Earnings Call Transcript - SBRA Q4 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Sabra Health Care REIT Fourth Quarter 2021 Earnings Call. I would now like to turn the call over to Lukas Hartwich, SVP of Finance. Please go ahead, Mr. Hartwich.

Lukas Hartwich, SVP of Finance

Thank you. Good morning. Before we begin, I want to remind you that we'll 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, 2021, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC this morning. 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 in the financials page of the Investors section of our website at www.sabrahealth.com. Our Form 10-K, 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, Chair and CEO of Sabra Health Care REIT.

Rick Matros, Chair and CEO

Thanks, Lukas, and thanks everybody for joining us today. Our opening song here is dedicated to the staff, the facilities. Let me start with updating everybody on our current trends. In terms of vaccination uptake, our workforce is now up to 87% vaccinated, which is really fantastic. Residents are about 92%. Approximately half of our operators have mandated vaccines and moving on to occupancy — for occupancy 25.5% of our operators are now at pre-COVID occupancy levels. The last week of January about 41% of the staff returned to work from being out due to Omicron. We had just huge numbers of staff out that was really impacting occupancy. So with staff coming back really in droves, it's having a direct impact on occupancy. The last two weeks, our managed portfolio showed improved occupancy of 46 basis points. And our top seven skilled operators have shown improved occupancy of 149 basis points in the last two weeks, which is as big a jump in that timeframe as we've seen since the pandemic started. Additionally, I would note that while there was obviously a lot of concern over coverage and things like that as Omicron hit, skilled mix from the first of the year was up 360 basis points due to acuity and skilling in place, and that really helped mitigate some of the financial impact of Omicron. Moving on to reimbursement Phase 4 funding, that money is still coming in so we don't have solid numbers yet on what the total is. We'll update as soon as we have that. I do want to spend some time today though on Medicaid because most of the focus understandably has been on all the assistance from the federal government, but there's really been tremendous assistance from the states, which is going to go beyond the federal government. And so, I just want to highlight a few things there. We took a look at 14 states that represent 73% of our skilled assets. In most states, there's a two- to three-year timeline before increased costs are captured. However, most states will use an annual market basket to adjust for inflation, which provides an opportunity for sooner recognition of increased costs. That inflationary increase has a specific labor component. About 80% of our states have provided a temporary Medicaid add-on. There's a common misconception that if the Public Health Emergency continues that FMAP funding goes away, but that's actually not the case. The states have discretion as to whether they want to keep those Medicaid add-ons in place. And we're optimistic that a number of the states will have that in place. So from a lobbying perspective, the focus has really shifted from the federal level to all the individual states. After Phase 4, there's not much left in the fund, and we're certainly not betting on getting new money in with Congress, so the focus is really going to be on the states and all the Medicaid assistance that we've gotten there. I want to make one comment on Avamere. I know that's been out there. I just want to point out that that negotiation we think went really well. We look forward to the ability to recapture it, which we fully expect that we will see some upside there. We have no additional restructurings being contemplated. There's no ongoing discussions with any of the tenants about restructurings. I also want to comment on Espirit, the Canadian deal, which Talya will talk more about. This is a very high-quality new asset with a trusted operating partner and strong growth prospects. So, we're really pleased to finally after years of making the effort see additional growth in Canada. Our acquisition pipeline currently stands at about $1.4 billion. While it's still primarily senior housing, we are starting to see more skilled nursing opportunities and opportunities in the behavioral and addiction space. We're also seeing more deal flow in Canada, and we certainly — we were seeing more deal flow anyway, but the announcement of the Canadian deal has increased that deal flow even more so. In terms of the balance sheet, Michael will spend a lot more time on that, but leverage continues to be well within target range and it should be expected to fluctuate, and that's really the primary message that we want to convey to everybody, that if we hit five times, it doesn't mean we're going to access equity. We've got plenty of room up to 5.5x as deal flow happens. Leverage can be expected to fluctuate up and down. We'll have some natural de-leveraging events with the portfolio improving, particularly the managed portfolio and EBITDA improving. We've got asset sales still that will be ongoing. So, we're in really good shape from a balance sheet perspective and in terms of the fact that we don't need to access the markets. We aren't issuing guidance, and while we did issue guidance at least for periods of time last year, the impact of Omicron particularly on the managed portfolio makes it impossible right now to predict the degree and the rate of recovery. Hopefully, we'll be in a better position to do that. I doubt by the time we have first quarter results — which is about six weeks away — but hopefully after that. And if we are able to, we will do first quarter guidance, but I think it's unlikely at this point in time. If we had strictly a triple-net portfolio we'd be in much better shape and have a high degree of confidence relative to issuing guidance. And with that, I'll turn it over to Talya.

Talya Nevo-Hacohen, President & Chief Investment Officer

Thank you, Rick. We recently announced that Sabra and a joint venture with Sienna Senior Living has entered into an agreement to acquire 11 senior housing communities in Ontario and Saskatchewan. This will nearly double Sabra’s investment in Canada given the vintage of the assets — on average six years old. And the timing of the acquisition, there is a clear path to increase occupancy across the portfolio as well as one community in lease up. Substantial expansion opportunities exist at four of the communities providing for an additional avenue of growth. As Rick said, transaction activity in Canada has increased significantly in the last 12 months and we believe that Sabra is well positioned both financially and operationally to pursue assets there including through our joint venture with Sienna. Now let me turn to our managed senior housing operating results. In the fourth quarter, Sabra's wholly-owned managed senior housing portfolio continued the momentum on top-line growth seen in prior quarters. This is offset by higher labor costs and contract labor expenses that have been challenging the healthcare industry since the middle of the third quarter with the emergence of first the Delta and then the Omicron variants of COVID-19. Early indicators point to the dissipation of the Omicron variant and rising employment rates as we speak, which will result in lower community spread, fewer infections among staff, greater availability of labor and lower utilization of contract labor. Continued move-in rates at or exceeding pre-pandemic levels and normalizing move-out rates point to the strength of demand for senior housing, which along with the return of the workforce will create the equation for ongoing recovery of senior housing barring another highly contagious variant of the virus. Demand for senior housing communities remains resilient and somewhat price insensitive. After a sustained lift in occupancy following the vaccine rollout, occupancy dipped in the fourth quarter but gross move-ins have remained in a range between even with 2019 and 10% higher. In higher-acuity communities — particularly memory care — gross move-outs have been impacted by higher death rates resulting from the Omicron variant. We have heard from our operators that 5% to 7.5% rate increases have gone unquestioned by residents and their families. At the same time, our operators are seeing move-ins coming from competing communities where aggressive pricing has changed residents' view of value. The headline numbers for the wholly-owned managed portfolio are as follows. Occupancy in the fourth quarter of 2021 excluding non-stabilized communities was 79.4% compared with 78.8% in the prior quarter, a 60 basis point increase. RevPAR excluding non-stabilized communities was $3,303 and RevPAR has remained stable over the past five quarters. Assisted living has shown increasing pricing power with same-store RevPAR increasing 5% from the first quarter to the fourth quarter of 2021, despite pandemic surges from two variants and labor shortages. Cash net operating income declined by 9.9% sequentially and margin decreased to 20.1%, 2.6% lower than the prior quarter. Virtually no COVID grant income was received in the fourth quarter and none was received in the third quarter. Contract labor cost in Sabra's assisted living and memory care properties drove this decline. Sabra’s wholly-owned managed assisted living portfolio experienced a dip in occupancy following the third quarter and began to recover late in the fourth quarter and into 2022. From September 2021 to October 2021, occupancy declined 126 basis points. From October to November 2021, occupancy declined 43 basis points. And from November 2021 to December 2021, occupancy increased 28 basis points. From December 2021 to January 2022, occupancy increased 108 basis points, making up most of the decline in the fourth quarter. There are signs of positive momentum in February with occupancy in the Enlivant portfolio increasing 80 basis points from January to mid-February. The downward occupancy trends is driven by our communities' memory care residents, where move-outs increased due to deaths related to surges of the Omicron variant in the general community because these residents are generally frailer and less able to comply with mask wearing and other infection control protocols. They are more vulnerable to COVID-19. While revenue in our wholly-owned assisted living portfolio grew 1.8% quarter-over-quarter, cash NOI margin compressed to 9.7% compared with 15.1% in the third quarter. Nearly the entire increase in operating expenses is attributable to increased contract labor costs in our wholly-owned Enlivant portfolio. Sabra’s wholly-owned managed independent living portfolio experienced less occupancy loss than the assisted living portfolio and its recovery has been more gradual. Throughout the duration of the pandemic, we have seen more move-outs driven by the need for higher care as residents have stayed in place longer and we continue to see that this quarter. From September 2021 to October 2021, occupancy increased 44 basis points. From October to November 2021, occupancy declined 34 basis points. And from November to December 2021, occupancy increased 6 basis points. From December 2021 to January 2022, occupancy decreased 119 basis points. But there was a clear distinction between our Canadian portfolio where occupancy increased by 73 basis points in this period and occupancy in our U.S. portfolio declined by 164. While revenue in our wholly-owned independent living portfolio grew 1.8%, cash NOI was flat quarter-over-quarter and cash NOI margin decreased slightly to 27.7% compared with 28.3% in the previous quarter. As a whole, the independent living portfolio has been less vulnerable to accelerated move-outs and labor challenges. Contributing to that result is that 8 of the 30 properties are in Canada where the impact of COVID-19 has not been the same as in the U.S. Despite high vaccination rates among residents in our retirement communities, there was a rise in active COVID-19 cases among both residents and staff starting in late December and through January, which began to decline in February. At the same time, labor shortages that emerged during the holiday season and drove higher labor costs due to overtime began to trend down after the New Year. Our Sienna retirement home portfolio had few and largely minor COVID-19 outbreaks during the surge of the Omicron variant in BC and Ontario, where there was a partial lockdown of Ontario through the end of January. While moving slowed during this period, residents were safe given the mid-90% vaccination rates in these retirement homes. And with that, I will turn the call over to Mike Costa, Sabra’s Chief Financial Officer.

Michael Costa, Chief Financial Officer

Thanks, Talya. For the fourth quarter of 2021, we recognized normalized FFO per share of $0.39 and normalized AFFO per share of $0.37. For the year, our normalized FFO per share totaled $1.57 and our normalized AFFO per share totaled $1.54, both of which hit the midpoint of our 2021 earnings guidance. As you noted in our earnings release, Avamere's December rental obligation of $3.6 million or $0.02 for diluted common share was paid in January 2022. Since Avamere's leases are accounted for on a cash basis, this amount will be reflected in our results for the first quarter of 2022. Compared to the third quarter of 2021, normalized AFFO per share increased $0.01 primarily due to lower rental revenues from cash-basis tenants, namely Avamere, and lower AFFO from both our wholly-owned managed portfolio and Enlivant joint venture as a result of higher labor costs. These decreases were partially offset by higher interest income primarily from the funding of the RCA mortgage loan during the quarter. Compared to the third quarter of 2021, normalized FFO per share increased $0.01. The decreases noted for normalized AFFO were offset by sequential reductions in both deferred taxes in the Enlivant joint venture and stock-based compensation. Cash NOI for the quarter totaled $109.2 million compared to $116.5 million in the third quarter. Included in cash NOI for the fourth quarter is $7.4 million of payments made to Enlivant from our joint venture to support them as they dealt with persistent labor pressures and the impact of the Omicron variant on operations. Excluding these support payments, cash NOI was effectively flat sequentially. As of December 31, 2021, our annualized cash NOI was $452.4 million and our SNF exposure represented 61.4% of our annualized cash NOI. G&A cost for the quarter totaled $8.2 million compared to $8.7 million in the third quarter of 2021. G&A costs for the quarter include $900,000 of stock-based compensation expense compared to $2.4 million in the third quarter. Recurring cash G&A costs of $7.2 million were 6.6% of cash NOI and in line with our expectations. We are in compliance with all of our debt covenants as of December 31, 2021, and continue to maintain a strong balance sheet. During 2021, we fortified our balance sheet by meaningfully extending our weighted average maturity, improving our debt laddering and lowering our reliance on term debt through the issuance of our $800 million senior note due 2031, while only increasing our fourth quarter cash interest expense by less than $200,000 to $22.7 million. As of December 31, 2021, our leverage was 4.98 times, which is in line with our long-term leverage target of 5x and well below our maximum of 5.5x. From time to time, our leverage may tick up above our target of 5x, particularly as we make investments, but we would expect leverage to come down naturally over time as performance in our managed senior housing portfolio recovers from the pandemic and as we recycle capital. Our liquidity as of December 31, 2021 totaled approximately $1.1 billion consisting of a full $1 billion of availability under our revolver and $112 million of unrestricted cash and cash equivalents. On February 1, 2022, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on February 28, 2022 to common stockholders of record as of the close of business on February 11, 2022. The dividend represents a payout of 81% of our normalized AFFO per share of $0.37. Lastly, I want to comment on guidance. Given the uncertainty around the timing of a recovery in occupancy, continued labor pressure, and the resulting impact of these items on our financial performance, we'll not be providing 2022 earnings guidance at this time. We'll continue to evaluate these circumstances in future quarters to determine if we can confidently provide meaningful earnings guidance. And with that, we'll open up the line for Q&A.

Operator, Operator

Our first question comes from the line of Nick Joseph of Citi. Your line is open.

Nick Joseph, Analyst, Citi

Thank you. Have any other tenants come to you after the Avamere announcement given the uniquely structured ability to recapture some of the rent reduction?

Rick Matros, Chair and CEO

Not one.

Nick Joseph, Analyst, Citi

Is that surprising? Obviously, Avamere was in a bit of a unique situation, but given kind of the map both in terms of near-term liquidity, but also kind of that ability to participate in the upside, is that a roadmap for future tenant restructuring?

Rick Matros, Chair and CEO

No. I think, look we've got a really good RevPAR and if they don't need it, they're not coming to us. We talk with them all the time. They know we're here to help if it's necessary. So, we're not going to take advantage of the situation like this if they don't need it.

Operator, Operator

Thank you. Our next question comes from Steven Valiquette of Barclays. Please go ahead.

Steven Valiquette, Analyst, Barclays

Hi, thanks. Hello everyone. So just the question here around — just healthcare REITs in general with skilled nursing assets this quarter, I think it's brought a pretty wide array of strategic updates in the various companies. One of your peers is talking about some high demand and elevated valuations through SNF assets and wants to sell some outperforming assets into that strength. And then Rick, I was caught by your comment saying that you're seeing more SNF opportunities showing up in the deal flow from your perspective. I guess I'm curious whether what you're seeing are assets that are more on the distress side or more on the side of revalued assets described by one of your peers? So just curious how you view that overall market. Thanks.

Talya Nevo-Hacohen, President & Chief Investment Officer

Hi, it's Talya. Let me take a stab at answering your question. So first of all, I think there's no conflict in what you just described. There has been skilled nursing sales transactional activity, and it's really been mostly off market, and if anything, the publicly traded healthcare REITs have been selling or to sell into that bid. We are seeing a small amount of skilled nursing. Frankly, there's nothing consistent in terms of quality — both high and low — in what we're seeing, but we're not seeing a lot of skilled nursing. And part of that is because there are other groups bidding for assets where they are pricing more than what we would price. In other words, there's incremental NOI that they're valuing.

Rick Matros, Chair and CEO

The other thing I would add is some of the pricing that you see out there is a little bit misleading because these are private groups or private capital, not private equity, and they own other kinds of businesses. The SNF opportunity is an opportunity for them to generate revenue in their healthcare businesses whether that's pharmacy or therapy or whatever. So, it's a bit of a different picture.

Talya Nevo-Hacohen, President & Chief Investment Officer

Right. And also, the operators are typically affiliated in some fashion with a real estate landlord. So again, they're able to capture more of the different parts of the income stream and not the same as what we're able to capture. And I think that's why you're seeing fairly limited SNF transactions being bought by publicly traded healthcare REITs.

Operator, Operator

Our next question comes from Vikram Malhotra of Mizuho. Your line is open.

Vikram Malhotra, Analyst, Mizuho

Two quick ones for me. One, can you just remind us your latest thinking on sort of the recovery path for both skilled nursing and senior housing versus pre-COVID levels? What are you sort of baking in your internal projections in terms of occupancy? And then second just on the regulatory front, you mentioned FMAP can vary quite a bit in terms of states maybe re-looking post any matching that goes away, but can you just talk about other regulations you are monitoring whether it's waivers potentially going away or additional capital for labor that SNFs may receive? Just anything on the regulatory front would be helpful. Thanks.

Rick Matros, Chair and CEO

Sure. So, on the Medicaid piece in addition to FMAP, we're keeping a close eye on the three-day waiver, so skilling in place. It's important at certain points in time. So, I don't want to make too big a deal out of it. When you've got an active variant that's really affecting us the way Omicron did then skilling in place was really important because that increase in skilled mix really helped mitigate some of the other financial impact from Omicron. But we also saw as things normalized and even with Delta because Delta while it was more serious wasn't anywhere near as contagious, our skill mix went back to pre-COVID level. So that one is a nice-to-have, and we'd like to see that stay in place long-term. We already noticed sequestration going away. So essentially, it's really skilling in place and all the Medicaid add-ons from the various states. And as I said, most of that dialogue has been positive. Your first question on recovery path, the caveat obviously is up — prognostication is no better than anybody else's. We think we're about a year away on skilled nursing being close to or at pre-COVID levels, and probably the latter part of 2023 for senior housing. And I don't want to make too much of the fact that we just had a huge increase in skilled occupancy the last two weeks because that's just pent-up demand. So, I think part of that is because of that, but if we could get back to the rate of recovery that we saw from January of 2021 through the fall before Delta hit, which was about 50 basis points a month, I think we'd be really happy with that.

Vikram Malhotra, Analyst, Mizuho

Okay, great. And then, if I could just clarify. You mentioned no additional tenants have come for relief post-Avamere. Some of your peers have mentioned they anticipate seeing additional requests, whether it's deferrals or actual rent relief. In your underwriting for the year, are you anticipating additional tenant issues still?

Rick Matros, Chair and CEO

We're not in our underwriting expecting a wave of restructurings. But a cautionary note I would put out there is that if you think about late spring or the summer and the federal assistance has kind of played out and maybe there hasn't been quite enough recovery, it's certainly possible that we may need to defer rent for some folks, but that's a temporary kind of issue and not a longer-term restructuring issue.

Vikram Malhotra, Analyst, Mizuho

Great, thanks for the clarification.

Operator, Operator

Thank you. Our next question comes from Rich Anderson of SMBC. Please go ahead.

Rich Anderson, Analyst, SMBC

Good morning out there. So, Rick you said if the portfolio was entirely triple-net, it'd be easier to produce guidance. So maybe we can get some triple-net guidance out of you. So if we go fourth quarter…

Rick Matros, Chair and CEO

Good try, Rich. That's not going to fly.

Rich Anderson, Analyst, SMBC

Well let me just — hear me out. So fourth quarter is what it is, came in and then you have a couple of payments coming in from Avamere to make whole for December and January. So if we were to just sort of normalize that out, going forward, shouldn't the triple-net portfolio be fairly predictable, if there's nothing else going on from abatement perspective or any kind of lease negotiations? It should be a fairly steady run rate, shouldn't it for the remainder of 2022, barring any sort new COVID spread?

Michael Costa, Chief Financial Officer

Hey, Rich, it's Mike. And I think that's a fair way to look at it. You hit one of the key points on the head, which is the timing of that Avamere ramp payment in the first part of this quarter. That's going to skew, if you're looking at our Q4 2021 numbers as a run rate, that's going to skew it a little bit. But you're right, I mean, absent any shortfall like Rick was alluding to between government assistance and recovery, and us giving a kind of temporary deferral or anything like that for tenants, that's a good way to look at what our triple-net run rate would be for 2022.

Rich Anderson, Analyst, SMBC

Good. Second question is you guys have been fairly active lately with your external investments. I'm wondering — you mentioned $1.4 billion pipeline. I'm wondering how much of the recent pace is something that we could expect going forward in light of the stock having a tough year last year. You want to keep an eye on your balance sheet. Do you expect a more slower pace of activity from an external growth standpoint going forward and that there happen to be just a bunch of things going on at once lately? Or can you actually see an acceleration through the year despite kind of all the challenges still going on?

Rick Matros, Chair and CEO

So, I'd say a couple of things. One, we're going to take advantage of the opportunities out there, but philosophically, because we invest for a long period of time and we don't look at just today's stock price when we look at our underwriting. We are making an assumption that there is going to be recovery. And you'll note last year before Delta hit, everything was recovering pretty nicely. Occupancy was increasing. The stock by August had gotten back up to $19, which makes everything that we're looking at very doable — and that's not even getting back to pre-COVID levels. So, we do make an assumption that we're not going to be stuck at a depressed stock level for a long period of time.

Talya Nevo-Hacohen, President & Chief Investment Officer

Yes, I think the other comment I'd add there is to the extent that we can structure our investments in a way that allows us to ride the recovery up of the investment then that becomes a real positive. So even if the entry point is, like in our Canadian portfolio, around a mid-single-digit cap, there's upside and we'll participate in that upside to the investment that again is an opportunity and opportunity for us over the long-term.

Rich Anderson, Analyst, SMBC

And then last question, perhaps for Mike, debt to EBITDA below five by a hair. I know it's an adjusted EBITDA that I think assumes whole annual impact of investment activity. First of all, correct me if I'm wrong about that, but assuming I'm right, how do you underwrite those in that calculation so that when the day comes and perhaps they underperform expectations because of everything that's going on in the world, do you haircut those so that when you calculate your leverage metric you don't sort of miss the number when the real numbers start to come in?

Rick Matros, Chair and CEO

Yes, you're right in that we do pro forma any acquisitions or dispositions for that number. And if you look at the larger pro forma adjustments to get there for Q4, the biggest by far adjustment is going to be related to our RCA mortgage loan. So don't expect much if any volatility in that number. So, I think what you point out is correct, just not necessarily for our fourth quarter leverage calculations, but on a go-forward basis, you're right. We're looking at it based on an annualized expected NOI, and to the extent that there is a potential that it doesn't reach that, that could cause some variability in our leverage numbers going forward. But what we're focused on is keeping it around the ballpark of five times. Will it get to 5.02? Possibly. Will it get to 4.98? Yes. It's going to hover around there. And we want to give ourselves enough room from our maximum of 5.5x such that if there are some blips or the timing is off by a quarter on any of that performance that we underwrote, it's not going to create an issue for us from a balance sheet perspective.

Operator, Operator

Thank you. Our next question comes from Juan Sanabria of BMO Capital. Your line is open.

Juan Sanabria, Analyst, BMO Capital

Hi, good morning. Based on the deferrals — what should we call it — is there any other tenants where you're using a security deposit to help pay for rents?

Rick Matros, Chair and CEO

No. We're pretty transparent on that, so no.

Juan Sanabria, Analyst, BMO Capital

Just looking at — I wanted to go back. I think Mike said something about a $7 million-plus support payment. I just wanted to get more details around that if that was to the joint venture with TPG. I thought there had already been a top-up and that was supposed to be the last of it. So just wanted to understand what that was about?

Rick Matros, Chair and CEO

No, the original one wasn't the last of it. You should expect that to continue from TPG because as we noted on our second quarter call last year — which I know seems like a lifetime at this point — one of the reasons that we opted not to take on the other 51% was because of TPG's decision to exit OpCo. OpCo's got a pretty big bleed, and we didn't want to be in the position of both having to write a check to delever and to support the OpCo bleed. So until the deal is finalized, there is a bleed there. And so from time-to-time because TPG owns 100% of OpCo, they are going to provide some support for that. We did participate last June, and a little bit of that support we've talked about in the past, and it's about $2.5 million, but we're not participating at this point. So you should expect that. The sales process — there are some parties that they're talking to, there isn't a full-blown sales process yet. One of the things that we're seeing out there for large portfolios is everybody's kind of waiting until things subside enough that there's some recovery that people can project off. There was a huge portfolio that was going to go through a marketing process about $2.5 billion in senior housing. It didn't happen. There's a private portfolio that's about $1 billion to $1.5 billion out there that's pretty high quality. And they're holding off as well. And there's another portfolio as well. So, I think until there's a little bit more traction on recovery, there's not going to be a full-blown process; they are having individual discussions.

Juan Sanabria, Analyst, BMO Capital

Thank you. And then just one last one. Can you quantify how much agency costs are flowing through the shop numbers to help us think about how that hopefully moderates at some point forward and what that could represent in terms of growth?

Rick Matros, Chair and CEO

No, we actually don't have that number and it peaked around November then it came down, and then it went up because of Omicron and it's coming down again. So we'd actually like to wait a little bit rather than pick a moment in time because it's been so volatile. We prefer just to wait a little while and get a little bit closer to where it's normalizing towards, which should be a relatively small number. The other point I'd make is an aggregate number isn't particularly meaningful because the degree of disparity that we see between our operators and the individual facilities, not just the operators, but really the individual facilities by market is huge. I mean, there's nothing that even resembles a bell curve. So coming up with one number just doesn't make any sense. People are just going to run with it and extrapolate from it and make assumptions that I think are incorrect.

Operator, Operator

Our next question comes from Connor Siversky of Berenberg. Your line is open.

Connor Siversky, Analyst, Berenberg

Apologies, you just took my last question. I'll leave it there.

Operator, Operator

Thank you. Our next question comes from Tayo Okusanya of Credit Suisse. Your line is open.

Tayo Okusanya, Analyst, Credit Suisse

Question around acquisitions going forward and the pipeline you guys talked about — $1.4 billion looks very healthy. You've done some really good deals year-to-date buying senior housing at about 6% to 6.5% caps, sometimes even 7, whereas your peers are buying portfolios in the mid-fives. When I still kind of think about your cost of equity today given where the stock is trading, I'm curious how you guys think about funding acquisitions going forward especially given some of the leverage targets?

Rick Matros, Chair and CEO

Yes, I'll take that real quick. In terms of funding in the short term, there's a couple that we would look to. First, we have quite a bit of cash on hand. That's one. We have full availability on our line of credit. We also have some capital recycling that's occurring throughout the year. And this is not even including the Enlivant sales proceeds. So, we have some expected sales and capital recycling throughout the year that will help finance some of those acquisitions without having to put our leverage in a place where we would have to think about raising equity.

Tayo Okusanya, Analyst, Credit Suisse

But you would fully expect to use the availability if needed which basically is an equity issue, right?

Michael Costa, Chief Financial Officer

Well, if we had to go there, but what I'm saying is that with the cash on hand and using a little bit on the line of credit plus sales proceeds, like the Canadian portfolio that we just announced, we wouldn't have to hit the ATM to keep our leverage in check. We'd be comfortable with our leverage levels with the sales proceeds and the cash on hand.

Rick Matros, Chair and CEO

And that's an important message Tayo, because last year, as we were really focused on de-levering the balance sheet, we were pretty aggressive as you recall with the ATM. And I think there's certain sensitivity about how quickly we might be willing to use it, but we got to where we needed to get. And as Mike said, we've got a number of tools available to us now. So, we're in a much better place.

Operator, Operator

Thank you. Our next question comes from John Pawlowski of Green Street. Please go ahead.

John Pawlowski, Analyst, Green Street

Maybe just a follow-up on that last question there. Could you give us a sense for the disposition volume or range of disposition volumes we could potentially see this year?

Michael Costa, Chief Financial Officer

I don't really want to give disposition guidance on the earnings call. It's going to be of a similar level that you've seen over the last couple years in terms of volume. I'm not going to be giving cap rate guidance either on this call, but like I said, we have a bit in the pipeline just your normal pruning of the portfolio and recycling of our capital and putting it into new investments, and I'll leave it at that.

Rick Matros, Chair and CEO

The only thing I would add is to the earlier discussion about what some of these private buyers are paying. We may be willing to look at some additional dispositions — again, to Mike's point it's not going to be major, but it could be slightly more than just the day-to-day stuff that we normally do if we think folks are willing to pay a valuation that we think is worth considering.

John Pawlowski, Analyst, Green Street

Okay. Rick, could you give us your latest thoughts on the size of the mortgage loan and preferred equity book? $400 million right now, does it grow meaningfully from here? Is it stable? Just help us think about the two to three year trajectory of that book.

Rick Matros, Chair and CEO

I'll make one comment and turn it over to Talya. Philosophically, it's not a direction that was going to be strategic. It's more relationship-oriented with operators and the ability to be a good capital partner and grow with those operators. We don't expect it to be substantial and it's not a strategic line of business that we're pursuing aggressively.

Talya Nevo-Hacohen, President & Chief Investment Officer

That's right on the mortgage side. On the preferred equity, we've been doing preferred equity at various points in the real estate and financial cycle since we started Sabra. And I think you'll see us continue to do that. It's very specific as to which project and what the timing is in the cycle. It's an opportunity for us to have a small amount of capital deployed with a relatively high rate of return and optionality typically on long-term ownership in the future. So, that's something we like. It also lets us be in the front row of property opportunities where we might otherwise not be able to buy on a stabilized basis on a fully marketed process.

Operator, Operator

Thank you. Our next question comes from Joshua Dennerlein of Bank of America. Your line is open.

Joshua Dennerlein, Analyst, Bank of America

Hey, everyone. Sorry I missed the earlier part. Are there any states where you're more or less positive on operators receiving more state funds or maybe even changes to some of the endpoints?

Rick Matros, Chair and CEO

Actually, most of the states that we're in have been really good. So, the biggest surprise state really was Texas, which as everybody knows historically has one of the worst Medicaid systems in the country, but they've been really terrific to operators. So, I'm happily surprised by the fact that by far the majority of the states have been really helpful, and I think it bodes well for the future as well. They're in good shape from a budget perspective. The pandemic has affected their view of Medicaid and how underfunded in certain states it's been. That doesn't mean that we're going to get big increases, but certainly the tone of the dialogue has changed, and the fact that so many of them have stepped up where they could have just banked that is a good sign.

Joshua Dennerlein, Analyst, Bank of America

And then maybe just a follow-up on potential dispositions: would there be more of a waiting approach for certain asset classes or is it opportunistic?

Rick Matros, Chair and CEO

It's really opportunistic. Our skilled exposure is down to 61%, which is as low as it's been in a long time. We'd like to see that below 60%, but our primary focus is to get back to growth between all the dispositions and the senior housing sales. The pandemic has affected earnings these last several years. So our primary focus is getting back to growth. We're not going to bypass doing a skilled deal simply because we're trying to get exposure under 60% — it depends on where the opportunities are. Number one is earnings growth; number two is balancing the portfolio, but earnings growth comes first.

Operator, Operator

We have a follow-up from Juan Sanabria of BMO Capital. Your line is open.

Juan Sanabria, Analyst, BMO Capital

Just a question on lease expirations — you've got 3.5% of rents expiring this year. Any color on how we should be thinking about that? And potentially is there any purchase option we should be thinking about as well in the portfolio over the next year or so?

Michael Costa, Chief Financial Officer

Over the next year or so, there's no purchase options that stand out to me. For the lease that's maturing this year, that's a tenant that we've talked about for a while. It's one of our cash-basis tenant portfolios called Wide Open. We talked about it for several quarters. That expires at the end of the year and we're in the process of putting in a long-term lease with that portfolio and hopefully should have that announced before the end of the year.

Rick Matros, Chair and CEO

One other comment to follow up on some of the Medicaid stuff was: the states — many of the states have received money from the feds. And as I said, the majority of states have been passing that on to skilled nursing. If states don't spend the money, they have to return it. So, that should create good tailwinds for our operators as the federal assistance tails off.

Juan Sanabria, Analyst, BMO Capital

Mike, could you just give us a bit more on that expiration on what the coverage is or are they essentially paying one times?

Michael Costa, Chief Financial Officer

They've been on a cash flow sweep for several years now. It was a portfolio that we transitioned to one of our best operators. They are a top-10 operator. They took over that portfolio a couple years ago. It was one of our stabilized portfolios that we did back in 2011, one of our first deals and one of our best deals that we've done. They took over that Wide Open portfolio a couple years back. As they were looking to reopen one of the facilities that had been shut down and reposition the portfolio there, we put them on a cash flow sweep, and that was a short-term arrangement with a five-year lease at the time. So that five years is coming up now and we're going to be looking to put it on a more normalized level of rent — something that's not on a cash flow basis and more steady.

Juan Sanabria, Analyst, BMO Capital

Great. And just one last one for me. Any guidance or color you can provide on G&A, $35 million in 2021? I know there's some uncertainties as to what the T&E project would be, but any color would be appreciated?

Rick Matros, Chair and CEO

We had a run rate for the quarter of $7.2 million. The fourth quarter numbers are always a little higher with some stock-based compensation and payroll-related items. I think that between $7 million and $7.5 million is probably a decent quarterly run rate to assume for our recurring cash G&A.

Operator, Operator

At this time, I'd like to turn the call back over to CEO, Rick Matros for closing remarks. Sir?

Rick Matros, Chair and CEO

Thanks everybody for joining us today and hopefully we are through the worst. I know we've said it before. I think the fact that 87% of the workforce is now vaccinated is encouraging going forward, so putting some positivity out there. Thanks everybody. Talk to you all soon.

Operator, Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.