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spk01: during the quarter primarily related to agency staffing. Our operators are very focused on this and have plans in place to reduce the use of agency labor in our communities. Interest expense of $46.9 million represented a decrease of approximately $9 million from the second quarter following the $500 million redemption of 9.75% senior notes in June. This redemption reduces our annual interest expense by approximately $49 million. In July, we prepaid a mortgage note due to mature in October on two senior living communities for approximately $15 million. At quarter end, we had total outstanding debt of $3.1 billion and net debt of $2.3 billion was equal to just 29% of gross assets. Aside from the $114 million partial repayment of the revolver scheduled for January of 2023, We have no significant maturities until 2024, and we have almost $5.8 billion of unencumbered gross real estate assets. At quarter end, we had over $800 million of cash and restricted cash on hand, which we plan to use for capital investments and debt repayment. In the third quarter, we spent $70 million on capital expenditures across our portfolio, which included approximately $52.9 million of capital improvements within the shop segment, and $16.9 million of capital was deployed in the office portfolio. During the first three quarters, we spent approximately $195 million on capital improvements across the portfolio. Based on projects previously underway and starting in the fourth quarter, we anticipate spending approximately $115 million for the remainder of the year. As we've discussed previously, investing our portfolio is a priority for us, and we continue to develop plans to improve our properties in order to grow occupancy, push rental rates, and enhance the overall value of our portfolio. That concludes our prepared remarks. Operator, please open up the line for questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Brian Mayer with B Reilly Securities. Please go ahead.
spk04: Good morning, Jennifer and Rick, and thank you for all those comments thus far. A few from me. On the Hurricane Ian, can you drill down a little bit more on the actual damage to the property? And I think you said you're going to start reopening in phases later this month, but how long will it take to fully reopen the property?
spk01: Good morning, Brian. Thanks for the question. The damage was fairly extensive. I mean, there was a sizable surge and as a result, our first floor was flooded. It's also the IL portion of that building is a tower that sustained some damage. We had some rooftop units that are not on top of the roof anymore. uh so there's a sizable amount of work to do uh we think the uh al building can be reopened by the end of the month and we're tracking that way the il building will take us a little bit more time uh probably you know best guess is probably middle of 2023 um but you know the positive in this is there's probably an opportunity to move it up market a little bit uh it's it's a it's a good building in a good market but um we're going to be smart about the capital that gets put back into the building as we restore it.
spk04: And I'm sure that there were no injuries or issues in that regard, like you were able to move people out well in advance of the hurricane hitting?
spk01: Yes, absolutely. The team is expert at evacuating when they need to. So everyone was safe and sound. It's really just loss of some property. and it'll get restored. It's nothing that can't be restored. It's pretty amazing to see how the team rallies to make sure the residents are well cared for in these situations.
spk04: Got it. And as it relates to insurance proceeds or deductibles, can you give us a little color on what you're seeing? I know it's still early innings.
spk01: Yes. So the deductible is largely accounted for already. So I think a lot of the future spend will be the the capital that we use to restore the building. So it probably won't have much of a P&L impact on a go-forward basis.
spk02: They are still working through exactly what needs to be done there so that we still don't have a complete idea of the costs associated with getting the building back online.
spk04: Got it. Good to hear from you, Jennifer. Thank you. Good morning. So maybe shifting gears to shop expenses, and I think that you, I couldn't write fast enough, talked about the skilled nursing facility, you know, being the lion's share of that. But, you know, what type of plans internally are you developing to, you know, get this under control such that this, you know, we're not talking about this, you know, two or four quarters from now. I mean, you know, how dire is it? How addressable is it? And maybe steps you're taking, you know, at the present.
spk02: Well, I think, you know, as Rick said, Brian, there were three categories of expense, you know, expenses that were pretty high this quarter. You know, for skilled nursing, the challenge, of course, is as skilled nursing and assisted living, and I think it's been clear that the industry is recovering, the needs base is recovering more quickly than choice-based senior living. As they grow occupancy, they need to bring on folks to care for the residents. And so while we are pushing our operators to grow occupancy, if they can't bring staffing on quickly enough to care for those folks, they need to bring agency on. On the skilled nursing operators, they're very focused on bringing regular employees in so they don't have to tap into agency, but it's going to be a continuing challenge. I think they're doing a good job this quarter. They were hit particularly hard with agency, but we're hoping with everything they're doing to attract employees that this will subside in quarters to come.
spk04: Got it. Maybe shifting gears a little bit to how you're balancing your spending, which is significant on CapEx. I know you have over $800 million in cash, but when you look from the outside in and you see sizable CapEx spending, the purchase of the Fremont property near San Francisco in August, I believe it was, versus liquidity needs and maturities down the road, you're not spending like you're stressing.
spk02: read and yet your shares are trading that way you know what comfort would you give to investors who maybe are little perplexed by what they're seeing yeah you know we're extremely focused on growing EBITDA and and you know if we've said a number of times we've talked about it before Brian that getting EBITDA to grow you know this company really has an EBITDA issue and so our plan is to grow EBITDA is to invest capital. Capital is not the golden ticket, so it can't be just capital. The operators need to do everything they can to turn their operations around, and we think they all have very good plans in place to do that. But without the investment in the communities, they will have a hard time recovering. This month was an anomaly in expenses. We expect that we'll continue to be able to push occupancy, but we have to invest in the communities in order to do that.
spk04: A question we get a lot is, are the shop communities damaged or in bad locations, or there's an issue with them relative to new supply? Can you talk a little bit about You know, the facilities you've owned, you've owned them for a while, you know, in general, has the communities around them grown positively? You know, and for those that maybe haven't, you know, the market's grown away from that particular facility, you know, are those the ones that you sold over the last couple of years? If you can kind of help us think through that, that would be great.
spk02: Yeah, that's a good question, Brian, and you hit on it toward the end of your question. We really did cull this portfolio of communities that we did not think would be successful moving forward. And so, the portfolio that we're left with is a good portfolio. You know, we started 2020 with a plan to spend a lot of money and capital in 20 and 21, and the pandemic delayed that. So, I think we started a little bit behind the eight ball in that we were delayed in the deployment of capital. I think this portfolio's occupancy would be higher now if we had been able to deploy that capital in 20 and 21 as planned. So, you know, so now we're deploying it, you know, just delayed by a couple of years. We feel very good about the ability for this portfolio to recover.
spk04: Okay, and then just maybe two more quick ones for me and maybe for Rick. You know, the covenant... I know you guys don't have a crystal ball on how quickly shop occupancy recovers and expenses decline and EBITDA grows, but what's your best guess that you hit the threshold such that you can be back in the market refinancing debt?
spk01: It's a good question, Brian, and I agree. It's really been hard to forecast when the shop portfolio will really turn around. We are really pleased with some of the progress we've seen. We are making progress on occupancy, for example. We would like to see a little bit more of a shift. This quarter we added a lot of residents on the assisted living memory care side and not as many on the independent living side, which is typically higher margins. So there's definitely still some work to do. We need to move occupancies up. We do think some of the inflationary costs will persist. We're going to have to push higher rates to offset that. The timing of all that is still up in the air. We've had some of the new operators transition to January 1st increases versus anniversary dates. So we do think there's some tailwinds come Q1 because we will be pushing rates probably in that 10%-ish range, possibly higher if inflation continues. So budgets are being worked through right now. Overall, I'd say... All of the operators across the board really believe there's a lot of opportunity. So it's hard to tell you when that incurrence test will turn around exactly because there's a couple of moving pieces. You've got to remember that it's done on a pro forma basis, and we don't have a particular refinancing deal in front of us right now in order to do the math. But if we focus on increasing the EBITDA, it'll happen sooner rather than later.
spk04: Just one last quick one on the cash, the $800 million in cash. I know that a lot of it's earmarked over the next year and some is being held as cushion, but I'm assuming that you guys are starting to collect some pretty sizable interest income off that with money markets now in the 2.5% to 3.5% range. Shouldn't we start to see that on the income statement and that partially starts to buffer your otherwise not insignificant interest expense.
spk01: Yes, absolutely. And you see this quarter we had a little, it's about $4.1 million of interest and other income on the P&L. So yes, you're right. I mean, that is pretty substantial. It'll likely increase as rates keep going up, but it is offset by the amounts outstanding on the revolver. So I wouldn't, again, The balance sheet is what it is, and we're moving forward, and we've got $5.8 billion of unencumbered gross assets that are available. So we still think we've got the flexibility we need. We are entirely focused on growing EBITDA right now to get it back to where it needs to be.
spk04: All right.
spk03: Thank you. That's all for me.
spk02: Thank you. Brian?
spk03: Again, if you have a question, please press star then 1. Please stand by as we poll for questions. This concludes our question and answer session. I would like to turn the conference back over to Jennifer Francis for any closing remarks.
spk02: Jennifer Francis Thank you, Operator. We're working hard to maximize the value of our assets through capital investment, redevelopment, and continued execution with leasing and occupancy growth. With a sizable amount of cash and few debt maturities until 2024, we believe we have both the time and flexibility to capitalize on favorable healthcare industry fundamentals and to continue investing in the recovery of our shop segment. Finally, we look forward to seeing many of you at Navy in San Francisco this month. Operator, that concludes our call.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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