Earnings Call Transcript - SBRA Q3 2021

Operator, Operator

Thank you for standing by and welcome to the Sabra Health Care Third Quarter 2021 Earnings Call. (Operator provided instructions.) As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Michael Costa, Executive Vice President, Finance and Chief Accounting Officer. Please go ahead, sir.

Michael Costa, Executive Vice President, Finance and Chief Accounting Officer

Thank you. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including the expected impact of the ongoing COVID-19 pandemic, our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2020 as well as in our earnings press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investor section of our website. And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Health Care REIT.

Rick Matros, Chairman and CEO

Thanks, Mike, and thanks everybody for joining us. I'd like to start today actually with a quote that Talya shared with me, the dedication in General McChrystal's new book, which is called Risk, A User's Guide: 'To the health care and other essential workers when things with risk are often difficult to effectively assess and impossible to completely mitigate, respond with quiet courage and too often sacrifice themselves for others.' We once again want to thank all of our workforce out there for everything they're doing on a day-to-day basis. Let me move on to labor now because that's, I think, foremost on everybody's minds. First, I'll start by saying labor pressures are really different by market. So there is not a simple answer or something I can say in terms of trends. For example, in California, the Northeast states and Texas, the labor shortage just hasn't been as bad as in other markets. It's also better in states that have kept up with wage increases. Florida and the southern states, for example, are far behind on wage equity and so our operators in those states are having more difficulty with labor than in other states. So really, it's all over the place. We also see a difference in labor pressure and the culture of our operators. That does make some difference as well and that part is actually quite good because the fact that culture could affect retention and recruitment is helpful and we're trying to share best practices with our tenants as it pertains to that. Our operators do have some level of optimism that those who have not come back into the workforce will do so as they start spending less for the holidays and have a less stressed environment with COVID receding and the vaccination uptake improving and creating a safer work environment. Currently, just under 80% of our operators' workforces are now vaccinated. So that's really a nice improvement since the last quarter. It's above industry average, and certainly above the national average in general. So we feel pretty good about that. I would say that for those that haven't mandated there is still a fear that they're going to lose too many employees if they mandate. But the data just really hasn't supported that: all the operators that we are aware of who have mandated simply have not lost that many employees and actually have been able to use that as a recruiting tool because they do have a safer environment. We understand the concerns that operators have; now they're just going to have to mandate whether they like to do so or not. We think that's a good thing. These labor issues are the primary impediment to the pace of the recovery. That said, our tenants have been incurring additional labor costs such as temporary agency labor in order to continue to push occupancy increases as much as possible. In other words, we don't have tenants that are saying, 'We're just not going to admit because we have labor shortages.' They'd rather spend more on labor to bring revenue in and keep those relationships intact. Again, that's something that we favor because the demand is clearly there. In terms of funding, the COVID-19 Public Health Emergency Act has been extended again for another 90 days with Medicare sequestration effective through year-end and we have optimism that will be extended again. FMAP funding increase is extended to the end of the first quarter of 2022. I'll move on to investments now. Our investment pipeline continues to be very active. We have approximately $2 billion in the pipeline, still not much in skilled nursing; 75% of our $2 billion potential investments are in excess of $100 million. To date, we've closed approximately $400 million with a weighted average cash yield of 7.55%. I want to note we did announce the closing of the first tranche on the RCA loan, and that's a deal that we feel really good about. We felt it was important to be a good capital partner. There aren't that many strong operators yet in the addiction space, so we want to be there for those who are, and that commitment to RCA was also the commitment to the sector relative to our intent going forward. A quick comment on the balance sheet: Harold will talk more about that, but the two offerings that we did, both the debt and the equity offering, strengthened the balance sheet and put us in really good shape on a go-forward basis with a level of optionality when it comes to funding acquisitions that we haven't had historically. Moving on to operations, excluding PRF, skilled rent coverage is down sequentially on a trailing 12-month basis, primarily due to the second quarter of 2020 being replaced with the second quarter of 2021, and on a quarterly standalone basis there was a sequential drop, which wasn't significant, but nevertheless a sequential drop was due specifically to higher labor costs. Our skilled occupancy, which lost momentum late summer, is now showing some recent improvement. The biggest turnaround has been Avamere. Avamere had actually fallen 300 basis points lower than the December low, but since opening the COVID units they have increased their occupancy by 400 basis points in the span of two weeks. Even though these COVID units will be around for some time, that should buy them a long period as we work on getting occupancy up on a longer-term basis throughout the Avamere portfolio. And with that, I will turn it over to Talya, and then she'll turn it over to Harold, and then we'll go to Q&A. Talya?

Talya Nevo-Hacohen, President, Senior Housing

Thank you, Rick. In the third quarter, Sabra's wholly owned Senior Housing Managed portfolio continued to build on the recovery that began late in the first quarter. Nationwide labor shortages coupled with the rise in COVID-19 infections from the Delta variant slowed the speed of the recovery during the latter part of the third quarter. We see clear signs of demand for senior housing and believe that the operators will mitigate labor shortages through initiatives on compensation, culture and safety. As we stand here today, the recovery of occupancy feels on track but the solution to the labor shortage remains worrying. The headline numbers for the wholly-owned managed portfolio are as follows: occupancy in the third quarter of 2021, excluding non-stabilized communities, was 78.8%, a 150 basis point increase from 77.3% in the prior quarter. RevPAR, excluding non-stabilized communities, was $3,272, essentially flat to the prior quarter's $3,263. RevPAR has remained stable over the past five quarters across both independent and assisted living despite surges in the pandemic. Cash net operating income declined by 11% sequentially and margin decreased by 3.4% compared to the prior quarter, in part because no COVID grant income was received in the third quarter compared with just over $500,000 of grant income in the second quarter. Excluding the grant funds, cash net operating income declined 6.2% and margin decreased only 2.4%. Operating expenses in Sabra's assisted living and memory care properties, including the wholly-owned and Enlivant portfolio, skewed higher in the third quarter, mostly in September, because of contract labor costs. Across the wholly-owned managed portfolio we are seeing leads at 20% to 50% above 2019 levels across the quarter and conversion rates higher than in 2019. The Delta variant appears to have delayed some move-in volume during September as well as slightly increased move-outs. Communities are beginning to recover from the effect of the Delta variant with move-outs normalizing and move velocity picking up. While the focus remains squarely on rebuilding occupancy in order to rebuild revenue, the shortage of labor and utilization of contract labor at higher cost have become a critical element in the path to economic recovery. Higher acuity communities have more staff; therefore, we have seen contract labor impact assisted living and memory care much more than independent living. Sabra's wholly-owned managed assisted living portfolio has continued the occupancy recovery that began in the second half of March, gaining 234 basis points from the end of the second quarter to the end of the third quarter. From June 2021 to July 2021 occupancy increased by 166 basis points. From July 2021 to August 2021 occupancy increased 53 basis points. From August 2021 to September 2021 occupancy increased 9 basis points. From the low in March through mid-October occupancy increased 457 basis points to 73.9%. This trend was driven by our wholly-owned and Enlivant portfolio which had occupancy of 73.7% in September, 400 basis points above June occupancy. By comparison, Sabra's net leased assisted living and memory care portfolio has shown continued occupancy recovery, increasing 303 basis points in the third quarter compared with the prior quarter. Note that in the supplemental information materials, we show this portfolio's statistics one quarter in arrears, which currently includes the periods immediately prior to and immediately following the distribution of the vaccine to senior housing communities. While revenue in our wholly-owned assisted living portfolio grew 3.6% quarter-over-quarter excluding grant income, revenue grew 7% quarter-over-quarter. Cash NOI margin compressed to 15.1% compared with 21.7% in the second quarter excluding grant income. About 70% of this change is attributable to an increase in contract labor cost in our wholly-owned and Enlivant portfolio, of which more than half was incurred in September. Sabra's Managed Independent Living portfolio experienced less occupancy loss than our Assisted Living portfolio and its recovery has been more gradual. Throughout the duration of the pandemic, we have seen that move-outs have been driven by the need for higher care and we continue to see that this quarter. From June 2021 to July 2021 occupancy was flat; from July to August 2021 occupancy increased 183 basis points and from August to September 2021 occupancy increased 30 basis points. Cash NOI in the wholly-owned independent living portfolio grew 4.2% quarter-over-quarter and margin expanded by 0.8%, while occupancy pressure at two of our Canadian retirement homes and catch-up on maintenance deferred due to the pandemic offset some of the gains made. Availability and cost of labor is not a meaningful factor in those Canadian homes. And with that, I will turn the call over to Harold Andrews, Sabra's Chief Financial Officer.

Harold Andrews, Chief Financial Officer

Thanks, Talya. I'll give a quick overview of the numbers for Q3, discuss recent balance sheet activity and briefly discuss our 2021 guidance. Before doing so, let me make a couple of remarks about the change in accounting for Avamere's lease. As we noted in our September 13, 2021 business update, Avamere has experienced cash flow constraints over the past several months from census declines as a result of a spike in COVID-19 cases in Oregon, Colorado and Washington together with admission limitations in these states, as well as from increased labor pressure. We have been using their letter of credit to satisfy their rent obligations beginning in September 2021 to help with these cash flow constraints. This letter of credit is expected to cover the rent obligations through a portion of the December 2021 amounts due, and we expect the full amount of rents due to the end of 2021 to be paid. However, even with the encouraging pickup in census they have seen since the opening of COVID-specific units in Oregon, we concluded that the lease no longer meets the high threshold to continue accounting for on an accrual basis. As a reminder, we must conclude that it is more than 75% probable that we will collect 90% or more of all payments due over the life of the lease to continue accounting on an accrual straight-line basis. The Avamere lease does not mature until 2031. Given the less-than-optimal EBITDA coverage historically for this lease, the 10-year remaining term and the uncertainty of the future stabilized performance level for these operations, we concluded that some level of rent adjustment in the future may be necessary. We expect this determination will not be made until sometime during 2022 as we begin to get additional clarity on future stabilized performance expectations. We consequently wrote off $25.2 million of straight-line rent receivable balances related to this lease. We continue to have $19.1 million of above-market lease intangible assets associated with the Avamere lease on our balance sheet. Any future lease amendment may result in the write-off or acceleration of the amortization on all or a portion of this balance. Now onto Q3 results. For the three months ended September 30, 2021, we recorded total revenues, rental revenues, and NOI of $128.6 million, $85.4 million and $96.3 million, respectively. Included in these amounts is the write-off of $25.2 million of straight-line rent receivables noted previously. Excluding this amount, total revenues, rental revenues and NOI were $153.8 million, $110.6 million and $121.5 million, respectively, as compared to $152.9 million, $110.8 million and $121.3 million for the second quarter of 2021. While our NOI, after normalizing for the Avamere write-off, was essentially flat — being just $200,000 higher than in Q2 — there were some notable changes in each direction in our managed senior housing portfolio and Enlivant joint venture that landed us there. NOI from our Managed Senior Housing portfolio decreased $1.2 million to $9.1 million due primarily to the fact that we received no government grant income this quarter compared to $500,000 last quarter as well as the impact of higher COVID-19 expenses and labor costs, as Talya discussed in her prepared remarks. NOI from the Enlivant joint venture was $3.5 million, which is $1.2 million higher than the second quarter, primarily due to the second quarter NOI containing the $2.5 million one-time support payments made to the joint venture. Excluding this amount, NOI from the joint venture decreased sequentially by $1.3 million. Revenues from the joint venture increased by $1.3 million due to increased occupancy of 2.2% to 71.9% for the quarter compared to the second quarter, offset by higher labor and COVID-19 expenses. On the expense side for Sabra, the G&A cost for the quarter totaled $8.7 million compared to $8.8 million in the second quarter of 2021. G&A cost included $2.4 million of stock-based compensation expense for the quarter compared to $2.3 million in the second quarter. Recurring cash G&A cost of $6.4 million were 6.7% of NOI and in line with our expectations. Interest expense totaled $24.2 million for the quarter, remaining effectively unchanged from the second quarter. The result of this activity is FFO for the quarter of $59.9 million and normalized FFO of $85.3 million, or $0.38 per share. FFO was normalized primarily to exclude the Avamere straight-line receivable write-off. This compares to normalized FFO of $88.4 million, or $0.41 per share, in the second quarter of 2021. AFFO, which excludes from FFO certain non-cash revenues and expenses, was $84.8 million and normalized AFFO was $85.2 million, or $0.38 per share. This compares to normalized AFFO of $86.6 million, or $0.40 per share, in the second quarter of 2021. For the quarter, we recorded net income attributable to common stockholders of $10.2 million, or $0.05 per share. Under the balance sheet, we issued $800 million of 3.2% senior unsecured notes due in 2031. The net proceeds were used to repay $345 million of our US-dollar-based term loans and subsequent to quarter end redeem all $300 million of our outstanding 0.8% senior unsecured notes due 2024, and to fund a portion of the RCA mortgage loan. This issuance allowed us to improve our weighted average debt maturity by 2.4 years to seven years and reduced our cost of permanent debt by 23 basis points to 3.5%. We were in compliance with all our debt covenants as of September 30, 2021 and continue to have strong credit metrics, all of which are presented pro forma for the redemption of our 2024 notes, which occurred on October 7. Our leverage was 4.81 times, interest coverage 5.32 times, fixed charge coverage 4.9 times, total debt to asset value 34%, unencumbered asset value to unsecured debt 289% and secured debt to asset value of just 1%. We continue to have a very strong liquidity position. After giving effect to the redemption of $300 million of 4.8% senior unsecured notes that were due in 2024, as of September 30, 2021, we had approximately $1.2 billion of cash and availability on our credit line. On October 15, we completed an underwritten public offering of 7.8 million newly issued shares of our common stock at a price of $14.40 per share and received net proceeds before expenses of $112.6 million. These proceeds were used to fund a portion of the RCA mortgage loan. On November 3, 2021, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30, 2021 to common stockholders of record as of the close of business on November 16, 2021. The dividend represents a payout of 79% of our normalized AFFO per share. Finally, a couple of comments on our 2021 guidance. We reaffirm our previously issued guidance range for normalized FFO of $1.56 to $1.58 per share and normalized AFFO of $1.53 to $1.55 per share. Our previously issued guidance did not include the impact of two matters that affected our full-year 2021 per diluted common share guidance for net loss, FFO and AFFO. The first is the straight-line receivable write-off, which had a $0.11 per share impact on net loss and FFO. The second is the debt extinguishment costs related to the 2024 note redemption early in the fourth quarter that resulted in a $0.17 per share impact on net loss and FFO, and a $0.16 per share impact on AFFO. The impact of these two transactions are added back in arriving at our expected normalized FFO and normalized AFFO numbers. And with that, we'll go ahead and open it up to Q&A.

Operator, Operator

(Operator provided instructions.) Our first question comes from the line of Richard Anderson from SMBC. Your question, please.

Richard Anderson, Analyst, SMBC

Thanks, sir, and good morning out there. Harold, I think this is your last call, so congrats on that. Just remind me, Rick, is the January 4 mandate that's coming just on skilled? Not on the senior housing, is that correct?

Rick Matros, Chairman and CEO

So I was clear on that before, and I'm a little less clear on the news this morning because it says all health care workers. The original mandate was health care businesses that received federal money and that's not the case with senior housing. So I'm assuming that you're correct that senior housing is still carved out, but our guess is that most of the senior housing can and many of them really want to mandate. I think we'll see more senior housing operators mandate anyway. So I think that's correct.

Richard Anderson, Analyst, SMBC

Okay. In terms of Avamere, it's a nice little bounce on the occupancy side, and I know you're going to reserve some time to figure out what you're going to do with that longer-term, but what would it take for you to not have to do something? I mean, if we get 400 basis points of occupancy gain, god willing, and that continues with some regularity, is there a scenario where you could resume accounting as before? If COVID cases decline and other good things happen in the future, might nothing need to be done?

Rick Matros, Chairman and CEO

Yes. So I think the way we think about it, Rich, and I know you'll recall that prior to the pandemic, Avamere had a lot of coverage of any of our material tenants. They were trending up prior to the pandemic on coverage and performance, and so hitting just trying to off a problematic period of time these last couple of months and slipping within coverage made it even that much more difficult for them. So I think we're inclined to want to do something for them. We just want to see things stabilize. We don't expect it to have a material impact on the company numbers or anything like that, but I think we would like them to have a little bit more breathing room. You never know; I think this demonstrated it. We have had a lot of conversations with tenants over the course of many restructurings, and most held up really well during the pandemic. This was the only tenant that we really had an issue with, and it came late in the game. So yes, I think we're inclined to do something next year for them. We just need things to stabilize a bit more and get a better sense of where they land, but again it won't be material.

Richard Anderson, Analyst, SMBC

Okay. Last question from me and I'll yield the floor to my peers, but any update on the timeline to Enlivant and TPG actually exiting that portfolio?

Rick Matros, Chairman and CEO

Not really. TPG wants to give it a little bit more time before they really run a full-blown process, and that's really because things have been rebounding pretty nicely there. I think their thought process — and I want to be careful speaking for them — is that as the portfolio has been recovering, it will make the opportunity to get a better valuation that much greater. So I guess it's not really going to start in earnest until after the first of the year, and then the way to think about it is however long it takes to find a buyer — it's going to take several months for regulatory reasons to get to a close. So I don't think we're looking at anything sooner than mid-year 2022 to close; it could be later in the summer. For us it doesn't really make a difference; it's what it is now, and to the extent they think that waiting will get a better valuation, that accrues to our benefit anyway.

Operator, Operator

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

Nick Joseph, Analyst, Citi

Thanks. Maybe just following up on that Avamere question, so if the letter of credit runs out in December, and recognizing that once things are stabilized maybe you can make a longer-term decision on the lease, what happens in that intermediate timeframe, maybe beginning in January, assuming the business fully recovers to a coverage level that would allow them to pay the rent?

Rick Matros, Chairman and CEO

Right now, we think we're okay for the couple of months following the expiration of their letter of credit. They were able to access some upfront funds, which is really going to help their liquidity on these COVID units. They negotiated with the State of Oregon and are in the process of some other negotiations as well, which we think will help. So we're not really concerned about the short term right now, even after the letter of credit runs out sometime in December.

Nick Joseph, Analyst, Citi

Thanks, that's helpful. I think you've obviously repositioned the balance sheet to be in a good position. I think you mentioned the acquisition pipeline may be $2 billion. How are you thinking about your cost of capital — I guess specifically the cost of equity — and the ability to execute on that acquisition pipeline just given where shares trade today?

Rick Matros, Chairman and CEO

So a couple of things. On the skilled side, behavioral health and addiction, clearly we can be competitive, and what we're finding on the senior housing side is it's difficult to compete on large portfolios with private equity given where our equity currently stands. But on the smaller deals that we have been executing on this year — about $75 million so far — those are deals that are on the radar of some of the more competitive players, and they're deals that we can get done and be creative with, whether that's earn-outs or other structures, because of some of the issues that some smaller senior housing providers have faced. We're really good at doing those kinds of smaller, more complex transactions, and focusing on the small things allows us to get more done on the senior housing side. Talya, I don't know if I missed anything on that.

Operator, Operator

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

Juan Sanabria, Analyst, BMO Capital Markets

Just hoping to spend a little bit more time on Avamere. Is it possible you could give us a sense of how that portfolio's EBITDAR has trended over time? I don't know if you can give like a T3 or T12 kind of pre-COVID and today, just to give us a sense of the degradation in cash flows and kind of what is potentially possible to get back to, to try to gauge how much rent could be cut and just the level of confidence in not having a material effect given it is your largest tenant.

Rick Matros, Chairman and CEO

They were actually trending up prior to COVID. They were trending up for two reasons: some operational initiatives they were taking and PDPM, like many other operators. So they were on the upswing. They made it through 16 months or so of the pandemic and their low point in occupancy in December of 2020 was 70%; they improved to about 74.5% going into the summer. Then you had severe admission restrictions in Oregon and Washington which pushed them down from 74.5% to just under 67%, over 300 basis points lower than their low in December, and that really threw them for a loop. Up until then, they were holding serve. So these COVID units opening and the improvement in occupancy give us reason to hope they can get back. Our whole focus is that they relied on coverage before, and they were able to hold serve through much of the pandemic until these recent events. That's why we say that when we make a final determination it won't be material because they were able to hold serve and we're just looking to give them a bit more breathing room.

Juan Sanabria, Analyst, BMO Capital Markets

Any color on kind of where the coverage is on a Q3 basis and what you think is a healthy coverage? I get that they can get bad but I'd like to gauge how big a rent cut could be.

Rick Matros, Chairman and CEO

I don't want to negotiate with Avamere on the phone right now.

Juan Sanabria, Analyst, BMO Capital Markets

Okay, fair enough.

Rick Matros, Chairman and CEO

Before the pandemic and before the positive trending with PDPM, they were around slightly above 1.0x coverage and you'd like them to be a little bit higher than that. We're not going to give them an adjustment that takes them to 1.5x — that's not going to happen. So we'll get there, but nothing dramatic.

Juan Sanabria, Analyst, BMO Capital Markets

Okay. And then with regards to the senior housing business overall, given the labor cost pressures, what kind of flow-through to NOI do you expect from incremental occupancy given the cost pressures? Or said differently, how are you thinking about margins getting back to where they were previous to the pandemic?

Talya Nevo-Hacohen, President, Senior Housing

Well, there's a lot of math that goes into this. You've got occupancy and rates on the revenue line, and rate is where operators are really thinking about what they can manage now in order to cover labor costs. In other words, passing through labor cost and labor increases. What we're hearing is everywhere from what we would expect to hear on rate increases, which are call it sort of the 5% annual increases, to something more substantial. It really is going to depend on the type of building, the level of care and the length of stay in those buildings. But there is a sense — I just came back from a day and a half at the NIC Conference in Houston — and there is definitely a sense among the operators with whom we spoke that some portion, if not the entire portion, of these labor costs can be passed through to residents. We are seeing consistently positive leasing spreads. In other words, our new leases were being written at higher levels than in-place rents. So that's the good news: there appears to be an ability to do that. That suggests that operators are not going to eat the entire cost of labor and come out fully eroded on margin. How much will be offset by the top line is going to be a function not just of rate but of continued occupancy increases. That's why I said there's a lot of math here, but that's the best I have right now.

Rick Matros, Chairman and CEO

The other point I would make is that our operators are not doing deep discounts like some competitors are. The rates we've shown in the supplemental have held up really well. Feedback indicates they are able to build occupancy without sacrificing rates to get occupancy back up.

Juan Sanabria, Analyst, BMO Capital Markets

So just to confirm the positive lease spreads you're seeing versus in-place rates — that's new and historically hasn't been the case. Are you seeing street rates for new customers moving up, or is that holding flat at best?

Talya Nevo-Hacohen, President, Senior Housing

Asking rates are moving up in general, certainly with the operators with whom I spoke. There are operators that are providing discounts to pull occupancy; you can see from the steady increases in occupancy within our portfolio that we're seeing good traction on occupancy increases. I'd characterize it as a significant uptick versus the pre-pandemic period, with higher conversions to move-ins compared with 2019. So there is positive momentum on leasing and everything indicates that is continuing so far. Operators are saying they can push rates more than the typical 4% to 5% that was seen pre-pandemic.

Rick Matros, Chairman and CEO

And going back just a little bit on Avamere, another point is the Phase 4 funds haven't come in yet. So in addition to the money they accessed for the new COVID units, the Phase 4 funds should also support them, which increases our comfort with receiving rent after the LOC is exhausted.

Operator, Operator

Our next question comes from the line of Amanda Sweitzer from Robert W. Baird. Your question, please.

Amanda Sweitzer, Analyst, Baird

Thanks, good morning. It looks like you granted another small tenant deferral request in September. Can you remind us of more information on the outlook for additional near-term rent deferrals outside of Avamere, and then is there any security behind the already deferred amounts?

Rick Matros, Chairman and CEO

There is always security behind them. The only other deferrals we've done have been really short-term in nature. We've had nothing long-term anticipated; they're nominal and we don't see anything else on the horizon right now.

Amanda Sweitzer, Analyst, Baird

Okay. So in terms of rent deferrals in October, you wouldn't expect a meaningful uptick?

Rick Matros, Chairman and CEO

No.

Amanda Sweitzer, Analyst, Baird

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

Rick Matros, Chairman and CEO

There aren't specific statewide initiatives I'm aware of beyond general budget improvements. Most states are pretty flush right now on the Medicaid side and are in good shape from a budget perspective. As we get into the first part of next year and they start discussions about annual rate increases, it's been a bit more positive because there is more money to work with. Only about half the states allocated FMAP directly to skilled operators, so there is a chunk of money that a lot of states are holding. So there's some optimism but not specific new initiatives across the board. One thing we may see more of is negotiations similar to what happened in Connecticut to increase wages and use the Medicaid program as a pass-through. In Connecticut, the industry worked with unions and the state to negotiate wage increases that were passed through in Medicaid and audited as pass-throughs. Many states' Medicaid programs allow for that. We've seen it happen in California and that's often an easier path because the increases must be passed through directly to employees. I would expect more of those negotiations in 2022.

Operator, Operator

Our next question comes from the line of Steven Valiquette from Barclays. Your question, please.

Steve Valiquette, Analyst, Barclays

Thanks. Hello, everyone. Just a question on the overall skilled labor environment. Across the entire post-acute health care provider spectrum, we've gotten mixed signals at different stages of the pandemic about which business models may be competing for the same type of skilled labor — thinking about home nursing or home health versus SNFs versus inpatient rehab facilities or LTACs. I'm curious to get your thoughts on the SNF sector in particular where there is overlap on competition for skilled labor across post-acute, and also whether acute care hospitals are part of that competition for the same type of skilled labor. Thanks for any thoughts.

Rick Matros, Chairman and CEO

Most of the competition is on the high-acuity post-acute space — LTACs and IRFs — and that's where you see more overlap. It's not as competitive with senior housing or home health simply because home health doesn't require the same staffing levels. LTACs are only in a handful of states; IRFs are more widely present but differ by market. The larger concern is how many health care workers left the workforce during the pandemic. That's the bigger issue: people who left for pandemic-related reasons and haven't come back. There's optimism that as pandemic benefits end and the situation stabilizes, many will return to the workforce. We've seen shortages even in dietary, housekeeping and laundry — roles you wouldn't have expected to be under stress previously. Time will tell if the people who took breaks come back, but that's the main factor affecting skilled nursing right now because of the number of employees required in those facilities compared with other settings.

Steve Valiquette, Analyst, Barclays

Okay. That's definitely helpful. Appreciate the color. Thank you.

Rick Matros, Chairman and CEO

The other thing I would point out is trends showed the workforce issues looked like they peaked at the end of 2020 and then started to get better because of optimism with vaccines. But then with a subset choosing not to get vaccinated, we had another wave and burnout got worse in the last several months. So there's some hope that once people have more time off and more vaccination uptick happens, folks who work in facilities will come back.

Operator, Operator

Our next question comes from the line of Omotayo Okusanya from Credit Suisse. Your question, please.

Omotayo Okusanya, Analyst, Credit Suisse

My question is more on reimbursement. You gave some good color on FMAP and sequestration and some of those things could end, but I'm curious what you're hearing about three things: making skilling-in-place permanent, whether any of the $10 billion emergency CARES Act funds remain and could be accessed, and any potential PDPM review by the new head of CMS?

Rick Matros, Chairman and CEO

On 'skilling in place,' I think there's an initiative and discussions among the trade associations to try to make that permanent. Given the benefits seen and the limited financial impact on the acute side, we have a shot at making that permanent, and that would help margins. On the CARES Act funds, after Phase 4 there's quite a bit less in the fund. There is still some money left, though — not zero — and providers have returned roughly $8 billion, primarily in the acute side, that they didn't need. I'm just rounding, but there is still a meaningful amount in the fund, perhaps on the order of the low tens of millions of dollars remaining available, though that may vary. If there were nothing left, there would be less optimism about additional support; but there is some money after Phase 4. On PDPM, nothing is being actively discussed right now about changing PDPM. Initially some thought 2021 could be a base year to assess PDPM, but given the pandemic disruptions in 2021, it might not be an ideal base. We don't have any reason to believe the new head of CMS won't be reasonable on PDPM; we expect continued engagement.

Omotayo Okusanya, Analyst, Credit Suisse

Thank you.

Operator, Operator

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

John Pulaski, Analyst, Green Street

Could you provide some details around the sequential deterioration in North American health care coverage, where their occupancy is today, and has it trended up or down in recent months?

Rick Matros, Chairman and CEO

That's a matter of one quarter rolling off and another quarter coming on. They're actually doing well and their occupancy is recovering. North American Health Care has the best skilled mix of any of our operators and we feel good about North America. There were just some timing issues with quarters dropping off and new quarters coming on. California has labor pressures, but wage equity in California has been relatively stronger so there are fewer issues compared with some other states.

John Pulaski, Analyst, Green Street

Maybe on that point: looking at your top 10 operator list, is geography the biggest driver of divergent outcomes and changes in coverage levels? You see North America, Avamere, Genesis decline sequentially, but some other operators are stable or increasing. What are the biggest one or two factors driving divergence across operators?

Rick Matros, Chairman and CEO

The two consistent factors are the quarters rolling off (i.e., timing effects) and decreases in PRF recorded in the current quarter. The third and most important is geography. For example, Genesis had facilities in markets with real labor pressures that impacted their coverage. So geography is currently the dominant driver of labor-related differences across operators.

John Pulaski, Analyst, Green Street

One last one from me: I won't hold you to a point estimate, but if occupancy continues to improve but recent labor resets fully flow through these trailing 12-month numbers a year from now, what is coverage look like across the portfolio? I'm struggling with the lagged nature of EBITDAR.

Rick Matros, Chairman and CEO

We like to see EBITDA coverage north of 1.4x in the aggregate and we were pretty much around there before the pandemic. If labor pressures abate to the degree we'd like, the new normal might be closer to 1.2-1.3x EBITDAR in skilled, depending on how things settle. We don't believe it's going to get down to 1.0x broadly, because there are dynamics that should push occupancy up: the number of skilled beds continues to decline, demographics are supportive, and the pandemic may accelerate some shifts. Prior to the pandemic, the space was projected to be fully occupied by about mid-decade, which should help the industry from an occupancy perspective and allow operators to pay for labor. Over the long haul coverage might be a bit wider, but it's unlikely to get to levels that would require widespread restructurings or significant long-term rent reductions.

Operator, Operator

Our next question comes from the line of Daniel Bernstein from Capital One. Your question, please.

Daniel Bernstein, Analyst, Capital One

Good morning. I wanted to go back to the vaccine mandate. When you say about 80% of the employees are vaccinated, it seems like that's a large number that could potentially be lost if operators mandate. Do you have any specific examples where your operator actually put in a vaccine mandate and what the attrition was from the employee standpoint? Maybe they did that in conjunction with wage increases or other mechanisms to retain employees. Just trying to get a better grasp of the risk that we'll see a lot of employee attrition within skilled nursing.

Rick Matros, Chairman and CEO

Enlivant, Holiday, Genesis, Atria and a number of smaller operators have mandated and have seen low single-digit attrition without necessarily raising wages to do it. That's been consistent across those operators we've talked to and some smaller operators as well. So call it low to mid-single-digit attrition in those instances. That seems to be the consistent experience.

Daniel Bernstein, Analyst, Capital One

Okay. And then real quick on the $2 billion pipeline — you said real estate acquisitions and loans — are you looking more at short-term structured mortgages like the RCA loan or more traditional acquisitions?

Talya Nevo-Hacohen, President, Senior Housing

The RCA loan was somewhat unique and not something we expect to be typical going forward. Our pipeline includes a mix of opportunities, but that type of transaction is not necessarily a recurring template for us.

Operator, Operator

Our final question for today comes from the line of Joshua Dennerlein from Bank of America. Your question, please.

Joshua Dennerlein, Analyst, Bank of America

Rick, in the past you've talked about the occupancy recovery in senior housing and skilled nursing. Curious on your latest thoughts on when we get back to pre-pandemic levels and whether labor plays a big factor in the timing.

Rick Matros, Chairman and CEO

On the senior housing side, I've been saying that by the end of 2022 we should be in pretty good shape and we still feel that way. On skilled nursing, prior to the Delta surge I thought we'd be there by the end of Q1 2022, but that's not going to happen given the surge and labor pressures. Right now our best guess for skilled recovery is also around the end of 2022. So despite the pressures, both senior housing and skilled may end up in a relatively good place around the same time next year, assuming trends continue to improve.

Operator, Operator

Thank you. This concludes the question-and-answer session of today's program. I'd like to hand the program back to Rick Matros for any further remarks.

Rick Matros, Chairman and CEO

Thanks very much. Thanks all for joining us today. We're always available as you all know for follow-up. I know we're seeing a bunch of folks at least virtually at NAREIT, so we look forward to having those meetings and additional discussions. Have a great day and stay safe.

Operator, Operator

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