Earnings Call Transcript - SBRA Q2 2025

Operator, Operator

Good day, everyone. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2025 Sabra Second Quarter Earnings Call. I would now like to turn the call over to Lukas Hartwich, EVP Finance. Please go ahead, Mr. Hartwich.

Lukas Michael Hartwich, EVP Finance

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 earnings guidance for 2025 and 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, 2024, 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.

Richard K. Matros, CEO, President and Chair

Thank you, Lukas, and thank you all for being here today. We appreciate your presence. I'll begin with the Holiday transition. As many of you know, we've had a long-standing relationship with Holiday since 2015. We enjoyed several successful years together, but then the pandemic struck. During that time, they were acquired by Atria, and from our viewpoint, they managed the situation quite effectively despite the challenging circumstances. However, since the pandemic, we've not experienced the same level of growth in that segment as we have in the rest of our SHOP portfolio. This is why we chose to make a change. We have been exploring new opportunities to strengthen our relationship with Discovery and with In Spirits, and this transition aligns perfectly with that plan. Furthermore, we've been establishing a relationship with Sunshine, so everything has come together nicely for us. We are optimistic about improving the performance of this portfolio over time. Additionally, breaking up a large portfolio into smaller pieces is beneficial as well. Moving on to reimbursement, we now have a clearer understanding of our Medicaid rate increases, which will average around 3.5%. Meanwhile, our top five skilled nursing tenants, making up about 50% of our skilled facilities, are averaging just above 5%, indicating another solid year for us in Medicaid rate increases. As for the Medicare market, as everyone has likely noticed, the rates were finalized at an increase from 2.8% to 3.2%, which is quite unusual, but we’re pleased to see that change. Regarding investments, I want to clarify some numbers from our previous call and the Nareit conference. In our last quarterly call, we mentioned $200 million in awarded deals, which are either closed or in the closing process. This pipeline is progressing as expected, although some deals didn't close before this call. Additionally, I mentioned at Nareit that we were actively working on another $300 million in investments at that time. The total figure of around $350 million that we discussed in our earnings release includes some of those deals from that $300 million which we chose to move forward with. We also have numerous other deals worth hundreds of millions that we review weekly. We're very confident about reaching our target of $500 million in investments this year. We are particularly excited about our goal to increase SHOP from 20% to 30%, which we expect to achieve on a run-rate basis around 2026, necessitating $1 billion in investments. By the end of this year, we anticipate being about halfway to that goal. We're finally beginning to see skilled opportunities that we deem valuable, and we hope to make some transactions in this area in the remainder of this year as well. Moving on to operations, we're pleased to report another very strong quarter. Our triple net rent coverage has significantly increased across all asset classes, reaching new highs in skilled and senior housing triple-net. Our occupancy and skill mix in the skilled portfolio continue to improve. We've returned our contract labor and employment levels to pre-pandemic standards. Overall, everything is trending positively. We are excited about the investment activity underway and look forward to closing out the year on a positive growth trajectory and progressing into 2026 with momentum. Now, I'll hand it over to Talya.

Talya Nevo-Hacohen, Executive VP

Thank you, Rick. Sabra's managed senior housing portfolio continues to grow and at nearly 21% of our total annualized cash NOI, it is a meaningful contributor to our earnings growth. As Rick stated, Sabra has closed on $122 million of senior housing investments so far this year and has been awarded about $220 million more in senior housing investments, most of which are expected to close by the end of the year. Deal flow remains very strong and Sabra's cost of capital allows us to bid competitively for senior housing properties. In the first quarter, we were pleased with the tailwinds that offset a typical seasonal cooling of demand. In the second quarter, we saw an uptick in positive momentum. Key operating statistics such as cash NOI and cash NOI margin are up 5.3% and 70 basis points, respectively, on a sequential basis for the total managed portfolio, including non-stabilized communities and joint venture assets at share. With the opportunity to develop new inventory constrained by the high cost of capital, building materials and labor, we do not see a near-term catalyst that will reverse the supply versus demand equation that exists right now. Today, we believe that acquiring well-performing newer senior housing communities geared to the taste of the baby boomer generation will be additive to Sabra's portfolio for years to come. Now let me turn to the same-store portfolio numbers. Sabra's same-store managed senior housing portfolio, including joint venture assets at share and excluding non-stabilized assets, continued its strong performance in the second quarter. The key numbers are: revenue for the quarter grew 5.6% year-over-year. Second quarter occupancy in our same-store portfolio was 86%, compared to 84.6% in the second quarter of 2024. Notably, our domestic portfolio occupancy was 83.5%, gaining 190 basis points of occupancy over the same period. RevPOR in the second quarter of 2025 increased 3.9% year-over-year for the same period. RevPOR grew 6.8% this quarter on a year-over-year basis in our Canadian portfolio, where occupancy has been above 90% for over 5 quarters, demonstrating the pricing power that comes with elevated occupancy. Importantly, as RevPOR and occupancy continue to increase, exPOR declined 70 basis points across the same-store portfolio driven by controlled costs and occupancy increases. Cash net operating income for the quarter grew 17.1% year-over-year in the same-store portfolio. In our U.S. communities, cash NOI grew 17.6% on a year-over-year basis, while in our Canadian communities, cash NOI for the quarter increased 15.9% over the same period. The trends that we have been seeing for the past year continue. Senior housing communities continue to fill up and operators are balancing rate and occupancy to maximize revenue. With a stable cost structure and increasing revenue, cash NOI and margin are growing. Our net lease stabilized senior housing portfolio also continues to do well with sequentially improving rent coverage, a reflection of continued strong operating results. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Michael Lourenco Costa, CFO

Thanks, Talya. For the second quarter of 2025, we recognized normalized FFO per share of $0.37 and normalized AFFO per share of $0.38 compared to $0.35 and $0.37, respectively, for the first quarter. The current quarter results represent a 6% improvement over the same period in 2024. Normalized FFO and normalized AFFO totaled $89.2 million and $91.6 million this quarter, respectively, which reflects strong sequential growth from increased NOI in both our triple-net and managed senior housing portfolios. Cash rental income from our triple-net portfolio increased $2.3 million from the first quarter. This was a result of a $1.4 million increase in percentage rents received, with the remainder being primarily driven by contractual annual rent increases. These percentage rents will vary from quarter to quarter and therefore, this increased level of percentage rent should not be assumed to be part of our earnings run rate. During the quarter, we updated our estimate of collectibility for certain leases within our triple-net lease portfolio and moved the leases for two tenants, Avamere National, from cash basis back to accrual, resulting in a net increase in normalized straight-line rental income of $454,000 for the quarter. Cash NOI from our managed senior housing portfolio totaled $25.3 million for the quarter compared to $24.1 million last quarter. This increase was driven by the strong sequential revenue and margin gains in our same-store portfolio. Interest and other income was $10.3 million for the quarter compared to $10.1 million last quarter. Cash interest expense was $25.8 million compared to $25.4 million last quarter. Recurring cash G&A was $9.4 million this quarter compared to $9.5 million last quarter. As noted in our earnings release, we have updated our 2025 earnings guidance on a diluted per share basis as follows: net income, $0.77 to $0.79. FFO, $1.52 to $1.54, normalized FFO $1.45 to $1.47, AFFO $1.47 to $1.49 and normalized AFFO of $1.49 to $1.51. This updated guidance increases our midpoint of normalized FFO and normalized AFFO to $1.46 and $1.50, respectively. This represents an increase in our normalized FFO midpoint of $0.15 and an increase to our normalized AFFO midpoint of $0.005. At this updated midpoint, we expect both normalized FFO per share and normalized AFFO per share to increase approximately 5% and 4%, respectively, over 2024. It is important to note that our guidance only includes completed investment, disposition and capital markets activity. We are also reaffirming the following assumptions included in our previously issued guidance, general and administrative expense of approximately $50 million, which includes $11 million of stock-based compensation expense. Ignoring the impact of acquisitions and dispositions, cash NOI growth for our triple-net portfolio is expected to be low single digits, in line with contractual escalators. Additionally, our guidance assumes no additional tenants are placed on cash basis or move to accrual basis for revenue recognition. Cash NOI growth for our same-store managed senior housing portfolio is expected to be in the low to mid-teens. Our updated guidance also assumes that cash interest expense is approximately $102 million. And that's the weighted average share count is approximately 241.5 million and 242.5 million for normalized FFO and normalized AFFO, respectively, which is in line with this quarter's weighted average share count after adjusting for the timing of ATM issuances during the quarter. Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 5x as of June 30, 2025, a decrease of 0.19x from March 31, 2025, and a decrease of 0.45x from June 30, 2024. As we have previously stated, the growth in our managed senior housing portfolio will provide us a pathway to get to our long-term average target leverage of 5x without having to access the equity market to delever our balance sheet, and this is precisely what has happened. And now that we've achieved that, we will evaluate our long-term average leverage target as earnings continue to improve. We have been proactively using the forward feature under our ATM to raise equity when our share price presents an attractive opportunity to lock in an accretive cost of capital to fund the deal flow we see in our pipeline. During the quarter, we issued $186.6 million on a forward basis at an average price of $17.86 per share after commissions. And in total, we currently have $266.5 million outstanding under poor contracts at an average price of $17.69 per share after commissions. During the quarter, we settled $29.9 million of outstanding forward contracts to help fund investment activity during and immediately after the quarter. We expect to use the proceeds from the outstanding forward contracts to close on the investments we have been awarded and do so on a leverage-neutral basis. Subsequent to quarter end, we entered into a new 5-year $500 million term loan and used those proceeds to repay our $500 million unsecured bonds that were set to mature in 2026. The interest rate on this term loan is floating at SOFR plus 120 basis points, and we can currently enter into interest rate swaps that fixed SOFR at 3.44%, effectively fixing the rate on this loan at 4.64% for the full term. The term loan also contains an accordion feature that can increase the total available borrowings to $1 billion, subject to terms and conditions. Pro forma for this financing, our weighted average maturity on our debt increases from 4 years to nearly 5 years, and our weighted average interest rate decreased 10 basis points from 4.14% to 4.04%. The successful financing not only addresses an upcoming maturity at a lower rate, but the effective rate is meaningfully lower than we would have achieved had we used the unsecured bond market. As of June 30, 2025, we are in compliance with all of our debt covenants and have ample liquidity of approximately $1.2 billion, consisting of unrestricted cash and cash equivalents of $95.2 million, available borrowings under our revolving credit facility of $837 million and the $266.5 million outstanding under forward sales agreements under our ATM program. As of June 30, we also had $109.3 million available under the ATM program. Finally, on August 4, 2025, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on August 29, 2025, to common stockholders of record as of the close of business on August 15, 2025. The dividend is adequately covered and represents a payout of 79% of our second quarter normalized AFFO per share. And with that, we'll open up the lines for Q&A.

Operator, Operator

It looks like our first question comes from John Kilichowski with Wells Fargo.

William John Kilichowski, Analyst

Maybe my first question, Rick, in the opening remarks, I found your comments on the investment guide to be really informative. At Nareit, you mentioned the $200 million and $300 million figures, and now it seems we're looking at a $350 million estimate. It appears that you're still optimistic about reaching around $500 million for the year, which I think is even more encouraging than your outlook at Nareit. Am I understanding that correctly?

Richard K. Matros, CEO, President and Chair

It will be somewhere in the $400 million to $500 million range. So just depending on timing. My guess is there will be some deals that may close like on January 1, maybe for tax reasons or whatever else, but it will be close.

William John Kilichowski, Analyst

Okay. That's helpful. And then I think, do you think that the rest of that number would be comprised of skilled nursing deals? And what's kind of keeping those from entering the pipeline so far? Like how close are you on pricing?

Richard K. Matros, CEO, President and Chair

Well, pricing is not an issue at all. It's actually just finding deals that we think are good deals, quality assets in the right markets. A lot of the stuff that we've looked at just isn't good. And I think that if you look at our triple-net portfolio, whether you look at the skilled portfolio or the senior housing portfolio, between the merger from a number of years ago when all the cleanup that we did subsequent as a function of that and the pandemic, both selling assets and transitioning assets, we've got a really great core of operators now, as evidenced by our coverage. Our coverage is stronger than most out there. And so we're really being particular about the quality of the assets that we're bringing into the portfolio. So I think it's fair to say that the majority of it will probably still be SHOP, but we are definitely focused on working on the skilled side and trying to get some deals in there. But I still think it would be weighted a little bit more towards SHOP and skilled, but we certainly want to do more skilled. The other thing I should just note is we're still not interested in building a loan book which is how some of these deals are getting done, and we're not interested in doing sort of complex JV kind of structures or mezz debt or anything like that. We're just not interested in doing that. We just introduced straightforward kind of simple to understand traditional deals. And just one other comment I want to make that I know you add another piece. As I misstated in the opening remarks, we met the 5% on the Medicaid rate increase is for the top 5 states, that were not the top 5 operators.

William John Kilichowski, Analyst

Got it. Okay. Very helpful. And then the last part for me was just on the same-store SHOP NOI. That number continues to run at the high end or maybe slightly above that, sort of low to mid-teens number that you've given, I think you're at 17%, 1H today. What's keeping you from maybe taking that guide up? I know Michael spoke last quarter about comps were maybe slightly tougher in the latter half of the year. I'm curious if you're still seeing that quarter-to-date or if maybe there's room for upside there.

Richard K. Matros, CEO, President and Chair

We're optimistic about the potential for growth. We believe we can adjust our guidance slightly while still aiming to exceed it. Therefore, we're taking a cautious approach.

Operator, Operator

Our next question comes from the line of Farrell Granath with Bank of America.

Farrell Granath, Analyst

My question is about same-store SHOP occupancy. I was wondering if you could add a little bit more color so sequentially, there wasn't much movement if there's anything specific going on just given the 2Q tends to be a little bit stronger in occupancy growth.

Talya Nevo-Hacohen, Executive VP

Yes, it's important to note that even though we transitioned the Holiday portfolio on April 1 at the beginning of Q2, 16 out of the 21 Holiday assets remained in same-store sales. We made this decision, and it had an impact due to the usual fluctuations that come with transitions. If we exclude that from consideration, the numbers would have appeared more favorable to you.

Farrell Granath, Analyst

Okay. And then also on the comments of skilled opportunities starting to come up, and looking to transact more. I was curious if you could add in a little bit more color. What's driving that- more of the opportunity opening up? Was it the OBBBA? And also, are you hearing anything in terms of concern on health systems? And is that driving any of the conversations?

Talya Nevo-Hacohen, Executive VP

I don't think that we're seeing a significant change in the volume of skilled nursing coming to market. I think we have seen, for a while now, a significant move of transactions into the private market by owner operators with capital backing them up outside of the REIT space. So we are seeing assets come to market in the SNF space. We're not seeing a lot, but we are seeing some. I think the only thing that has shaped the volume of deals we've seen has been true both on skilled and senior housing over the last few years is the recovery in fundamental operations. Just thinking about owners whether or not they had financing in place, the fact is operations have recovered significantly both in skilled and in senior housing, and that allows for much more robust pricing even if cap rates have moved up somewhat from pre-pandemic, but the operational recovery has been very effective in raising absolute prices.

Farrell Granath, Analyst

Okay. And just to confirm, when you're saying that, is the influence of kind of moving past the reconciliation bill, has that lifted any potential weight or concern while you've been having your conversations? Or was that not always even a part of the conversation?

Richard K. Matros, CEO, President and Chair

No, that's a nonissue.

Operator, Operator

And our next question comes from the line of Nick Yulico with Scotiabank.

Elmer Chang, Analyst

This is Elmer Chang with Nick. First question is just on the SHOP portfolio again. How do you expect component drivers to trend in the back half of the year since, as I mentioned, NOI growth guidance implies some slowdown given just previous comments and your remarks about employment levels returning to pre-pandemic levels and maybe some potential impact from the holiday transition assets.

Talya Nevo-Hacohen, Executive VP

I hesitate to make predictions about the future, but currently, everything appears quite positive. There is essentially no new inventory entering the system, and we're observing very few development deals at the moment. While we did see some previously, there are none right now, and almost none in the pipeline in the markets where we have been investing and where our assets are located. Given this context, demand is rising due to the increasing number of people aging and ready to move in. Our focus remains on the care segment, with the majority of our assets in assisted living and memory care, along with some independent living. I believe the fundamental demand in secondary markets, particularly in the middle market price range, is well positioned and likely to grow.

Elmer Chang, Analyst

Okay. And then second question on a Holiday transition portfolio. You mentioned that you transitioned them to trusted operators and you've been building a relationship with Sunshine for some time. But how are you getting comfortable with maybe diversifying the tenant base a little bit? And then could you provide additional color on what that bidding process entails for operators looking to take on transition assets?

Richard K. Matros, CEO, President and Chair

I'm not quite clear on what you mean by the benefit of the transition and breaking it up; I believe having less dependence on a single operator is always beneficial. Additionally, being able to manage this with established relationships with two to three operators across most facilities is important. I'm not fully grasping your question. Regarding the bidding process, when we consider a transition, we typically identify the operators we believe would be a good match, provide them with the necessary information, and have them submit proposals, similar to any standard process, and we proceed from there.

Operator, Operator

And our next question comes from the line of Seth Bergey with Citi. Seth, are you there? Maybe muted. Going once, going twice. All right. We will move on. And our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Austin Todd Wurschmidt, Analyst

Great. Rick, I appreciate the details on the transitions. I guess I'm just curious kind of how long you've been evaluating transitioning these assets and when kind of you made that final decision to move forward because it does sound like there was a little bit of a process in selecting operators for these buildings?

Richard K. Matros, CEO, President and Chair

You might recall that there was a change in leadership at Holiday, and we thought that we should give the new team time, and look, they may be doing a great job with other things. So I don't want to sort of be negative about anyone. But post the transition, despite all the positive interactions with the new team, we just want to get the results that we expected to get and that we were seeing in the rest of our SHOP portfolio. So it was really as simple as that. And so last year, we started having serious discussions about moving the portfolio. And by the end of the year, we had pretty much identified a list of potential operators that could take over different pieces of that portfolio and targeted the transition date. So that was all before the end of last year.

Austin Todd Wurschmidt, Analyst

That's helpful. And then for the five assets that you excluded from the same-store pool, how impactful has the transition been? Were these already the most underperforming assets? And are you planning on investing any additional capital into those specific assets?

Michael Lourenco Costa, CFO

Yes. Some of those assets that are excluded more in our same-store pool leading up to the transition. So not a major change there. And it shows given how little the overall pool change sequentially. And we have been putting capital into those assets that entire portfolio, quite frankly, over the last couple of years, I'd have to look to see if those five assets specifically were part of that program. I'd have to imagine they were given we need to see that performance turnaround.

Austin Todd Wurschmidt, Analyst

Got it. And then with the Holiday assets transition in April, I guess can you share kind of how the occupancy trended through the quarter and maybe what the momentum looks like into July? Just to help us understand the fact that NOI is tracking ahead, but there is this implied deceleration with presumably occupancy being a big piece of that. So just give us a sense of what that momentum looks like headed into the back half of the year.

Talya Nevo-Hacohen, Executive VP

Sure. I'll provide an overview of the trends we observed during the second quarter, specifically related to the Holiday transition assets. Initially, we noticed a decline in tours, but they have significantly increased since June. Move-ins began to rise in May. Although I don't have data from before April, it's clear that move-ins have been on the rise while move-outs have been decreasing consistently for several months. This indicates positive momentum: tours are up, move-ins are up, and move-outs are down. The result of these trends is an increase in occupancy. We believe that the transitional challenges are now behind us, and we expect to see further improvements in occupancy and its positive impact on the financial results moving forward.

Operator, Operator

And our next question comes from the line of Vikram Malhotra with Mizuho Securities.

Vikram L. Malhotra, Analyst

I guess just going back to the external growth of the pipeline, kind of what you laid out, I guess, Rick, implies a pretty big acceleration in the back half. And I'm wondering kind of how timing-wise, is it more back-end weighted? And how sustainable is this pace into '26 given your goal of kind of hitting 30% of SHOP.

Richard K. Matros, CEO, President and Chair

I don’t think the momentum is heavily weighted towards the second half because we currently have about $350 million out of the $400 million to $500 million that are either close to closing or already awarded. So, I believe it is fairly well distributed over the next couple of quarters. Talya, would you like to discuss next year?

Talya Nevo-Hacohen, Executive VP

The volume we are experiencing remains strong, and we continue to bid according to what we consider fair pricing for Sabra, taking into account the cost of capital. We are currently in the second round and touring every asset that interests us. We've discussed the characteristics of these assets, which are mainly newer developments in senior housing located in robust markets with growth potential. Therefore, the returns are not primarily bond-like. So far, everything looks promising. I can inform you that the team is visiting two different properties this week, so the momentum is still going. Regarding the timing, what we've mentioned is that what we have been awarded is in process, with documentation underway and steps being taken to close, so it’s not as delayed as it may seem.

Vikram L. Malhotra, Analyst

Okay. And then I just wanted to clarify two quick things. So one, I think you mentioned the transition assets in the pool, like I think you had mentioned if we strip them out, it would have been different occupancy or different NOI growth. Do you mind just clarifying, like, if you didn't have the transition assets, what the growth would be? And then just the other clarification essentially was that on the overall acquisition, you talked about the pipeline. I'm just wondering if some of that is sitting in Canada as well.

Talya Nevo-Hacohen, Executive VP

I'll address the second part of your question. In Canada, we are still evaluating opportunities. Honestly, I would like to pursue more deals there. However, the challenge we face is that debt rates in Canada are roughly 200 basis points lower than in our market, which results in cap rates being about 150 to 200 basis points lower as well. As a result, we've observed that some of our competitors are closing deals with a 6% or 5.5% initial yield in Canada, and that pricing is simply too high for us, regardless of our interest in acquiring those assets.

Michael Lourenco Costa, CFO

Yes. And then on your first question, look, we didn't disclose that. I guess one thing I would say is that if we didn't have those transition assets in our same-store numbers, the number would be better.

Talya Nevo-Hacohen, Executive VP

It sits along the length of what I said before about occupancy as well.

Operator, Operator

And our next question comes from the line of Alec Feygin with Baird.

Alec Gregory Feygin, Analyst

Just to circle back on the Holiday transition, can you articulate maybe some of the NOI upside that you've already captured and will continue to capture throughout this year or next?

Richard K. Matros, CEO, President and Chair

Look, I think we're not going to get specific about that because it really requires a crystal ball. I think listening to one of our peers' calls, they're seeing nice improvement in the transition they went through a year later. So we fully expect it to improve, but to specify how much it's going to improve and what that time frame is, there's no way we can be right about that answer. So too much specificity you're looking for with a crystal ball.

Alec Gregory Feygin, Analyst

Okay, fair. No crystal ball. So that's totally fair. Second for me, on the actual pipeline, maybe just speak on the mix of assets, whether they're IL/AL/campus, and is it new operators or existing operators? Just maybe some more details there?

Talya Nevo-Hacohen, Executive VP

Are you referring to deals that we are currently seeing in the market, those that we are evaluating, or those that have already been completed?

Alec Gregory Feygin, Analyst

In the pipeline, that $220 million.

Talya Nevo-Hacohen, Executive VP

Some of the deals are transactions with groups we know and trust. Others involve groups with whom we are working to establish a relationship, presenting an opportunity for us to engage. All of these are institutional quality assets typically sold by institutional owners for vintage issues.

Operator, Operator

And our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Omotayo Tejumade Okusanya, Analyst

Just a couple of really quick ones. Community Care, the rent coverage there kind of declined slightly. Just kind of curious, could you give us an update on how we're doing and if there's anything we should be paying attention to there?

Richard K. Matros, CEO, President and Chair

Yes. Nothing that we're really concerned about. They've had some challenges in where their states has a lot of operators are. And so they're focused on divesting a few facilities. And that's basically all there is to it. So they'll be fine when that occurs.

Talya Nevo-Hacohen, Executive VP

1.77x coverage is not something we're complaining about either.

Richard K. Matros, CEO, President and Chair

Right, right. But they've been working on these facilities, and it's just not happening the way they would like it to. And we’ve been in that market with others besides them, and it's a tough market that these particular facilities are in. So we have noted they're a good-sized company. They're very strong. They're a good operator. We love working with them. And so we're very confident that once they divest a few of these things, they'll be good. But again, as Talya said, even with the reduction, there's no concerns.

Omotayo Tejumade Okusanya, Analyst

Are these your assets that they're going to be divesting?

Richard K. Matros, CEO, President and Chair

Yes.

Omotayo Tejumade Okusanya, Analyst

I understand, that's helpful. Regarding the concerns about the debt ceiling and fiscal deficits, do you anticipate any risk of entering a sequestration situation in the next year or two, and how might that affect Medicare?

Richard K. Matros, CEO, President and Chair

I don't believe so, but it's really hard to predict. However, our lobbying groups have performed exceptionally well on our behalf. With the Medicaid cuts in the bill, we have been excluded. While this may exert pressure on state governments, we understand that we have been carved out. The upward adjustment in the Medicare market basket is encouraging. We do not have any dialogues with CMS that are causing us concern as we look ahead to the next year or more. I feel we're in a strong position. Additionally, it's important to note that the entire sector is in a different place now, given the ongoing decline in supply alongside an increase in occupancy. This sector can now afford more; our rent coverage has significantly improved. As occupancy continues to rise, we've already reached a turning point with operating leverage. Hence, the benefits from each additional patient are becoming increasingly pronounced. Overall, it feels very positive at this moment, even as we look to the next few years. I expect that as inflation decreases, similar to this year's Medicaid rate increases being lower than last year's, we will see moderation in the coming years. The Medicare market basket will also stabilize, but this moderation will occur during a time when the industry is, once again, quite robust.

Operator, Operator

Our next question comes from Michael Stroyeck with Green Street.

Michael Lee Stroyeck, Analyst

Maybe on the labor side, what sort of wage increases are you seeing your operators pass along to employees today? And is there any difference in wage growth between your SNF and senior housing portfolios?

Richard K. Matros, CEO, President and Chair

No, it's around 4%. It's been like that for almost three years now with those wage increases. Just to update everyone, in 2022 there were significant adjustments to employee wages across the board in both areas. Then in 2023, it moderated to mid-single digits, showing that the actions taken by our operators in 2022 were effective and have remained stable since. The fact that we've reached pre-pandemic employment and temporary agency levels with those wage increases indicates that it has all been successful.

Michael Lee Stroyeck, Analyst

Yes. That makes sense. I guess, are there any states or markets where you are seeing a particularly tight labor market, either on the skilled nursing or senior housing side?

Richard K. Matros, CEO, President and Chair

I can't think of a specific example right now. Overall, everything has improved, though the extent of improvement varies. However, there isn’t any significant distress in any particular market.

Operator, Operator

And it looks like our final question today comes from the line of Seth Bergey at Citi.

Seth Eugene Bergey, Analyst

I think in talking about kind of the opportunities that you've been awarded. Some of them are with new operators, some of them are with existing. Can you talk a little bit about your selection criteria for new operators?

Richard K. Matros, CEO, President and Chair

We spend a significant amount of time with potential operators before considering a deal with them. This allows us to understand their operations, the markets they choose, and most importantly, their quality outcomes. It's quite standard practice. However, another aspect to consider is that many skilled operators are content with their current portfolios and are not focused on growth. Therefore, we have been seeking new operators who are eager to expand so that we can increase the number of operators in our portfolio who are committed to growth, rather than solely relying on bringing new operators on board.

Seth Eugene Bergey, Analyst

Great. And then just I think on the last call, you mentioned kind of as the outlook for SHOP has improved that there's actually been a smaller pool of buyers. I'm just kind of curious, as you look out there for investment opportunities, kind of how the buyer pool has changed, if at all?

Talya Nevo-Hacohen, Executive VP

The buyer pool has changed very little over the past year, especially in the last six months. The primary participants are the REITs and private capital. While many private equity funds have stepped away from the sector, a few are starting to re-enter, but they are doing so cautiously and not committing to large investments. Harrison Street, in particular, has consistently remained active in this space.

Operator, Operator

And that does conclude our Q&A session today. I will now turn the call back over to Rick Matros. Rick?

Richard K. Matros, CEO, President and Chair

Thank you, and thank you all for joining us today. As always, we're available for more dialogue, and we look forward to talking with you, and enjoy the rest of the summer. Take care.

Operator, Operator

Thanks, Rick. This concludes today's conference call. You may now disconnect.