Sabra Health Care REIT, Inc. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT Third Quarter 2022 Earnings Call. I would like to turn the conference 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 to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, 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 has been a management change at North America 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 12 buildings. This is a very good portfolio. We've always received inquiries about it. So we knew that we would have some terrific options in terms of transitioning the portfolio. So, that's why that occurred, specific to that with North American, we have a signed transition agreement. It's a very cooperative transition. They've been 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, providing some 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, it just makes them a stronger tenant from our perspective, so it was a really good transaction for us to do with Avamere. As to Ensign, everybody knows Ensign. They're an extremely strong operator. So, we see that as real upside. The credit quality is obviously quite different from having a private operator; their market equity cap, the corporate guarantee, and the transparency from being public, which most investors don't have with the REITs, since most of our tenants are private. So, we think that's an added plus. The durability of our earnings stream going forward as a result of this transaction has even greater certainty. So we feel great that we've been able to expand our relationship with them. In our evaluation, we felt the trade-off for this upgrade in exchange for the 12% reduction in rent was well worth it. And 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 reported a quarter in arrears. While occupancy was flat in the second quarter, as noted in the release, since June through October, our occupancy increased 180 basis points, which we view directly as a function of labor getting better. Similarly, for our AL portfolio, that was up 190 basis points during that same timeframe, so 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 opportunities in relatively small senior housing deals, and secondarily behavioral health 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. So 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've seen tailwinds on occupancy and rate for two quarters and are now seeing labor costs start to decline as agency labor 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, and 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. While independent living has been playing catch up on occupancy and REVPOR, the lighter staffing model and lower cost structure have allowed cash NOI to recover at a faster pace. We have seen pricing power across our entire portfolio with annual increases to rate between 8% and 9%, inclusive of care, and positive re-leasing trends. Higher care demands have continued 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 to 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. REVPOR 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 to 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 comprise 16% of the units in our wholly-owned managed portfolio. We believe that the rebound we're seeing in Canada is a function of strong demand emerging after the lifting of COVID restrictions that remained in place longer than in the U.S., essentially the same scenario experienced domestically in the month 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, including 16 properties and 2 mortgages, was 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 conversions. 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. And 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 recognize 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, and 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 healthcare 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 a result of lower rents received from cash-basis tenants I just mentioned 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 one time EBITDARM coverage. 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 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. We have seen short-term rates increase significantly in a short period. 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're 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. Our leverage as of September 30, 2022, was 5.5 times. As we have stated the last few quarters, this leverage level is above our long-term average target, so we view this as simply a short-term 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 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 7, 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 30, 2022, to common stockholders of record as of the close of business on November 17, 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. And with that, we'll open up the lines for Q&A.

Our first question will come from Austin Wurschmidt of KeyBanc Capital Markets.

Rick, I was just hoping first you could provide a little bit more detail on the terms of the new leases of the transition assets as far as lease duration, escalators that are baked in there, and if there's any sort of fair market rent resets in the coming years?

Yes. Those are actually in the press release, Austin. But for Avamere, the annual rent escalator is 2.75%, for Ensign, the annual escalator is our CPI base not to exceed 2.5%. The duration of the leases for Ensign are 18…

There are two master leases, one is 18 years, and the other is 20 years.

I appreciate it. Sorry about that. And then separately, I was hoping you could provide an update on the 17 in-process transitions that you announced last quarter. And if there's been any change in cash rent contribution versus what those were contributing in Q2. When do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence over time?

Yes. So I think the quick answer is there's no changes to what we put into our investor presentation last quarter; those transitions are still in process. The timing is unchanged. We expect those to stabilize between now and the end of '24.

And then with the eight that are already transitioned to, have those stabilized at the $44.8 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 what we're stabilization is, but they're progressing as we expect.

But we possibly expected those to take a number of months before they stabilize, well into 2023. So they're on track, but similar timeframe to the other 17.

And our next question will come from Juan Sanabria of BMO Capital Markets.

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, and maybe the T3 coverage was a lot worse than that necessitated a rent reduction for the new operators. Just hoping you could talk through why there's some dilution coming in with the transition.

It's largely a matter of negotiation. The cash flow has remained quite stable. Occasionally, we can shift a portfolio and achieve a rent increase, which we've successfully done with smaller portfolios in the past. However, typically, everyone understands that a transition is necessary, and it becomes part of the negotiation process. In this instance, we didn't consider the 12% reduction significant enough to negate the advantages of partnering with Ensign. Honestly, there were offers that were slightly higher, but we felt that the benefits of working with Ensign and reinforcing Avamere were more valuable than a minor difference in rent. Although it would still be lower than North American rates, it might not have been as low.

You mentioned some transitions that are still in process, involving 25 assets. This is in addition to what you discussed regarding potential upsides, but it clearly serves as an offset. Is there anything else that…

There is nothing else, Juan. The 25 that we had previously announced were a function of ongoing discussions with our operators. So, a lot of transparency and a lot of productivity relative to those transactions. This was different. There was a change in management. That was their Board's decision. We had a great relationship with the prior management team. They did a strategic reevaluation and came to us late in the summer. It was a unique circumstance and nothing should be extrapolated from it relative to the rest of the portfolio.

Okay. And then just one last one for me, for the dispositions, the $200 million that you have targeted, any sense on what it means from a modeling perspective in terms of cap rate or rents associated with that? And any issues with financing some of that, given the capital market dislocations we're all living through?

I can address that. We are still aiming for a year-end closing on most of those transactions. To reach the $200 million target, the recent financing challenges that have affected everyone have emerged only recently. One of the portfolios, which is the largest part of that $200 million, has been in progress for quite some time. They had their financing arranged and secured before the latest interest rate increases.

Any color on kind of the yield implied on the $200 million?

It's low single to mid-single digits?

Yes, mid to low single digits.

Our next question will come from Steven Valiquette of Barclays.

More of an industry question here. But last quarter, you guys had a pretty useful slide on the status of some of the Medicaid rate data among your top 10 states. Just looking for any updates, any key states and the evolution of some of the state rate updates. Would certainly be helpful? Thanks.

Yes. Sure, Steve. We didn't include that chart this time because there has been no change and no updates. I think the one state that we are all anxious to find out about is Texas, and our operators on the ground are cautiously optimistic that they'll be successful with data getting a rate increase next year, we'll see. Aside from how Texas handled FMAP, which was appreciated, as you know, Medicaid rates have been historically low there, and the industry has been underfunded. The reason for the optimism is not just the dialogue operators are having with legislators, but the fact that the pandemic demonstrated some real issues in the system there. That's the one that we're really all waiting for, but no other updates, Steve. That's why we didn't put it on the chart.

One of the quick ones, I apologize if I missed this. But what's the skill mix in the properties going over to Ensign? They're notorious for being able to improve that pretty dramatically. I'm wondering if that's a big part of their improvement plan as far as the operations within those but just for the starting point and where that is for Avamere?

Theirs' skill mix is one of the two highest in our portfolio, it's in excess from a revenue perspective of 60%. Skill mix is already high. We'll see whether Ensign can make that high or not. There are huge opportunities on the expense side. The facilities have historically been allowed to sort of do their own thing when it comes to expenses. Some believe they have a lot to bring to the table from an expense perspective. 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 pickups in the other two areas. The improvement in rent coverage due to 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 Ensign will be putting in place that have been successful in the remainder of their portfolio.

And our next question will come from Joshua Dennerlein of Bank of America Merrill Lynch.

I appreciate the color on North American. Was there any discussion of the 12% reduction? I feel like I normally, like, I broke my lease, I would have to cover the difference between whoever comes in and takes my apartment versus what I was supposed to pay. So, is there any discussion on North American covering that 12% reduction or…?

No, because it wasn't that kind of negotiation, or it wasn't that kind of leverage in place. They were sincerely interested in sizing down. There just wasn't that kind of leverage to negotiate that. Our rent is fully covered at the current contractual level through the February 1st transition date.

I don't understand why there wasn't leverage as a landlord versus tenant here. Are they typically responsible for the full term of the lease through the end of the agreement? Or was it coming due on February 1?

It's a couple of 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. But once we made the decision to transition, so that they can move down to 12 buildings instead of honoring their request for reduction that removed any of those other levers.

Are there any other tenants who could walk away like this or are leases structured differently?

No, as I mentioned, this was a very unique situation. It was heavily influenced by the Board's involvement and the changes in management, along with a reevaluation of the portfolio. We are not observing this elsewhere in the portfolio. All the statements we've made about the portfolio historically still hold true today. Occasionally, unique circumstances arise that are unforeseen, but this shouldn't be extended to other areas of the portfolio.

One final question for me. When did these conversations start between North American and your team?

Somewhere around the middle of August.

Our next question will come from Michael Griffin of Citi Research.

I guess, pro forma for this transaction Ensign and Avamere now, your largest tenants, you've spoken pretty positively about both of them. Would you expect to continue to grow these relationships? How great can we see them become as a percentage of your tenant base?

No, I think we've been pretty committed ever since we did the merger to try and keep everybody below 10%, so that we're not overexposed to any one tenant. I put it this way; Ensign and Avamere were additional facilities to us that we just thought were fantastic things to execute on, we would happily do that. We're not going to set a goal that we're going to continue to grow and get them to X percentage 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.

The commentary you were saying around Canada seemed relatively more positive. Should we maybe see an increase in investment from you in Canada, or is this more kind of just a tactical opportunistic approach?

A couple of thoughts. One is, we've already acquired more in Canada this year prior to this past quarter. Those assets went on in the numbers that I provided because I used only same-store sales numbers over time. The environment in Canada has been very interesting. There's some generational shifts occurring. Groups are selling assets. Everybody you cover for sure has been active in that market. We've had some good fortune in executing transactions this year. I think you'll continue to see us trying to be active there. 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. The second is the bid-ask spread that is in place today, trying to get to a place where our acquisitions are actually accretive, if not the first year, then surely thereafter.

Our next question will come from Vikram Malhotra of Mizuho Securities.

I wanted to follow up on the transition of these assets. You said it was a unique circumstance where the Board decided to change what the strategy of the firm. That led you to renegotiate. I'm just trying to get a better understanding of the leverage you say went away versus Ensign saying we can take costs out, etc.? Or just the outlook that both these operators had? How does that square with this lower rent level that they wanted or required to operate these facilities?

Thank you for the question. There are indeed many transitions happening. When making a transition, it’s common to seek lower rents as people feel they have leverage. This situation is not unusual and does not reflect the quality of our portfolio or our future earnings projections. It's important to recognize just how tough the last three years have been. The recovery is taking much longer than we anticipated, and everyone is adopting a more cautious stance regarding recovery timelines. We’re facing a reality where having more flexibility in leases is essential. This industry has never experienced anything like this before, and it’s crucial to acknowledge the severity of the challenges from the past three years. We are likely still over a year away from full recovery in occupancy, and even longer for margins. Everyone has been trying to create more space for themselves, which is completely understandable.

Is it safe to say that looking forward, with how labor has surprised in terms of persistently high costs and shortages of labor, in your underwriting going forward to the portfolio, you are now taking in more rent adjustments just given the situation? Because in the past, you've said you're not making any more rent reductions.

No, we're not baking in any more rent reductions. With our portfolio, we are where we are. As we look at new acquisitions, we are putting rent levels in place that reflect where they currently are. That gives us room to grow going forward and provides more certainty.

Because last quarter, we would have looked at these tenants and said they're over 1.4 times covered, no issue. I know this was a unique circumstance, but it makes one wonder, like, given what you just described, does that have enough buffer from here on, or do you need to create a buffer just given how the environment has unfolded? More comment than a question. One last thing, I want to make sure I understand the behavioral portfolio and what appropriate coverage is here, but in the top 10 tenants, the behavioral coverage did fall. Is there anything we should be concerned about in terms of restructuring?

I'll take the first part and kick it over to Talya. There is no concern at all. On the 1.4 you refer to, that’s EBITDAR basis. We underwrite on EBITDAR basis. We underwrite 1.4 to 1.5 on an EBITDAR basis. So, that's a big difference because there's a 40 basis-point differential between EBITDARM and EBITDAR. Our coverage remains on track.

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 and hasn't been able to manage due to not getting enough staff. That's driven us to slightly lower NOI and therefore pressure on coverage. We have other operators in the sector that operate smaller buildings in other parts of the country, and they are covering upwards of 5 times. So it varies based on the operations, etc., of these buildings. We typically underwrite at about a 2 to 2.5 times at new acquisitions in the space.

The other point I’d make is even though labor issues affect all asset classes to some extent, the economic model of behavioral facilities has a much lower breakeven point from an occupancy perspective than skilled nursing and senior housing. So, there's actually more breathing room there as well.

And our next question will come from Tayo Okusanya of Credit Suisse.

Just along Vikram’s line of questioning, again, this idea of are there any additional watchlist tenants that you guys may kind of have your eye on? I asked that in the context of just again, the rent coverage on the senior housing portfolio is still pretty tight at this point. The fundamentals are pretty tight even with the recovery. How are you thinking about that at this point, given the fundamentals in both skilled and senior housing?

Sorry, Tayo, can you repeat the last part of that question?

Sure. This idea of your watchlist tenants, if there's any real change in the lift in context of rent coverage on your senior housing portfolio is still tight. Fundamentals in skilled and senior housing are still challenging?

Our watchlist remains the same as it's been. As I mentioned in my prepared remarks, our sub one EBITDARM coverage is about less than 5% of our overall NOI. The other point I want to make is on the senior housing piece for the triple net; it's a very small portion of our portfolio. I understand your question on the coverage, but it's a small piece of our triple-net portfolio.

The only other point that needs stressing is that even though it is tight, it's at least improving. It went from 109 to 113. That's certainly not where we want it to be, but there is improvement. The recovery may be taking longer than we'd like, but we all believe we've been through the worst of it. I think the worst was when Omicron hit and then exacerbated all the labor issues, reversing all the occupancy gains.

On the Enlivant front. I know we've always kind of talked about it; previously, you said before you do anything with TPG, wait for this thing to recover. Looking at occupancy today, it looks like 85%, which is pretty high relative to industry standards. 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 the 75% to 76% range. That said, yes, the portfolio is going to be marketed soon. From the bankers' perspective and TPG’s perspective, which we agree. At this point, you need to go out with 2023 numbers that are believable to market the portfolio. That will happen soon. The management team is completing their budget process that will be presented to the board and once signed off, the marketing process will kick off before year-end by the bankers.

That 85.5% you're looking at is for our Sienna joint venture.

Our next question will come from John Pawlowski of Green Street Advisors, LLC.

Michael, with regards to this statistic you shared with the percentage of tenants below 1 times EBITDARM coverage. Could you share the same statistics on EBITDAR?

Yes. I could get that exact number for you. As you recall, we don't disclose EBITDAR because of the various ways our peers report it and it just becomes a non-comparable number. But in terms of EBITDAR coverage, I'm pulling it up right now. It's consistent with what we've disclosed in the past. It's just under 6%.

So the same percentage of tenants are below one on both EBITDARM and EBITDAR roughly?

It's like a 2 percentage difference. We were below 5% on EBITDARM, and just below 6% on EBITDAR.

I have a follow-up question on the McGuire Group. I believe you extended a working capital loan to them, but their EBITDARM coverage is almost 2 times, so just from the outsider's view, they shouldn't need cash, but they need cash. Can you give us a sense for what drove the working capital loan? 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.

But, as we have been saying consistently, because this recovery is taking as long as it is, we believe that we will need to help tenants out for some period of time. That can come in a number of forms, it may not be tied to transitions. That could be in the form of rent relief, either partial or full, or it could be a working capital loan. So, 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.

Our next question will come from Daniel Bernstein of Capital One Securities.

Hi, thanks for taking the call and I apologize just to hear the dog barking in the background. Are there any purchase options that were given to Ensign or Avamere, and as part of that transition of those North American assets?

No.

Okay. The flu has 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? Are residents and employees getting the flu vaccine at higher levels than pre-COVID? Just trying to get a sense.

I don't have good data on that. I would be surprised if it was higher than previously COVID levels. There's usually a pretty concerted effort to get residents vaccinated for the flu. For employees, it's always kind of 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. I don't have good data on that, but I would be surprised to see any uptick. We're not seeing any impact yet. I know that there's been concern about COVID, flu, and RSV, but we're not seeing that hit the business at this point.

I was wondering whether it was a cultural change or not, but I guess there's not enough data. And 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?

Yes. It was somewhere in the neighborhood of $2 million, somewhere in that range, as far as our cash NOI goes. It dropped by about $2.4 million. That's roughly the number we're looking at.

And that was all paid early in Q4?

Correct.

Our next question will come from Richard Anderson of SMBC Group.

I have a question on sort of the irony of cutting rent and giving a portion of that portfolio to an operator where you just cut rent, Avamere. I wonder if that weighed into your thinking at all, given the history with Avamere. How do those four assets marry with the existing Avamere portfolio in terms of coverage and rent? Is it perhaps a precise reflection of what you had in place already there?

Let me order, I think better answer to your question, since you used the word irony. Just a little bit of history. Avamere obviously, we got as part of the merger. Avamere was the one tenant that we didn't do anything with, their rent coverage was always really tight. We chose not to do anything to them, where we took care of all the other operators that we did. Once the pandemic hit, they still managed through it. Given how long the pandemic went on it became too much. We thought we had to do something for them at that point. We put that recap capture mechanism in place because we believed they could get back to a higher rent level over time. Giving them the four additional facilities will that make the portfolio much stronger overall, particularly with the 20% Washington State Medicaid rate increase. That will accelerate the rent recovery there much more quickly than we anticipated. Washington is a key market for them, and it made a lot of sense. Ensign I think just has two buildings in Washington, they might be off a little bit, but they don't have much of a presence up there. They preferred just to do the California portfolio as well. Does that answer your question?

The four assets, is the coverage on them 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 there were some huge expense opportunities for Ensign in particular because of the quality of the Company, perhaps, but also just nationally. Was that upside at the expense opportunity for them a function of them, Ensign, or was it a function of the existing way by which the portfolio was being managed? I'm just curious, to what degree there was an under-management situation that Ensign can exploit?

It was more a function of how North American operators structured things. There’s a lot of autonomy at the facility level relative to purchasing, where Ensign as everybody knows, their local operators do have a lot of independence and authority, but Ensign leverages their scale with group purchasing and getting discounts as a result of that. That’s a completely different philosophy; not saying one's right or wrong, there are different reasons for companies doing that. Ensign bringing that philosophy will yield positive results on the margin for this portfolio.

Is there a similar expense opportunity for the foregoing Avamere or is that sort of just status quo?

No, the Avamere opportunity is more on the revenue and occupancy side. Because of their geographic distribution in Washington, prior to getting these four buildings, they had some difficulty in getting managed care contracts at the rates they wanted. These four buildings densify their markets and urban communities. They've already had conversations with insurers. They believe this opportunity will allow them to not only get additional managed care contracts but get better rates because of the volume they can provide from a service perspective in the Seattle market.

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.