Sabra Health Care REIT - Q3 2023

Transcript

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

Good day, everyone. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Third Quarter 2023 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to Lukas Hartwich, EVP Finance. Please go ahead, Mr. Hartwich.

Lukas Hartwich (SVP 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 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, 2022, 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 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. And with that, let me turn the call over to Rick Matros, CEO, President, and Chair of Sabra Health Care REIT.

Rick Matros (President, Chair, and CEO)

Thanks, Lukas. For those unfamiliar, the song leading into the call is Hatikvah. It's the national anthem for the State of Israel, and it means the hope. Today is the one-month anniversary of the massacres and the hostage-taking. There is a saying that we Jews have, Ach, Am Yisrael Chai. It means the people of Israel live, and it's never been as important to us as it is today. We're here, we're not going anywhere. With the levels of antisemitism in the U.S. and Europe hitting levels that we haven't seen since the '30s, your Jewish friends don't feel good. They're not okay. Their kids don't feel safe. It's really important for all of us that you use your voices, that you reach out. We all know where silence leads us. Thank you. Now on to the quarter.

I'm pleased to report the work we put into improving our portfolio has positioned it to be stronger than it was pre-pandemic. Our dispositions and transitions have enhanced the quality of our portfolio and our credit quality. Our EBITDA coverage is up in all asset classes. Occupancy in our skilled nursing, triple net senior housing and SHOP portfolios continue to improve. Our two significant transitions, North American to Ensign and Enlivant to Inspirit, continue to show material growth, validating our decision to move those portfolios to those particular operators. Our skilled nursing concentration continues to drop and is now at its lowest point since inception, enhancing the diversity, diversity of our portfolio. Our balance sheet is exemplary, with no near-term maturities, no floating rate debt outside our revolver, and leverage has ticked down and will continue to improve.

As our cost of capital continues to show improvement, we look forward to being a net acquirer again in 2024, focusing on singles and doubles in all of our asset classes. Although we're not providing guidance yet, we do plan on providing full year guidance 2024, early in 2024. A couple of other comments, one regarding the mandate and the final rule and timing. The original goal for the industry was to submit 10,000 comments to CMS. There have now been over 40,000 comments submitted, the great majority by far against the rule.

CMS is required to go through all these comments, so it's going to take quite some time, we believe, before there's a final rule, and then the actual impact of the rule, if it should come to pass, is probably a couple of three years down the line. In terms of our behavioral segment, we saw some concerns in the notes about the behavioral segment. It's performing well, and you'll hear more comments about that, as we go through today's discussion. With that, I'll turn the call over to Talya.

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

Thank you, Rick. Our wholly owned, managed senior housing portfolio has shown strong positive momentum over the past 5 quarters, with a significant increase in cash net operating income as a result of strong revenue growth and expense control. The headline numbers for the wholly owned managed portfolio on a same-store basis, excluding non-stabilized assets and government stimulus, are as follows: Occupancy for the third quarter of 2023 was 81.9%, a sequential increase of 170 basis points, the highest occupancy we've had in the past 5 quarters. Quarterly occupancy in our independent living portfolio improved significantly, increasing 240 basis points on a sequential basis. RevPOR in the third quarter of 2023 increased by 5.8% over the third quarter of 2022.

Annual rent increases in our portfolio began to roll out October first and continue from there into early 2024. We expect that rent increases will be more tempered compared to recent years. Probably in the 5%-7% range. Excluding government stimulus funds, cash NOI for the quarter grew 5.3% sequentially, and more than 28% over third quarter 2022. All of our larger portfolio saw a substantial increase in cash NOI, propelled by revenue growth, leveraged by flat to lower expenses. We transitioned to 11 assisted living properties from Enlivant to Inspirit in early July. That portfolio's third quarter occupancy increased 70 basis points, and cash NOI increased 16.4%, both on a sequential basis. Average occupancy in September was more than 230 basis points higher than in June, while cash NOI increased 88% in those same periods.

We are optimistic that we will see continued improvement in operations as the portfolio continues its recovery. Our Holiday same-store portfolio has continued to have positive net occupancy growth, a trend that began this past June, with 220 basis points of occupancy gains and 7.9% cash net operating income growth on a sequential basis. Inquiry volume, as well as conversion to move-in rates, have increased meaningfully quarter over quarter. In addition, move-outs have declined to their lowest level in a year. After trending up since third quarter of 2022, move-out levels appear to have peaked in the first quarter of this year and have since trended down, with acuity and death continuing to drive more than half of the move-outs.

Our net lease stabilized senior housing portfolio continues to perform well, growing occupancy that now remains at pre-pandemic levels and improving rent coverage. At the end of the third quarter, Sabra's investment in behavioral health included 17 properties and 2 mortgages, with a total investment of just over $800 million. RCA Monroeville, a residential treatment center that opened in late 2020, was added to the stabilized pool in the second quarter, bumping coverage up for the pool shown in our supplemental by 0.05 times, but nudging occupancy down 2.5% on a TTM sequential basis. This reflects that the break-even point of this property type occurs at a much lower occupancy level than in skilled nursing and senior housing.

In late September, Sabra completed the first phase of the redevelopment of a 132-bed residential treatment center in Greenville, South Carolina, which is pre-leased to one of Sabra's operators. We continue to spend time on behavioral health, including meeting with established as well as smaller operators, to assess the best path for Sabra to continue to invest in this underserved sector. With that, I will turn the call over to Mike Costa, Sabra's Chief Financial Officer.

Michael Costa (CFO)

Thanks, Talya. For the third quarter of 2023, we recognized normalized FFO per share of $0.33 and normalized AFFO per share of $0.34. In line with our earnings reported for the second quarter of 2023, and consistent with the expected normalized FFO and normalized AFFO run rate of between $0.33 and $0.34 per share, we have communicated over the last several quarters. In terms of absolute dollars, normalized AFFO increased $2.1 million sequentially, driven primarily by a $700,000 increase in NOI from our managed senior housing portfolio, a $600,000 increase in cash rental income, and a $200,000 decrease in cash interest expense.

Also, as of September 30, 2023, our annualized cash NOI was $453.5 million, and our SNF exposure represented 54.3% of our annualized cash NOI, down 140 basis points from the second quarter and down 570 basis points from a year ago. This annualized cash NOI reflects the impact of sales completed during the quarter, as well as some of the realized upside from our managed senior housing portfolio, property transitions, and behavioral conversions. Like last quarter, we have included a table on page 14 of our supplement, which illustrates the upside opportunity in our annualized cash NOI from the recovery in our managed senior housing portfolio, as well as from the stabilization of our previously disclosed property transitions and behavioral conversions.

This table has been updated to reflect the impact of sales completed during the quarter, which accounted for the majority of the change in our expected NOI from last quarter, with the remaining difference due to quarter-to-quarter noise in our cash basis tenant pool. Now turning to the balance sheet, which continues to be a source of strength, especially in the current lending environment. Our net debt to adjusted EBITDA ratio was 5.57 times as of September thirtieth, 2023, and is down 0.04 times from the end of the second quarter as a result of improved performance in our triple net and managed portfolios, as well as from the impact of asset sales completed during the quarter. We expect leverage to naturally decrease as we realize the upside opportunities in our portfolio that we have outlined in our supplement.

We remain committed to a long-term average leverage target of 5x, and because of the embedded upside in our portfolio, together with proceeds from any potential future disposition activity, we are confident we can achieve that target over time without needing to access the capital markets. Our opportunistic long-term debt issuances and proactive hedging, together with having a well-laddered maturity schedule and no material maturities until 2026, results in a predominantly fixed rate balance sheet that provides us with significant cost certainty for the foreseeable future. Excluding our revolving credit facility, which makes up just 1.4% of our total consolidated debt, we have no floating rate exposure, and our cost of permanent debt is 3.95% as of September 30, 2023.

Additionally, through our hedging activities, we are currently saving over $16 million per year in interest expense, which provides a solid foundation to realize earnings growth in future periods. As of September 30, 2023, we were in compliance with all of our debt covenants and have ample liquidity of $1 billion, consisting of unrestricted cash and cash equivalents of $33 million and available borrowings of $967 million under our revolving credit facility. Finally, on November 6, 2023, 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, 2023, to common stockholders of record as of the close of business on November 17, 2023. The dividend represents a payout of 88% of our 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 a question, press Star, then the number One on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.

Joshua Dennerlein (Senior Equity Research Analyst)

Yeah. Hey, guys, appreciate the time. Rick, I heard your comment in your opening remarks about being a net acquirer in 2024. Just kind of curious on where you're seeing the opportunities and what kind of cap rates you're seeing out there.

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

I can take that. It's Talya. Cap rates is a really, really tough question to answer in this environment. I think we have seen mostly off-market opportunities brought to us by operators, and those have been the deals that have been more interesting, and less capital - sometimes capital stack issues, which is easy for us to solve. But the hard part, of course, is if we're trying to buy deep value add, that's more challenging for us because we can't affirmatively solve that. We need an operator to solve that, and that takes time. So the off-market deals have been most interesting. But we're actually seeing a pickup in deal flow. I think a lot's going to trade at unit value.

I think we're already seeing that. I think the banks are also going to be addressing some of their load, if you will. So I think there could be opportunities that arise to that. But right now, it hasn't – the deal flow is still stronger, and it's still more mainstream than I would expect it to be. There's not massive distress yet coming through yet.

Joshua Dennerlein (Senior Equity Research Analyst)

Appreciate that, Talya. And then maybe just on sources of capital, like, kind of... Or, or maybe a, a better question would just be, like, how far away are these opportunities away from, like, kind of how you think about your cost of equity or cost of capital?

Michael Costa (CFO)

Yeah, I mean, in terms of cost of capital, as you know, the last two years, any investment activity we've been doing has been funded by selling off underperforming assets, which provide a really cheap cost of capital, but we're largely done with that. So that's not necessarily going to be a meaningful source of anything going forward. It's really going to depend on where our stock starts trading, to be completely blunt. You know, we're trading around NAV right now, which is great. We would like to see our stock price be, you know, a little bit higher than that, comfortably above NAV, before we start using that as a form of currency.

At that point, I think we have the ability to use a combination of equity through our ATM, our revolving credit facility, and any potential sales proceeds to finance acquisitions that are going to be in the cap rate ranges that we've seen in the past. You know, call it, you know, high single digits. At that point, that becomes something that we could make accretive.

Rick Matros (President, Chair, and CEO)

One thing I would add to that is that we keep trying to emphasize, so people really understand, outside of our revolver, we have no floating rate debt. So using our revolver to match as Mike just talked about would still put us in a very, very good position given where the rest of our debt lies.

Joshua Dennerlein (Senior Equity Research Analyst)

Thanks, everyone.

Operator (participant)

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

George Yong (Analyst)

Hi, this is George Yong for Vikram. Can you just comment on any watch rates and potential small tenants that could be at risk? And could you please provide more color on Landmark and what's your exposure there?

Rick Matros (President, Chair, and CEO)

Yeah. So, we don't have tenants that we really view at risk at this particular point in time. Our tenant base that's under one times remains in the 5%-6% level, which is where it's been really throughout the pandemic and before. As far as Landmark is concerned, there are less than 1% of our NOI, and you know, we saw the notes, there were some issues raised around it, but they, they're staying current on rent, and that's just immaterial to us. So, but they are staying current on rent, so we just don't see any issues there right now.

George Yong (Analyst)

Okay, great. That's helpful. Can you just please walk us through the changes and timing of the long-term NOI growth opportunity?

Michael Costa (CFO)

Yeah. I mean, the biggest change that I would focus on is the bottom line number, and that number came down sequentially, basically because we sold assets during the quarter. That's really it. You know, the steps between what our actual analyzed NOI was and our pro forma number, those changed quarter over quarter, but that's because, again, we sold assets. There's some of that upside that we've already realized, that's already in our baseline number. So I think the main thing to focus on is what the change in that bottom line number was, and that's predominantly-

Rick Matros (President, Chair, and CEO)

... related to sales.

Rich Anderson (Managing Director and Equity Research)

Great. Thank you so much for taking the question off.

Rick Matros (President, Chair, and CEO)

Yep.

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. I just wanted to follow up on Josh's line of questioning. You mentioned you could fund it creatively with the revolver, given the low leverage and low floating rate exposure. So would you be willing to temporarily lever up to do acquisitions in the current environment? And what's more appealing to you, skilled nursing, given the higher yields, or seniors housing?

Rick Matros (President, Chair, and CEO)

We're still as laser focused as we've been at trying to keep our leverage low. So, you know, we don't want to lever up, and we're pleased it came down a little bit. It's gonna continue to come down. We'd like to see it under 5.5 times. So it's more a function of the stock price getting a little bit better. So that's actually currency that we can use. And then we can have a balance between, you know, using our stock and using the revolver so that the leverage doesn't go up. In terms of which asset classes are the most appealing, we see upside in all of them. We think there's a nice run ahead in skilled nursing.

If you look at the demographic, combined with the declining supply, which, you know, as we've talked about, has accelerated during the pandemic. And then senior housing, you know, new supply just isn't gonna be an issue. And so occupancy in both those asset classes are gonna continue to rise. On the behavioral side, those opportunities just don't come up very often. As we've talked about, it's a very young space, and there aren't a lot of tried and true operators, so I think any growth there will be incremental. So essentially, what I'm saying, Juan, is we're gonna go where the opportunity is. We've done a good job diversifying the portfolio with growth in other spaces through dispositions and transitions and the like.

And I think it's an important point to make that even though we've been focused on diversifying and getting that skilled exposure down, which is a primary driver of diversification, we're not gonna bypass doing a good skilled deal. So we're not sort of digging our heels in and saying, you know, "Oh, we don't wanna go up a point or two on exposure for skilled, so we're just not gonna do this deal." We need to, we need to grow earnings again. There's nothing more important to us than growing earnings again, and so we'll take advantage of any of the opportunities that we see out there. But also, as we said, in the press release, we're gonna be focused on singles and doubles. We don't need to do anything large, anything transformative, anything noisy, just singles and doubles and just have steady, predictable growth.

Juan Sanabria (Managing Director)

Then just as a follow-up, I'm just curious on the SHOP business; had a big sequential improvement in occupancy. So was any of that driven by discounting or just being a bit more conscious of the price and occupancy trade-off? It looked like the RevPOR growth slowed. And then if you could just—you gave the comments on the rent increases expected for this coming year that have already started. What was the amount that you got last year, just to think about a year-over-year comp perspective? Thank you.

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

Well, sure. So last year it was a high single- to low double-digit growth on asking rents and in place. So the... operators felt they could justify it because customers are aware of it because labor rates have gone up so much, and everybody, everyone is experiencing what was going on with inflation and labor. So, as inflation has softened, the view is – I mean, I said 5-7. I think I said something very similar last quarter. Our operators here, some are at 5, like in Canada, some are domestic operators are closer to 7. That's what their expectation is. In terms of discounting, that's a good question.

We have not seen any substantial discounting, and outside of normal and standard operating procedure. So I don't think it's that. I think it was just a seasonal matter and just the blend of assets that came together. You saw the growth in all the other stats, and frankly, cash net operating income is a real important one.

Juan Sanabria (Managing Director)

Yep. Thank you.

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

Sure.

Operator (participant)

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

Rich Anderson (Managing Director and Equity Research)

Thanks. Good morning out there, and, heartfelt opening comments there, Rick. Thanks for that. In terms of the, you know, the going on offense sort of motif that you're talking about here, you know, someone said to me, "Rich, don't do anything, and we'll pay you." I'd be like, "Sign me up," you know? And, and so, you know, in this case, you know, you've been rewarded for sort of for doing that, and I don't mean you're not working, of course, but, do you, do you think that at the current stock price, you'd still kind of let this marinate and, and perhaps not go on the offensive? Or do you need, you know, sort of extra, you know, effervescence to your stock price before you can actually go into this sort of net acquire, strategy for next year?

Rick Matros (President, Chair, and CEO)

Yeah. So we're definitely, we're not going into Aaron Judge mode here, okay? So, you know, we, as, as Mike said, Talya doesn't get that, but-

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

No. Over my head.

Rick Matros (President, Chair, and CEO)

We need, we need the stock price to improve more. Just being around NAV isn't good enough, so we are gonna let it marinate more. We think that we've created a really good story here. As I said in the opening remarks, we're much better positioned than we were really at any point in time, however far you wanna go back, and not just before the pandemic. So, we think as we let this marinate, to use your term, as we put guidance out for 2024, people see earnings growth coming, we think that our cost of capital will improve, and then we will be able to do what we said we were gonna do.

Rich Anderson (Managing Director and Equity Research)

Okay. You, you said on the, on the issue with CMS and, and, you know, the 40,000 responses, you said 2-3 years for implementation. Does that, is that-- are you saying like a phase-in type of phenomenon? Is, is that what you think ultimately comes of this? I mean, can you picture how this, how this, you know, gets rolled out to the industry?

Rick Matros (President, Chair, and CEO)

Yeah. So if you, if you go back and look at the proposed rule, there was a 2-5-year phase-in period. You know, it was broken down into different components. It was gonna take some period of time before the final rule actually came out and then went into effect. After that, it can take 6-12 months for the final rule to actually go into effect. So if you start playing all that out, you're really looking at a few years from now before this, you start to see the beginning of the impact. So, you know, that's why, you know, we've been saying to investors at conferences is, really chill about this. It's not today's issue.

The industry has to deal with it, our lobbyists have to deal with it, but today's issue is dealing with the shortage that we have. The actual mandate, if it happens, because the industry also isn't gonna sit by if the final rule is something that we don't believe we can live with, then, you know, it's a ways, way down the line. So, that's really, that's really what I was, what I was referring to.

Rich Anderson (Managing Director and Equity Research)

Okay. Okay, I just wanted to know what you meant by the 2-3 years. I, I get it now.

Rick Matros (President, Chair, and CEO)

Okay.

Rich Anderson (Managing Director and Equity Research)

So, last question from me. You know, you had some, you've had some nice numbers out of Medicaid in terms of growth, Medicare, you know, 4% for the coming year. You know, Tyler, you said inflation has softened and, you know, to a degree, of course, you're correct. But, do you have a concern that if inflation continues to improve, that we could be looking at some sort of Medicaid/Medicare hangover event for the following year, where you don't quite keep up with what you're getting this year, and then suddenly, you know, your external growth, you know, underwriting process becomes more difficult, you know, and we go back to more like nominal 2% type growth going forward?

Is that the expectation that you'll be sort of underwriting into your external growth process, or do you see Medicare, Medicaid sort of keeping a, you know, a CPI plus type of number for a period of couple of years going forward?

Rick Matros (President, Chair, and CEO)

Yeah. So I get the question, Rich, but there's a lag time for Medicare and Medicaid, particularly Medicaid, with the cost support process. So we fully expect next year's Medicaid rates will be higher than the 5%+ aggregate we got this year. And we expect Medicare to be higher also, as it'll capture current inflation more. So... And if you remember, there was a component of the Medicare rate increase that was a takeaway.

Rich Anderson (Managing Director and Equity Research)

Right. Right.

Rick Matros (President, Chair, and CEO)

It happened over 2 years. Without that takeaway, the 4% would have been, I believe, 6.2%. So, we think that number, I'm not gonna sit here to tell you today that it's gonna be 6.2% next year, but we believe it's probably better than 4%. So we think we have at least another year of robust rate increases from both Medicare and Medicaid, which also buys you that much more time for occupancy to start exceeding pre-pandemic levels. The industry is about 200 basis points below pre-pandemic level now. If you look at the NIC report, it says 82%, but the NIC report, NIC data, when it comes to SNFs, isn't really very good. It's a small subset. You know, NIC is really good for senior housing, not for SNF.

So, we're getting pretty close and, as I said in my opening remarks, given the decline in supply, and obviously it's market-driven, we fully expect occupancy to go beyond pre-pandemic levels on the skilled side, as well as senior housing, and that combined with these outsized rate increases, will compensate for the increase in labor and get us not just back to margins that are where they were pre-pandemic, but we believe margins that will be better. And the other point I would make, just specific to our portfolio is, you know, we were able to take advantage of a lot of the opportunities presented to us during the pandemic to sell assets and transition assets. So we've got a much stronger group of operators, now than we did before the pandemic.

So I think that helps as well. You know, look, before the pandemic, you had operators that were good, they did a nice job, and you had great operators, and you had weaker operators. But the operators that were okay. It wasn't good enough anymore with the pandemic. So it really separated operators out even more. And again, we were able to, you know, take advantage of some of those opportunities, so we feel pretty good about where we are.

Michael Costa (CFO)

Yeah, and the other thing I'll add to that, Rich, so you, you alluded to underwriting. And in this environment where inflation has been where it's at, it's not like we're underwriting annual increases of 5%-6% going forward into the future. And in fact, you know, our existing portfolio and, and most everything we underwrite has largely fixed rate increases that are going to be, you know, between 2%-3%, which, again, would insulate our operators in the event, you know, inflation comes down, they're not getting those rate increases they're getting now, while their, their fixed cost is only going up by a smaller amount as well.

Joshua Dennerlein (Senior Equity Research Analyst)

Okay, great. Thanks for the color.

Michael Costa (CFO)

Mm-hmm.

Rick Matros (President, Chair, and CEO)

Yep.

Operator (participant)

Your next question comes from the line of Wes Golladay with Baird. Your line is open.

Wes Golladay (Senior Research Analyst)

Hey, yeah, good morning to everyone. We talked a lot about the revenues in the managed care. Just want maybe can we talk about the expenses a little bit? Do you expect any normalization, next year, any easy comps, whether it's, you know, just having more open positions, taxes, anything, that needs to be called out?

Rick Matros (President, Chair, and CEO)

I think, on the operating expenses, they—it's really been labor that's a big driver. The rest of the operating expenses have held in pretty reasonably. And, labor, look, it's still going to be tough going for a while. The level of wage increase has come down, registries come down, temporary agency, that is. So, but you're still gonna you still, you still have some inflation on the wage, wage side. I think, because labor is the only impediment to growing occupancy even more quickly, you're gonna operators are willing to pay a little bit more, to fill those spots so they can increase their admission rates, because that's going to more than compensate for the difference.

Wes Golladay (Senior Research Analyst)

Got it. And then on the labor, are you still seeing some shortages where maybe it's been a governor on occupancy gains?

Rick Matros (President, Chair, and CEO)

Oh, absolutely. I mean, look, we've gotten, you know, pretty decent chunks of those folks that burned out back, but we still have a ways to go. So it's not normal yet. And it's still gonna take some time. So, you know, I hope you're not hearing that everything's hunky dory from anybody else on labor, because it isn't. It's just better than it was, and it keeps improving. And the wage increases in 2023 are not nearly as high as they were in 2022. And then when you bring temporary agency down, because that is so expensive, particularly with the price gouging that occurred during the pandemic, that, net-net, even when you're raising wages on your employees, you're in better shape from a margin perspective because of the cost of that temporary agency.

Wes Golladay (Senior Research Analyst)

Yeah, I guess maybe just a quick follow-up on that. That's what I was trying to get at. I mean, you had obviously flat expenses this quarter, which was amazing. But when we look out to next year, I mean, how much of that is just, you know, burning off an easy comp versus on these temp workers who are potentially gouging, and then next year we get to a more normal environment? Would that be more of a, I guess, normalized growth year next year?

Michael Costa (CFO)

Yeah. I, I think on the senior, because I think you're talking about senior housing, correct?

Wes Golladay (Senior Research Analyst)

Correct. Yeah. The managed side, yes.

Michael Costa (CFO)

Yeah. I mean, in our senior housing, the agency labor and the temp labor was predominantly on the SNF side. We didn't. I think in the comps that we're looking at, there wasn't that much, if any, agency labor in those comps.

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

We also talked about-

Michael Costa (CFO)

I think-

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

... sequential comparisons. So-

Michael Costa (CFO)

Yeah

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

... so, you know, it's expenses have come down if you look year-over-year, but on a sequential basis, it's basically holding, people are holding tight.

Wes Golladay (Senior Research Analyst)

Okay. Thanks so much.

Michael Costa (CFO)

Mm-hmm.

Operator (participant)

Your next question comes from the line of Michael Griffin with Citi. Your line is open.

Michael Griffin (VP, Equity Research Analyst)

Great, thanks. On the recently transitioned assets, I'm curious if you can give us any color on what Inspirit is doing different relative to Enlivant in order to get that occupancy uplift? And can we continue to see occupancy increases despite getting into a more seasonal time of the year?

Rick Matros (President, Chair, and CEO)

Yeah. So some of it is just basic blocking and tackling. With Enlivant, you had a company that was being sold, that were losing people in management basically every week, and so the portfolio was just floundering. So bringing in an operator, one, that happens to be very good, who we knew, but secondly, they're laser focused, and they're supporting the business and putting the initiatives in that are necessary to grow occupancy. It's really kind of as simple as that. There is still plenty of room for occupancy to grow. That portfolio was in the mid-90 percentile before the pandemic.

Michael Griffin (VP, Equity Research Analyst)

Helpful. And then just on the asset sales this quarter, I'm curious if you can comment on maybe buyer appetite for those or kind of the IRR, is there anything that they're underwriting to on those type of transactions?

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

I'd say that there continues to be strong appetite for skilled nursing facilities, and we certainly continue to get reverse inquiries on various parts of our portfolio, geographic parts of our portfolio. That's one. Pricing, I think, is more unit or bed-based as opposed to cap rate-based for the most part, because most of the buyers that we're seeing are owner-operator or owners with, you know, capital partners with affiliated operators. So they're capturing 100% of NOI, let's say, in skilled nursing, whereas we would capture a rent stream, which would be certainly less than 100% of NOI.

Rick Matros (President, Chair, and CEO)

... Thank you.

Operator (participant)

Your next question comes from the line of John Pawlowski with Green Street. Your line is open.

John Pawlowski (Senior Analyst)

Hey, good morning. Thanks for the time. I just have one question related to senior housing triple-net business. Curious what you think sustainable EBITDA and coverage level ratios are today, given potential deferred CapEx in the portfolio and probably some higher interest expense on kind of short-term working capital lines for operators?

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

Yeah, the senior housing, we don't see ABL lines as a prevalent mode. Skilled nursing, where you're paid, essentially, you have to bill and then get paid, you see ABL lines being prevalent. In senior housing, 'cause people pay their rent the first of the month, which is in advance, it's not really a factor. You know, do I think we're gonna get back to 1.5, 1.3? Yeah, I don't think that's... I think that's within reason. On CapEx, you know, there's room for CapEx in that coverage number for sort of usual maintenance CapEx.

Any sizable capital projects, we would, we would, as the landlord, consider participating in that and essentially financing that, for an operator, 'cause it, it inures to the landlord's benefit 'cause it's, we're improving our fixed asset. Does that make sense?

John Pawlowski (Senior Analyst)

Okay. Yeah, maybe just one follow-up to the 1.05, the 1.3, that's a level where you sit back and you're really not losing any sleep at night in terms of the ability of tenants to pay rent?

Talya Nevo-Hacohen (EVP, Chief Investment Officer, and Treasurer)

That's what we underwrote to back pre-pandemic.

Rick Matros (President, Chair, and CEO)

Yep.

John Pawlowski (Senior Analyst)

Okay. Thank you.

Operator (participant)

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. There are no further questions at this time. I turn the call back over to Rick Matros.

Rick Matros (President, Chair, and CEO)

Thank you all for joining us today. Appreciate your time and appreciate your support. See a bunch of you at NAREIT, and look forward to that. Am Yisrael Chai.

Operator (participant)

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