trying to get a better grasp of what the risk is that? We'll see a lot of employee attrition within skilled dursing?

Right. So in Livent, holiday, Genesis, Atria, we have a number of smaller operators, one that's one of my board members, Juniper, they saw low single-digit attrition, and they didn't have to raise wages to do it. So it was all really pretty consistent with all those operators and some of the smaller operators that we've talked to, which just hasn't been -- and visually, you feel like it's going to be a bigger issue, which is holding back some of the other operators instead of jumping on the mandate, but it just hasn't been. So that's really what we've seen consistently amongst most the operators that we're aware of. So, call it, low to mid-single-digit attrition. That's it.

Okay. And then real quick, on the $2 billion pipeline, is that both in real estate acquisitions and loans? Or you're looking at more of a kind of doing more like the RCA mortgages? Short-term structured deals?

Yes. The RCA loan was somewhat unique. As you know, we've not done a transaction like that in the past, really, and it's not something you hold out is going to be typical for us.

Our final question for today comes from the line of Joshua Dennerlein from Bank of America.

In the past, you've talked about the occupancy recovery in Senior Housing and Skilled Nursing. Just kind of curious your latest thoughts on when we get back to that pre-pandemic level and does labor play any factor in how you're thinking about these days?

Yes. So on the Senior Housing side, I had been saying that by the end of '22, we should be in pretty good shape. I think we still feel that way on Senior Housing. And on skilled, prior to the delta surge, I felt like we'd be there by the end of the first quarter of '22, that obviously is not going to happen, and the labor pressures have put more stress on that. So right now, our best guess on skilled is, it's also about the end of the year. So even though there's a lot more pent-up demand, I think, on the skilled side, as it turns out because of all these other factors, maybe they both wind up in a relatively good place at about the same time.

This does conclude the program of the question-and-answer session of today's program. I'd like to hand the program back to Rick for any further remarks.

Thanks very much. Thanks all for joining us today. We're always available, as you all know, for follow-up. I know we're seeing a bunch of folks at least virtually at NAREIT, so we look forward to having those meetings and to have any additional follow-up discussions. And have a great day, and stay safe.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.