Sabra Health Care REIT - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered steady operational progress and modest upside vs Street: total revenues rose to $183.54M (+10.1% YoY), with diluted EPS $0.17; FFO/share $0.36 and AFFO/share $0.37. Revenue beat consensus by ~$3.3M; FFO/share was essentially in line to slightly above; EPS matched expectations. S&P Global estimates reference: revenue $180.23M*, FFO/share $0.3569*, EPS $0.1701*.
• Managed senior housing same-store Cash NOI grew 16.9% YoY; portfolio coverage reached post‑pandemic highs (SNF 2.19x; SH-leased 1.41x; Behavioral 3.77x), reflecting labor moderation and rate/occupancy tailwinds.
• Guidance was reaffirmed: 2025 per-share ranges remain Net Income $0.67–$0.70; FFO $1.42–$1.45; Normalized FFO $1.43–$1.46; AFFO $1.47–$1.50; Normalized AFFO $1.48–$1.51. Management expects to include awarded deals in guidance after closing.
• Catalysts: >$200M awarded SHOP acquisitions at high‑7% initial yields; Fitch affirmed BBB‑ with Stable Outlook; dividend declared $0.30/share. Leverage improved to Net Debt/Adj. EBITDA 5.19x with ~$1.1B liquidity.

What Went Well and What Went Wrong

• What Went Well
  • Same-store managed SH Cash NOI +16.9% YoY; RevPOR +2.8% YoY; occupancy up to 85.4% (Canada 90.9%, U.S. 83%)—operators are “tactically deploying the levers of occupancy and rate” to drive NOI and margins.
  • Coverage at post‑COVID highs (SNF 2.19x; SH-leased 1.41x; Behavioral 3.77x); “leverage ticked down again and we have ample liquidity available,” per CEO.
  • Awarded >$200M newer‑vintage senior housing deals at high‑7% initial yields; legacy Jasper second phase acquired for $7.8M at 7.5% yield.
• What Went Wrong
  • Behavioral/Specialty occupancy showed volatility typical of the segment; management characterized trends as “meander[ing]” given short lengths of stay, holiday seasonality, despite strong coverage (3.77x).
  • Limited availability of attractive SNF acquisitions; nonprofit divestitures often “losing a lot of money,” making lease underwriting challenging amid Medicaid uncertainty.
  • Macro/policy overhang: potential Medicaid program pressure debated in Washington; while management is constructive on guardrails, they acknowledged provider tax risks and will watch summer rate decisions.

Transcript

Operator (participant)

Good day, everyone. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2025 Sabra First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Lukas Hartwich, AVP Finance. Please go ahead, Mr. Hartwich.

Lukas 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 31st, 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 comparable GAAP results included on the financials page of the investor section of our website at sabrahealth.com. Our Form 10-Q, Earnings Release, and Supplement can also be accessed in the investor section of our website. With that, let me turn the call over to Rick Matros, CEO, President, and Chair of Sabra Health Care REIT.

Rick Matros (President, CEO, and Chair of the Board)

Thanks, Lukas, and thanks, everybody, for joining us today. Our skilled nursing and TripleNet senior housing EBITDA on REIT coverage continued to set new highs at 2.19 and 1.41, respectively, with behavioral hitting its highest level since year-end 2023 at 3.77. On average, coverage for our top 10 relationships is up sequentially, and while not all of them were up, there are none that we have concerns about. Specifically, as it relates to McGuire, about a year ago, they had a pretty large one-time Medicaid pickup due to some underpayments from the Michigan Medicaid system. In the absence of that, their coverage would not have—would not show a drop in the current period. Our contract labor continues to improve. While not quite down to pre-pandemic levels, it is lower than it's been in four and a half years.

Labor still is difficult, but certainly moderating at a much quicker pace than we would have anticipated. Our skilled occupancy is up 80 basis points sequentially, with our skilled mix up 10 basis points. Our TripleNet senior housing occupancy is up 50 basis points sequentially. Talya will discuss SHOP results in detail. Our deal pipeline continues to be busier than in a very long time, still primarily SHOP, but with enough opportunities that we're able to bid on newer vintage assets with attractive yields. We have a mix of deals with existing operators and are also entering into new relationships with proven operators we've been cultivating relationships with.

While we do not usually comment on awarded deals, given our experience in closing awarded deals, we wanted to provide a sense of the volume we hope to close on this quarter by noting the more than $200 million which have been awarded to us. That is more than we did in all of 2024, with more coming as we speak. There is nothing new to note as it pertains to Medicaid other than we are looking forward to this summer's Medicaid rate increases. With that, I will turn the call over to Talya.

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

Thank you, Rick. Sabra's managed senior housing portfolio held up well in the first quarter of 2025. Despite an expectation that seasonality would be back and would drive a dip in operating results, revenue, cash NOI, and margin were flat on a sequential basis for the total managed portfolio, including non-stabilized communities and joint ventures at share. The senior housing industry continues to gain ground post-pandemic, with more units occupied than ever before, according to Nick, having absorbed significant inventory that came online starting just before and continuing during the pandemic. With little new supply expected to be delivered in the next few years, we see continued opportunities for internal as well as external growth in senior housing. Sabra's same-store managed senior housing portfolio, including joint ventures at share and excluding non-stabilized assets, continued its strong performance in the first quarter.

The key numbers are: revenue for the quarter grew 6.3% year-over-year, first-quarter occupancy in our same-store portfolio was 85.4% compared to 82.6% in the first quarter of 2024. Notably, our domestic portfolio occupancy was 83%, gaining 340 basis points of occupancy during that period, while our Canadian portfolio occupancy was 90.9%, adding 140 basis points of occupancy in the same period, having ramped up occupancy ahead of our U.S. portfolio. RevPOR in the first quarter of 2025 increased 2.8% year-over-year for the same period. In our Canadian portfolio, where occupancy has been in the low 90% for a few quarters, RevPOR grew 4.9% this quarter on a year-over-year basis, demonstrating the impact of scarcity value. Importantly, as RevPOR and occupancy continued to rise, export declined 1.1% across the same-store portfolio. Cash NOI for the quarter grew 16.9% year-over-year in the same-store portfolio. In our U.S.

Communities, cash NOI grew 14.4% on a year-over-year basis, while in our Canadian communities, cash NOI in the quarter increased 24.7% over the same period, demonstrating the power of operating leverage. The trends that we have been seeing for the past year continue. Senior housing operators are tactically deploying the levers of occupancy and rate to maximize revenue, and expenses remain steady, causing NOI to grow and expense to decline. Our net-lease stabilized senior housing portfolio continues to do well with continued solid rent coverage, reflecting the underlying operational recovery. With that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Michael Costa (EVP, CFO, and Secretary)

Thanks, Talya. For the first quarter of 2025, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.37, compared to $0.34 and $0.35, respectively, for the first quarter of 2024. Normalized FFO and normalized AFFO totaled $85.2 million and $88.2 million this quarter, respectively, which represents a year-over-year increase of 7% and 9% for normalized FFO and normalized AFFO, respectively. I would like to highlight a few key components of this quarter's earnings. Cash rental income from our TripleNet portfolio totaled $90 million for the quarter, up from $89 million in the first quarter of 2024, despite disposing of $115 million of real estate from our TripleNet portfolio last year. Cash NOI from our managed senior housing portfolio totaled $24.1 million for the quarter, compared to $19.1 million in the first quarter of 2024.

This increase was driven primarily by strong occupancy, NOI, and margin gains in our same-store portfolio, as well as the impact of our addition of eight properties to this portfolio in 2024 through acquisitions and transitions. Interest and other income was $10.1 million for the quarter, compared to $8.9 million in the first quarter of 2024. Cash interest expense was $25.4 million, in line with the first quarter of 2024 and our 2025 guidance run rate. Recurring cash G&A was $10 million this quarter, which matches our 2025 guidance run rate. As noted in our earnings release, we have reaffirmed our previously issued 2025 earnings guidance, and the results for this quarter are in line with our assumptions underlying that guidance.

Now, briefly turning to the balance sheet, our net debt-to-adjusted EBITDA ratio was 5.19 times as of March 31st, 2025, a decrease of 0.08 times from December 31st, 2024, and a decrease of 0.36 times from March 31st, 2024. This improvement in 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. 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 $84.3 million on a forward basis at an average price of $17.32 per share after commissions.

In total, we currently have $110.5 million outstanding under forward contracts at an average price of $17.32 per share after commissions. We expect to use the proceeds to close on the investments we have been awarded and to do so on a leverage neutral basis. As of March 31st, 2025, we are in compliance with all of our debt covenants and have ample liquidity of over $1 billion, consisting of unrestricted cash and cash equivalents of $22.7 million, available borrowings under our revolving credit facility of $917.3 million, and the $110.5 million outstanding under our forward sales agreements under our ATM program. As of March 31st, 2025, we also had $297.7 million available under our ATM program. Finally, on May 5th, 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 May 30th, 2025, to common stockholders of record as of the close of business on May 16th, 2025. The dividend is adequately covered and represents a payout of 81% of our first quarter normalized AFFO per share. With that, we'll open up the lines for Q&A.

Operator (participant)

At this time, I would like to remind everyone, in order to ask the question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Hi, this is Elmer Chang on with Nick. Thanks for the question, and congrats, Talya, on the upcoming retirement. My first question is on how you're thinking about dispositions throughout the year. I think you expected a $50 million skilled nursing facility sale in the near term from last quarter's call. Is that still on the table? If so, when would you expect that to close? Maybe how has delayed timing put pressure on the pricing for that sale?

Rick Matros (President, CEO, and Chair of the Board)

We still expect that to close. It's just an estate that there's a lot more regulatory hoops to jump through, and there won't be any change on the proceeds that we're expecting. It's going to just be one of those. It'll happen when it happens, but it's on course to happen. Beyond that, it's just ordinary course of business stuff for us, like it used to be, which could be sort of $50-$100 million a year. We don't have much in the way that's targeted right now.

Okay. Thank you. Second question is just on SHOP. I'm just wondering how you're thinking about the trajectory of RevPOR and expense growth throughout the year as the portfolio approaches that high 80% occupancy level, given operators emphasize growing occupancy during the quarter. It sounds like it seems like the U.S. business may have less pricing power. How are you just thinking about how those two levers are trending? What will trend throughout the year?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

What we're seeing, what we expect, subject to whatever might happen in the political arena, right now, labor, which is the largest expense, is stable. As a function of export, it's decreasing because occupancy is increasing. I actually think that as occupancy continues to rise, and we expect it to rise throughout across all the spectrum of senior housing, both in the U.S. and Canada, pricing is going to also get increased just because that's the lever that's going to be available too. The higher the occupancy, the higher the price you can actually start to demand once you cross a certain threshold. I think there are significant tailwinds on both occupancy and RevPOR. I think expenses right now, I'd say, hold as they are, subject to unknowns.

Okay. Thanks so much.

Operator (participant)

Your next question comes from the line of Farrell Granath with Bank of America. Your line is open.

Farrell Granath (Equity Research Associate)

Thank you so much for taking my question. My first one is about your guidance, reiterating guidance. I know you made commentary about a deal awarded, so I wanted to just touch on, is any of that being contemplated? Also on the SHOP guidance just given the execution this quarter, which tends to be seasonally softer, keeping the low to mid-teens cash NOI growth for the year.

Michael Costa (EVP, CFO, and Secretary)

Yeah. In terms of the acquisitions that we announced that we're working on, those are not included in our guidance. We'll include those in our guidance once they've closed. You could expect when we get into our second quarter call, once those deals and potentially other ones have closed, we'll incorporate that into our thoughts around guidance. Short answer is no, they're not incorporated into the guidance currently. On your second question, we reaffirm guidance and all the assumptions underneath it. That same-store growth that we, the guidance that we gave of low to mid-teens, still stands.

Rick Matros (President, CEO, and Chair of the Board)

Look, we want to be moderate here. We just want to give ourselves a little bit more time. If we have a reason to revisit from second quarter, we'll do that.

Farrell Granath (Equity Research Associate)

Thank you. Also, just generally, in what you're seeing in the transaction market, especially with your ability to enter into a $200 million portfolio deal, what are you seeing as in terms of deal flow? Are you seeing that increase and also the sellers and buyers entering into this space?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

Happy to take that. By the way, the $200 million that we've been awarded are actually not a single portfolio, but there are multiple transactions in there.

Farrell Granath (Equity Research Associate)

Okay.

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

Just to be just for clarity's sake, we're seeing a very robust pipeline of deals come to us. It's heavily biased to senior housing, which we're largely viewing at or entirely viewing as SHOP, with rare exceptions. The assets we're seeing are primarily either single assets or a few assets that can be bought bundled or not. We have started to see some large portfolios. They're kind of outliers. Oftentimes, there are things we've seen. There are portfolios we've seen before. They're of less interest to us at the moment because we're seeing the best opportunities for us for multiple reasons to be in these onesie-twosie situations. What's interesting about what we're seeing is that the sellers are frequently private equity firms that either provided development capital or bought assets or early stage, and they're at fund life and want to sell.

The assets were covered enough from COVID that they can exit at an okay multiple in terms but they need to get capital back to their LPs so that they can launch their next fund. That is really the recycling of capital issue that is driving quite a bit of sales. There are occasionally situations where we are seeing some sellers who are unsuccessful come back to the market again. Right now, it is a timing issue of getting good execution or decent execution. Sometimes it is just sufficient execution for these sellers. Assets now in the senior housing arena have recovered enough, even though cap rates have risen, for people to get out without having to oftentimes put additional cash in to pay-off debt.

Farrell Granath (Equity Research Associate)

Has that increased competition that you've seen as well?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

The private equity buyers are largely out as buyers. There are a few that are tiptoeing around. We've seen one that's been more active. We are seeing the public REITs be active, as you have seen that as well. Sometimes we actually overlap with groups that we haven't typically overlapped with in the past. Pricing has remained pretty tight from our perspective on deals where we've bid.

Farrell Granath (Equity Research Associate)

Great. I really appreciate it. Thanks.

Operator (participant)

Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt (Senior Equity Research Analyst)

Thanks. Good morning, everybody. On the $200 million of senior housing acquisitions, are these all deals in the U.S.? Can you just give us a sense of kind of the operating metrics where they sit today and what sort of that may imply for kind of the future growth profile?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

I'm going to be cautious here in terms of giving you hard numbers because these are deals that we've been awarded, and we haven't closed on them quite yet. First of all, they're all domestic. They're biased towards the eastern half of the United States, if that gives you any additional good color. They all have growth embedded in them because while they are decently occupied, there is still room for growth, and there's still room for RevPOR increases.

Rick Matros (President, CEO, and Chair of the Board)

They're also a little more heavily weighted towards AL memory care than IL.

Austin Wurschmidt (Senior Equity Research Analyst)

Did you want to add something, Talya?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

No, I'm good.

Austin Wurschmidt (Senior Equity Research Analyst)

Okay. And then just following up, Rick, you kind of referenced you haven't historically disclosed deals until they've closed. I guess what led you to break that practice with this $200 million? Should we expect you'll continue to announce deals that have been awarded or under LOI?

Rick Matros (President, CEO, and Chair of the Board)

We did it because, one, our track record when we get deals awarded is that we get them closed. We felt like we've got so much great activity now that we didn't want another quarter to go by without making sure that you all were up to speed on what we expect to see happen because we had been saying even earlier in the year that we expected to do quite a bit more than we did last year, and that was certainly our target. It was really specifically for that reason.

Austin Wurschmidt (Senior Equity Research Analyst)

Thanks. That's all.

Rick Matros (President, CEO, and Chair of the Board)

We may or may not do it, we may or may not do it going forward because we'll have closed deals to announce at the rate things are going.

Austin Wurschmidt (Senior Equity Research Analyst)

Understood. Helpful.

Operator (participant)

Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Juan Sanabria (Managing Director)

Hi, good morning. Talya, congratulations. First question, just no problem. First question is just on Genesis. I know you guys were super proactive trying to reduce exposure over the years, but if you could just remind us on how much in NOI you're getting from Genesis. I know it's out of your top 10 list, and kind of the structure that's in place and the credit behind that lease, and obviously if you've been your paid rents to date through, I guess, May.

Rick Matros (President, CEO, and Chair of the Board)

Yeah. We sold all but eight of the original 86 last year because we wanted to have more security going forward. We decided to sublease those eight assets to a trusted operator. Their rent was slightly less than Genesis, but because of the Genesis guarantee, Genesis makes up the stub. It's not material. That's been going really well for us. No missed payments.

They will be our operator going forward after the lease expires. The operations have improved materially since they started. With really that many facilities, it's pretty negligible impact on our NOI. Yeah, we're good there.

Juan Sanabria (Managing Director)

Great. Good to hear. Secondly, just on SHOP, could you just remind us kind of the deferred or kind of revenue-generating CapEx that we should be thinking about this year for the in-place portfolio? If we should be thinking about incremental kind of CapEx spend on the pipeline over and above traditional maintenance CapEx?

Rick Matros (President, CEO, and Chair of the Board)

Mike's pulling that up. I would say that because of the vintage of the assets that we acquired last year and that we're currently in the process of acquiring, they're really new. They're new assets. They're less than 10 years old. Most of them are five, six, seven years old.

The CapEx requirements for the stuff that we're buying just isn't material. When we were asked earlier about competition, we've got so much in the pipeline that we've really been able to be extremely selective about the assets that we want to buy. That regardless of what happens with competition in any of the geographic areas, any of the markets that we're buying in, we've got really new, good-looking assets to compete with anybody.

Michael Costa (EVP, CFO, and Secretary)

Yeah. In terms of the dollars, Juan, in terms of regular maintenance CapEx, we've been spending on average somewhere between, call it, $1.5 million-$2 million a quarter on our consolidated portfolio. On larger projects, that's going to be very community-specific. We spent a lot last year, as we've talked about in the past. There are some deferred projects that got delayed because of the pandemic. That number was over $30 million that we spent across our entire portfolio. We expect that number to be quite a bit lower in 2025 because of the fact that we caught up last year, as well as what Rick pointed out with the newer vintage assets that we've been adding to our portfolio just naturally required less CapEx.

Juan Sanabria (Managing Director)

Thank you.

Operator (participant)

Your next question comes from the line of Seth Bergey with Citigroup. Please go ahead.

Seth Bergey (Senior Research Associate)

Hi. Thanks for taking my question. I guess just going back to the pipeline, kind of as you have been proving out for SHOP, it sounds like there may be a little bit more competition out there for deals. Has there been any change to your underwriting criteria in terms of the type of assets you're looking at, geographies, or kind of your return expectations?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

I actually think that the competition has just shifted to being actually a smaller pool of buyers for the most part on the assets that we see in general. As Rick said, we're being very deliberate and picky about what we're pursuing for all the reasons that were outlined. In terms of underwriting, really nothing has changed. We're really focused on our cost of capital and looking at making sure that how we underwrite leads us to get deals that are accretive. The other element that is relevant to us when we're looking at transactions and believe we're looking at a lot. I probably clear 10 concrete agreements a week just to give you a sense of scale. That's a lot of deals.

We look at situations where we have an opportunity to buy at maybe not the highest price because either we have a relationship and history with an operator who's involved in the deal and has an ability to effect or impact how the sale happens. We are also looking at working with operators that have a pipeline of assets that are expected to come to market in some fashion and potentially even develop an opportunity someday in the future when that might make sense. We are not counting on development today, trust me. The assets themselves matter, but there are strategic reasons also for these specific investments in terms of the relationships and the future of our organization and opportunity to buy and invest.

Seth Bergey (Senior Research Associate)

Great. That's helpful. I guess just for the second one, your coverage levels continue to improve, but are there any changes to your watch list with respect to operators?

Rick Matros (President, CEO, and Chair of the Board)

No, none.

Seth Bergey (Senior Research Associate)

Okay. Great. Thank you.

Operator (participant)

Your next question comes from the line of Georgia Denko with Mizuho Securities. Your line is open.

Hi, this is Georgia from Vikram. Just in the press release, you mentioned that you're not seeing many attractive SNF opportunities. Can you just provide more color on what makes a SNF acquisition unattractive? Is it a location, operator, anything else that you can share? Thank you.

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

Losing a lot of money is a good starting point, and we see a fair amount of those because oftentimes what we're seeing is a nonprofit that's divesting because they're bleeding cash on the asset. That's tough because it's really tough to structure a lease around an asset that doesn't have the ability to pay rent because it's going to take time. Even if you get the most fantastic operator in there and the asset is fundamentally well situated and all that, it's going to be a while before they're able to turn the facility around so that they can pay rent. That's the challenge of the math around lease. We're not doing managed assets in the SNF space.

Rick Matros (President, CEO, and Chair of the Board)

We're really not seeing anybody else get much done too. Hopefully, there's a Medicaid overhang, obviously, on this page. I think we're hopeful that as there's clarity on Medicaid, that more assets will come into the market. I mean, people can go ahead and do deals and assume nothing's going to happen, but we prefer to be a little bit cautious about how we underwrote a SNF deal, not knowing what's going to happen with their Medicaid revenue stream.

That's helpful. Thank you. Just a second question on the SHOP portfolio. Can you just provide more color on what do you expect in terms of occupancy cadence throughout the year and what are the trends that they're using so far in the second quarter?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

We're a month into the second quarter, so I hesitate to extrapolate too much. I think the first quarter was flat sequentially, as I said, which is kind of the new seasonality, at least for this year. I expect things will pick up. If you think about where assets are located, let's just say let's talk about our Canadian assets. People are less likely to move in during January, February, and March when there are snowstorms and it's negative 20 degrees outside, right? I think we were at Vancouver last week. The skies were sunny and bright, nicer than Southern California. Toronto is getting better as well. I think the mood increases and move-ins will increase even just in our Canadian portfolio for those reasons. Of course, any of our assets that are in the northern part of the U.S. have the same issue with winter.

It's just hard to be in Minnesota and think you're going to move in January and February and March.

Great. Thank you for taking my questions.

Operator (participant)

Your next question comes from the line of Richard Anderson with Wedbush. Your line is open.

Rich Anderson (Managing Director)

Thanks. And congrats, Talya.

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

Thank you.

Rich Anderson (Managing Director)

Guess we'll see you around for a few more quarters, though. On the topic of not interested in any large portfolios, Rick, is that because of the portfolios, or is that because of your sort of commitment to all of us to sort of keep it simple and not get into a fire hose drinking situation again? I'm just curious what's motivating the lack of interest in large portfolios as you see it today.

Rick Matros (President, CEO, and Chair of the Board)

Yeah. It's really that commitment, as you know very well because you've covered us for so long. We did a lot of things that we felt we had to do at the time that created a lot of noise, but it effectively repositioned us to be strong going forward. Nevertheless, it takes some time to get past that in people's minds and be an organization that is dependable and people can sort of predict more where things are going to be going. We articulated that in 2023 coming out of the pandemic, and we stuck to it. There is so much activity out there for us to take advantage of. We don't need any big swings. When we repositioned the company with the merger and really exiting Genesis, we didn't need to do it again, and we still don't need to do it.

We've got a really strong portfolio. We had less SNF operator issues than, I think, pretty much everybody during the pandemic. We just want to be predictable and keep it simple. We can do hundreds of millions of dollars of deals and do them with deals that are under $100 million. None of the deals in this sort of basket of 200-plus are close to $100 million. That is our commitment to you all and a commitment to ourselves. We're going to be very laser-focused on it. Will we be willing to do something larger next year or whatever? Yeah, of course, we might be willing to do that. Right now, we're able to have a better balance in our portfolio between senior housing and skilled than we've ever had. It drives our growth better. We still want to do skilled deals.

We love the space, and obviously, it'll increase our average weighted yield. We want to have that balance in the portfolio. We want to have a component of our asset base that is a strong driver of earnings, stronger driver of earnings than the 2.25-2.5% bump she'd get on a triple net. Not sure. I'm belaboring it probably a little bit, Rich, but.

Rich Anderson (Managing Director)

Yeah. Yeah. I enjoyed the good stuff. Next question is, we're hearing some of your peers are doing some SHOP conversions. Is that a part of your strategy at all within the portfolio, or is it going to be mostly looking for stuff externally?

Rick Matros (President, CEO, and Chair of the Board)

We did a bunch of that and some during the pandemic. There's not much left for us to do there. I mean, coverage is great. We've got some legacy assets in there that are doing really well, and the operators are happy. There might be a little bit here or there, but it's not going to be anything significant. I think we reduced our triple-net senior housing portfolio over the last several years by a third or something like that. There's not much left there. Obviously, as we continue to grow SHOP, you'll see the triple-net senior housing portfolio drop as a percentage of our exposure. Behavioral, obviously, will drop as well because we're going to be allocating our capital to the two spaces that have the talents: senior housing and skilled nursing.

Rich Anderson (Managing Director)

Okay. Last for me, the Medicare, the CMS suggestion or whatever, 2.8% for fiscal year 2026 is fine, I guess. It's obviously down from last year, obviously, not to be unexpected given inflation subsiding. You have Medicaid questions that you can't answer yet. No one can. You layer that on top of what you've witnessed as improving coverage. I mean, is the day, are we past, sort of, is the thrill gone, I guess, on coverage? Do we start to get sort of more of a sideways movement because the reimbursement sources are likely to slow down now on a year-over-year basis? Coverage has had a nice run, but maybe it's kind of in the rearview mirror now. What do you think of that?

Rick Matros (President, CEO, and Chair of the Board)

Yeah. No, it's a good question. I don't think we're going to be sideways for a while for a couple of reasons. One, and we've talked about this in the past, this was the year we expected to see Medicare rate and Medicaid rate increases come down. Just formulaically, they're encompassing periods of time where inflation started coming down. The 2.8% is still about a full point or so higher than it was historically, what we saw historically every year. While we expect Medicaid certainly not to be at the 7%+ we saw last year, we still think it's going to be outsized.

I think given occupancy continuing to grow, given the moderation in labor, and given another set of outsized, based on historical, outsized Medicaid rate increases this summer and about 70% of our buildings get their Medicaid rate increases in July and August, we still should see improved coverage for a while. If something should happen with provider taxes, that could mitigate that somewhat. That remains to be seen. I think it will have a relatively negligible impact for us because there is going to be a cost offset as well if the ceiling comes down. You will see it start picking up again once the Medicaid rate increases get baked in. I think we still have some room to grow there over the course of this year, Rich.

Rich Anderson (Managing Director)

Okay. Sounds good. Thanks very much.

Operator (participant)

Your next question comes from the line of Alex Hegen with Baird Equity Research. Your line is open.

Hi, thank you for taking my question. Kind of speaking for the $200 million set of deals, and Talya, you kind of talked about maybe the strategic relationship angle, but maybe any more details with are these operators that you'd like to grow? Are they new operators into the portfolio? What do you expect that shadow pipeline to kind of be after these deals close?

Talya Nevo Hacohen (EVP, CIO, and Treasurer)

The answer to question number one is yes, yes, yes, yes, all of the above. The answer to number two is tougher to assess. I think we'd rather close the deals and then be able to report further detail on the additional opportunities that we're looking at.

All right. Fair enough. Secondly, can you provide some details in the maybe kind of steady decline in occupancy in the behavioral health and specialty hospitals and other segment? Kind of what are the prospects for releasing those spaces if they do go dark and at what rents?

Rick Matros (President, CEO, and Chair of the Board)

It's a very different business than senior housing and skilled nursing, obviously. The break-even point is at a pretty low level of occupancy, like under 60%. The coverage went up pretty nicely, actually, because revenue for patient day went up. But it's a very, very dynamic business. In skilled and senior housing, your occupancy is pretty predictable for the most part. It doesn't change dramatically. That's not the same with the behavioral space. You have very short lengths of stay. It's a very dynamic business. The holidays and shortly right after the holidays, you always see pretty significant drops because no one's coming in for rehab typically during the holidays. That carries a little bit over into the early part of the year. There may be some recovery on that. It's just something the coverage is so strong. It's just at 3.77.

It's just not something that we're concerned about. It's just a different kind of business. For us, we're used to kind of seeing these ups and downs.

All right. Thank you for that.

Operator (participant)

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from Omotayo Okusanya with Deutsche Bank. Your line is open.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Yeah. Hey, guys. This is Omotayo. I was just wondering if you guys could give some updated thoughts on how Medicare reimbursement for skilled nursing could be impacted by the current attempts by the U.S. government to establish a new federal budget?

Rick Matros (President, CEO, and Chair of the Board)

What we're hearing on the Hill is that they're not going to touch Medicare. The president has said the same thing about Medicaid. As we've talked about, I think the last couple of quarters, we think there is some exposure on provider taxes. We're not seeing or hearing anything in any of the discussions that our lobbyists are having on the Hill relative to Medicare. I'm not sure that the proposed rule would have come out the way it did if that was an issue. The comment period once the proposed rule came out, everything's happening like it normally happens there. We're not hearing anything from inside CMS along those lines either. We're in an environment where things change every hour, apparently.

That said, I'm not making light of anything because we have our antenna up on the Medicaid stuff, but we feel pretty comfortable with Medicare.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Got it. That's very helpful. That's all I have on my end. Thanks, guys, for the time.

Operator (participant)

There are no further questions at this time. I turn the call back over to Rick Matros.

Rick Matros (President, CEO, and Chair of the Board)

Thanks, everybody, for joining us. We're available as always if you want to reach out and have additional discussions. Otherwise, we'll see a bunch of you folks at NAREIT. We look forward to it. Thanks, everyone.

Operator (participant)

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