Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT third quarter 2022 earnings call. I would now like to turn the call over to Lukas Hartwich, SVP Finance. Please go ahead, Mr. Hartwich.
Thank you and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our expectations regarding our tenants and operators, and our expectations regarding our acquisition, disposition, and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2021, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished 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 Financial page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the Investors section of our website. With that, let me turn the call over to Rick Matros, CEO, President, and Chair of Sabra Health Care REIT.
Thanks, Lukas. Thanks, everybody, for joining us. We appreciate it. I'll start with the North American transition. To start with, there had been a management change at North American, and in concert with that change, management and the board undertook a reevaluation of what they wanted to do with the portfolio, going forward. They approached us with a couple of options. One option was to downsize the company to the 12 non-Sabra facilities that they had primary ownership in, and the other was a rent reduction. We didn't view the rent reduction as something that was necessary given our assessment of the performance of the portfolio, and we're actually happy to accommodate them on their request to downsize to the 12 buildings. This is a very good portfolio.
We've always gotten inbounds on it, so we knew that we would have some terrific options in terms of transitioning the portfolio. That's why that occurred. It was specific to that issue with North American. We have a signed transition agreement. It's a very cooperative transition. They're being terrific on their end with us, and we wish them the best going forward. In terms of the bidding process, it was pretty robust. We felt going to Ensign and Avamere in Washington was the best possible outcome for us for a couple of reasons. In terms of Avamere, they've really been doing pretty well since we addressed their issues. Adding these four buildings really fills in their market needs, provides some really terrific opportunities for them from a managed care contracting perspective.
When you add these four buildings to their portfolio, in addition to the recently received 20% Medicaid rate increase in Washington, this makes them a stronger tenant, from our perspective. A really good transaction for us to do with Avamere. As to Ensign, everybody knows Ensign. They're extremely strong operator, we see that as real upside. The credit quality is obviously quite different from having a private operator. Their market cap, the corporate guarantee, and the transparency from being public, which you know, most investors don't have with the REITs because most of our tenants are private. We think that's an added plus. The durability of our earnings stream going forward, as a result of this transaction, we think has even greater certainty.
We feel great that we've been able to expand our relationship with them. In our evaluation, we felt like the trade-off for this upgrade in exchange for the 12% reduction on rent was well worth it. I'm sure we'll get more questions on it during Q&A. Moving on to the operating environment. Labor continues to improve. It's still tough, but occupancy is now improving as well as labor's improved. I would note and remind everybody that our Triple Net occupancy is a quarter in arrears. While our occupancy was flat in the second quarter, as noted in the release, on the skilled side, June through October, our occupancy increased 180 basis points, which we view directly as a function of labor getting better.
Similarly, for our AL, our AL portfolio, that was up 190 basis points during that same timeframe, June through October. Our senior housing lease portfolio also continues to improve, and we had a nice bump in rent coverage there. Moving on to investment activity. We continue to see opportunity in relatively small senior housing deals and secondarily behavioral deals. Skilled nursing investment opportunities have shown a slight uptick, but nothing of note. We're also seeing more activity that we hope to transact on in Canada. From a high level, we continue to view investments through a capital recycling lens. In other words, our investments will continue to be funded with proceeds from asset sales, and we expect that to continue as we move into 2023.
Finally, a note on ESG. We issued our second report. We've also started a new program called Green Links, which is a small fund designed to give our Triple Net operators access to capital to fund initiatives in energy and water efficiencies. These initiatives will be accretive to our operators and therefore beneficial to us and our commitment to the Sabra ESG initiatives. With that, I will turn the call over to Talya.
Thank you, Rick. I will discuss the performance of our wholly owned managed senior housing portfolio and our investment activity in behavioral health real estate. The operating results of our wholly owned managed senior housing portfolio saw continued positive trends in the third quarter of 2022. We have seen tailwinds on occupancy and rate for two quarters and are now seeing labor costs start to decline as agency is increasingly replaced with permanent staff, which will both lower and stabilize expenses. The headline numbers for the quarter on a same store basis are as follows. Occupancy for the third quarter of 2022, excluding non-stabilized assets, was 81.5%, driven by a 1.3 percentage point increase in our independent living communities compared to the prior quarter.
Comparing third quarter 2022 to third quarter 2021, occupancy in our assisted living communities increased 2.7 percentage points and 2.5 percentage points in our independent living communities. Same store occupancy has continued to trend up since the Omicron variant surge in early 2022. RevPOR for the period, excluding non-stabilized assets, was $6,306 in our assisted living portfolio, a 50 basis point increase over the prior quarter and a 6.4% increase over third quarter 2021. RevPOR for the period excluding non-stabilized assets was $2,705 in our independent living communities, a 1.8% increase over the prior quarter and a 5.5% increase over third quarter 2021. Excluding government stimulus funds, cash NOI for the quarter was slightly ahead of the prior quarter.
Our independent living portfolio saw a 6.7% increase in cash NOI as most of the increase in quarter-over-quarter revenue went directly to the bottom line. Continued rate increases in our assisted living portfolio offset some of the margin pressure resulting from higher labor costs. In the quarters immediately following the vaccine rollout, our needs-based portfolio experienced an earlier and steeper rebound than our independent living portfolio, which we described at the time. While independent living has been playing catch up on occupancy and RevPOR, the lighter staffing model and lower cost structure has allowed cash NOI to recover at a faster pace. We have seen pricing power across our entire portfolio with between 8% and 9% annual increases to rates inclusive of care and positive leasing spreads.
Higher care needs and deaths continue to drive elevated move-out rates, particularly at our higher acuity properties. If we compare the same store operating results of our Canadian assets with our U.S. assets, our Canadian assets have been outperforming our U.S. communities throughout 2022. On a same store basis here are some quick statistics. Occupancy for the third quarter in our Canadian communities increased 3.9 percentage points compared with the prior quarter and 7.3 percentage points compared to the third quarter of 2021. This compares with our U.S. communities increase of 10 basis points on a sequential quarter basis and 1.5 percentage points compared to the third quarter of 2021. RevCOR growth in our Canadian portfolio was only slightly higher than in our U.S. portfolio.
However, cash NOI for the third quarter in our Canadian communities was 12.2% higher on a sequential basis and 43.7% higher compared with the third quarter of 2021. In comparison, cash NOI in our U.S. portfolio, excluding government stimulus funds, dropped slightly on a sequential basis, and grew 2.5% compared with the third quarter of 2021. Over the past four quarters, cash NOI in our Canadian communities grew 9.5% per quarter on a compounded basis. These statistics reflect only our same store assets in Canada, which comprises 16% of the units in our wholly owned managed portfolio.
We believe that the rebound we are seeing in Canada is a function of strong demand emerging after the lifting of COVID restrictions that remained in place longer than in the US, essentially the same scenario experienced domestically in the months following the rollout of the vaccine. Let me now turn to our behavioral health portfolio. At the end of the third quarter, Sabra's investment in behavioral health included 16 properties and two mortgages, with a total current investment of $756 million. We intend to invest an additional $53 million of capital to complete the conversion of five of these properties, all of which have been leased to operators as well as another property identified for conversion. At the completion of these conversions, Sabra's investment in behavioral health will total over $800 million.
We continue to meet with new operators and explore business relationships within the addiction recovery sector as well as other areas of behavioral health where we see investment opportunities. With that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.
Thanks, Talya. For the third quarter of 2022, we recognized normalized FFO per share of $0.36 and normalized AFFO per share of $0.35. Compared to the second quarter of 2022, normalized FFO per share and normalized AFFO per share decreased $0.03, primarily due to lower NOI from the Enlivant joint venture as a result of receiving $3.4 million of government grant income last quarter.
Lower NOI from tenants whose rent is accounted for on a cash basis. This is a timing issue as the shortfall was received subsequent to quarter end and recognized in the fourth quarter. During the quarter, we wrote off roughly $16.5 million of straight-line rental income receivables primarily related to the transition of the North American Health Care facilities to Ensign and Avamere that we previously announced. These amounts are added back in arriving at normalized FFO and AFFO. Cash NOI for the quarter totaled $115.6 million compared to $118 million for the second quarter. This decrease is primarily the result of lower rents received from cash basis tenants I just noted, and is expected to reverse itself in the fourth quarter.
Cash NOI for this quarter includes $2.2 million of excess rents paid by Genesis pursuant to the memorandums of understanding entered into in 2017 when we began the disposition of a majority of our Genesis exposure. These rents had a burn off period of just over four years from the date the properties were sold and are reaching the end of that burn off period. We expect the amount of Genesis excess rents we recognize in earnings to decrease to $1.2 million in the fourth quarter of 2022, and be $1.6 million and $328,000 for the full year 2023 and 2024 respectively. As of September 30, 2022, less than 5% of our NOI is below 1x EBITDARM coverage.
As of September 30, 2022, our annualized cash NOI was $448.4 million, and our SNF exposure represented 60% of our annualized cash NOI, down 70 basis points from the second quarter and down 740 basis points from a year ago. G&A costs for the quarter totaled $9.7 million compared to $8.6 million in the second quarter of 2022. This increase is due to a $1.3 million dollar increase in stock-based compensation expense compared to the second quarter of 2022. As a reminder, last quarter, we made an adjustment to the payout estimates on performance-based awards that were set pre-pandemic, which resulted in a reduction to stock-based compensation expense in that quarter.
Excluding the stock-based compensation expense adjustments I referenced earlier, recurring cash G&A was $7.6 million compared to $7.8 million in the second quarter. During the quarter, we recognized $60.9 million of impairment of real estate related to six SNFs that are under contract to sell as part of our capital recycling efforts. Now turning to the balance sheet. Our balance sheet continues to be an area of strength for Sabra, with no material maturities until the second half of 2024, and no floating rate debt outside of the balance of our revolving line of credit, which we expect will be repaid by the end of the year with proceeds from in-process dispositions.
Our proactive approach to hedging our variable rate exposure has proved highly valuable in this current rate environment, where we have seen short-term rates increase significantly in a short period of time. Because of our hedging activities, our annual interest expense is nearly $8 million lower than it otherwise would be at today's market rates. We are in compliance with all of our debt covenants and our liquidity as of September 30, 2022, totaled approximately $890 million, consisting of unrestricted cash and cash equivalents of $26.3 million and available borrowings of $861.4 million under our revolving credit facility. As of September 30, 2022, our leverage was 5.5 x.
As we have stated the last few quarters, this leverage level is above our long-term average target, but we view this as simply a short-term timing mismatch. During the quarter, we repaid $18.8 million of borrowings under our credit facility and expect to pay down our revolver by the end of the year as we receive proceeds from completed and pending dispositions, which are expected to generate roughly $200 million in gross proceeds. Once these proceeds are received and we repay our revolver borrowings, we expect leverage to be closer to our long-term average leverage target. We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable, and we are well positioned to do just that.
On November 7th, 2022, our board of directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30th, 2022, to common stockholders of record as of the close of business on November 17th, 2022. The dividend represents a payout of 85.7% of our normalized AFFO per share of $0.35. Lastly, as we have communicated the past several quarters, we did not issue earnings guidance this quarter. While we are encouraged by the continued, albeit slow, recovery in the labor markets, which we view as a key barrier to occupancy recovery, the timing and velocity is still a question mark. This uncertainty against the backdrop of macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time. With that, we'll open up the lines for Q&A.
Thank you. To ask a question, you will need to press star one one on your phone. Please stand by as we compile the Q&A roster. One moment please. Our first question will come from Austin Wurschmidt of KeyBanc Capital Markets. Your line is open.
Hey, thanks everybody. Rick, I was just hoping first you could provide a little bit more detail on the terms of the new lease, new leases of the transition assets as far as lease duration, you know, escalator, escalators that are baked in there, and if there's any sort of fair market rent resets in the coming years.
Yeah, those are actually in the press release, Austin. For Avamere, the annual rent escalator is 2.75%. For Ensign, the annual escalators are CPI based not to exceed 2.5%. The duration of the leases for Ensign are, what, 18?
There are two master leases. One is 18 years, one's 20 years for the initial term.
Yeah, I'd appreciate. Sorry about that. Separately, I was wondering if you could provide an update on the 17 in-process transitions that you announced last quarter. You know, if there's been any change in cash rent contribution, you know, versus what those were contributing in 2Q. You know, when do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence over time?
Yeah. I think the quick answer is there's no changes to what we put into our investor presentation, excuse me, last quarter. Those transitions are still in process, and the timing is unchanged. We expect those to stabilize between now and the end of 2024.
With the eight that are already transitioned, have those stabilized at the $4.8 million quarterly run rate?
They're progressing as we had expected. I'd have to get the exact number of where they stand relative to where stabilization is, but they're progressing as we expect.
We expected those to take a number of months before they stabilize, well into 2023. They're on track, but similar timeframe to the other 17.
Okay. That's helpful. Thank you.
Thank you. One moment please for our next question. Our next question will come from Juan Sanabria of BMO Capital Markets. Your line is open.
Hi, good morning. I just, Rick, hoping you could talk a little bit more about the transition and why the need to reduce the rent if the coverage on the assets that was in place was seemingly pretty healthy from the outside looking in. Maybe the T3 coverage was a lot worse, and that necessitated a lower rent for the new operators. Just hoping you could talk through why there's some dilution coming in with the transition.
Well, it's just really a function of negotiation, I think. The cash flow stream was pretty steady. Every once in a while, you can transition a portfolio and get an increase in rent, and we've done that with smaller portfolios, historically. In most cases, people know that you have to transition, and so it just becomes a part of the negotiation. In this case, we didn't see the 12% reduction as being significant enough to offset the positive aspects of moving to Ensign. And frankly, there were offers that were slightly higher, but we thought the attributes of going with Ensign and strengthening Avamere were more important than some incremental difference on the rent. It still would've been lower than North American, but maybe not just as low.
If you highlighted some transitions that you were doing and I guess are still in process, 25 assets, I believe. This was in addition to what you talked about that had upside, but this obviously is an offset. Is there anything else that
No, no. Nothing. No. There's nothing else, Juan. Look, the 25 that we had previously announced were a function of ongoing discussions with our operators. A lot of transparency and a lot of proactivity relative to those transactions. This was different. There was a change in management, that's their board's decision. You know, we had a great relationship with the prior management team, and they did a strategic reevaluation and came to us late in the summer. You know, it was a unique circumstance, and nothing should be extrapolated from it relative to the rest of the portfolio.
Okay. Just one last one for me. For the dispositions, the $200 million that you have targeted, any sense on what that means from a modeling perspective in terms of cap rate or rents associated with that? Do any of the buyers, any issues with financing some of that, given the capital market dislocations we're all living through?
I can talk to that. We're still looking at a year-end type of closing on most of those transactions, so to get to that $200-ish million. The financing challenges that have hit everybody, as you know, have been pretty recent. One of the portfolios, the largest component of that $200 million has been something that's been underway for a fairly lengthy period of time. They've had their financing organized and committed to prior to the most recent rate hikes. Does that answer your question?
Yeah. Any color on kind of the yield implied on the $200 million?
It's low single. Mid-single digits?
Yeah. Mid- to low-single digits.
Thank you very much.
Thank you. One moment please for our next question. Our next question will come from Steven Valiquette of Barclays. Your line is open.
Great, thanks. Good afternoon, everybody, and good morning. So more of an industry question here, but last quarter, you guys had a pretty useful slide on the stats of some of the Medicaid rate updates among your top 10 states where you operate with a double presence. Just looking for any updates on any key states and the evolution of some of the, you know, state rate updates. Any color you could provide would certainly be helpful. Thanks.
Yeah, sure, Steve. Thanks. We didn't include that chart this time because there's been no change and no updates. I think the one state that we all are anxious to find out about is Texas. Our operators on the ground are cautiously optimistic that they'll be successful with getting a rate increase next year. We'll see. You know, other than how Texas handled FMAP, which was appreciated, you know, as you know, Medicaid rates have been historically low there, and really, the industry's been underfunded. I think the reason for the optimism is not just the dialogue that operators are having with legislators, but the fact that the pandemic demonstrated some real issues in the system there. You know, that's the one that we're really all waiting for, but no other updates, Steve. That's why we didn't put another chart in.
Okay. One other quick one. Apologize if I missed this. What's the skilled mix in the properties going over to Ensign? They're kind of notorious for being able to improve that pretty dramatically, but I'm wondering if that's, you know, a big part of their improvement plan as far as the operations within that, but just for the starting point and where that is right out of the gate.
Yeah, their skilled mix is one of the two highest in our portfolio. It's in excess of a revenue perspective of 60%. The skilled mix is already high. We'll see whether Ensign can make that higher or not. There are huge opportunities on the expense side. The facilities has historically been allowed to sort of do their own thing when it comes to expenses. Ensign believes they have a lot to bring to the table, from an expense perspective and of course, there are corporate synergies as well. I think any changes in skilled mix probably will be incremental, but there'll be much bigger pick ups on the other two areas.
The improved rent coverage as a result of this deal that we noted in the releases, we expect that to continue to improve, not just because you're recovering from the pandemic, but because of the programs that Ensign will be putting in place there that have brought them so much success in the rest of their portfolio.
Yep. Okay. Makes sense. That's helpful. Thanks.
Yep.
Thank you. One moment please for our next question. Our next question will come from Joshua Dennerlein of Bank of America Merrill Lynch. Your line is open.
Yeah. Hey, guys. Appreciate the color around North American, but maybe just was there any discussion of that 12%? Like I feel like I normally, like if I broke my lease, I would have to kind of cover the difference between whoever comes in and takes my apartment, versus what I was supposed to pay. Is there any discussion on North American covering that 12% rent reduction or a break fee?
No, because it wasn't that kind of negotiation or there wasn't that kind of leverage in place. You know, they were sincerely interested in sizing down. Yeah, there just wasn't that kind of leverage to negotiate that. Our rent is fully covered at the current contractual level through the February first transition date, though.
Was there I don't understand why there wasn't leverage of a landlord versus tenant here. Like, aren't they typically responsible for the full term of the lease through the end of the agreement or was it coming due on February one?
No. Well, say a couple things. First, we have a confidentiality agreement, so there's not a whole lot I can say that's specific to the actual negotiations that we went through. Once we made the decision to transition and so that they can move down to 12 buildings as opposed to honoring their request for a reduction, that removed any of those other levers.
Got it. Are there any other tenants who could kind of walk away like this, or are leases structured differently?
No. As I said, this is very, it was a unique situation, and it had a lot to do with the, you know, the board's involvement and the changes in management and their reevaluation of the portfolio. We're not seeing this elsewhere in the portfolio, so all the statements we've made about the portfolio generally, historically, you know, remain true today. You know, sometimes things happen that are unique and you don't anticipate. No one should extrapolate this to any other aspect of the portfolio.
Got it. One final question from me. When did these conversations start between North American and your team?
Somewhere around the middle of August.
All right. Appreciate the color. Thanks. Thanks, sir.
Yep.
Thank you. One moment please for our next question. Our next question will come from Michael Griffin of Citi Research. Your line is open.
Great, thanks. I guess pro forma for this transaction, Ensign and Avamere are now, you know, two of your largest tenants. You've spoken pretty positively about both of them. Would you expect to continue to grow these relationships, and how great can we see them become as a percentage of your tenant base?
No, I think, you know, we've, you know, ever since we did the merger, we've been pretty committed to trying to keep everybody below 10% so that we're not overexposed to any one tenant. I put it this way: If Ensign and Avamere brought additional facilities to us that we just thought were, you know, fantastic things to execute on, we would happily do that. We're not gonna set as a goal that we're gonna continue to grow and get them to X% higher than they are now. I still think we're better off, regardless of how good the operators are, having as much diversity in our portfolio as possible.
Gotcha. The commentary you were saying around Canada seemed, I guess, relatively more positive. Should we maybe see an increase in investment from you in Canada? Is this more kind of just tactical, opportunistic approach?
A couple of thoughts. One is, we've already acquired more in Canada this year prior to this past quarter, so that's already. Those assets were not in the numbers that I provided because I used only same-store sales numbers over time. The environment in Canada for the past year and a half maybe has been very interesting. There's some generational shifts occurring, and groups are selling assets, and portfolios. Everybody that you cover for sure has been active in that market. We have had some good fortune in executing some transactions this year. I think you'll continue to see us trying to be active there.
I think the biggest challenge for anybody in the acquisitions world right now is capital, and Mike earlier spoke about our focus on recycling capital. That's one. Two, the bid-ask spread that is in place today, and trying to get to a place where our acquisitions are actually accretive, if not the first year, then shortly thereafter.
Okay. That's it for me. Thanks for the time.
Thank you. One moment for our next question. Our next question will come from Vikram Malhotra of Mizuho Securities. Your line is open.
Thanks so much for taking the question. Just I wanted to just follow up on the on the transition of these assets. You said it was a unique circumstance where, you know, the board decided to change, led you to having to renegotiate. I'm just trying to get a a better understanding of the leverage you say sort of went away versus, you know, Ensign saying, "We can take costs out," et cetera, or just the outlook that the both these operators had and how that squares with this lower rent level that they wanted or required to operate these facilities. Doesn't when you say there's no read across, I'm almost wondering, like these are very well-regarded operators.
Would that not suggest other operators would also say, "Hey, as we negotiate things when leases come due or in this environment, we would also like a lower rent level, even though there's synergies down the road." I'm just trying to square away, like, these are well-regarded operators. You said there's better credits. I'm just not sure how that squares with. They have an ability to take out costs. How does that square with lower rent?
Well, first of all, I appreciate the question. First of all, in a lot of transitions, that is the case. You do wind up negotiating a lower rent 'cause you're making a transition, and people feel like they are in a position of strength. That does happen. That's not unusual. It's not a function of the quality of this portfolio or the projections of the earnings streams going forward. I'm not sure how much it's appreciated how brutal the last three years have been, and this recovery is taking much longer than any of us ever expected. Everybody that we're aware of are taking a much more conservative approach to how long recovery is gonna take and just having more breathing room within leases.
This industry's never gone through anything like this. I think there needs to be a lot more weight put on the realism of the disaster that the last three years have been. We're still probably, what, over a year away from recovery from an occupancy perspective and a little bit more so from a margin perspective. Everybody's trying to give themselves more breathing room. I think that's really understandable.
Is it safe to say, like looking forward with how maybe labor has surprised in terms of persistently remaining high in costs and shortages of labor in your underwriting going forward for the portfolio, you are now baking in more rent adjustments just given the situation? Because in the past you've said, you know, we're not baking in any more rent reductions.
No, no, we're not baking in any more rent reductions because with our portfolio, we are where we are. As we look at new acquisitions, we're putting rent levels in place that reflect where they currently are. So that gives us room to grow going forward and gives us more certainty and gives us more room as well. No, that's not the case that we'd be looking at more rent reductions or factoring that into new acquisitions.
Okay. Yeah, because again, I was just going back, like last quarter, we would have looked at these tenants and said, "Oh, they're over 1.4x covered, you know, no issue." It just—I know this was a unique circumstance, but it naturally makes one wonder like, hey, given what you just described, is the 1.4 coverage, does that have enough buffer from here on, or do you need to create a buffer just given how the environment has unfolded? As I just, it's more a comment than a question. One last thing, I just wanna make sure I understand the behavioral portfolio and kind of what appropriate coverages are here. In the top ten tenants, the behavioral coverage did fall. I'm just wondering, on a spot basis, where does that stand? Is there anything we should be concerned about in terms of restructuring?
I'll take the first part and kick over behavioral to Talya. There is no concern at all. Let me say that. On the 1.4 that you referred to, that's on an EBITDAM basis. When we underwrite, we underwrite on an EBITDAR basis. We underwrite 1.4-1.5 on an EBITDAR basis. That's obviously a big difference because there's something like a 40 basis point differential between EBITDAM and EBITDAR. Their 1.4 coverage was EBITDAM. We will continue to underwrite on a 1.4-1.5 basis on an EBITDAR basis. From an EBITDAR basis, we are comfortable on a go-forward basis, as we have been historically, that 1.4-1.5 coverage will be sufficient for skilled nursing.
This is Talya. On the behavioral health side, I don't have that spot occupancy for you, but that specific operator has actually had some pressure on its occupancy. It hasn't been able to has admissions limitations due to not being able to get enough staff. That's actually what drove a slightly lower NOI and therefore a little pressure on the coverage. We have other operations sector that operate smaller buildings in other parts of the country, and they are covering at upwards of, I don't know, five times. It really varies as the operations, et cetera, of the buildings and what fundamentally is going on inside the buildings. We typically underwrite at about 2-2.5x new acquisitions in this space.
The other point I'd make is, even though labor issues can affect all the asset classes to one extent or another, the behavioral facilities, the economic model of those facilities' break even point is much lower from an occupancy perspective than it is for skilled nursing and senior housing. There's actually more breathing room there as well.
Okay. Thank you.
Thank you. One moment please for our next question. Our next question will come from Omotayo Okusanya of Credit Suisse. Your line is open.
Hi. Yes, good morning out there. Just along Vikram's line of questioning, again, this idea of are there any additional, you know, watch list tenants that you guys may, you know, may kind of have your eye on? I ask that in the context of just, again, the rent coverage on the senior housing portfolio is still pretty tight at this point. You know, fundamentals there too are still pretty tight even with the recovery. Just kind of curious how you're kind of thinking about that kind of at this point, given kind of underlying fundamentals in both skilled and senior housing.
Sorry, Tayo, can you repeat the last part of that question?
Sure. Again, it's this idea of, you know, your watch list tenants, like between last quarter and this quarter, you know, kind of, if, again, if there's any real change in the list. I just ask that in the context of, you know, rent coverage on your senior housing portfolio is still pretty tight, and I think fundamentals in skilled and senior housing are still pretty challenging.
A couple things. Our watch list is the same as it's been, you know. Like I mentioned in my prepared remarks, our sub one EBITDARM coverage is about less than 5% of our overall NOI. I think the other thing to point out is on the senior housing piece for the triple-net. That's a very small portion of our portfolio. I understand your question on the coverage, but it's the smallest piece of our triple-net portfolio.
The only other point I'd make, Tayo, was even though it is tight, it's at least improving. You know, it went from 109-113. That's certainly not where we want it to be, but they are showing improvement. You know, as we've been saying kind of all along, the recovery may be taking longer than we'd like, but we all believe that we've been through the worst of it, and I think the worst of it really was when Omicron hit. It exacerbated all the labor issues and kind of reversed all the occupancy gains and all that kind of thing. I think we're well past the worst of it. We're not seeing COVID today, and I mentioned this on the last call, so it continues to be true.
We're not seeing COVID in and of itself impact the business. The vaccinations have been highly effective, as have been the boosters. Most of the staff is vaxxed as well. The business is holding up really well relative to current COVID cases. They're pretty negligible.
Gotcha. That's helpful. Then on the Enlivant front, I know, you know, we've always you know, the last thoughts around it was, you know, before you do anything with TPG, you know, kinda wait for this thing to recover, and then maybe there could be conversation at that point. Just looking at occupancy today, it looks like, you know, 85%, which is pretty high relative to kind of where the industry is. Is now an appropriate time to start looking at the JV again, and what could be the potential outcome?
Their occupancy isn't 85, but it's in 75%-76%. That said, yeah, the portfolio's gonna be marketed soon. From the banker's perspective and TPG's perspective, which we agree, at this point, you need to go out with 23 numbers that are believable in order to market the portfolio. That's what will happen. The management team is completing their budget process that will be presented to the board. We'll sign off on it, and sometime before year end, the marketing process will be kicked off by the bankers.
Yeah, Tayo, on that 85.5% that you're looking at, that's for our Sienna joint venture.
Gotcha. Okay, that's helpful.
No worries. A lot of numbers.
Great. Thank you.
Yep.
Thank you. One moment, please, for our next question. Our next question will come from John Pawlowski of Green Street Advisors, LLC. Your line is open.
Thanks. Good morning. Michael, with regards to the statistic you shared with percentage of tenants below 1x EBITDARM coverage, could you share the same statistics on EBITDAR?
Yeah. I could get that exact number for you. As you recall, we don't talk about or we don't disclose EBITDAR because of the various ways that our peers report it. It just becomes a non-comparable number. In terms of EBITDAR coverage, I'm pulling it up right now. It's consistent with what we've disclosed in the past, and it is just about just under 6%.
Sorry. The same percentage of tenants are below one on both EBITDARM and EBITDAR, roughly?
It's like a 2% difference. We were below 5% on EBITDARM and just below 6% on EBITDAR.
Okay. Maybe I'll follow up. Quick question on The McGuire Group. I believe you extended a working capital loan to them, but their EBITDARM coverage is almost 2x. Just from the outsider's view, they shouldn't need cash, but they need cash. Can you just give us a sense for what's drove the working capital loan, and do you expect to extend additional loans to operators in the coming quarters?
That is tied to a transition of a portfolio that they took on for us. That's what that's associated with. We have provided very few working capital loans in general to our operators. If we need to, they usually are very short term in nature, and they're really to expedite a transition and make it happen faster.
That said, you know, we've been pretty consistent saying that because this recovery is taking as long as it is, that we believe that we will need to help tenants out on a short-term basis for some period of time. That can come in a number of forms that may not be tied to transitions. That could be in the form of, you know, rent relief for a period of time, partial or full, or it could be a working capital loan as well. You know, we leave the door open to step up and help our tenants as they try to get to the other side of this whole three-year experience.
Okay. That's it for me. Thanks for the time.
Thank you. One moment for our next question. Our next question will come from Daniel Bernstein of Capital One Securities. Your line is open.
Hi. Thanks for taking the call, and I'll apologize if you hear the dog barking in the background. A quick question here. Are there any dangers of working hybrid now? Are there any purchase options that were given to Ensign or Avamere and part of that, the transition of those North American assets?
No.
Okay. Another question I had here was, you know, obviously, you know, the flu's been in the headlines. What has been the flu vaccine uptake? I don't know if you have any information on this, versus, say, historical pre-COVID levels. I mean, are residents and employees getting the flu vaccine at higher levels than pre-COVID? Just trying to get a sense of
Yeah. I don't have good data on that, Dan. I would be surprised if it was higher than pre-COVID levels. There's usually a pretty concerted effort to get residents vaccinated for the flu. For employees, it's always kind of been them doing their own thing. I don't think there's ever been much of a concerted effort in the past for employees, like there was with COVID. But I don't have good data on that, but I would be surprised to see if there was an uptick. We're not seeing any impact yet. I know that there's been sort of this triple concern between COVID, and flu, and RSV, which is, you know, mostly impacting little kids and older adults. But we're not seeing that hit the business at this point.
Okay. No, I appreciate that. I was just wondering whether it was a cultural change or not, but I guess there's not enough data. The last question, I don't know if you went over this earlier in the call or not, but what was the cash NOI shortfall from those tenants who paid in 4Q instead of 3Q? This was it, asset base-
It was somewhere.
Model purposes.
Yeah. It was somewhere in the neighborhood of, I call it $2 million, somewhere in that range. 'Cause as far as our cash NOI goes, yeah, it dropped by about, call it $2.4 million, and that's, you know, roughly the number we're looking at.
Okay. That was all paid early in 4Q?
Correct.
Okay. Yeah. That's all I have. Appreciate the time. Thanks.
Thanks, Dan.
Thank you. One moment please for our next question. Our next question will be coming from Richard Anderson of SMBC Group. Your line is open.
Thanks. Good morning. I have a question on sort of the irony of cutting rent and giving a portion of that portfolio to an operator where you had just cut rent, Avamere. I wonder if that weighed into your thinking at all in terms of where these 24 assets would go, and how, you know, given the history with Avamere, I assume you're feeling much better about them at this point, given the restructuring. How does those 4 assets marry with the existing Avamere portfolio in terms of coverage and rent, and is it perhaps a precise reflection of what you had in place already there?
Yeah. Let me in order to, I think, better answer your question, since you used the word irony, just a little bit of history. You know, Avamere, obviously, we got Avamere as part of the merger. Avamere was the one tenant that we didn't do anything for. Their rent coverage was always really tight, but we chose not to do anything to them when we took care of all the other operators that we did or sold assets or whatever it was, because they had other revenue sources with some of their ancillary businesses. Once the pandemic hit, they still continued to manage through it, but given how long the pandemic went on, it sort of became too much.
We felt like we really needed to do something for them at that point, but we put that recapture mechanism in because we thought that they could, over time, get back to a higher rent level. Where some of this fits into all that thinking is by giving them the four additional facilities, it's gonna make the portfolio that much stronger overall, and particularly when you add the 20% Washington State Medicaid rate increase. The acceleration of the rent recovery there will happen even more quickly than we anticipated. Washington's a key market for them. That made a lot of sense. Ensign, I think, just has two buildings in Washington, maybe.
I might be off a little bit, but they don't have much of a presence up there, so it made a lot more sense. And they preferred just to do the California portfolio as well. Did that answer your question?
Well, I guess the four assets, the coverage on them, is it a reflection of what the new existing coverage is with Avamere? Is it higher or lower?
No, I think that's a good estimate there.
Okay. Second question. You said that there was some huge expense opportunities for Ensign, particularly, you know, because of the quality of the company perhaps, but also just the national portfolio. But is that upside, that expense, you know, opportunity for them, a function of them, Ensign, or was it a function of the existing way by which the portfolio was being managed, a combination? I'm just curious to what degree there was an under-management situation that, you know, Ensign can exploit.
It was more a function of how North American operated. There's a lot more autonomy at the facility level relative to purchasing. Where Ensign, as everybody knows, their local operators do have a lot of independence and a lot of authority. Ensign does take advantage of its scale when it comes to group purchasing and getting discounts, as a result of that. That's a completely different philosophy. I'm not saying one's right or one's wrong. There are different reasons for companies doing that. Ensign bringing that philosophy to bear will reap positive results on the margin for this portfolio.
Okay. Is there a similar expense opportunity for the four going to Avamere, or is that sort of just status quo?
No, the Avamere opportunity is more on the revenue and occupancy side.
Okay.
Because of their geographic distribution in Washington prior to getting these four buildings, they've had some difficulty in getting the Managed Care contracts that they want at the rates they want. These four buildings, it may sound whatever because it's only four buildings, but it actually densifies their markets in their urban communities so that. They've already had conversations with the insurers. They believe that this opportunity will allow them to not only get additional Managed Care contracts but get better rates because of the volume that they're gonna be able to provide from a service perspective to those insurers around the Seattle market.
Okay, great. Thanks very much.
Yep.
Thank you. I'm seeing no further questions in the queue. I would now like to turn the conference back to Rick Matros for closing remarks.
Thanks everybody for your time. I know it was a lot to digest. Hopefully, we've answered your questions. If you have additional follow-up, the team's available as we always are to have additional discussions. Thanks and take care.
This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.