Q4 2023 Sabra Health Care REIT Inc Earnings Call

Participants

Lukas Hartwich; SVP, Finance; Sabra Health Care REIT, Inc.

Rick Matros; CEO, President & Chairman of the Board; Sabra Health Care REIT, Inc.

Talya Nevo-Hacohen; CIO, Treasurer & EVP; Sabra Health Care REIT, Inc.

Michael Costa; CFO, Secretary & EVP; Sabra Health Care REIT, Inc.

Austin Wurschmidt; Analyst; Key Banc Capital Markets

Presentation

Operator

Good day, every one, My name is Mandy, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sabra fourth 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.(Operator Instructions) I would now like to turn the call over to Lukas Hartwich, SVP, Finance. Please go ahead, Mr. Herbert.

Lukas Hartwich

Thank you and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our earnings guidance for 2024 and our expectations regarding our tenants and operators in 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, 2023, 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 Sotera Health.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.

Rick Matros

Thanks, Lucas. Good, everybody. Appreciate you joining us. We're pleased to report continuing stability and organic growth in our portfolio. In our skilled portfolio, occupancy is up 50 basis points sequentially and 290 basis points year over year our EBITDA rent coverage is up 0.1 point sequentially, with similar improvement in our top 10 in the aggregate. While labor is tough, the improvement over the last year is material contract labor is down 29% on a patient day basis. And nursing all in is up just 4.3% on a patient day basis. And the combination of that coming down and our revenue per patient day growing at the rate that has been growing the skilled portfolio has put us in a position where in the aggregate, our portfolio's margins are pretty much where they were at pre pandemic.
And so the really good news there is we're not even at pre-pandemic occupancy. So we see a really a really terrific opportunity ahead of us in terms of margins improving over where they were on a pre pre pandemic. We also continue to see improve it in the senior housing lease portfolio occupancy is up 130 basis points sequentially and direct rent coverage jump 0.11. Talya will talk in detail about our SHOP portfolio for both skilled and senior housing portfolios. We expect occupancy to exceed pre-pandemic levels, as I said, but the reason is on different for each of the two different asset classes. So for skilled, it's a demographic coupled with a declining product and for senior housing, it's a demographic combined with the negligible new supply for the foreseeable future. We appreciated that CMS in numerous states have been capturing cost increases in reimbursement rates, and we're optimistic that we'll continue at the state level this summer and for fiscal year 2025 for CMS, our behavioral and specialty hospital portfolios had stable port stable performance. We have provided full year guidance for the first time since before the pandemic with 5% and 6% increases in normalized FFO and normalized FFO respectively. At the midpoint of guidance. We're also starting to see more investment opportunities, but no clear trends as of yet.
And with that, I will turn the call over to Talya.

Talya Nevo-Hacohen

Thank you, Rick. Sabra's entire wholly owned managed senior housing portfolio, maintained positive momentum in the fourth quarter with mid to high-teens percentage growth in revenue and cash net operating income on a year-over-year basis. This was a function of continued occupancy and RevPAR gains, coupled with moderating expenses, quarterly occupancy in independent living, assisted living and memory care in our managed portfolio is the highest it has been since the second quarter of 2020.
Sabra's same-store wholly owned portfolio currently consists of 51 properties, of which 28 are independent living and 23 are assisted living memory care communities. The headline numbers for this portfolio, excluding nonstabilized assets and government stimulus are as follows. Occupancy for the fourth quarter of 2023 was 81.2%, a year-over-year increase of 130 basis points, the highest occupancy for this portfolio over the past five quarters. Revenue for in the fourth quarter of 2023 increased by 4% over the fourth quarter of 2022.
Current increases for asking rents and renewals are in the 5% to 7% range more moderate than prior years. As anticipated, cash NOI for the quarter grew 12.2% over fourth quarter 2022 more recently in January 2020. For this portfolio's cash NOI posted an increase of more than 25% compared to January 2023. The performance of Sabra same-store assisted living portfolio was attributable to strong gains made by nearly every one of the operators managing these communities. While the foundation was set by our spirit portfolio, which was transitioned from Enlivant in mid 2023, nearly every operator was able to drive RevPAR while managing export in Spirit portfolio. About half of our same store assisted living portfolio experienced cash NOI growth of 14.5% sequentially and 21% year-over-year.
We continue to see operational financial and cultural improvement in these communities since the transition, the same-store pool of properties in our unconsolidated joint venture with Sienna, excluding non-stabilized assets and government stimulus had 2.5% higher occupancy in the fourth quarter on a year over year basis with a 159% increase in cash NOI in the same periods, the drivers are occupancy increases and 5.7% higher RevPAR, coupled with 9.1% lower exports leading to cash NOI margin expansion of 12.7% in the fourth quarter on a year over year basis, our net leased stabilized senior housing portfolio continues to perform well with occupancy well above pre-pandemic levels.
And steadily improving rent coverage. At the end of the fourth quarter, Sabra's total investment in behavioral health remained approximately $800 million. I want to point out that the trailing 12-month statistics in the supplemental one quarter in arrears for our behavioral health portfolio shows a slight downward trend over the prior quarter for both occupancy and rent coverage. This is largely a function of changes in the pool of properties, including the addition of our Monroeville residential treatment center to the stabilized pool in the second quarter. Monroeville currently operates at a lower occupancy rate than the rest of the pool, but continues to cover its rent payment.
And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Michael Costa

Thanks, Dahlia. For the fourth quarter of 2023, we recognized normalized FFO per share of $0.32 and normalized AFFO per share of $0.33 during the quarter we saw an $800,000 decrease in cash rents compared to the third quarter, primarily due to the sale of a portfolio of 13 skilled nursing and two senior housing assets during the third quarter. Also during the fourth quarter, we updated our estimates of performance based compensation, which resulted in an increase to general and administrative expense totaling $5.1 million, of which $3.8 million relates to the first three quarters of 2023 and has normalized out of our fourth quarter normalized FFO and normalized AFFO. These amounts were partially offset by a $300,000 increase in normalized AFFO from our managed senior housing portfolio as a result of improved rates and occupancy.
This quarter, we are pleased to introduce full year earnings guidance for the first time since the start of the pandemic throughout the pandemic, Sabra and many of our peers did not issue full year guidance because the uncertain operating landscape in the industry made it difficult to project expected financial performance with a high level of conviction as an industry interest 2024 with a much improved operational environment. And as Sabra specifically interest 2024, with the majority of our portfolio transitions and repositioning is behind us, we have a much clearer line of sight into the expected performance of our portfolio for the coming year. Our estimated ranges for the full year 2020 for performance on a diluted per share basis are as follows. Net income $0.53 to $0.57, FFO $1.33 to $1.37, normalized FFO of $1.34 to $1.38 normalized FFO $1.38 to $1.42 and normalized adjusted FFO of $1.39 to $1.43. As a reminder, our guidance does not assume any acquisition or disposition activity.
I also want to point out a few things on our 2024 guidance. At the midpoint of our normalized FFO and normalized AFFO ranges, we expect to realize year-over-year growth of approximately 5% and 6%, respectively, which would be the 1st year of earnings growth for Sabra since the start of the pandemic, our guidance also assumes a return to a more normalized run rate of cash G&A of approximately $36.8 million in 2024 compared to $39.5 million in 2023. As discussed on previous earnings calls, we have no floating rate debt outside of balances on our line of credit.
Therefore, we expect cash interest expense in 2024 to remain consistent with 2023 with any variability coming from changes in outstanding borrowings on our line of credit. Our current quarterly dividend of $0.3 per share would represent an 85% payout using the midpoint of our normalized AFFO guidance. Our expected earnings growth throughout our guidance range would also reduce our leverage from current levels and closer to our long-term average target.
Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 5.74 times as of December 31, 2023. And as noted earlier and on previous calls, we expect leverage to naturally decrease as the performance in our portfolio continues its recovery from the pandemic. We remain committed to a long-term average leverage target of 5 times and are confident we can achieve that target over time without needing to access the capital markets.
As of December 31, 2023, we are in compliance with all of our debt covenants and have ample liquidity of $947 million, consisting of unrestricted cash and cash equivalents of $41 million and available borrowings of $906 million under our revolving credit facility.
Finally, on February 1, 2024, Sabra's Board of Directors declared a quarterly cash dividend of $0.3 per share of common stock. The dividend will be paid on February 29, 2024 to common stockholders of record as of the close of business on February 13, 2024. The dividend is adequately covered and represents a payout of 91% of our fourth quarter normalized FFO per share. And as noted earlier, this payout percentage is expected to improve in 2024.
And with that, we'll open up the lines for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Joshua Dennerlein, Bank of America.

This is Tal Grant on behalf of Josh Dennerlein. I first question I wanted to ask about the relationship with Ignite on what are you seeing in terms opportunities going forward with either expanding or deepening this relationship? Or if you can touch on any other relationships you're hoping to expand on?

Talya Nevo-Hacohen

Sure. I'm happy to take that we have been working with Ignite since we transitioned and civils a nursing home properties in Oklahoma to them several times before the pandemic and have always been interested in working with them. We have we did a small tack-on deal to our Oklahoma buildings. We've looked at several other deals now. We've we announced the deal that we closed on last year. And we continue to look for opportunities with them. We are not the only reason with whom they have a relationship. So they I think they balance a balance this all out and look for the best terms they can get they like to negotiate, but it's up, but it's -- but we have tremendous respect for their capabilities as operators and are endeavoring to do more with them.

Great. And just I know you made a few comments on the SHOP business, but I was wondering if you could expand a little bit on how you're seeing there play out into 2024, either in terms of margins or occupancy.

Talya Nevo-Hacohen

I think we all wish we could see really rapid increases on the revenue side and add decreases or no increases on the expense side. What I think where what we really are starting to see, however, is consistent growth on the top line and through both occupancy and RevPAR growth. And I think importantly, we're still starting to see that expenses per occupied room export is declining. And I think that's a really key metric, which is why I added it to my talking points this morning. And to me that signals that the breakeven point is it is being moved over so that we are now starting to get the benefit of operating leverage.

Great. Thank you for the color.

Operator

Nick Yulico, Scotiabank.

Thanks for the questions. This is Elmer chain on with Nick. I'm touching on Ignite again in a different way, but you had a fairly active quarter acquiring that portfolio. Could you just talk about whether this transaction was more so a credit driven transaction versus maybe the operator needing capital to expand? And did you assume any mortgage debt in the process?

Talya Nevo-Hacohen

And so we did not assume any mortgage debt and that's one two, it's not credit driven. It's really based on operation operations and stick at their very conservative look forward on what they can do with these buildings with these are newer buildings, and they are buildings that the team at Ignite actually had open when they were at their prior employer. So there's a tremendous amount of familiarity. The two buildings are very close to one another on. So there's there's really good geographic coverage there. Does that help you got it?

Yes, that helps. Thank you. And then I guess just on the seniors housing managed businesses, well, I know you mentioned maybe seeing increased rent growth in the 5% to 7% of pain, and you talked about seeing occupancy gains hopefully to pre pandemic levels. Is that was that a target for 2024 embedded in 24 days? Or is that more so like a two-to-three-year objective?

Michael Costa

I mean, I wouldn't say it would be a two to three-year objective. I think the best way to think about it. If you look back over the last couple of quarters where we put that bridge to illustrate the remaining upside in our portfolio. A healthy amount of that upside for the senior housing managed business specifically is captured in our 2024 guidance and particularly in the year-end run rate. So by the time we get to the end of 2024, you know, the vast majority of that upsize the recapture was a little bit left to capture in '25 and beyond.

Got it. Okay. Thank you.

Operator

Austin Wurschmidt, KeyBanc Capital Markets.

Austin Wurschmidt

Great, thanks. And just wanted to hit back on sort of the senior housing managed portfolio and maybe put a finer point on what are you assuming for same-store NOI growth for the year within that segment of the business?

Michael Costa

Yes. So we didn't we didn't disclose that obviously in our in our release. And I think if you look at what glove our peers have put out, I think just general and industry sentiment of, call it double digit, low 10s, even mid 10s growth. I think that feels about right. And for our portfolio, I think is probably a good assumption to use when you're looking at our silver specific portfolio.

Austin Wurschmidt

That's helpful. And I guess given sort of the acceleration you've seen now in the last couple of quarters. Does that? Yes, certainly a good jumping off point heading into the year. So from here, I mean, should we assume something more consistent with historical seasonality levels? Or do you think you can kind of outperform historic seasonality just given the strength you're seeing and maybe some of the catch-up from the operator transitions that happened last year.

Talya Nevo-Hacohen

I think that you're going to you're always going to have seasonality. I think one of Rick's points at the top of the call was about the lack of new supply. So what you have is you had a larger denominator, call it pre pandemic. You now have that same denominator and you have more people in the cohort and more people moving into occupancies increasing. And what I referenced about operating leverage is really going to be part of the story that leads to what Mike was talking about with respect to NOI. growth. In other words, the more you fill the buildings and it's more it's not a completely static pool, but it's but the pool of your audience and your resident numbers are moving up and your number of beds available remains as remaining relatively static. At the moment, you're going to get the benefit of operating leverage because that incremental resident has a much higher pull through to the bottom line.

Rick Matros

The other point I would make about guidance is obviously we felt we've had enough trends in our asset classes to provide full year guidance, but it's still impossible to predict as you've been hearing exactly how much that how much or how quickly things are going to improve continue to improve. So hopefully, if you know, if we've erred, we've been conservative in our assumptions.

Austin Wurschmidt

That all makes a lot of sense. And just one last one I wanted to hit on was you know sort referenced of coverage is certainly trending positively across the overall portfolio. It does look like HealthSmart group has seen kind of continued to trend lower now for several quarters since they've been on that top 10 list. And just wondering if you could share any detail as to what's driving that and when you might expect that to stabilize or even see a reversal?

Rick Matros

Yes, they are. But they've really been benefiting from PRS and that's dropped off completely. So that's actually been a big factor there. Really they are really good operators are in a really tough environment in Texas. So we don't have any concerns about them going forward, and we think that things will level out for them and then start and improving again.

Austin Wurschmidt

Very good. Appreciate the detail. Thank you.

Operator

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

Lukas Hartwich

Great, thanks. And just wanted to ask about the acquisition of the environment heading into 2024. We know in the past you've talked about potentially being a net acquirer in the year ahead, but you didn't include any acquisition expectations in your guidance? Just wanted to get a sense of how deep the pipeline is and sort of where you see yields for both on the skilled side and then anything on senior housing.

Rick Matros

And so I'll start on.
So in terms of being a net acquirer, that is that is our goal for this year and on and all the asset classes in skilled and senior housing and behavioral as those opportunities present themselves.
So I want to reiterate that even though we've focused a lot over the past year plus on diversifying the portfolio. And obviously, our skilled exposure is at the lowest point. It's been in our history and will continue to drop. So we're not going to bypass doing skilled deals. We're actively looking for skilled deals and so on because we're dropping so low our skilled exposure, we're really able to do more skilled deals and still have a much more diversified route than we've ever had before. So everything is really about earnings growth this year. And so we're not going to put any sort of false guardrails are or boundaries around what are the asset classes that we're currently in.

Talya Nevo-Hacohen

And in terms of the depth of the acquisition pipeline and a couple of things, I'd say one senior housing market is very active. And it's a very active mid-last year. It has since the end since the start of 2024, it has them everyone's reengaged with a different perspective on pricing because there was a bid-ask spread that really made everything come to a halt. But now it feels like there's there are a lot of assets on the market. So there are groups that are that have to refinance or or sell because of their situation with their lender. And so we're seeing a lot of fairly new newer assets on the market on the senior housing front, skilled nursing. And I'd say the dynamics are different. We see them. We don't see that much from product quality marketed by the brokerage firms. What we have found is that those transactions are happening off market and it's been it's been incumbent upon us to insert ourselves into those relationships more actively in order to capture opportunities on on skilled nursing and they're competitive as they are on senior housing, but it's active.

Rick Matros

Great. That's helpful.

Lukas Hartwich

And then maybe, Rick, just back to your points in your prepared remarks about field margins and being back at pre them pre-pandemic levels, I realize I think you're still about 500 basis points of occupancy below where you were pre-COVID on. So I guess just given I think the expectation for more occupancy uplift here in the near and medium term, where could we see margins get to in that business?

Rick Matros

It's hard to predict where they can get to. But on a few basis points above where they were pre-pandemic is certainly a few percentage points, certainly not and out of the realm of possibilities of really your question really is just how long it's going to take to get there. And it's interesting, right, because over the past couple of years, there's been so much focus on senior housing and how it's great because you're pushing through these your 10% rate increases and it's private pay and they've gotten the advantage of it over the skilled nursing space. But the fact of the matter is, is the cost report process at the state level. The market basket process at the federal level has a time lag, but that time lag now has been catching up as we saw this past summer this past October first, and we're going to see that again this year. So you're getting some base at least compared to historical trends some really nice outsized rate increases at a lot of the states and with CMS. And remember, this year's fiscal year market basket increase will not have the parity adjustment. So that's going to help even more. So our revenue per patient day, it has really grown very, very nicely over the past couple of years. And our non-nursing labor, it's been relatively flat it's been really modest inflation. And now we're seeing, as I mentioned, just under 4.5% inflation on nursing over the last year or so on. That's really helped to compensate for the occupancy. So but again, how far occupancy can go, we believe we can go beyond pre-pandemic levels, at least in a number of different markets where we're starting to see access issues on so that I think the margin uplift will be even greater than a few percentage points.

Lukas Hartwich

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

Operator

Your next question comes from the line of Vikram Malhotra with Min Xu Ho.

Lukas Hartwich

Your line is open up new and thanks for taking the question. Maybe just first on the guidance incentives, obviously, the first a time post-COVID. So I'm just wondering, can you give us some specifics on what's baked into the low end?

Rick Matros

The high end?

Lukas Hartwich

You talked about low 10s, same store growth. But but what else is specifically back to reach either the lower high end high end anyway, is it put is those potential credit issue baked in or not?
Yes, I wouldn't say there's any credit issue baked in or not. And I think the reason the range is largely dictated by what Rick said earlier on the call, which is it's hard to predict where this is going to shake out. If we knew with certainty, we just put out one number, hey, so there is some uncertainty being baked in there of where we're going to end up over the course of the remainder of this year. So we're just providing ourselves some some cushion there and some a reasonable amount of cushion, but nothing too broad for that. So that's where it's at. It's not any credit issues or anything like that.
Okay. And then just on the regulatory side, two things, if you could any updated thoughts on and how you see the minimum staffing final ruling shaking out component wise or timing wise?
And then, Rick, I think you you alluded to the fact that there's going to be a good, a decent Medicare bump, should we think about it as a 4% to 5% this year? Is that fair?
Thanks.

Rick Matros

On the Medicare, Bob, I don't want to get ahead of CMS, obviously on anything, but we were at 4.1% last year with the parity adjustment. So I think something north of that is reasonable because there was still a lot of inflation to capture. So I don't think that's an unreasonable assumption.
And on the other minimum staffing, there's no update really in terms of timing they said in 2024, we'll have the final the final rule. But I think it's fair to say that at this point, we don't believe no matter how much they water water down and maybe they don't order down. But to the extent that they do, we don't think any staffing mandate is acceptable and particularly given the fact that our nurses out there. So I think the industry will take a very strong stand and do whatever it thinks is necessary to ensure it's defeat. We've got bipartisan support in Congress because the fact of the matter is even though they are not funding, let's assume it was in place, even though they're not funding it upfront, the cost report process at the state level and also at the federal level, we'll eventually capture those increased costs as costs and and that will show up in increased rates. So it actually will cost the government billions of dollars a year, even if they are funding it sort of upfront just because of how the cost of product cost report process works. So I think on from a legislative perspective, that's a big issue. I think the fairness of it and the lack of availability of nurses with certainly no movement on the Hill relative to even having some controlled immigration for skilled workers that would be really helpful to us. And I think all those factor into why we're getting so much bipartisan support from Washington on there, not being a staffing mandate Great.

Lukas Hartwich

And sorry, one last clarification in the in the I remember last call you had mentioned there may be a few more transitions, smaller ones. So I'm I'm just wondering if you can help us roughly quantify the benefit of the transition that have already been completed in 2023 and what the benefit is in 24? And are there any additional transitions planned?
Yes.
I mean, in terms of the transitions that we talked about last quarter, I think if you look at the trend from our when we first put out this bridge in this for the second quarter that we put out in the third quarter, you saw that that number came down because we started capturing a little bit of that as a large number in totality. I think that's like $4 million or two, I think. But the total upside for that piece of the pie was like 4 million. We capture a little bit of in Q three a little bit in Q4. And I think similar with the with my comments on shop, I think by the time we get to the end of the year, we'll see most of that are captured. But again, it's small dollars in the grand scheme of things.

Operator

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

Lukas Hartwich

Thanks. Good morning. Out there. So Rick, you mentioned investment opportunities, but no clear trends. Can you what did you mean by that? I mean, do you talk about like what types of assets you might buy? I know there's been some talk about that in this call, but you do have like sort of a defined kind of pipeline that you're looking at? Or is that still sort of hard hard to quantify? I'm just curious what more color you can lend on the external growth front for this year?

Rick Matros

Sure. So I want to what I tell you is points. We're not seeing much in terms of quality, skilled nursing deals out there. So it's hard to predict kind of the volume and exactly where cap rates are going to settle. And although we think cap rates will stay in the 9% to 10% range, I don't think we're going to see the eight handle stuff that you saw in our pre-pandemic days. So but we just haven't had. So we're not seeing enough volume out there. And in all three of our asset classes. Obviously, as I said, we're seeing more of the senior housing side for us to be able to determine what we might be able how much we might be able to get done and also because of the pandemic on prior to the pandemic, we never included on acquisition assumptions and guidance. But we would sometimes say outside of guidance, you know, we think we're going to get x-amount of investments done this year and we think most will be in the third and fourth quarter or provide some color like that. But given the pandemic, we just don't have enough data at trend data to even determine how we're going to do 200 million this year. We're going to do 400 billion this year. It's just kind of impossible at this point. Hopefully as we get a little bit further into the year, and we'll be able to be have a little bit more granularity on where we think things may go. We will have the first quarter earnings call, not that far out from now.

Lukas Hartwich

And hopefully we'll have a little bit more data than that we can share take Exxon thinks in terms of the spread investing opportunity, if you say nine handle on that on sniffs, something lower than that on senior housing, but what do you what do you think the range of in return spread the spread to your cost of capital will be? Is it like it should be required to be?
I should say for you to pull the trigger on something that you like to that have to be 200 plus basis points. Are that asking too much? I'm just I'm just curious where your mind is that in terms of the accretive nature of your external growth?

Rick Matros

Yes. So we don't have a set number at our current cost of capital for the deals we're seeing are accretive to us. That's amazing. We just want them to be accretive and on. And I think as we look out over the course of this year, everybody is still in recovery. So we can do like on the skilled side, like we just did with Ignite still in the 9% to 10% range. And we know there's more upside on even though you might say, hey, do you want to start out with a bigger spread, we're going to get a bigger spread over time as the industry continues to recover and on the shop side, there's still a lot of upside there as well. So it may be a little bit tighter on day one. But as long as we know, we know the operator, we know the market and we can see the upside there. We can see what the performance was pre-pandemic and then it's worth it to us because as I said, you know, as we keep kind of hammering home out, we just we need to get back to strong earnings growth.

Lukas Hartwich

And last question for me on you mentioned in the release a 1.72 times dorm coverage in your skilled space, excluding provider relief funds. Is that it is that in arrears number? Is that a 3Q or 4Q number it's a it's a 12-month number as of September 30th.
Okay. So I took note of the fact that it that that same equivalent number was 1.61 times in their third quarter release it that's quite a credit improvement. It doesn't get the benefit of the Medicare yet your starting point in October one, if it starts, it's the third quarter annualized. So what would you say is the reason for that big pop in coverage? Is there any moving parts in there that we should know about?

Rick Matros

Well, there were a couple of things on a lot of our operators experienced larger than average Medicaid rates in July and August. So that starts to impact impacted. And labor really has moderated quite a bit again, and we always keep saying this, it's still really tough out there or to make light of it. But it has moderated, I think a little bit more than we would have expected. So I think the combination of slower labor growth and stronger revenue per patient day growth, particularly on the Medicaid side is what contributed to it connect.

Lukas Hartwich

Could you be starting to tease a two times number if things continue to go in the right direction from your lips rich content.

Rick Matros

Thank you.
Thanks.

Operator

Your next question comes from the line of Michael strike with Green Street. Your line is open.

Lukas Hartwich

Thanks and good morning. Maybe one on the Shin portfolio. So coverage levels are now back to 2019 are spot levels mostly captured in that trailing 12 month figure at this point? And if not, should we expect any more meaningful improvement in coverages in that business?
Sorry, for which portfolio for additional portfolio or the senior housing lease portfolio.

Rick Matros

A guy that's got it.

Talya Nevo-Hacohen

And again, that is a data plan or I'm sorry, can you repeat the question because now that I know what portfolio you're talking about?
I can probably handle constructible model science.

Lukas Hartwich

Yes, sorry about that coverage levels. They're back to 2019 in the senior housing lease portfolio, again, are spot levels mostly captured and that trailing month 12-month figure? And if not, should we expect any more meaningful improvement in coverages in that business?

Talya Nevo-Hacohen

I think I think we're optimistic that coverage will continue to improve as operating leverage continues to own Strathmore and ally to buy online.
Okay.

Rick Matros

Fair enough.
Yes.
Okay.

Lukas Hartwich

Good to know. And then maybe one on contract labor. I know you mentioned it's down pretty meaningfully in aggregate, but have you seen any pockets in your portfolio that have started to see agency labor utilization maybe come back up in recent months?

Rick Matros

I'm not all Terry coming up. You certainly have markets where it's still bad, but we're not seeing increases. I mean, anecdotally, we may there may be a facility here or there but by operator, we're not really seeing increases over the past few months and temporary labor. I think over the holidays, they might have a little bit of a spike, but that's not that's not a typical for the holidays, but it came right back down.

Talya Nevo-Hacohen

We're really seeing I was reading your housing front, very it's almost zeroing out of agency or or at least back down to it should have no not so-called normal levels of unaffected by the last few years. And because we're seeing also at the same time, I'm more net hires. I'm filling of positions that had been that had been vacant for some time, better retention, which is what the net hires is about. And um and overall, just stronger ability to hire, retain and come and compensate a permanent employees.

Lukas Hartwich

Great. Thanks for the time.

Talya Nevo-Hacohen

Thank you.

Operator

Again, if you'd like to ask a question, star then the number one on your telephone keypad.
Your next question comes from the line of Connor silver ski with Wells Fargo. Your line is open.

Lukas Hartwich

I thank you for the time. Maybe just to bounce back on the investment environment. It's been a pretty common theme among health care re earnings that the propensity to invest in 2024 is a dramatic improvement from, say, years prior and in that context, it seems like solvers messaging here is maybe a little bit more conservative than others. So I'm wondering when you say that in skilled nursing in particular, there are less high-quality opportunities coming across the desk. Do you feel that that's more due to increased competition in the space? Or is that more of a function of just the pricing disconnect?
Between potential sellers and buyers.

Rick Matros

I don't think it's necessarily either. I think that for those that don't have to sell, they've just been waiting for more recovery. I really think it's as simple as that. So we fully expect to see more opportunities in the skilled space and better quality opportunities. But if you haven't had to sell, we might as well hang in there or wait for on top line and margins to improve more the other.

Talya Nevo-Hacohen

The other thing I'd add to that is we thought a lot there was a lot of buying back private investors in the skilled space when cap rates were really cheap and bridge to HUD was was flowing in unprecedented amounts. And that, of course, has shifted in the last, whatever, six, six, eight months. And now the opportunity to provide debt or to sometimes provide equity in a sale leaseback format has reemerged, which is where the retailer can play and so that I think that explains why you're seeing other reach provide various levels of debt in terms of the cap stack.

Rick Matros

And then why you're seeing us probably have seen more opportunities on sale leasebacks going for you to note, Gartner, they are more conservative than our peers, I guess, shows the impact of the pandemic. And our mentality is because we've never been accused of being more conservative than our peers.

Lukas Hartwich

Understood. I appreciate the color there. And maybe one more. This is taking a bit more of a long-term forward outlook. I have seen on Nick, Matt, for example, some markets where occupancy is getting quite high. And I'm wondering if we could expect to see certain states are released some certificate of needs within the next several years and allow for some more construction activity and saying that under the context, too, of knowing that it's cost prohibitive at the moment to really generate a return of construction activity, but it seems like there are some markets where you're kind of hitting carrying capacity. So just curious to hear any thoughts you have on that dynamic?

Rick Matros

Yes. So it's a yes, up what I would say, yes, there are more. Obviously, there are actually quite a few markets like that. I think our portfolio in the aggregate, it is getting closer to 40%, 40% of the operators are or close to it or where their occupancy was pre-pandemic. But there's no talk right now in the States relative to changing skill. And obviously, there's going to be a huge crisis in the country. And as you noted, we're already seeing it from an app in terms of the access problems in certain markets. And so there's going to have to be something different at this at the state level and perhaps the federal level as well, that being the cost of building skilled nursing facilities is exorbitant, given the level of regulation. Some states obviously have of additional regulation on top of federal regulation. So it makes it even more expensive. California is a great example of that. So you've got that issue, then you've got this. You've got the COA issue as well. So yes, so it's just it's hard to see anything proactive happening at the level of the government until things get really, really bad. And you have a bunch of bad headlines because people can't get access to care. I just don't think I think everything is more focused than ever on the election cycles in the short term. And I just I just don't we haven't heard it and I just don't see it cutter. I think it's just and it will keep on growing occupancy. And then as I said, there will be some really bad headlines and then maybe there'll be some changes, which will probably take years, right? So I think you've got a really nice run ahead of you on the skilled side for occupancy.

Lukas Hartwich

I appreciate the color. I guess all roads lead to increasing occupancy in the years ahead?
Actually, Tom?
Yes.

Rick Matros

And per member before the pandemic, the industry just based on demographics and and the curve at that point, what was the current rate of decline in supply, which has obviously accelerated the industry was projected to be effectively full 2025, 2026, and the pandemic has pushed that out. But nothing's changed since there except that the number of closed facilities has actually increased, right. So yes, and effectively, full is a little bit different for different buildings, but it's sort of low to mid 90s.
Yes.

Operator

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

Rick Matros

Thank you for joining us today. As usual, we're all available for follow-up and on those that are going to be in Florida. We'll look forward to seeing everybody at the conference next week. Thank you.

Operator

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

Talya Nevo-Hacohen

Not only that, yes, Gap, many are now we do and a lot of buzz there. Why the yes.