Sabra Health Care REIT, Inc.

Thank you for standing by, and welcome to the Sabra Healthcare third quarter 2021 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a 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, turning 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 investor section of our website at www.sobrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the investor section of our website. And with that, let me turn the call over to Rick Matros, Chair and CEO of Sabra Healthcare REIT.

Thanks, Mike, and thanks, everybody, for joining us. I'd like to start today actually with a quote that Talia shared with me. It's the dedication in General McChrystal's new book, which is called Risk, A User's Guide. To the healthcare 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, on 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 and 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 the southern states, 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 in the culture of our operators. So that does make some difference as well, and that part's 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 for the holidays and have a less stressed 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's seen the news today, but the new mandate with CDC and OSHA is effective on January 4th. So by January 4th, all healthcare 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 have 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, you know, 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 the revenue in and keep those relationships . 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 increase is 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. Seventy-five percent 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 two offerings that we did, both the debt and the equity offering, both served 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, the 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 Avamir. Avamir had actually fallen 300 basis points lower than their December low. But since opening the COVID unit, they've increased their occupancy 400 basis points in the span of the last two weeks. And even though those COVID units won't be around forever, that should certainly buy them a lot of time as they work on getting occupancy up on a longer-term basis for us. Yes, they have a portfolio. And with that, I will turn it over to Talia, and then she'll turn it over to Harold, and we'll go to Q&A. Talia?

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 a 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 five quarters across both independent and assisted living despite surges in the 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 enlivened portfolio, skew 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 percent 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 move-in 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 owned 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 enlivened portfolio, which had occupancy of 73.7% in September, 400 basis points above June occupancy. For comparison, Sabra's net least 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 and live-in 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. 2021 to July 2021, occupancy was flat. From July to August 2021, 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 two 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, SABR's Chief Financial Officer.

Thanks, Talia. 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 Avomir lease. As we noted in our September 13th, 2021 business update, Avomir has experienced cash flow constraints over the past several months from census declines as a result of a 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 the lease to continue accounting on an accrual straight line basis. The Avomer lease does not mature until 2031. Given the less than optimal EBITDA 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 Avomer 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 three months ended September 30, 2021, we recorded total revenues, rental revenues, and NOI of $128.6 million, $85.4 million, 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 million, and $121.5 million, respectively, as compared to $152.9 million, $110.8 million, and $121.3 million for the second quarter of 2021. While our NOI, after normalizing the Avomir 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 Enlivened 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 Talia discussed in her prepared remarks. NOI from the enlivened joint venture was $3.5 million, which is $1.2 million higher than the second quarter, primarily due to the second quarter NOI containing the $2.5 million one-time support payment the joint venture made to enlivened. 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 SAAB, the G&A costs 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 percent 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 38 cents per share. FFO was normalized primarily to exclude the Avamir straight line receivable write-off. This compares to normalized FFO of $88.4 million, or 41 cents per share, in the second quarter of 2021. AFFO, which excludes from FFO certain non-cash revenues and expenses, was $84.8 million, and normalized AFFO was $85.2 million, or 38 cents per share. This compares to normalized AFFO of $86.6 million or 40 cents per share in the second quarter of 2021. For the quarter, we recorded net income attributable to common stockholders of $10.2 million or 5 cents 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 30th, 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 7th. Our leverage, 4.81 times. Interest coverage, 5.32 times. Fixed charge coverage, 4.9 times. Total debt to asset value, 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 of 4.8% senior unsecured notes that were due in 2024, as of September 30th, 2021, we had approximately $1.2 billion of cash and availability on our lines. On October 15th, we completed an underwritten public offering of 7.8 million newly issued shares of our common stock at a price of $14.40 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 3rd of 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 30th, 2021 to common stockholders of record as of the close of business on November 16th, 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 AFFO of $1.56 to $1.58 per share normalized AFFO of $1.53 to $1.55 per share. Our previously issued guidance did not include the impact of two 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 rent 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 17 cent per share impact on net loss and FFO and a 16 cent per share impact on AFFO. The impact of these two transactions are added back and are expected normalized FFO and normalized AFFO. And with that, we'll go ahead and open it up to Q&A.

Certainly. Once again, if you have a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Richard Anderson from SMBC. Your question, please.

Thanks. Good morning out there. Harold, I think this is your last call, so congrats on that.

This is his last call. Wow. Thanks, Rich. I appreciate it.

So just remind me, Rick, is the mandate, January 4th mandate, that's just unskilled, right? Senior housing is 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 healthcare workers. The original mandate was healthcare businesses that received state or 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, um, that we will get those housing providers. We use that as a cover because a lot of them really want to mandate. Uh, so I think we'll see more senior housing operators mandated anyway, but I think that's correct.

Okay. Um, in terms of AveMir, You know, it's a nice little bounce on the occupancy side, and I know you've 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, you know, God willing, you know, with some sort of regularity, is there a – scenario that, you know, you could get back, you know, assuming COVID cases decline and all the good things that hopefully will happen in the future that, you know, maybe nothing will have to happen?

Yeah, so I think, so the way we think about it, Rich, is, and I know you'll recall that prior to the pandemic, Avenir had the lightest coverage of any of our, you know, material tenants. And so, you know, hitting this kind of problematic period of time these last 19 months, And starting out with dinner 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 to us. I mean, we had a lot of conversations with you over the course of all the restrictions we did related to the merger and all the things that we did for those other tenants that 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, yeah, 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 timeline to enliven TPG and, you know, an actual exit from that portfolio?

Not really. 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 their thought process is as the portfolio has been recovering, it'll 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, you know, 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 think by waiting, they'll get a better valuation, that it proves to our benefit anyway.

Okay. Okay, great. Thanks very much.

Thank you. Our next question comes from the line of Nick Joseph from Citi. Your question, please.

Thanks. Maybe just following up on that Avamir question. So as 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 expiration of our ability to use a lot of credit. They were able to access sort of upfront funds, which is really going to help their liquidity on these COVID units that they negotiated with the state of Oregon. And they're in the process of some other negotiations as well, which you think will help. 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.

Thanks, that's helpful. I think you've obviously repositioned the balance sheet to be in a good position. I think you mentioned the acquisition pipelines, 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 shares trade today?

So I think a couple of things. One, you know, on the skill 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 smaller deals 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 You know, that's earn outs or things like that because of some of the issues that some of the particularly smaller senior housing providers have had. And, you know, 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 know, you all are concerned in terms of us taking on some difficult things. But it allows us to get more things done on the senior housing side. if we focus on the smaller things. Todd, I don't know if I missed anything on that.

No, I think that's exactly right.

Thank you very much.

Yep. Thank you. Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Your question, please.

Hi, good morning. Just hoping to spend a little bit more time on Avermere. Is it possible you guys could give us a sense of how that portfolio's EBITDA has trended over time. I don't know if you can give like a T3 or a T12 kind of pre-COVID and 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 two reasons. They were trending up because of some operational initiatives that were taken home, and they were trending up because of PDPM, just like all the rest of our tenants. So they were actually on the upswing. And really, you know, when you think about it, you know, they made it through, what, 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 had these really severe admission restrictions that we haven't seen anywhere else in the country in Oregon and Washington. And really, unrelated to how much COVID was actually happening. It was just sort of this visceral reaction that the states had. And they dropped from 74.5% to 67%, just under 67%. So over 300 basis points lower than their low in December. So that really just, you know, threw them for a loop. Up until then, they were holding serve. You know, I think these COVID units and the pop-in occupancy buys them the time, hopefully, that 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 these sort of recent events. And so that's why we say 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 they're always going to be some bumps in the road.

Any color on kind of where the coverage is on like a T3 basis and what do you think is the healthy coverage? I get that they can get by a bit like just to keep them at a healthy level. Just to get a sense of how big their rent cut could be is what we're trying to get to.

I don't want to negotiate with Adam here 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, you know, we're not going to give them an adjustment that takes them to one and a half 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 to 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 there's a lot of math that goes into this. So you've got occupancy and you've got rate 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 costs. 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 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 acuity and the length of stay in those buildings. But there is a sense, I just came back from a day and a half 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 positive leasing spreads. In other words, new leases are being written at higher than in-place rents. So that's the good news. There appears to be an ability to do that. That suggests that you're not going to eat the entire cost of labor and have it come out of there quickly. 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 map I have right now.

The other point I would make, Juan, is that our operators aren't doing any of these deep discounts like some of the competitors are. And you see on the rates that we put in the supplemental, that's all held up really well. So they're giving Talia 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-place, I think that's new and that historically hasn't been the case because someone typically leaves it as more acute. But are you seeing street rates for new customers that 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 because of 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 what I would characterize as the pent-up demand, significant inquiry increases versus pre-pandemic periods, 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. The typical was more like the 4% to 5% pre-pandemic. Now we're seeing hearing operators say they think they can do more.

And going back, Juan, just to change a little bit back on Avamir, the other thing I forgot to mention is that the Phase 4 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 4 funds as well, too. which goes to our comfort with receiving rent after the LC is done.

Thank you. Thank you. Our next question comes from the line of Amanda Sweitzer from Baird. Your question, please.

Thanks. Good morning. 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 Avalmeer, and then is there any security behind that? the already deferred amounts?

Well, one, there's always security behind them. But the only other things 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.

And then in terms of additional skilled nursing support, are there any incremental state initiatives you're watching or finding encouraging?

There aren't specific state initiatives, but 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 narrative has been a little bit more positive there because there's more money to work with. And only about half the states allocated FMAP 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 aren't familiar, the industry worked with the union in the state of 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 ever 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. That's helpful.

Appreciate the time.

Yep.

Thank you. Our next question comes to the line of Stephen Vallecat from Barclays. Your question, please.

Thanks. Hello, everyone. So just a question on the overall skilled labor environment. I've found that really across the entire post-acute health care provider spectrum, we've gotten some mixed signals at different stages of the pandemic on which business models may or may not be competing for the same type of skilled labor. When you think about 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.

I think most of the competition is on the high-acuity post-acute space. So think LTACs and IRFs. It isn't as competitive on this when you talk about the skilled labor It is the certified nursing assistants, 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 on IRS and LTACs LTACs are only in a handful of states and I arrested a lot more states, but they don't have a big presence in the presence. I think about a dozen things. So, um, you know, I, I think that the larger concern is how many healthcare workers have just left the workforce. That's really, that's really the larger concern. And, um, 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, you know, dietary and housekeeping and laundry and things like that. But it's more about the workforce, and time will tell whether after taking a break, particularly since they've spent so much time schooling and having this career, that they'll 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. That's definitely helpful. I appreciate the other.

Thanks. The other thing I would just point out, and 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 in because there was a lot of optimism on the part of employees that now that 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 burnout really got worse. And so if you look at the trends the last several months, the peak of the burnout 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 everything, everybody's vaccinated, that work in the facility, that they'll come back to the workforce. So we'll see.

Got it. Okay. Thanks, Rick.

Thank you. Our next question comes from the line of Tayu Okasanya from Credit Suisse. Your question, please.

Yes, good morning out there. Harold, again, congrats and good luck. Welcome back, Kyle. Appreciate that, guys. My question is really more on the sneak reimbursement side. I mean, you guys give 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 three things, scaling in place, Also, you know, the $10 billion emergency fund from the Cures Act. Is anything left in that? Could you guys suddenly get money from any of that? And also potential PDPM review by the new head of the CMS?

Yeah, 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 was going in place and the lack of financial or the absence of financial impact on the acute space who always sort of fought 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 on the margins, right? So there'll definitely be a key focus on that. On the funds, after phase four, there is quite a bit left 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. If there was nothing left in the fund, I think there wouldn't be much optimism because given everything that's going on in D.C. 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? Oh, PDPM. Yeah, I think nothing's being discussed right now about any changes or 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 recovering, to try to assess where PDPM really fell 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 year 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, is going to be any less reasonable with the industry on PDPM than the previous leadership.

Thank you. Thank you. Our next question comes from the line of John Pulaski from Green Street. Your question, please.

Great. Thanks for the time. 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?

Yeah, that's just a matter of one quarter falling off and another quarter getting picked up. They're actually doing... They're actually doing well. Their occupancy is recovering. They have the best skilled mix, one of the two best skilled mix of any of our operators in the business. So, yeah, we feel good about North America. We don't have any issues. There were just some timing issues there with quarters dropping off a new quarter coming on. And California's 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 know, you see North America and Avermere. Genesis declining sequentially, but some other operators are stable or increasing. So what are the biggest one or two factors that are driving this divergence across operators?

Right. So the two consistent factors were Q2 2020 dropping off and Q2 2021 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 you know, Genesis with the facility that we have, we don't have very many facilities left with Genesis, just the eight buildings, but they've had real labor pressures in those facilities and that was a factor that really impacted their coverage. So yeah, geography is kind of everything right now when it comes to labor pressures, at least the degree to which you are experiencing labor pressures.

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

Yeah, so, you know, we like to see our EBITDA coverage north of 1.4 in the aggregate. And we were pretty much around there on the aggregate, you know, before the pandemic. But if the labor pressures don't abate to the extent that we would like to see them abate, you know, the new normal could be 1.3 EBITDA coverage unskilled. So, you know, that just remains to be seen. We don't believe it's going to get down to, you know, what times or anything like that. And that's primarily because there are too many dynamics at work right now that are going to 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 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 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 yeah, so over the long haul, You know, maybe coverage is a little bit wider, but it's not going to get to a point that's either dangerous or is going to cause all of us to do some significant restructurings and long-term rent reductions. We just don't see that. Okay. Thanks for all the talk.

Thank you. Our next question comes from the line of Daniel Berenstein from Capital One. Your question, please.

I guess good afternoon or good morning for you on the West Coast. I guess the only question I had is I wanted to go back to the vaccine mandate. You know, when you say that 80% of your, I guess the operators, 80% of the employees are vaccinated, it seems like that'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 and, you know, what the attrition was from the employee standpoint. Maybe they did that in conjunction with wage increases or some other mechanisms to retain employees. Just trying to get a better grasp of what the risk is that we'll see a lot of employee attrition within skilled nursing.

Right. So Enliven, 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. It just hasn't been, and viscerally you feel like it's going to be a bigger issue, which is holding back some of the other operators from sort of jumping on the mandate, but it just hasn't been. So that's really what we've seen consistently amongst 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 are you looking at more of a kind of doing more like the RCA mortgages? Or short-term structured ideals? Sorry? Yeah.

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 that is going to be typical for us.

Okay. All right. That's all I have. Thank you.

Thanks, Dan. Appreciate it.

Thank you. Our final question for today comes from the line of Josh Dennerly from Bank of America. Your question, please.

Yeah. Hey, guys. Hope everyone's doing well. Rick, in the past, you've talked about the occupancy recovery and 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?

Yeah. So on the senior housing side, I have 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.

Okay. Thanks for the color. Everything else has been answered. Thanks.

Thank you. This does conclude 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 NAIRI, so we'll look forward to having those meetings and to having additional thought discussions. And have a great day and stay safe.

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