Sabra Health Care REIT, Inc. (SBRA) Q4 2024 Earnings Call Transcript

Good day. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the 2024 Sabra Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. The operator provided instructions. With that, I would like to now turn the call over to Lukas Hartwich, EVP, Finance. Mr. Hartwich, please go ahead.

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-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, CEO, President and Chair of Sabra Health Care REIT.

Thanks, Lukas. Appreciate it. Thanks everybody for joining the call. We appreciate it. Let me start by sending out love and prayers to the Bibas family. Their bodies will return to Israel today. May the memories of Kfir and Ariel and Shiri be a blessing. Thanks for allowing me that. So moving on to Sabra, first, I want to comment on the promotions that we announced this week for Kara, Lukas, and Anna. We're really blessed to have three of them as part of our team. They're fantastic and they exemplify everything that's good and important about Sabra and also exemplify the depth of our team and just really appreciate them and look forward to working with them in the years ahead. Moving on to performance for the quarter, Sabra delivered what's been a succession of a number of great quarters in a row. Our senior housing and skilled portfolio continue to strengthen. Workforce availability does remain a challenge to the sector, but our tenants have been able to implement strategies to mitigate those challenges and labor has stabilized.

Our SHOP same-store occupancy was up 80 basis points sequentially with margins up 20 basis points. Our SHOP cash NOI was at 17.9% for the quarter. Our senior housing triple-net coverage stayed steady at 1.36. Our skilled occupancy was up 60 basis points sequentially with skilled mix up 30 basis points. Our EBITDARM coverage hit an all-time high of 2.09. Our skilled margins are now higher than we've seen in years. Our top 10 had another strong quarter. For 2025, we'll continue to build upon the strategy we successfully executed in 2024, as evidenced by our 7% year-over-year normalized AFFO growth. We would anticipate a higher volume of deals in 2025. The increased volume we started to see before year-end has accelerated since with more opportunities than we've seen in quite a long time. The opportunities are primarily SHOP, but we are seeing more skilled opportunities. The fact that we had nothing new to announce this particular quarter shouldn't reflect on what we think we'll get done this year.

We fully anticipate having a busy year and a year that will have higher volumes than we had last year. Let me move on to the regulatory and political environment. The political environment's potential impact on our business has been an overhang, but I'd like to make a couple of points. First, the threat of Medicaid cuts. We take that very seriously. While any actions that may be taken are unpredictable, there are natural guardrails in place and I want to go through some of those guardrails. As it pertains specifically to Medicaid cuts, Congress has been historically protective of the elderly population, particularly those vulnerable institutionalized folks. The Medicaid budget, inclusive of matching funds, is critical to the governors of all states, both red and blue. In fact, the red states have been the greater recipients of Medicaid access, the expansion of Medicaid access in recent years.

So in addition to the bipartisan support that we've always had in Congress, the governors of the states, both red and blue, will be united to protect the elderly in our facilities and the Medicaid budgets that are so critical to them. We have a robust lobbying effort that we expect will be successful. A couple of other things I think to point out in terms of how early in the process we're in: the House budget has $880 billion of unspecified Medicaid cuts. The Senate version has no Medicaid cuts and overturns the staffing mandate. So you've got opposite sides of the spectrum. You have no specificity on where those Medicaid cuts are, so there's a very, very long way to go. Finally, as I noted earlier, I think the final guardrail for us is the strength of our portfolio. Having margins, rent coverage, SHOP margins where they are with organic growth still to come in both those segments I think puts us in a very good position to withstand anything that may happen going forward. And with that, I will turn the call over to Talya.

Thank you, Rick. Sabra's managed senior housing portfolio had another solid quarter. The total managed portfolio including non-stabilized communities and joint venture assets at share had sequential revenue growth of 3.5%, cash NOI growth of 5.4% with margin expansion of 50 basis points. These statistics demonstrate sequential improvement in operating results that reflect the continued recovery in Sabra's senior housing portfolio. In the fourth quarter, we added one property to Sabra's managed portfolio. We see opportunities for external growth setting up well alongside internal growth. Sabra's same-store managed senior housing portfolio including joint venture assets at share continued its strong performance this quarter. The key numbers are: Revenue for the quarter grew 7.4% year-over-year with our Canadian communities growing revenue by 10.6% in the same period. Both of these results are consistent with the growth statistics we reported last quarter.

Fourth quarter occupancy in our same-store portfolio grew by 2.3% year-over-year. Notably, our domestic portfolio occupancy grew 2.8% during that period while our Canadian portfolio grew 1.2% in the same period. RevPOR in the fourth quarter of 2024 continued to rise with an increase of 4.5% year-over-year while exPOR rose a near 0.6% for the same period. Total expenses for the same-store portfolio rose 3.4% in the fourth quarter on a year-over-year basis. Insurance costs had the largest percentage increase among all expenses but represent less than 3% of total expenses. Labor cost, which represent more than 50% of expenses, grew 2.1% in the quarter on a year-over-year basis. Cash NOI for the quarter grew 17.9% year-over-year, just above last quarter's results. In our U.S. communities, cash NOI grew 15.2% on a year-over-year basis, while in our Canadian communities, cash NOI for the quarter increased 26.9% over the same period, benefiting from the continuous strong performance of our joint venture properties.

Overall, we expect to see revenue growth continue to outpace expense growth as it has in recent quarters, resulting in ongoing growth in cash NOI. Cash NOI margins should continue to expand across the portfolio as the senior housing industry builds revenue by balancing occupancy and rate and expenses, especially if labor costs remain stable. With this as a backdrop, we are seeing significant transaction volume in the senior housing space. Virtually all of the deals are structured to transact as managed rather than leased properties. Our cost of capital now allows us to pursue these opportunities, which can generally be described as newer, nearly stabilized senior housing communities that offer care to residents. Our net lease stabilized senior housing portfolio also continues to do well with strong rent coverage, reflecting the underlying operational recovery. And with that, I will turn the call over to Mike Costa, Sabra's Chief Financial Officer.

Thanks, Talya. For the fourth quarter of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.36. Normalized AFFO totaled $86.9 million this quarter, which is in line with the third quarter. I would like to highlight a few key components of this quarter's earnings. Cash rental income for our triple-net portfolio totaled $90 million for the quarter, which was down $1.8 million due to timing of cash basis tenant rents and the impact of asset sales. Cash NOI from our managed senior housing portfolio totaled $24.1 million for the quarter, compared to $22.9 million last quarter. This increase was driven primarily by continued sequential same-store growth as well as the impact of a 92-unit property acquired at the beginning of the fourth quarter. Recurring cash G&A was $10.2 million this quarter and slightly better than the $10.4 million per quarter run rate we've provided on the last several calls.

Normalized FFO per share and normalized AFFO per share were $1.39 and $1.44 respectively for the full year, which represents 7% year-over-year growth. This growth is the result of steady performance improvements in our managed senior housing portfolio, continued stability in our triple-net portfolio and disciplined capital allocation, three factors that we expect to contribute to further growth in 2025 as illustrated in our full year 2025 guidance. Our full year 2025 guidance on a diluted per share basis is as follows. Net income $0.67 to $0.70, FFO $1.42 to $1.45, normalized FFO $1.43 to $1.46, AFFO $1.47 to $1.50, and normalized AFFO $1.48 to $1.51. At the midpoint, we expect both normalized FFO per share and normalized AFFO per share to increase approximately 4% over 2024. It is important to note that our guidance does not assume any 2025 investment disposition or capital markets activity.

There are a few other important assumptions in our guidance I would like to point out. Cash NOI growth in our triple-net portfolio is expected to be low-single-digit in line with contractual escalators. Additionally, our guidance assumes no additional tenants are placed on cash 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. As the portfolio gets closer to full recovery, this growth rate may decelerate and as a result our guidance assumes the growth rate in the first half of the year will be higher than the growth rate in the second half of the year. General and administrative expenses is expected to be approximately $50 million and includes $11 million of stock-based compensation expense. The weighted average share count assumed in our guidance is approximately 240 million and 241 million shares for normalized FFO and normalized AFFO respectively and is in line with our fourth quarter weighted average share count after adjusting for the timing of ATM share issuances during the quarter.

Now briefly turning to the balance sheet, our net debt to adjusted EBITDA ratio was 5.27x as of December 31, 2024, a decrease of 0.03x from September 30, 2024, and a decrease of nearly half a turn from December 31, 2023. This improvement in our leverage is driven primarily by the continued NOI growth in our managed senior housing portfolio, accretive capital recycling, and prudent use of our ATM to fund growth. As of December 31, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $980 million consisting of unrestricted cash and cash equivalents of $60.5 million, available borrowings under our revolving credit facility of $893.4 million, and $26.1 million related to shares outstanding under forward sales agreements under our ATM program. As of December 31, 2024, we also had $382.8 million available under the ATM program. Finally, on February 3, 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 February 28, 2025, to common stockholders of record as of the close of business on February 14, 2025. The dividend is adequately covered and represents a payout of 83% of our fourth quarter normalized AFFO per share. And with that, we'll open up the lines for Q&A.

Thank you. The operator provided instructions. Our first question for today comes from the line of Farrell Granath with Bank of America. Your line is live.

Hi, thank you so much. My first question is in regards to the occupancy for your SHOP portfolio. Just looking ahead to 2025, what are your thoughts on the pacing of the occupancy, either an acceleration or deceleration just generally in the senior housing space?

It's an interesting question because what we're seeing is operators managing, balancing out, pushing rate versus occupancy because they can't — not everyone can do both at the same time. So it's very hard for me to sit here and handicap which, how much occupancy is going to increase versus a focus on revenue increases by driving RevPOR. We're seeing very strong — we have seen very strong increases in our Canadian portfolio, which now seems to be stable, ramping down in terms of the rate of growth. But there's still plenty of room in our domestic portfolio and I think that certainly in independent living it will continue to get pushed on the occupancy side; in assisted living I think there's definitely continued push, but a desire also to raise RevPOR at the same time.

And Farrell, the only other thing I would add is, the way I would look at it is, it's not going to be a deceleration, it's just a function of how much it's going to accelerate to Talya's point.

Great. Thank you for that. And also I know you made some comments on the opportunity set that you're seeing in 2025, an increase in it, both a mix of SHOP and the SNFs. I was curious if are you seeing any impacts in pricing when it comes to SNFs, specifically due to the current environment?

It's interesting you say that. We were just at the eCap conference about 10 days ago. I would say that the transaction market in skilled nursing is robust right now. There is a lot of money chasing deals and opportunities still. Whether lenders and the healthcare REITs are able to continue to participate in that right now in an accretive fashion is the big challenge: how to figure that out.

So it's the strategic buyers that are chasing the money. That's what the issue is from a competitive perspective. They're valuing these assets not just based on a nursing facility but on the revenue it generates for all their acquired businesses. So they're operating entities, so they're able to pay up. So as Talya said, it's been pretty frothy for those buyers.

Okay. Thank you so much.

Thank you for your questions. Our next question comes from the line of John Kilichowski with Wells Fargo. Your line is live.

Thank you. Good afternoon. Maybe just to follow up on that last question, Rick, just from your opening remarks, it sounds like you feel a lot more confident in the acquisition pipeline this year versus last year, at least you expect an acceleration. I'm curious what you're seeing or what's changed quarter-over-quarter or from the past couple months till now that makes you feel confident in your ability to accelerate these deals. Given, like you said, it's pretty frothy for some of your competition to bid up on deals.

Hey John, I'll make a couple of comments and turn it over to Talya. First, we're not doing the kinds of deals that some of our competitors are doing. There's been a lot of loan volume and as we've talked about in quarters past, we're just not interested in pursuing that unless there's a very specific reason that's tied to one of our operators. So if you take all that volume away, it changes the picture for everybody. But just to remind everyone, last year, acquisitions were just starting to pick up over the course of the year, particularly on the SHOP side. And our cost of capital was improving over the course of the year. So this year, we enter into it in a much different place where there's much higher deal volume and our cost of capital allows us to do the deals that we would like to do. Talya?

Sure. I'm clearing at least 10 confidentiality agreements a week and we're only in mid-February. There's just a lot of deals coming into the market and there's a few sources for them. For the most part, one source is a lot of private equity firms that have assets that are at funds that are end of life or beyond, similar to other kinds of investors; there are PE funds that have decided the price is good enough now — let's just get out. So we're seeing quite a bit of that because there's been enough of a recovery to recoup and just exit. We're also starting to see green shoots on some interesting refinancing and recapitalization opportunities because three months ago, everyone expected interest rates to be declining. Actually what's happened is that has reversed and interest rates have gone up on the 10-year to about 4.5% now. So there's opportunities to refinance and not do much on the cash-in refi, to refinance out banks that have loans that sort of disappeared and now we're seeing more refis looking for preferred equity, mezzanine debt, et cetera.

So there's sort of a new stream of opportunities coming in. But there's the recovery — if you really pull back and zoom out for a second, there's been enough of a recovery that people that have wanted to exit can finally hit a number that feels okay and they can exit as opposed to continue to carry. And they're really willing to do that and that's really the break point that we've hit over the last few months.

Okay, got it. I appreciate the detailed answer. And then, just one more from me on the SHOP guide, earlier in the opening remarks there was a comment made about the back half maybe experiencing some modest deceleration in that growth just given it gets harder on the year-over-year comp. How do we pair that with the fact that in this business there should be greater operating leverage as you hit those sort of higher occupancy marks? And I think you're at 85.8. Once you reach those higher 80 marks, we've always heard in this business you really start to see the operating leverage of the business shine that maybe should allow for more growth. So could you help us sort of pair those two comments together?

Yes. I think it's us trying to be a little bit conservative in those assumptions. I think that's a big component of it. I'm not going to hide that fact. But also, last year, we saw quite a bit of occupancy growth year-over-year. We're sitting at about 85.5 as of the fourth quarter. If you think that this stabilizes in the upper-80s, low-90s, you're starting to get to a point where those occupancy gains aren't going to be as easy to come by versus where they were a year or two ago. So it's just us trying to be conservative on those assumptions and that growth, still acknowledging the fact as you pointed out and as Talya pointed out, that the operating leverage kicking in is something that not only are we seeing right now, but we expect to see even more so as occupancy continues to get closer to that, call it, 90% level. So that's effectively it. I mean, I don't think there's much more to look into it besides that.

Your point is correct, John.

Yes. That's why I noted exPOR increased 0.6%, which is essentially flat, which goes to operating leverage.

Okay. Great. Thank you.

Thank you for your questions. Our next question is from the line of Nick Joseph with Citi Research. Your line is live.

Hey there, it's Michael Griffin here with Nick. Rick, I think in your opening remarks, you talked a little bit about some strategies that your operators have implemented to effectively mitigate costs. Can you maybe expand on that a bit, what some of these initiatives could be? And is there the opportunity within operators in your portfolio to share best practices, just given cost mitigation is going to remain a focus?

I think it's a couple of things. One, in terms of recruiting, they've embraced digital marketing for recruiting in many cases, which has been really helpful getting more people into the door to be considered. The other is I think there's been a complete revamping of the onboarding processes with all of our operators. So the onboarding process has been lengthened; typically there are mentors assigned to new employees, and I think that's really helped get some traction with longevity. So I think those are the two main things. Obviously, we saw in 2022 a rebasing of wages. And so that's kind of normalized since then. We've always competed with the service sector, but I think the rebasing of wages during COVID has made our operators a more attractive destination as opposed to other service kinds of positions. So it's really those things.

Yes. That's helpful context there. I appreciate it. And then maybe just going back to the acquisition pipeline, Talya, you talked a bit about looking at more stabilized product that had a care component. Should we read into that that the pipeline has tilted maybe more toward assisted living relative to independent living within the managed portfolio and what kind of yields or IRRs are you underwriting to for prospective transactions?

So I'd say that assets with care components are, by definition, doing better now. Recovery has really affected them because they're able to charge rate as part of the offering as opposed to necessarily drive to maximum occupancy. Of course, they have a higher cost structure. Oftentimes they're IL/AL with memory care. That is in fact what we're seeing mostly. We are seeing some standalone independent living, but not that much. We're still seeing deals that go in with initial yields in the 7% to 7.5% range, but stabilize above that and that's still happening.

And I would also reiterate strategically, we are focused on increasing our SHOP exposure. But within our SHOP exposure, you should see over time our assisted living increase and our independent living decrease, which should help our growth numbers as well.

Great. That's it for me. Thanks for the time.

Thank you. Our next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is live.

Hey everybody, it's Austin Wurschmidt here. Going back to your comment about kind of full recovery in the SHOP portfolio. My sense was that was an occupancy comment. Can you share where margins and NOI stack up relative to occupancy and what the full recovery and future upside entails for those metrics as well?

I think I went through where we are today in my comment. I think there's visibility on getting somewhere close to where we were pre-pandemic in senior housing, particularly in those assets where you can really drive rate, which is based on location, vintage, and similar characteristics.

Got it. I mean are there any regions or operators specifically that have already surpassed, I guess, the full recovery point and would give you even more confidence about the balance of the portfolio being able to grow again beyond what you're deeming to be kind of full recovery?

Yes, I think we definitely have operators both in our senior housing and our skilled portfolio that have surpassed where they were pre-pandemic. And so we look to do more deals with them. Our portfolio has gotten so strong and a lot of that happened with some of the steps that we took during the pandemic that all of our operators are on that path. Some are just further ahead than others. But we're at the point right now where we don't have stragglers that we had pre-pandemic. And it's also why we've been selective in terms of the deals that we've done, both in terms of market, operator and the age of the assets that we're buying. So we think with everything that we did last year and actually a lot of volume in 2022 as well, we've really enhanced the quality of the portfolio from a market, asset and operator perspective.

And then just last one. Rick, you mentioned you expect to do more investments this year relative to last year. How significant of a year-over-year increase could we see, given all the reasons that Talya highlighted around what's going on in private equity and with higher interest rates today?

Before the pandemic, if you exclude some of the really big moves that we made, we typically did several hundred million a year that we'd like to get back to — I'm not going to predict exactly that will be there this year, but that's certainly a goal for us: to get back to the level of investments that we did on a routine basis prior to the pandemic.

That's all for me. Very helpful. Thank you.

Thank you for your questions. Our next question comes from the line of Vikram Malhotra with Mizuho. Your line is live.

Hey, this is Georgi on for Vikram. Just on the external growth pipeline, can you just talk about what the competition looks like for stabilized assets in the senior housing?

Mostly the healthcare REITs for the nicer assets — the institutional quality assets. Below that kind of quality level, I think you've probably got some high net worth investors. We're not seeing much private equity in the space right now, though they're starting — there's starting to be rumblings of their coming back. It's hard to be a levered buyer right now. There's just not enough spread between cost of debt and cap rate.

That's helpful. And I just have one more on the SHOP portfolio. Can you just provide more color on what January end-ups were compared to last year?

I don't have the exact numbers for the portfolio with me but it's sort of in the 4% to 5% range is what we're seeing in our larger operators, and they're achieving those.

And the other thing to point out, too, is that rent bumps are all done in January for many operators, though it varies operator by operator. Some do them on an anniversary date of the lease.

Great. Thank you.

Thank you for your questions. Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is live.

Hi, thanks for the time. Just hoping you could talk a little bit about the infrastructure — the platform guidance seems to call for kind of flat G&A. So just curious how you guys are investing in the system that is a strength of REITs to have the platforms and the capital to invest behind the business. Presumably, the moat will get wider as that happens over time. I'm just curious on your latest initiatives around being a leader in SHOP.

We've been in SHOP for a while now, and we established infrastructure several years ago when we started our foray into that. So from a systems perspective, from a technology perspective, from a personnel perspective, those are pretty well established to the point where adding additional scale in there — any additional costs are going to be really incremental. It's not anything major to take on larger portfolios or more operators. That's where the biggest impact from a G&A perspective would be on the SHOP side. To the extent there's any triple-net, we could absorb that without adding any headcount realistically. So I hope that answers your question, Juan.

Now, I would just add, Juan, that from a systems perspective, we're continually upgrading and improving our systems so that the technology that we have in place continues to get better, allows us to provide different levels of support to our operators, to interact differently, to have more visibility and to have more predictability as we start building artificial intelligence capabilities into our systems.

You said the keyword there. Just curious on 2025, you talked about acquisitions ramping up. But curious if there's any dispositions, you had some sales in the fourth quarter, which we didn't necessarily model. So just curious how we should be thinking about sales and dispositions for 2025.

The dispositions that we had in the quarter were in the ordinary course of business. Historically, ordinary course dispositions for us have been roughly $50 million to $100 million plus a year. There was nothing unusual about it. And you can tell by the number of facilities in what was a relatively small proceeds number that they weren't producing very much. We do have an SNF portfolio that's still in the process of being sold that's about $50 million. Other than that, it's ordinary course.

Thank you.

Thank you for your questions. Our next question is from the line of Richard Anderson with Wedbush. Your line is live.

Thanks. Good morning. So I want to talk about the accretive/dilutive math on that. You're trading at around 12x forward AFFO. That's like an 8-ish AFFO yield. Would you say you're breakeven in the first year of investment and grow from there? Or just curious how you think about that from an accretive dilution standpoint?

Based on where our stock is at right now as well as where we can issue debt and use leverage, somewhere in the low to mid-7s on a going-in yield is breakeven or slightly accretive. We also have opportunities where initial yield is around that level but there's growth baked into it, so it's not only the initial yield but the long-term growth profile compared to expectations built into our cost of capital.

Okay. If you're doing $500 million this coming year, would it be safe to say half of that is funded with equity more or less?

The numbers I've been talking about are usually in the 60:40 equity to debt range to keep our leverage around 5x.

Okay. And then, Rick, back to you, big picture. You mentioned the spread between the House and the Senate in terms of Medicaid unspecified — who knows exactly what is actually in those — that line of thinking from the House perspective. If it's so wide like that, is there a concern that at least there will be some of it — I mean, to find a middle ground between those two governing bodies? How do we get through this and avoid any kind of disruption at all?

So a fair question. This may not sound great because the numbers are so enormous — anything over $1 trillion would be some cause to worry. If anything under $1 trillion, it's better. The $880 billion number from the House is very large; the Senate has $0 in Medicaid cuts. That number is going to come down. Hopefully it goes away, particularly when the governors start getting involved in the fight, but it's going to come down. Given how strong the portfolio's performance is with rent coverage and the margins and it's continuing to improve and still got room to grow, I think that we'll be okay even if there's some kind of a hit. There are statutory issues and Congress has to be involved; it can't just be done unilaterally. So I actually think that you may have less concern about Medicare than you do about some kind of hit on Medicaid. I'm cautious but optimistic that the combination of bipartisan support, state governors' interests, and our lobbying efforts will limit any damaging outcome.

Ladies and gentlemen, we have lost our main speaker line. Please hold and we'll work to get them back. I'll put you back into hold music until we have them back with us. Give us one second; we'll be right back on. Thank you. Ladies and gentlemen, we really appreciate your patience here. Richard, I know you're in the middle of your question. We'll bring you back up on to the stage. Go ahead.

Well, Rick was in the middle of answering the question. I guess I broke the Internet with it, but you were saying, Rick, on this...

So what I was saying was, you're talking about really big numbers here. If the number is over $1 trillion, it creates a lot of concern regardless of how the Medicaid cuts are distributed — so it's better that it comes down from the $880 billion number. But because the House and Senate are at very different starting points, there will be negotiation and involvement from states and stakeholders. Given the strength in our portfolio metrics, rent coverage, and margins, and continued improvement with room to grow, I think we'll be okay even if there's some kind of a hit. Does that answer your question?

Yes, it does. And how would you parlay that into Medicare — different forces at work, but just curious.

It's different forces at work. A lot of the fluctuations are being tested in the courts and there are statutory issues as well. They can't just do this without Congress being involved. I tend to fall back on the bipartisan support and the involvement of governors. It's just not going to be simple to enact broad cuts that would harm people most dependent on government aid.

Fair enough. And I just want to say much respect to your opening comments on this call, by the way. Thanks, everybody.

Thank you.

Thank you. Our next question is from the line of Alec Feygin with Baird Equity Research. Your line is live.

Hello, and thanks for taking my question. I'll echo what Rich said in respect to those opening comments. My question is: do you expect specialty and behavioral coverage to improve as the year progresses?

I think it's just going to kind of meander around where it is. A lot of the fluctuations are in behavioral hospitals, which is a really dynamic business. The coverage is fantastic so there's no concerning trends. I think it'll meander and not be consequential.

Got it. And kind of changing that, what is the current size of the cash basis tenant base? And did the dispositions in the quarter include tenants on cash basis?

In terms of the cash basis tenant base, the component we're really focused on are the tenants not paying full rent and paying variable amounts month-to-month or quarter-to-quarter. That component is a couple of percentage points of NOI — less than 5% of our NOI. Regarding sales in the quarter, yes, some of those were related to cash basis tenants.

All right. Thank you.

Thank you. Our next question is from the line of Michael Stroyeck with Green Street. Your line is live.

Thanks and good morning. Maybe one on the transaction market. Is there any recurring theme on potential deals that the company has looked at and then ultimately passed on, particularly within SHOP? Is it just a function of price like what you're seeing with NIF transactions or maybe something else that leads to not closing on these deals?

I think there are a couple of characteristics we're focused on. One is the quality of the asset itself — the vintage of the asset as well. We look at the market and the long-term viability of the assets. Those are critical factors. The SHOP deals we're seeing now generally are high-quality assets and it's an opportunity, as Rick described earlier, to improve our portfolio over time by adding institutional-quality assets.

On those high-quality assets you're bidding on, is it just a function of different cap rates that you're ascribing versus where the deals ultimately trade at?

I think the band of cap rates is fairly narrow. Often the seller or the operator has an ability to say who the buyer will be, so relationships come into play. We're also seeing off-market deals where relationships are definitely part of the discussion.

Got it. Okay. And then maybe one just on SNF coverage levels. The magnitude of the SNF coverage increase during the quarter seemed fairly outsized relative to actual occupancy gains we saw. Can you just help us understand what drove such a healthy step-up in coverage?

I think it's where occupancy kicked in. It was a big jump in terms of operating leverage. Also, Medicaid increases that kicked in around July and August really had the biggest impact. You'll see ongoing impact from the Medicare market basket as well in subsequent quarters.

Got it. That's helpful. Thank you.

Thank you. Next question is from the line of Aaron Hecht with JMP Securities. Your line is live. Go ahead.

Thank you. I was just looking at your loan book, it looks like it's around $400 million. It sounded like that's not an area you want to be focused on and the maturity date ranges are pretty wide. Is anything coming up soon in terms of maturities? And do you expect those to convert to ownership? Or do you just recycle out of those as they come due?

There's nothing imminent in that loan pool. Individually, there are some that we'd like to refinance and redeploy the capital, and others where we have an opportunity to buy in which case we'll consider that when the window opens. There's nothing really actionable at this moment.

I was really looking at the three mortgage loans and it looks like the first maturity dates in 2026, and that's the big bucket. Is there a big maturity in 2026? Or is that more back-end weighted?

There's a maturity at the end of 2026. So it's essentially just under two years away.

And what's the size on that?

It's the majority of that bucket — about $300 million.

RCA loan. That discussion will be whether they want to take us out, which would be fine, or whether we convert it into something else like a triple-net. The loan is performing and we'll play it as it goes along.

Okay. Thanks, Rick. Appreciate that.

Thank you for your question. We have our next question from the line of Omotayo Okusanya with Deutsche Bank. Your line is live.

Hi yes, good afternoon, everyone. Great comments at the beginning of the call, for sure, Rick. Sticking on this topic of Medicare and Medicaid, what are your thoughts around if they are eventually to get cut? Are they more likely to impact SNF programs versus classic Medicaid on the skilled nursing side? Is that all dependent on the trillion-dollar number you mentioned? Or how should we think about that probability?

The answer is yes: there are other programs like CHIP and some Medicaid expansions that could be targeted first. Some home- and community-based programs might be targeted before institutional Medicaid funding. So it's reasonable to think cuts would be distributed across programs and not solely to SNFs, and that provides some comfort that the core institutional funding for the elderly would be defended. Also, depending on the final number, sectors may unite in lobbying efforts. Organizations like AARP will be active on behalf of vulnerable populations. All of that reduces the likelihood of a devastating outcome for our sector.

That's helpful. One other question, I know it's still early, but any thoughts at this point about how Robert F. Kennedy Jr. may want to run CMS and what the implications are for the industry?

I have zero idea how to predict that. There's no clear information to assess. I won't speculate.

Appreciate it.

Thank you for your questions. We have no further questions at this time. I'd like to turn the call back over to Mr. Matros.

Thanks, everybody, for your time today. Appreciate the support as always, and we look forward to seeing many of you at the Citi Conference. Have a good day.

Thank you. And ladies and gentlemen, that will end Sabra's 2024 fourth quarter earnings call. Have a great rest of your day. Take care.