Sabra Health Care REIT, Inc. (NASDAQ:SBRA) Q3 2022 Results Conference Call November 8, 2022 1:00 PM ET
Company Participants
Lukas Hartwich – SVP, IR
Rick Matros – Chair, President and CEO
Talya Nevo-Hacohen – CIO, Treasurer and EVP
Michael Costa – CFO
Conference Call Participants
Austin Wurschmidt – KeyBanc Capital Markets
Juan Sanabria – BMO Capital Markets
Steven Valiquette – Barclays
Joshua Dennerlein – Bank of America Merrill Lynch
Michael Griffin – Citi Research
Vikram Malhotra – Mizuho Securities
Tayo Okusanya – Credit Suisse
John Pawlowski – Green Street Advisors, LLC
Daniel Bernstein – Capital One Securities
Richard Anderson – SMBC Group
Operator
Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT Third Quarter 2022 Earnings Call.
I would like to turn the conference over to Lukas Hartwich, SVP, Finance. Please go ahead, Mr. Hartwich.
Lukas Hartwich
Thank you and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our expectations regarding our tenants and operators, and our expectations regarding our acquisition, disposition and investment plans.
These forward-looking statements are based on management’s current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2021 as well as in our earnings press release, included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday.
We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances and you should not assume later in the quarter that the comments we make today are still valid.
In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the Investors section of our website.
And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra Health Care REIT.
Rick Matros
Thanks Lukas. Thanks, everybody for joining us. We appreciate it. I’ll start with the North American transition.
To start with, there has been a management change at North America and in concert with that change management and the Board, undertook a reevaluation of what they wanted to do with the portfolio going forward. They approached us with a couple of options. One option was to downsize the Company to the 12 non-Sabra facilities that they had primary ownership in, and the other was a rent reduction. We didn’t view the rent reduction as something that was necessary given our assessment of the performance of the portfolio. And we’re actually happy to accommodate them on their request to downsize to 12 buildings. This is a very good portfolio. We’ve always gotten inbounds on it. So we knew that we would have some terrific options in terms of transitioning the portfolio. So, that’s why that occurred, specific to that with North American, we have a signed transition agreement. It’s a very cooperative transition. They’ve been terrific on their end with us, and we wish them the best going forward.
In terms of the bidding process, it was pretty robust. We felt going to Ensign and Avamere in Washington, was the best possible outcome for us for a couple of reasons. In terms of Avamere, they’ve been doing — they’ve really been doing pretty well, since we addressed their issues, adding these four buildings, really fills in their market needs, provides some really terrific opportunities for them from a managed care contracting perspective. And when you add these four buildings to their portfolio, in addition to the recently received 20% Medicaid rate increase in Washington, just makes them a stronger tenant from our perspective, so really good transaction for us to do with Avamere.
As to Ensign, everybody knows Ensign. They’re extremely strong operator. So, we see that as real upside. The credit quality is obviously quite different from having a private operator, their market equity cap, the corporate guarantee, and the transparency from being public, which most investors don’t have with the REITs, because most of our tenants are private. So, we think that’s an added plus. The durability of our earnings stream going forward as a result of this transaction, we think has even greater certainty.
So we feel great that we’ve been able to expand our relationship with them. And in our evaluation, we felt like the trade off for this upgrade, in exchange for the 12% reduction on rent was well worth it, so. And I’m sure we’ll get more questions on it during Q&A.
Moving on to the operating environment, labor continues to improve. It’s still tough, but occupancy is now improving as well as labor’s improved. I would note and remind everybody that our triple net occupancy is a quarter in arrears. And while occupancy was flat in the second quarter, as noted in the release, on the skill side, June through October, our occupancy increased 180 basis points, which we view directly as a function of labor getting better. And similarly for our AL portfolio that was up 190 basis points during that same timeframe, so June through October. Our senior housing lease portfolio also continues to improve and we had a nice bump in rent coverage there.
Moving on to investment activity, we continue to see opportunity in relatively small senior housing deals, and secondarily behavioral deals. Skilled nursing investment opportunities have shown a slight uptick, but nothing of note. We’re also seeing more activity that we hope to transact on in Canada. From a high-level we continue to view investments through a capital recycling lens. So in other words, our investments will be — continue to be funded with proceeds from asset sales. And we expect that to continue as we move into 2023.
And then finally, a note on ESG, we issued our second report. We’ve also started a new program called Green links, which is a small fund designed to give our triple net operators access to capital to fund initiatives and energy and water efficiencies. These initiatives will be accretive to our operators and therefore beneficial to us and our commitment to the Sabra ESG initiatives.
And with that I will turn the call over to Talya.
Talya Nevo-Hacohen
Thank you, Rick.
I will discuss the performance of our wholly-owned managed senior housing portfolio and our investment activity in behavioral health real estate. The operating results of our wholly-owned managed senior housing portfolio saw continued positive trends in the third quarter of 2022. We’ve seen tailwinds on occupancy and rate for two quarters and are now seeing labor costs start to decline as agency is increasingly replaced with permanent staff, which will both lower and stabilize expenses.
The headline numbers for the quarter on a same-store basis are as follows. Occupancy for the third quarter of 2022 excluding non-stabilized assets was 81.5%, driven by a 1.3 percentage point increase in our independent living communities compared to the prior quarter. Comparing third quarter 2022 to third quarter 2021, occupancy in our assisted living communities increased 2.7 percentage points and 2.5 percentage points in our independent living communities.
Same-store occupancy has continued to trend up since the Omicron variant surge in early 2022. REVPOR for the period excluding non-stabilized assets was $6,306 in our assisted living portfolio a 50 basis-point increase over the prior quarter and a 6.4% increase over third quarter 2021. REVPOR for the period excluding non-stabilized assets was $2,705 in our independent living communities, a 1.8 increase over the prior quarter and a 5.5% increase over third quarter 2021.
Excluding government stimulus funds, cash and NOI for the quarter was slightly ahead of the prior quarter. Our independent living portfolio saw a 6.7% increase in cash NOI and most of the increase in quarter-over-quarter revenue went directly to the bottom line. Continued rate increases in our assisted living portfolio offset some of the margin pressure resulting from higher labor costs. In the quarters immediately following the vaccine rollout, our needs based portfolio experienced an earlier and steeper rebound than our independent living portfolio, which we described at the time.
While independent living has been playing catch up on occupancy and REVPOR, the lighter staffing model and lower cost structure has allowed cash NOI to recover at a faster pace. We have seen pricing power across our entire portfolio between 8% and 9% annual increases to rate inclusive of care and positive re-leasing trends. Higher care — and that’s continued to drive elevated move-out rates particularly at our higher acuity property.
If we compare the same-store operating results of our Canadian assets with our U.S. assets, our Canadian assets have been outperforming our U.S. communities throughout 2022. On the same-store basis, here are some quick statistics. Occupancy for the third quarter in our Canadian communities increased 3.9 percentage points compared to the prior quarter and 7.3 percentage points compared to the third quarter of 2021. This compares with our U.S. communities increase of 10 basis points on a sequential quarter basis and 1.5 percentage points compared to the third quarter of 2021.
REVPOR growth in our Canadian portfolio was only slightly higher than in our U.S. portfolio. However, cash NOI for the third quarter in our Canadian communities was 12.2% higher on a sequential basis and 43.7% higher compared to the third quarter of 2021. In comparison, cash NOI in our U.S. portfolio excluding government stimulus funds dropped slightly on a sequential basis and grew 2.5% compared with the third quarter of 2021. Over the past four quarters, cash NOI in our Canadian communities grew 9.5% per quarter on a compounded basis.
These statistics reflect only our same-store assets in Canada and which comprises 16% of the units in our wholly-owned managed portfolio. We believe that the rebound we’re seeing in Canada is a function of strong demand emerging after the lifting of COVID restrictions that remained in place longer than in the U.S. Essentially the same scenario experienced domestically in the month following the rollout of the vaccine.
Let me now turn to our behavioral health portfolio. At the end of the third quarter Sabra’s investment in behavioral health including 16 properties and 2 mortgages was a total current investment of $756 million. We intend to invest an additional $53 million of capital to complete the conversion of five of these properties, all of which have been leased to operators as well as another property identified for conversions.
At the completion of these conversions, Sabra’s investment in behavioral health will total over $800 million. We continue to meet with new operators and explore business relationships within the addiction recovery sector as well as other areas of behavioral health where we see investment opportunities.
And with that, I will turn the call over to Michael Costa, Sabra’s Chief Financial Officer.
Michael Costa
Thanks, Talya. For the third quarter of 2020, we recognize normalized FFO per share of $0.36 and normalize AFFO per share of $0.35. Compared to the second quarter of 2022, normalized FFO per share and normalized AFFO per share decreased $0.03, primarily due to lower NOI from the Enlivant joint venture, as a result of receiving $3.4 million of government grant income last quarter, and lower NOI from tenants whose rent is accounted for on a cash basis.
This is a timing issue as the shortfall was received subsequent to quarter end and recognized in the fourth quarter. During the quarter, we wrote off roughly $16.5 million of straight line rental income receivables, primarily related to the transition of the North American health care facilities to Ensign and Avamere that we previously announced. These amounts are added back in arriving at normalized FFO and AFFO.
Cash NOI for the quarter totaled $115.6 million, compared to $118 million for the second quarter. This decrease is primarily a result of lower rents received from cash basis tenants I just noted and is expected to reverse itself in the fourth quarter. Cash NOI for this quarter includes $2.2 million of excess rents paid by genesis pursuant to the memorandums of understanding entered into in 2017, when we began the disposition of a majority of our genesis exposure.
These rents had a burn off period of just over four years from the date the properties were sold, and are reaching the end of that burn off period. We expect the amount of genesis excess rents we recognize in earnings to decrease to $1.2 million in the fourth quarter of 2022 and be $1.6 million and $328,000 for the full year 2023 and 2024, respectively.
As of September 30 2020, less than 5% of our NOI is below one times EBITDARM coverage.
As of September 30, 2022, our annualized cash NOI was $448.4 million and our SNF exposure represented 60% of our annualized cash NOI, down 70 basis points from the second quarter and down 740 basis points from a year ago.
G&A cost for the quarter totaled of $9.7 million, compared to $8.6 million in the second quarter of 2022. This increase is due to a $1.3 million increase in stock-based compensation expense compared to the second quarter of 2022.
As a reminder, last quarter, we made an adjustment to the payout estimates on performance based awards that were set pre-pandemic which resulted in a reduction to stock-based compensation expense in that quarter. Excluding the stock-based compensation expense adjustments, I referenced earlier, recurring cash G&A was $7.6 million, compared to $7.8 million in the second quarter.
During the quarter, we recognized $60.9 million of impairment of real estate related to six SNFs that are under contract to sell as part of our capital recycling efforts.
Now, turning to the balance sheet. Our balance sheet continues to be an area of strength for Sabra with no material maturities until the second half of 2024 and no floating rate debt outside of the balance of our revolving line of credit which we expect will be repaid by the end of the year with proceeds from in-process dispositions. Our proactive approach to hedging our variable rate exposure has proved highly valuable in this current rate environment, we have seen short-term rates increased significantly in a short period of time.
Because of our hedging activities, our annual interest expense is nearly $8 million lower than otherwise would be at today’s market rates. We’re in compliance with all of our debt covenants. And our liquidity as of September 30, 2022, totaled approximately $890 million, consisting of unrestricted cash and cash equivalent of $26.3 million and available borrowings of $861.4 million under our revolving credit facility.
As of September 30, 2022 our leverage was 5.5 times. As we have stated the last few quarters, this leverage level is above our long-term average target, so view this as simply a short-term tiny mismatch. During the quarter, we repaid $18.8 million of borrowings under our credit facility, and expect to pay down a revolver by the end of the year, as we receive proceeds from completed and pending dispositions which are expected to generate roughly $200 million in gross proceeds.
Once these proceeds are received, and we repay a revolver borrowings, we expect leverage to be closer to our long-term average leverage target. We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable and we are well positioned to do just that.
On November 7, 2022, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30, 2022 to common stockholders of record as of the close of business on November 17, 2022. The dividend represents a payout of 85.7% of our normalized AFFO per share of $0.35.
Lastly, as we have communicated the past several quarters, we did not issue earnings guidance this quarter. While we are encouraged by the continued albeit slow recovery in the labor markets, which we view as a key barrier to occupancy recovery, the timing and velocity is still a question mark. This uncertainty against the backdrop of macroeconomic volatility continues to make it difficult to confidently provide a meaningful estimate of our earnings at this time.
And with that, we’ll open up the lines for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Austin Wurschmidt of KeyBanc Capital Markets.
Austin Wurschmidt
Rick, I was just hoping first you could find, you provide a little bit more detail on the terms of the new leases of the transition assets as far as lease duration, escalators that are baked in there and if there’s any sort of fair market rent resets in the coming years?
Rick Matros
Yes. Those are actually in the in the press release, Austin. But the — for Avamere, the annual rent escalator is 2.75%, for Ensign the annual escalators, our CPI base not to exceed, 2.5%. The duration of the leases for Ensign are 18…
Talya Nevo-Hacohen
There’s — yes, 18. There are two master leases, one is 18 years, one is 20 years.
Austin Wurschmidt
I appreciate it. Sorry about that. And then separately, I was worried you could provide an update on the 17 in process transitions that you announced last quarter. And if there’s been any change in cash rent contribution versus what those were contributing in 2Q. And when do you expect the $10 million plus of cash NOI on those 17 assets to sort of commence overtime?
Michael Costa
Yes. So I think the quick answer is there’s no changes to what we put into our investor presentation, last quarter, those transitions are still in process. And the timing is unchanged. We expect those to stabilize between now and the end of ’24.
Austin Wurschmidt
And then with the eight that are already transitioned to, have those stabilized at the 44.8 million quarterly run rate?
Michael Costa
They’re progressing as we had expected, I’d have to get the exact number of where they stand relative to what we’re stabilization is, but they’re progressing as we expect.
Talya Nevo-Hacohen
But we possibly expected those to take a number of months before they stabilize so well into 2023. So they’re on track, but similar timeframe to the other 17.
Operator
And our next question will come from Juan Sanabria of BMO Capital Markets.
Juan Sanabria
Rick, hoping, you could talk a little bit more about the transition and why the need to reduce the rent if the coverage on the assets that was in place was seemingly pretty healthy from the outside looking and maybe the T3 coverage was a lot worse than that necessitated a rent — a lower rent for the new operators. So just hoping you could talk through why there’s some dilution coming in with the transition.
Rick Matros
Well, it’s just really a function of negotiation, I think, from — the cash flow stream was pretty steady. Every once in a while you can transition a portfolio and get an increase in rent. And we’ve done that with smaller portfolios, historically. But most cases, people know that you have to transition. And so, it just becomes a part of the negotiation. And in this case, we didn’t see the 12% reduction as being significant enough to offset the positive aspects of moving to Ensign.
And frankly, there were offers that were slightly higher. But we thought the attributes of going with Ensign and strengthening Avamere were more important than some incremental difference on the rent. It still would have been lower than North American that maybe not just as low.
Juan Sanabria
And then — you highlighted some transitions that you were doing and I guess we’re still in process, 25 assets, I believe. And so this was in addition to what you talked about that had upside, but this obviously is an offset. Is there anything else that…
Rick Matros
There is nothing else, Juan. The 25 that we had previously announced were a function of ongoing discussions with our operators. So, a lot of transparency and a lot of productivity relative to those transactions. This was different. There was a change in management. That’s their Board’s decision. We had a great relationship with the prior management team. And they did a strategic reevaluation and came to us late in the summer. So, it was a unique circumstance and nothing should be extrapolated from it relative to the rest of the portfolio.
Juan Sanabria
Okay. And then just one last one for me, for the dispositions, the $200 million that you have targeted, any sense on what it means from a modeling perspective in terms of cap rate or rents associated with that? And do any of the buyers — any issues with financing some of that, given the capital market dislocations we’re all living through?
Talya Nevo-Hacohen
I can talk to that. So, we’re still looking at a year-end type of closing on most of those transactions. So to get to the $200-ish million. The financing challenges that have hit everybody are — have been pretty recent. And one of the portfolios — the largest component of that $200 million has been something that’s been underway for a fairly lengthy period of time. So, they’d have their financing organized and committed to prior to the recent — most recent rate hikes.
Juan Sanabria
Any color on kind of the yield implied on the $200 million?
Talya Nevo-Hacohen
It’s single — it’s low single. Mid single digits?
Michael Costa
Yes, mid to low single digits.
Operator
Our next question will come from Steven Valiquette of Barclays.
Steven Valiquette
More of an industry question here. But last quarter, you guys had a pretty useful slide on the status of some of the Medicaid rate data status among your top 10 states [Technical Difficulty]. Just looking for any updates, any key states and the evolution of some of the state rate updates. And they probably — will certainly be helpful? Thanks.
Rick Matros
Yes. Sure, Steve. Thanks. So we didn’t include that chart this time, because there’s been no change and no updates. So I think the one state that we all are anxious to find out about is Texas, and our operators on the ground are cautiously optimistic that they’ll be successful with data getting a rate increase next year, we’ll see. Other than how Texas handled FMAP, which was appreciated, as you know, Medicaid rates have been historically low there. And really, the industry has been underfunded. So I think the reason for the optimism is not just the dialogue that operators are having with legislators, but the fact that the pandemic demonstrated some real issues in the system there. So, that’s the one that we’re really all waiting for, but no other updates, Steve. That’s why we didn’t put it on the chrt.
Steven Valiquette
One of the quick ones, I apologize if I missed this. But what’s the skill mix in the property is going over to Ensign, kind of notorious for being able to improve that pretty dramatically. But I’m wondering if that’s a big part of their improvement plan as far as the operations within that, but just for the starting point and where that is for Avamere?
Rick Matros
Theirs skill mix is one of the two highest in our portfolio, it’s in excess from a revenue perspective of 60%. And so skill mix is already high. We’ll see whether Ensign can make that high or not. There are huge opportunities on the expense side. The facilities has historically been allowed to sort of do their own thing when it comes to expenses, so. And some believe they have a lot to bring to the table, from an expense perspective. And of course, there are corporate synergies as well.
So I think any changes in skilled mix, probably will be incremental. But there’ll be much bigger pickups in the other two areas. So the improved rent coverage as a result of this deal that we noted in the releases. We expect that to continue to improve not just because you’re recovering from the pandemic, but because of the programs that Ensign will be putting in place there that have been — brought in so much success in the remainder therefore, into rest of their their portfolio.
Operator
And our next question will come from Joshua Dennerlein of Bank of America Merrill Lynch.
Joshua Dennerlein
I appreciate the color on North American. But maybe, was there any discussion of 12%? Like, I feel like I normally, like, I broke my lease, I would have to kind of cover the difference between whoever comes in and takes my apartment versus what I was supposed to pay. So there any discussion on North American covering that 12% reduction or…?
Rick Matros
No, because it wasn’t that kind of negotiation, or it wasn’t that kind of leverage in place. So, they were sincerely interested in sizing down. And so yes, there just wasn’t that kind of leverage to negotiate that. Our rent is fully covered at the current contractual level through the February 1st transition data.
Joshua Dennerlein
But, so is there — I don’t understand why there wasn’t leverage as a landlord versus tenant here. Are they typically responsible for the full term of the lease through the end of the agreement? Or was it coming due on February 1?
Rick Matros
No. Well, it’s — a couple of things. First, we have a confidentiality agreement. So, there’s not a whole lot, I can say that’s specific to the actual negotiations that we went through. But once we made the decision to transition and so that they can move down to 12 buildings as opposed to honoring their request for reduction that removed any of those other levers.
Joshua Dennerlein
Is there — are there any other tenants who could kind of walk away like this or lease is structured differently?
Rick Matros
No, as I said, this was a very unique situation. And it had a lot to do with the Board’s involvement and the changes in management and reevaluation of portfolio. We’re not seeing this elsewhere in the portfolio. So all the statements we’ve made about the portfolio, generally, historically, remain today. Sometimes things happen that are unique and you don’t anticipate, but you shouldn’t extrapolate — no one should extrapolate this to any other aspects of the portfolio.
Joshua Dennerlein
One final question for me. When did these conversations start between North American and your team?
Rick Matros
Somewhere around the middle of August.
Operator
Our next question will come from Michael Griffin of Citi Research.
Michael Griffin
I guess pro forma for this transaction Ensign and Avamere now, so your largest tenants, you’ve spoken pretty positively about both of them. Would you expect to continue to grow these relationships? And how great can we see them become as a percentage of your tenant base?
Rick Matros
No, I think, we’ve — ever since we did the merger, we’ve been pretty committed to try and keep everybody below 10%, so that we’re not overexposed to any one tenant. So I put it this way, is Ensign and Avamere were additional facilities to us that we just thought were fantastic things to execute on, we would happily do that. We’re not going to set as a goal that we’re going to continue to grow and get them to X percentage higher than they are now. I still think we’re better off regardless of how good the operators are, having as much diversity in our portfolio as possible.
Michael Griffin
And then the commentary you were saying around Canada seem I guess relatively more positive. Should we maybe see an increase in investment from you in Canada, or is this more kind of just tactical opportunistic approach?
Talya Nevo-Hacohen
So a couple of thoughts. One is, we’ve already acquired more in Canada this year prior to this past quarter. So that’s all ready. And those assets went on in the numbers that I provided because I used only same-store sales numbers over time. The environment in Canada, for the past year and a half maybe has been very interesting. There’s some generational shifts occurring. And groups are selling assets. And then portfolios and everybody that you cover for sure has been active in that market. And we have had some good fortune in executing some transactions this year.
I think you’ll continue to see as we — trying to be active there. I think the biggest challenge for anybody in the acquisitions world right now is A capital. And Mike earlier talked — spoke about our focus on recycling capital, that’s one. And two, the bid-ask spread that is in place today and trying to get to a place where our acquisitions are actually accretive, if not the first year, then surely thereafter.
Operator
Our next question will come from Vikram Malhotra of Mizuho Securities.
Vikram Malhotra
I wanted to just follow-up on the transition of these assets, you said it was unique circumstance where, the Board decided to change, I guess what the strategy of the firm. And that led you to having to renegotiate. But I’m just trying to get a better understanding of the leverage, you say, sort of went away, versus, Ensign saying we can take costs out, et cetera? Or just the outlook that both these operators had? And how that squares with this lower rent level that they wanted or required to operate these facilities? Doesn’t — when you say there’s no read across, I’m almost wondering like, these are very well regarded operators. Would that not suggest other operators would also say, hey, as we negotiate things, when leases come due, or in this environment? We would also like a lower rent level, even though there’s synergies down the road? I’m just trying to square away like — these are well regarded operators, we’ve said there’s better credit. So I’m just not sure how that squares with — and they have an ability to take out costs. How does that square with lower rent?
Rick Matros
First of all, I appreciate the question. — First of all, a lot of transitions, that is the case. You do want to negotiating a lower rent, because you’re making a transition. And people feel like they are in a position of strength. So that does happen. That’s not unusual. It’s not a function of the quality, this portfolio or the projections of the earning stream going forward. But I’m not sure how much it’s appreciated, how brutal the last three years have been. And this recovery is taking much longer than possible — than any of us ever expected.
And everybody is taking a much more conservative — everybody that we’re aware of, are taking a much more conservative approach to how long recovery is going to take. And just having more breathing room within leases. That’s — it’s been — this industry has never gotten any through anything like this. So I think there needs to be a lot more weight put on the realism of the disaster that the last three years have been. And we’re still probably right over a year away from recovery from an occupancy perspective, and a little bit more so from a margin perspective. So everybody’s been trying to give themselves more breathing room. I think that’s really understandable.
Vikram Malhotra
So then, is it safe to say like looking forward with how maybe labor has surprised in terms of persistently remaining high costs and shortages of labor, in your underwriting going forward to the portfolio, you are now taking in more rent adjustments, just given the situation? Because in the past, you’ve said, we’re not making any more rent reductions.
Rick Matros
No, we’re not baking in any more rent reductions. Because with our portfolio, we are where we are. As we look at new acquisitions, we’re putting rent levels in place that reflect where they currently are. And so, that gives us room to grow going forward and gives us more certainty and gives us more room as well. So, no, that’s not the case. We’d be looking at more rent reductions, or factoring that into new acquisitions.
Vikram Malhotra
Okay. Because, again, I was just going back, like last quarter, we would have looked at these tenants and said, they’re over 1.4 times covered, no issue. And so, it just — I know this was a unique circumstance, but it naturally makes one wonder like, hey, given what you just described is the one poor coverage — does that have enough buffer from here on, or do you need to create a buffer just given how the environment has unfolded? It’s more comment than a question. But one last thing. I just want to make sure I understand the behavioral portfolio and kind of what appropriate coverages are here, but in the top 10 tenants, the behavioral coverage did fall. And so I’m just wondering, on a spot basis, where does that stand? Is there anything we should be concerned about in terms of restructuring?
Rick Matros
I’ll take the first part and kick over the heavy to Talya, there is no concern at all, we say that. On the 1.4 that you refer to that;s kind of EBITDAR basis. Well, we underwrite we underwrite on EBITDAR basis. So we underwrite 1.4 to 1.5 on an EBITDA basis. So that’s actually obviously a big difference because there’s something like a 40 basis point differential between EBITDARM and EBITDAR. So 1.4 coverage was EBITDARM. We will continue to underwrite on a 1.4 to 1,5 basis on an EBITDAR basis. So from an EBITDAR basis, we are comfortable on a go forward basis as we have historically that 1.4 to 1.5 coverage will be sufficient for skilled nursing.
Talya Nevo-Hacohen
This is Talya. On the behavioral health side, I don’t have that spot occupancy for you, but that specific operator has actually had to — had some pressure on its occupancy and hasn’t been able to — has missions limitation due to not being able to get enough staff. And that’s actually what drove us slightly lower NOI and therefore a little pressure on coverage. We have other operators in the sector that operate smaller buildings in other parts of the country, and they are covering it upwards of 5 times. So it really varies as the operations et cetera of these buildings and what fundamentally is going on inside the buildings. We typically underwrite at about a 2 to 2.5 times at new acquisitions in the space.
Rick Matros
The other point I’d make is even though labor issues kind of affect all the asset classes to one extent or another, the behavioral facilities, the economic model of those facilities, breakeven point is much lower from an occupancy perspective than it is for skilled nursing and senior housing. So there’s actually more breathing in there as well.
Operator
And our next question will come from Tayo Okusanya of Credit Suisse.
Tayo Okusanya
Just along Vikram’s line of questioning, again, this idea of are there any additional watch list tenants that you guys may kind of have your eye on. And I asked that in the context of just again, the rent coverage on the senior housing portfolio is still pretty tight at this point. And fundamentals, there’s pretty tight even with the recovery. So just kind of curious how you’re kind of thinking about that, kind of at this point, given kind of underlying fundamentals in both skilled
underlying fundamentals in both skilled and senior housing…
Michael Costa
Sorry. Tayo, can you repeat the last part of that question?
Tayo Okusanya
Sure. Again, so it’s this idea of — between last quarter and this quarter, kind of your watch list tenants, again, if there’s any real change in the lift. And I just asked that in the context of rent coverage on your senior housing portfolio is still pretty tight. And I think fundamentals and skills and senior housing are still pretty challenging?
Michael Costa
So a couple things, our watch list is the same as it’s been caught. Like I mentioned in my prepared remarks, our sub one EBITDARM coverage is about, is less than 5% of our overall NOI. I think the other thing to point out is on the senior housing piece for the triple net, it’s a very small portion of our portfolio. I understand your question on the coverage, but it’s a small piece of our triple-net portfolio.
Rick Matros
And the only other point that needs to tie was even though it is tight, it’s at least improving. So, went from 109 to 113. So that’s certainly not where we want it to be. They are showing improvement. So, as we’ve been saying, kind of all along, the recovery may be taking longer than we’d like, but we all believe that we’ve been through the worst of it. And I think the worst of it really was weighing Omicron hit, and then exacerbated all the labor issues and kind of reverse all the occupancy gains and all that kind of things. So, I think we’re well past the worst of it. And we’re not seeing COVID — today, and I mentioned this on the last call, see if it continues to be true. We’re not seeing COVID in and of itself impact the business. The vaccinations have been highly effective, as had been the boosters, most of the staff is vacced as well. So the business is holding up really well, relative to current COVID cases, they’re pretty negligible.
Tayo Okusanya
And then on the Enlivant front. I know, we’ve always kind of you — last thoughts around it was before you do anything with TPG, kind of wait for this thing to recover. And then maybe there could be conversation at that point. Just looking at occupancy today, it looks like 85%, which is pretty high relative to kind of where the industry is, is now an appropriate time to start looking at the JV again, and what could be the potential outcome?
Rick Matros
So their occupancy isn’t 85, but it’s in 75, 76 per share. But that said, yes, the portfolio is going to be marketed soon. From the bankers perspective, and PPGs perspective and which we agree. I mean, at this point, you need to go out with 23 numbers that are believable in order to walk at the portfolio. And so that’s what will happen. So the management team is completing their budget process that will be presented to the board, we’ll sign off on it. And sometime before year-end, the marketing process will be kicked off by the bankers.
Michael Costa
Yes. Tayo, that 85.5% that you’re looking at. That’s for our Sienna joint venture.
Operator
Our next question will come from John Pawlowski of Green Street Advisors, LLC.
John Pawlowski
Michael with regards to this statistic you shared with percentage of — below 1 times EBITDARM coverage. Could you share the same statistics on EBITDAR?
Michael Costa
Yes. So, it’s — I could get that exact number for you. And, as you recall, we don’t talk about the — we don’t disclose EBITDAR, because of the various ways that our peers reported and it just becomes a non-comparable number. But in terms of EBITDAR coverage, I’m pulling it up right now. It’s consistent with what we’ve disclosed in the past. And it is just under 6%.
John Pawlowski
Sorry. So, the same percentage of tenants are below one on both EBITDARM and EBITDAR roughly?
Michael Costa
It’s like a 2 percentage difference. We were below 5% on EBITDARM, and just below 6% on EBITDAR.
John Pawlowski
Okay. I got follow-up. Question on the McGuire Group, I believe you extended a working capital loan to them, but their EBITDARM coverage is almost 2 times, so just from the outsider’s view, they shouldn’t need cash, but they need cash. So, can you just give us a sense for what drove the working capital loan? And do you expect to extend additional loans to operators in the coming quarters?
Talya Nevo-Hacohen
That is tied to a transition of a portfolio that they took on for us. So, that’s what that’s associated with. We have provided very few working capital loans in general to our operators. If we need to, they usually are very short-term in nature and they’re really to expedite a transition and make it happen faster.
Michael Costa
But that said, we’ve been pretty consistent saying that because this recovery is taking as long as it is that we believe that we will need to help people, help tenants out on a — for some period of time. And whether — and that can come in a number of forms and may not be tied to transitions. So that could be in the form of rent relief for a period of time, partial or full, or it could be a working capital loan as well. So, we leave the door open to step up and help our tenants as they try to get to the other side of this whole three-year experience.
Operator
Our next question will come from Daniel Bernstein of Capital One Securities.
Daniel Bernstein
Hi, thanks for taking the call and I apologize just to hear the dog barking in the background. Two — quick question here. Are there any purchase options that were given to Ensign or Avamere, and part of that transition of those North American assets?
Rick Matros
No.
Daniel Bernstein
Okay. And then another question I had here was, obviously, the flu has been in the headlines. What has been the flu vaccine uptake? I don’t know if you have any information on this, versus say historical, pre-COVID levels? I mean, are residents and employees, getting the flu vaccine at higher levels than pre-COVID? Just trying to get a sense.
Rick Matros
I don’t have good data on that, Dan. I would be surprised if it was higher than previously-COVID levels. There’s usually a pretty concerted effort to get residents vaccinated for the flu. For employees, it’s always kind of them doing their own thing. I don’t think there’s ever been much of a concerted effort in the past for employees like there was with COVID. But I don’t have good data on that. But I would be surprised to see that there’s an uptick. We’re not seeing any impact yet. I know that there’s been sort of this triple concern between COVID and flu and RSV, which is mostly impacting little kids and older adults. But we’re not seeing that hit the business at this point.
Daniel Bernstein
I was just wondering whether it was a cultural change or not, but I guess there’s not enough data. And then the last question, I don’t know if you went over this earlier in the call or not, but what was the cash NOI shortfall from those tenants? Who paid in 4Q instead of 3Q? [indiscernible].
Rick Matros
Yes. It was somewhere in the neighborhood of I call it $2 million somewhere in that range, because as far as our cash NOI goes, it dropped by about call it $2.4 million. And that’s roughly the number we’re looking at.
Daniel Bernstein
And that was all paid early in 4Q?
Rick Matros
Correct.
Operator
Our next question will be coming from Richard Anderson of SMBC Group.
Richard Anderson
So, I have a have a question on sort of the irony of cutting rent, and giving a portion of that portfolio to an operator where you just cut rent, Avamere. So, I wonder if that weighed into your thinking at all, in terms of where these 24 assets would go. And how, given the history with Avamere, I assume you’re feeling much better about them at this point, given the restructuring. But how does — how do those four assets marry with the existing Avamere portfolio in terms of coverage and rent? And is it a perhaps a precise reflection of what you had in place already there?
Rick Matros
So, let me order, I think better answer to your question, since you use the word irony. Just a little bit of history. So, Avamere obviously, we got Avamere as part of the merger. Avamere was the one tenant that we didn’t do anything for their rent coverage was always really tight. But we chose not to do anything to them, where we took care of all the other operators that we did, or sold assets or whatever it was, because they had other revenue sources with some of their ancillary businesses. Once the pandemic hit, they still continue to manage through it. But given how long the pandemic went on, it sort of became too much. So, we felt like we really needed to do something for them at that point. But we put that recap capture mechanism and because we thought that they could over time, get back to a higher rent level.
And so where some of this fits into all that thinking is by giving them the four additional facilities is going to make the portfolio that much stronger overall. And particularly when you add the 20%, Washington State Medicaid rate increase. So, the acceleration of the rent recovery there will happen even more quickly than we anticipated. And Washington is a key market for them and so that that made a lot of sense. Ensign I think just has two buildings in Washington, they might be off a little bit, but they don’t have much of a presence up there. So it made a lot more sense to me. And they preferred just to do the California portfolio as well. So does that answer your question?
Richard Anderson
Well, I guess the four assets, the coverage on them, is it a reflection of what the new existing coverage is with Avamere? Is it higher or lower?
Rick Matros
No, I think that’s a good estimate there.
Richard Anderson
Okay. Second question, you said that there was some huge expense opportunities for Ensign in particular, because of the quality of the Company, perhaps, but also just national portfolio. But is that upside at the expense opportunity for them a function of them, Ensign, or was it a function of the existing way by which the portfolio was being managed at combination? I’m just curious, to what degree there was an under management situation that Ensign can exploit?
Rick Matros
Yes. It was more a function of how North American operators. There’s a lot of autonomy at the facility level relative to purchasing, where, Ensign as everybody knows, their local operators do have a lot of independence and a lot of authority. But Ensign does take advantage of its scale when it comes to group purchasing, and getting discounts as a result of that. So, that’s a completely different philosophy.
I’m not saying one’s right or one’s wrong, there are different reasons for companies doing that. But Ensign bringing that philosophy to bear will read positive results on the margin for this portfolio.
Richard Anderson
Okay. And is there a similar expense opportunity for the foregoing Avamere or is that sort of just status quo?
Rick Matros
No, the Avamere opportunity is more on the revenue and occupancy side. Because of their geographic distribution in Washington, and prior to getting these four buildings, they’ve had some difficulty in getting the managed care contracts if they want, at the rates, they want. These four buildings, and it’s — it may sound whatever, because it’s only four buildings, but it actually densifies their markets and their urban communities. So that — and they’ve already had conversations with the insurer. So they believe that this opportunity will allow them to not only get additional managed care contracts, but get better rates because of the volume that they’re going to be able to provide from a service perspective to those insurers around the Seattle market.
Operator
Thank you. And I’m seeing no further questions in the queue. I would now like to turn the conference back to Rick Matros for closing remarks.
Rick Matros
Thanks, everybody, for your time. I know it was a lot to digest. Hopefully we’ve answered your questions. If you have additional follow-up, the team’s available as we always are to have additional discussions. Thanks and take care.
Operator
This concludes today’s conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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