Sabra Health Care REIT, Inc.

Q1 2023 Earnings Conference Call


spk13: Good day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Healthcare REIT first quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, that is star one again. I would now like to turn the call over to Lucas Hartwich, SVP Finance. Please go ahead, Mr. Hartwich.
spk02: Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition, and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31st, 2022, 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 that 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 Our Form 10Q, earnings release, and supplement can also be accessed in the investor section of our website. And with that, let me turn the call over to Rick Matros, CEO, President, and Chair of Sabra Healthcare REIT.
spk01: Thanks, Lucas, and good day, everybody. Thanks for joining us. We're continuing to see traction in operational recovery. Occupancy in our skilled nursing portfolio has now improved every month in the fourth quarter and continued through January. Occupancy, October through January, our skilled nursing portfolio improved 130 basis points. Our skilled mix jumped up dramatically in the first quarter as well. Labor trends are improving, but it's still tough. And it's going to be a bit of a slog there, I think, for a while, but we're certainly off our highs in terms of inflationary increases and agency utilization. So we feel good about the progress that's being made there as well. EBITDOM coverage without PRF, and that's really the only way we think everyone should be looking at it at this point, has improved sequentially on a trailing 12 months basis and even more so on a trailing three months basis. I want to comment on a couple of specific operators. I think everybody saw and noted signature health coverage decline. Signature health had a tough second half. They sold 24 facilities close to and right size their corporate infrastructure to accommodate a leaner company. And so that was quite distracting for them. However, their first quarter rebounded dramatically and I went back over a year and a half to find a quarter that was as strong as the first quarter is for Signature Health and wasn't able to find one. So we feel really good about where SIG Health is on a current basis. Similarly, Avomir, while their coverage was fine as reported, they also had a strong first quarter as well. Comment quickly on the transition from the old North American portfolio. That's going well for Avomir, and it's going well for Ensign. As Ensign noted on their earnings call, they're ahead of schedule, even though there's still a lot of upside to be had there. So in terms of our three largest operators, SIG Health and Avomir and Ensign, We feel like we're in a really good place with all three of those operators right now. We're pleased with the proposed 3.7% market basket, and we do expect better than historical Medicaid rate increases. Most of those rate increases for our portfolio will be effective on July 1st. We'll have some more clarity probably over the next several weeks on what those rates will be. Our expectation, though, is that some states will be extending COVID rate add-ons, and some will update the cost report base year to reflect more current data, and that's a reflection of the fact that many states do acknowledge the impact of COVID on the industry and the lack of viability of some of the Medicaid rate increases in certain states. So, as we saw last summer, we're seeing some of the same things this summer as states are being more generous with their Medicaid rates. Investment activity is light and will remain so in the near term. Competitive landscape has changed with lender loans and liquidity needs driving sales. Pricing uncertainty exists, and I'm sure Talia will talk more about that as well. As noted in the press release, we have terminated our position in the JV. There is no impact on earnings or any other ramifications to the company other than the fact that there are a number of folks out there, rating agencies and others, who still look at the debt carried by the JV, and so that obviously is gone. So, from that perspective, for those that looked at the JV debt, it's a delevering event for us. We're now focused on transitioning the 11 wholly-owned facilities to a new operator. I would note on the 11 wholly-owned facilities, they are different than the JV portfolio. The JV portfolio was part of the original ALC acquisition. The 11 facilities that we own came afterwards. And these are larger facilities and larger markets that are primarily a combination of AL and memory care patients or residents. And with that, I will turn the call over to Talia.
spk12: Thank you, Rick. I'll first turn to the results of our managed senior housing portfolio and then provide a brief update on our investment activity in behavioral health. Our wholly owned, managed senior housing portfolio continued its recovery throughout 2022, but it was essentially flat in the first quarter of 2023. Having worked to manage and overcome labor and wage challenges for nearly two years, operators are now focused on building occupancy by bringing in new residents in numbers that materially exceed departing residents who, for the most part, are not leaving by choice. Expenses are continuing to moderate, which is a positive, and the continued evolution of an investment in customer acquisition strategies is now seen as foundational. Our operators first became attuned to this when the pandemic began, and they were forced to pivot to virtual sales, and they have embraced this change. The headline numbers for the wholly owned managed portfolio on a same-store basis, excluding non-stabilized assets and government stimulus, are as follows. Occupancy for the first quarter of 2023 was 80.7%, a 140 basis point increase over first quarter of 2022, and a 100 basis point decrease over the prior quarter. REVPOR in the first quarter of 2023 increased by 7.3% over the first quarter of 2022, driven by nearly 10% annual rate increases achieved in our holiday and wholly owned enlivened portfolios. REVPOR for the first quarter was $6,484 in our assisted living portfolio, flat to the prior quarter, and $2,771 in our independent living portfolio, 110 basis points higher than the prior quarter. Excluding government stimulus funds, cash NOI for the quarter was slightly off the prior quarter, but nearly 33% higher than in the first quarter of 2022, driven by continued margin recovery, particularly in our fully owned enlivened portfolio, demonstrating the benefit and challenges of operating leverage. We continue to see strong rate growth and continued those seasonal occupancy gains across our senior housing portfolio. Our net least stabilized senior housing portfolio has seen consistent occupancy increases since the low in February of 2021. As of February of 2023, occupancy had recovered to 88.2%, which is equal to the occupancy level immediately before the pandemic and 11.5 percentage points above the pandemic low. Our leased portfolio skews to assisted living and memory care, which have had a more robust occupancy recovery than independent living, as they are needs-based. In addition, we have transitioned some poorer-performing leased communities to the managed portfolio, allowing us to participate in their financial recovery. Move-out rates, driven mostly by higher care needs and deaths, seem to be stabilizing, but at an elevated rate relative to pre-pandemic averages. This may be a temporary phenomenon as we are seeing average length of stay reverting to Pre pandemic levels after spiking in early 2021. we speculate that residents that moved in during the 1st rounds of COVID vaccine clinics at communities. What we then characterize as pent up demand are driving higher move outs. Now, 18 months later. As mentioned in prior calls, high yielding, time efficient, and cost effective customer acquisition strategies have become critical to filling communities. Larger operators who have the benefit of scale and capital are successfully using digital marketing to generate qualified leads that have a high rate of conversion to leases. Although the conversion rate from personal referral sources is higher, the absolute number of move-ins that are sourced through operators' digital presence far exceeds those from other lead sources. We are still in the early stages of the evolution of customer acquisition in senior housing and expect to see further changes as the target customer also evolves. Comparing the first quarter of 2023 results of our wholly owned managed portfolio by country, excluding government stimulus, we see that our Canadian assets have slightly outperformed our U.S. communities compared with the prior quarter. In Canada, we see a similar phenomenon as we described in the U.S. of higher move-out rates offsetting occupancy gains, likely for the same reason. The labor costs and availability in Canada that we noted in last quarter's earnings call also seems to be resolving. As an example, in the first quarter of 2023, our Canadian joint venture reduced agency costs by 85% compared to the prior quarter. Turning briefly to our behavioral health portfolio, at the end of the first quarter, Sabra's investment in behavioral health included 17 properties and two mortgages with a total investment of $793 million at the end of the first quarter, which is expected to total $837 million once the balance of CAP committed capital is deployed. We have identified additional properties within our owned portfolio as candidates for conversion and are in active discussions with potential operators regarding those locations. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.
spk07: Thanks, Talia. For the first quarter of 2023, we recognized normalized SFO per share of 33 cents and normalized AFFO per share of 34 cents. These results are consistent with the normalized FFO and normalized AFFO run rates we articulated on our fourth quarter earnings call and are in line with our expectations. As of March 31st, 2023, approximately 5% of our NOI was below one times EBITDARM coverage, which is consistent with previous quarters. Also as of March 31st, 2023, our annualized cash NOI was $451.4 million, and our SNF exposure represented 56.7% of our annualized cash NOI, down 140 basis points from the fourth quarter of 2022 and down 500 basis points from a year ago. We expect this percentage to continue moving lower throughout 2023 as a result of further earnings recovery in our senior housing managed portfolio and through any future SNF dispositions. G&A costs for the quarter total $10.5 million compared to $10.9 million in the fourth quarter of 2022. Excluding stock-based compensation expense, cash G&A for the quarter was $8.3 million compared to $8.8 million for the fourth quarter of 2022. Now turning to the balance sheet. Our balance sheet continues to be a source of strength for Sabra, allowing us to confidently withstand the market headwinds of tightening credit and high interest rates. As of March 31st, 2023, we are in compliance with all of our debt covenants and have ample liquidity of nearly $1 billion, consisting of unrestricted cash and cash equivalents of $34 million and available borrowings of $920 million under our revolving credit facility. We have no material near-term debt maturities. Our next material debt maturity is in 2026, and our weighted average debt maturity is currently at 6.3 years. Our net debt to adjusted EBITDA ratio was 5.52 times as of March 31, 2023, and in line with our expectations. We expect our leverage to decrease in future periods as our portfolio continues its operational recovery and through proceeds from any future disposition activity. Excluding our revolving credit facility, which makes up just 3.3% of our total debt, we have no floating rate debt exposure and our cost of permanent debt is 3.93% as of March 31, 2023. The combination of a low leverage fixed rate balance sheet with meaningful liquidity and no near-term maturities affords us the luxury of not needing to access the capital markets in the foreseeable future. On May 3rd, 2023, our board of directors declared a quarterly cash dividend of 30 cents per share of common stock. The dividend will be paid on May 31st, 2023 to common stockholders of record as of the close of business on May 16th, 2023. The dividend represents a payout of 88% of our normalized AFFO per share. Lastly, we did not issue earnings guidance this quarter, but we are hopeful to be in that position to do so sometime in 2023. Until then, we still believe that the 33 to 34 cent quarterly run rate of normalized FFO per share and normalized AFO per share that we provided on our fourth quarter call is still appropriate. And with that, we will open up the line for Q&A.
spk13: Thank you. At this time, I would like to remind everyone in order to ask a question to please press the number one on your telephone keypad. Again, that is star one. We'll pause for just a moment to compile a Q&A roster. Your first question comes from the line of Michael Griffin with Citi. Please go ahead.
spk05: Great, thanks. Maybe we can go back to the fundamentals around SNFs. And, Rick, I'm curious, in your assumptions for the rest of the year, I mean, how are you thinking about, you know, expectations? You kind of gave a high level of agency and labor costs kind of decreasing. But if we were to quantify that, let's say at the beginning of the year, maybe you're thinking flat agency utilization or something. Where might that be at the end of the year? And has your thoughts around it changed?
spk01: So, no, my thoughts haven't changed around it. I think occupancy... we still think 34 to base 40 basis point improvement a month is doable. Uh, we'd like to see more obviously, but we think that that's doable and it's so still hampered by, by, uh, labor, um, issues. But, um, you know, we've seen so signature health, for example, in the first quarter, sequentially had a drop of 5% in their labor costs. Um, so, and I don't want to suggest that it's going to continue at that rate, but that was, a relatively nice drop with occupancy improving pretty dramatically in that portfolio. Their occupancy was up almost 300 basis points in sequential quarters. So, I just think it's going to still be sort of a slow kind of improvement. I think there'll be a greater shift, continuing greater shift from agency to in-house staff with increased wages, but the rate of inflation on those wages has also slowed down, and I would expect that to continue as well, because last year, especially the second half of the year, there were significant wage increases that were passed on to staff in the facilities. To the extent that there needs to be more of that, there's nothing but good news, really, on the reimbursement front, both in terms of Medicaid this summer and the Medicare market basket. So that's going to help with margins, obviously, but it's also going to help provide more cash for people to use incentives to hire staff as well.
spk05: And then just one clarification on the coverage. I think you said XPRF, which is probably the right way to think about it. It was about 155 this quarter versus 148 last quarter. If we go back to December of 21, like you have laid out in your deck, Would that number be lower than the 155 this quarter, or should we be thinking about it on a year-over-year improvement basis?
spk01: We have to dig that one up because I don't have that at my fingertips. But certainly it's higher on a year-over-year basis, but we'd have to go back and look at that quarter specifically. If we can find it while we're still on the call, we'll let everybody know.
spk05: Great. That's it for me. Appreciate the time.
spk13: Our next question comes from Tayo Acuzaña with Credit Suisse.
spk00: Hi, yes. Good morning over there. Two questions for me. First of all, senior housing on the lease side, again, EBITDA coverage of 114, I believe. Again, that kind of suggests EBITDA is still probably less than one. So just kind of wondering, how do we kind of think about that portfolio and what's happening fundamentally that suggests coverage ultimately improves over time? Is there some, you know, some risk of, you know, of tenants within that pool possibly needing some assistance going forward?
spk12: Taya, I can give you some color there. So first of all, really what, first of all, it's kind of a stale number, right? It's trailing 12. So we kind of know that you still have the impact of the agency costs and labor issues in that number. And we're expecting that that's going to roll off. We've also seen occupancy increases, as I mentioned in my remarks, in that portfolio and even into this past year. even into this coming quarter. So we're optimistic that coverage is going to turn, especially once as the labor issues are embedded in that number and the expense part of that number and the EBITDARM are going to start to roll off.
spk00: Gotcha. Okay. That's helpful.
spk01: And then also, we also talked, let me just tie off what is worth and All of our asset classes, almost all of our inflation is in the labor category. We're not seeing much inflation in the non labor category. So that actually helps quite a bit is the operators get better on recruiting and retaining staff that we're not worried about other sort of inflationary levers.
spk00: Gotcha. Okay. That's helpful. And then from the enlivened perspective, I mean, again, okay, withdrawn from this thing, you guys have no economic interest, no impact, nothing at all going forward. But could you just help us understand what exactly a withdrawal entails? Does that mean you just kind of gave up your ownership in the JV for free or you didn't get any economic benefits? you know, benefit from giving it up? If you're just going to give us, like, details of just exactly what this entails to be able to kind of walk away from this kind of clean and fair.
spk01: There's a provision in the JV documents, a JV agreement, rather, that allows either side to give notice and just walk. So there's no compensation. It's not like a management agreement or anything like that where one side has to claim a term fee or something like that. You just sort of walk. And look, the lenders have the assets. They're transitioning assets to other operators. There's nothing there anyway.
spk12: Those loans are non-recourse anyhow, so there was no obligation, no recourse to Sabra.
spk01: Yeah. Unfortunately, Kyle, the downturn in the debt markets really took away all the obvious potential buyers for the portfolio. So you sort of have the double whammy of the pandemic impact on the business, and then the then the debt markets turn down, and so you sort of wiped out a whole potential audience of buyers.
spk15: I appreciate the call. Thank you.
spk14: We'll take our next question from Josh Dennerle with Bank of America.
spk17: Yeah. Hey, guys. Thanks for the time. I just wanted to follow up on the enlivened JV. I get that you can walk away from it, but I would have thought you would get a benefit because there was debt on the portfolio and now that won't be flowing through your income statement. Is that a correct assumption?
spk07: Yeah. Hey, Josh, it's Mike. Yeah, so it's not a correct assumption. Here's why. So that joint venture was accounted for under the equity method. And when we wrote that thing down to zero last quarter, as you recall... we no longer recognize any revenues, any expenses, any FFO, any AFFO from that joint venture, period. It's zero. Not that it was much before we did that, but going forward because of the way the accounting rules work, it's zero. So there's nothing flowing through our financials as a result of our writing it down to zero. There's nothing flowing through our financials as a result of us exiting that joint venture. The debt, you know, since it was an unconsolidated joint venture, was not appearing on our balance sheet anyways. So literally there's no impact to our financial statements as a result of this.
spk17: Okay. So the impact was already in the one key result and there was nothing on the go forward. Okay.
spk07: There was nothing in the one key result. There was zero FFO, zero earnings, zero everything, zero balance sheet value, zero. There's nothing in our first quarter results. for that live and joint venture. Okay, okay, that makes sense.
spk17: I appreciate you clarifying that. And then, Rick, in your opening remarks, you mentioned you expect better or you expect Medicaid increases to come in kind of on the better side. What are you seeing or hearing that kind of gives you confidence that the boosts are going to be on the better side?
spk01: Well, it's the actual dialogue that's happening with the trade associations in the various states and the state legislatures and the folks that are in charge of the budgets there. So that's really where it's coming from. Look, it's not going to be all 50 states. Last year when we had more clarity on those states that were giving out size rate increases, you know, we published that. I think that was our second quarter 22 earnings release. So, you know, we'll do the same. We'll do a business update if we know sooner than later on that as well. But it's coming from direct discussions. And I think the biggest question mark on the states that we're in is Texas. So I think everybody's got a comfort level now that Texas legislature will make permanent the 1962 that was part of the FMAP add-on and some additional amount above that. The issue is with PHE going away May 11th, the states, in this case, Texas has the option of extending that 1962 until the full rate increase goes into effect in September. But we just don't know yet if they're going to do that. So I think worst case scenario for Texas is you have a four month kind of hole where they lose the FMAP add-on, they'll get it back in September, but they're going to have that four month period where there isn't anything. That's what we know about Texas. But again, on all the other states, our assumptions are based on actual dialogues and things being put in budgets and stuff like that.
spk15: Thank you.
spk01: The other thing I should point out, too, is some of this is just organic. So the cost report process itself starts to capture inflation. There's a lag time between when states when the state cost reports are filed and when reimbursement rates actually occur. But those course reports do capture inflation. It's one of the reasons that we expect next summer's, so 2024, next summer's Medicaid rate increases to be even better because they'll really be capturing a lot of the worst period of inflation that we had during COVID. So the fact that there may be a couple of states that are willing to accelerate The base period for the cost report now and not wait another year is a positive for those particular states.
spk14: All right, and we'll take our next question from Austin Wortschmidt with KeyBank Capital Markets.
spk03: Great. Good morning. I have a question on the 33 to 34 cent run rate. When you layer in sort of the 25 transition assets you guys highlighted last year, I think they were generating cash rent around the $5 to $6 million range on an annualized basis with upwards of $15 million upon that ultimately commencing. How much of that has commenced and is captured in that run rate? And then also, does the 33 to 34 assume any acceleration? in NOI from the senior housing managed portfolio?
spk07: So, the run rate is based on what we reported this quarter, right? Or even based on what we reported in Q4. So, it doesn't assume any acceleration in the senior housing managed. So, that would be incremental to that number. Obviously, we didn't want to bake that into the run rate because I don't have a crystal ball. But, yeah, so if there is improved performance there, which we expect there to be, then I would expect that number to improve as well. In terms of the transitions, you know, those are ongoing, as we've talked about for the last several quarters. We expect those to be fully transitioned and that NOI pickup that you alluded to to be realized, you know, by the end of 2024. Again, it's going to vary by situation. It's going to vary by project in terms of, you know, of when those things roll in, but they're incrementally getting picked up in our earnings and we expect it to still be fully in there by the end of 24.
spk15: Do you have a sense on the top of your head?
spk01: Nothing was impactful in the current run rate.
spk03: I'm sorry?
spk01: Nothing was impactful in the current run rate.
spk03: Understood. Do you have a sense what those 25 assets are generated in the first quarter on an annualized basis relative to the five to six in the second quarter of last year?
spk07: Um, it's, it's higher than that 5 to 6, but it's less than the 15. I mean, it's again, like I said before, if there's 25 projects, there's probably 20 different stories there. So it's hard to pin down exactly what that run rate is going to be on an overall basis. It's going to be dependent on timing and a whole other a whole lot of other factors, but it has increased since that 5M dollars we disclosed back in Q2.
spk03: Got it. Understood. And then just as far as the 11 assets, wholly owned assets leased to enliven, were those kept in the same store pool this quarter? Just curious how they performed. And then can you shed some light on the timing of a transition, you know, whether you have any operators lined up or sort of a short list? Just any detail around that would be helpful. Thanks.
spk12: So they are in the same store pool. And they actually have been one of the drivers of performance of the assisted living component of the pool because they've had a strong recovery over the last 12 months. If you recall, they were, call it break even a year ago or so. And they actually have a real margin now between recovery on occupancy and strong rev pour growth.
spk01: In terms of the transition, we're just trying to work cooperatively with Enliven and TPG on that, so it should happen in the coming months, but I can't give a specific timeframe. We know of a number of operators that have an issue in the portfolio, so identifying the right operator in and of itself is not going to be a concern or an issue for us.
spk15: Great. I appreciate all the detail. Thank you.
spk14: Our next question comes from Stephen Valliquette with Barclays.
spk06: All right, thanks. A couple of really more just kind of housekeeping questions around the supplement. I guess on pages four, five, and six, I guess first on page five, normally I think that page is normally delineated as like the same store data, but this quarter it was not. I don't know if that is still same store data on page five as far as the EBITDARM coverage ratios that are there. not going to see or exactly which properties are included on that data. So that was kind of housekeeping question number one. And then number two, I guess, sorry, go ahead.
spk07: Yeah, I'll answer it as we go through. So the answer to your question is that is not same store. That is for our entire stabilized portfolio. And, you know, the majority of our portfolio is included in that stabilized pool. We took out the same store triple net. information this quarter, as you've noted. Just periodically, we review our disclosures, we review our peers' disclosures, we take an evaluation of what is helpful disclosure for the market and for investors. And we noticed that not many people present TripleNet same-store information. So we were kind of an outlier in that regard, and we thought the overall portfolio was more indicative and more useful for investors.
spk01: And we did seek out some feedback from investors about that, as we typically do before we change disclosures.
spk06: Okay, that's helpful. And then just to triangulate that then, like the footnotes on pages five and six are the same around the sort of stabilized portfolio. Looks like the property count in the stabilized portfolio might be that 356 number that's on page six. And then on page four, you show 396 total properties and consolidated. So are there basically roughly 40 properties, give or take, that are not in the stabilized set of properties? Am I doing that math right? And if we do it offline or follow-up offline, I'd be happy to do it, too, if it's kind of hard to do this on the fly. But I hope that that question makes sense.
spk07: Yeah, let's follow-up offline on that one so I can do that math softly.
spk08: Okay, all right, fair enough. Okay, thanks.
spk13: Our next question comes from Vikram Malhotra with Mazuho.
spk16: Thanks so much for taking the question. So I just wanted to follow up on the ins and outs to the FAD run rate. You talked about the transition in 22 benefiting through the year into 24, but then you also alluded to additional transitions potentially, I think in Canada, you said, or maybe there was also some additional senior housing conversions. Can you just walk us through that again? Are there Is there an additional bucket of assets that you will start to transition, leaving enlivenment aside, that sort of may impact the fad going into the end of 23, early 24?
spk07: I mean, I'd say that we're no different than any other company. We're always looking at our portfolio and evaluating the best outcomes for our portfolio. We did that to a significant degree last year, which led us to our conversations around dispositions and transitions, but that doesn't mean it's stopped. We're still looking at our portfolio, and there may be opportunities to transition assets to new operators, maybe opportunities to underperforming assets to new operators. There may be opportunities to transition or convert properties to behavioral health. That's always going to be something that's in our portfolio and, quite frankly, anybody else's portfolio. The material stuff that is impacting our portfolio or that will impact our portfolio is what we've talked about since Q2 of last year. So incrementally nothing material.
spk16: Okay. So it's not like a similar size bucket as last year. It's a much, much smaller bucket that you would look to tackle through the year over and above alignment. Okay. And then just looking at sort of investment opportunities, I know Richard mentioned things are slow and evolving but can you sort of walk through maybe the broader capital structure in terms of you know assets but also potentially um additional say preferred equity investments or additional loans that you may uh decide to make as investments given all the uh uh all that's going on in the debt markets around uh skilled nursing but even broadly senior housing sure um i'll try to answer that uh we are seeing reasonable
spk12: flow of assets and opportunities coming to us. Few of them are interesting. We look at our cost of capital and we think about ways to invest and that leads us to focus more on preferred equity or higher yield or mezzanine debt or something that has higher yield or a greater opportunity in the longer term. Right now, what we are seeing remains to be underperforming assets that want full pricing. It is unclear what exactly is full pricing today. I think that's a bit of the challenge and why we are continuing to look at things because we're interested in price discovery. With debt being at the levels in terms of interest rate and a significantly reduced proceeds level in terms of availability, we are seeing both a liquidity as well as a credit issue for borrowers, developers, et cetera. And that, we would hope, would create opportunities for us. so far the we haven't found them but we continue to look and we continue to try to be creative there there are a lot of assets that are recovering at this point particularly in senior housing that are recovering well but their cost structure and their capital stack is so upside down and frankly values are probably not where they used to be So there's a lot of readjustment that's going on and a lot of recalculating of capital and the outcome of those, the tensions between borrowers, lenders, and other investors is going to play out over the next period of time.
spk16: Okay, that's helpful. And just in this one thing I wanted to clarify, remember maybe it was last quarter You had alluded to the fact that there was a lot of talk in the healthcare space about PLRs, and I believe you had, in 2018 or 19, received one yourself. Correct me if I'm wrong. I'm just wondering what the goal or objective of obtaining that PLR was.
spk07: Yeah, so we did receive that. We were the first in our space to get that, as we discussed last quarter. And the reason why we got that PLR was to enable us to have independent living facilities in a non-lease structure. That was it. Absent that PLR, we could not have, the only way we could own independent living facilities was through a triple net lease. And as you're aware, we have that holiday portfolio, which is all independent living, and it is not under a lease structure. So that was the whole reason and the rationale behind getting that PLR.
spk01: It also provides optionality for us, which is something that we always strive to maintain in as many aspects of the company as possible so that if at some point in time we choose to approach things differently from an operational perspective, we have the ability to do that. It's not our intent at this point in time because of the quality of the operators that we have in our independent living facilities at this time.
spk15: Great. Thank you.
spk14: Our next question comes from Michael Stroyak with Green Street.
spk04: Good morning. One follow-up on the wholly owned enlivened portfolio and the operator transition. I know you mentioned they're performing well, but could you take us through just a reasonable base case in terms of potential degradation we could see the NOI as a result of the transition?
spk01: Yeah, I'll take that. So we don't have a degradation-based case. There may be some frictional costs, as there always are when you transition to a new operator. But given the distractions, the understandable distractions that the enlivenment management team has had with the sale process, working with lenders, transitioning an entire portfolio of facilities to a variety of different operators, bringing in an operator that is that has none of those distractions that is known to us. We think any frictional costs will be temporary. We actually think that there is upside in the operational results of that portfolio.
spk04: Okay, that makes sense. And then one quick one on shop expense growth. I know you called out it's been moderating over the past few quarters. How much of that is agency labor just coming back to earth? versus a normalization in other expense line items?
spk11: It's largely exactly what you said. It's largely the labor, the agency costs.
spk01: Yeah, as I noted a little bit earlier on the call, we're just not seeing significant inflation in the non-labor category. So as the operators get a better handle on their labor costs, then the top line improvements will just flow through better. without anything else getting in the way.
spk15: Great. Thank you. Appreciate the time. Yep.
spk14: Looks like our next question from Michael Griffin with Citi.
spk05: Great. I appreciate the follow-up. Just wanted to touch on bridge to HUD in terms of, like, external growth stuff. I don't think it's been mentioned so far, but, you know, if we think back to low interest rate regime, maybe that permanent financing was then called the mid-3s. probably moved up since then. Do you have a sense, Talia, maybe when you're underwriting transactions, you know, where that might be at for that sort of longer-term permanent financing?
spk12: Thank you. Yeah, you know, I don't have it post-FedRedHuck yesterday, but I figure it's probably in the sevens. I mean, I will tell you that we are seeing other debt quotes non-HUD, non-bridge-to-HUD, but just like construction debt and stuff being quoted as a floor of seven and a quarter, currently at about eight and a half, and that's at around 50% loan-to-cost, just to give you a scale.
spk05: That's great. I appreciate the color.
spk07: Hey, Michael, just a follow-up to your question earlier on where coverage was, XPRF. a year ago, it was basically flat to where it was today, so exactly flat, 1.55 times on a trailing 12-month basis. And when you consider what happened in that intervening timeframe with labor expenses spiking, you have annual rent increases and the like, the fact that it has stayed flat and is increasing is pretty encouraging.
spk15: Thanks, Mike.
spk13: As a reminder, everyone, to ask a question, that is star one on your telephone. We'll take our next question from Juan Sanabria with BMO Capital Markets.
spk10: Hi. Thanks for the time. A couple questions. I guess on the coverage, you talked about how it's improving. Would you be able to give the T3 coverage XPRF for the SNF and seniors housing portfolio?
spk07: What we'll say, Juan, is that, because, yeah, we did not disclose it, it is higher than our trailing 12-month number.
spk10: Would that be the case for Signature and Avomir as well?
spk01: In the case of Avomir, it might be slightly up. I don't have that at my fingertips. In the case of Signature, they had a tough second and third quarter. So once they got all those sales and closures behind them and got corporate right-sized for the leaner company that they are today, they really refocused and bounced back super dramatically in the first quarter. I'm talking about current first quarter, not a quarter in arrears.
spk10: Okay.
spk07: Yeah, and the trailing three-month numbers we're talking about, again, are trailing three months ended December 31st. There's been four months since then. And as Rick alluded to earlier, the preliminary numbers we've seen come in for the actual first quarter of calendar year 23 are encouraging and headed in the right direction.
spk10: Okay. And then on the dispositions you guys completed, curious if you could share the yields or cap rates or the NOI that was booked for the modeling purposes in the first quarter just to help us on a run rate basis.
spk07: Yeah. So in terms of the dispositions, you know, we disclosed the vast majority of our disposition activity for the quarter. We disclosed like in February. And as we said back then, the yield on that was called mid-single digits. So, you know, whatever incremental sales we had between that point and the end of the quarter, one, were small, and two, really didn't change that overall metric. So I think that's still a good number to go with.
spk10: Okay. Thanks. And then like the investments you did make in the quarter were at 8%, is that kind of a new bogey, you think, for where assets are trading today, or are those deals, you know, one of them was from the development pipeline? Is that indicative of today's pricing, or those are unique situations and not necessarily?
spk12: Those are unique situations. One, as you just said, the bulk of it was from a development pipeline. And the other one, so that was a pre-negotiated yield, if you will, or cap rate. And then the other one was a small property that is allowing us to create a campus with an operator of ours who's in a substantially larger building across the way. So it was an unusual piece. They weren't, didn't have a lot of folks rushing to buy a small building on the campus of another building.
spk10: Okay, and one last one, if you don't mind. The loan book, anything that we should be aware of in terms of potential risk? We've had some news in the broader healthcare read space of some loans going. Pariship, just curious how you feel about your current loan book.
spk12: I don't think there's any change, and the bulk of it is not at risk. It's nothing like the Ventas loan that they had to foreclose.
spk07: Yeah, they're not MES loans that we have, Juan.
spk15: Thank you.
spk14: We'll take our next question from Austin Wortschmidt with KeyBank Capital Markets.
spk03: Yeah, just one quick follow-up for me. Can you guys remind us what percent of your operators are on a cash basis and what the plan is for those tenants over time, whether you're maybe looking to sell some of those assets or enter into long-term contractual leases with either the current operator or potentially a new operator?
spk07: Yeah, so in terms of our cash basis tenant pool, like I've said in the previous quarters, the part that we really focus on are the portion of our cash basis tenant pool that pays us various amounts, you know, and they'll pay us a different amount this month versus next month, right? And that pool has come down. It was before like 5%, 6% through some of the sales and some of the transitions we've done. It's now somewhere call it 3% of our NY. So it is coming down, and like we've talked about before, through the activities we're doing on the portfolio, whether it be sales or transitions, that's going to address a large component of that.
spk08: Great. Thanks, Michael.
spk13: And there are no further questions at this time. I'd like to turn the call back over to Rick Matros.
spk01: Thanks, everybody, for joining us. It feels good to at least believe that we've gotten the worst behind us and really do feel pretty good about things going forward. So, again, thanks for the support. Thanks for joining us today, and have a great day.
spk14: And this concludes today's conference.
spk13: You may now disconnect.

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