Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Analysis

Sabra Health Care REIT Reports Strong Growth and Positive Guidance for 2024

In Q3 2024, Sabra Health Care REIT showed solid financial growth with normalized AFFO per share rising 9% year-over-year to $0.37. Cash rental income surpassed guidance at $91.8 million, driven by percentage rents. The managed senior housing portfolio saw a 17.8% increase in cash NOI. For 2024, Sabra revised its guidance, projecting normalized AFFO between $1.43 and $1.44 per share. Occupancy and margins strengthened across multiple portfolios, with expectations for continued growth into 2025. The company maintains a healthy balance sheet with a net debt to adjusted EBITDA ratio of 5.3x, highlighting operational recovery and investment opportunities.

Strong Performance in Senior Housing Portfolio

In the third quarter of 2024, Sabra Health Care REIT demonstrated notable improvements across its senior housing assets. The company reported a revenue growth of 7.6% year-over-year in its same-store managed senior housing portfolio, with Canadian communities outperforming at a 10.8% growth. The occupancy rates for assisted living and independent living facilities have increased to 84.1% and 84.9%, respectively. A significant contributor to this success has been a 17.8% year-over-year increase in cash NOI, driven by solid operational efficiencies and modest expense growth.

Financial Metrics Reflect Stability and Growth

Normalized Funds from Operations (FFO) increased to $0.35 per share with a year-over-year growth of 9%. The Adjusted Funds from Operations (AFFO) reached $0.37 per share, marking a $0.01 increase from the previous quarter. Overall, Sabra's normalized AFFO totaled $86.9 million, benefiting from rising cash rental income, which amounted to $91.8 million, exceeding previous guidance forecasts.

Updated Financial Guidance for 2024

Sabra updated its full-year 2024 guidance, projecting net income between $0.48 and $0.49 per share and AFFO between $1.41 and $1.42 per share, which represents slight upward adjustments. More specifically, the normalized FFO guidance increased by $0.02 at the midpoint, reflecting confidence in continued operational improvements.

Improving Balance Sheet and Debt Ratios

The company reported a decrease in its net debt to adjusted EBITDA ratio to 5.3x, down from 5.45x in the previous quarter. This reduction is driven by continued growth in the managed senior housing portfolio. Furthermore, Sabra's liquidity remains robust at $947.8 million, ensuring financial flexibility for future investments.

Dividends and Shareholder Returns

In a display of confidence in cash flow generation, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share, adequately covered by the normalized AFFO. This translates to an 81% payout ratio, indicating a commitment to returning value to shareholders while maintaining enough capital for reinvestment.

Investment Strategy Focuses on Quality and High-Yield Assets

Sabra is pursuing a selective investment strategy, focusing on high-quality, newer vintage assets with strong operational performance. In the third quarter alone, the company committed nearly $100 million to new and pre-announced investments. The CEO highlighted a diversified pipeline of opportunities, particularly in the senior housing sector, while remaining cautious about portfolios requiring substantial management efforts.

Operating Leverage and Cost Management

Sabra's operational performance indicates material improvements in operational efficiencies, as evidenced by rising cash NOI margins. Recent quarterly results reflected a 60 basis point increase in cash NOI margin, showcasing the company’s ability to harness operating leverage. Management indicated prospects for this trend to continue, particularly as occupancy levels improve and expense growth remains contained.

Future Outlook and Market Trends

Looking forward, Sabra projects continued growth, largely attributed to stable occupancy rates and favorable reimbursement dynamics in the Medicare and Medicaid landscape. The management expressed optimism regarding the potential for sustained demand in skilled nursing and senior housing sectors as demographic trends favoring such assets persist. The company anticipates a potential increase in investment activities, driven by stronger market conditions.

Challenges in Behavioral Health Investments

While there is growing interest in behavioral health among investors, Sabra's current strategy does not prioritize further investment in this sector. The company finds it essential to focus on high-quality assets that present lower risk profiles, indicating a deliberate choice to avoid the complexities and uncertainties associated with emerging behavioral health opportunities.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sabra Third quarter 2024 earnings call. [Operator Instructions]

I'd like to now turn the call over to Lukas Hartwich, SVP of Finance. Please go ahead, Mr. Hartwich.

[Lukas Hartwich, executive]

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 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, 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 Financial's page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release and supplement can also be accessed in the Investors section of our website.

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

[Rick Matros, executive]

Thanks, Lukas, and thanks, everybody, for joining us. To start, I'd note that we've now had several quarters in a row of continuing improvements in all of our primary asset classes. We've really distanced ourselves in the pandemic. We're hitting highs in several statistical categories. So we really feel good about where we are right now.

Occupancy for our SNF portfolio is up 130 basis points sequentially. Our skilled mix continues to increase up 110 basis points sequentially and higher now than it's been for quite some time. Occupancy for our same-store SHOP portfolio is up 90 points -- 90 basis points sequentially, and margins in both those portfolios continue to strengthen. Occupancy in our triple-net senior housing portfolio has been hovering around 90% for 4 quarters already now. Our EBITDAR rent coverage for our skilled nursing and triple-net senior housing portfolios at 1.94% and 1.37%, respectively, are at levels that are much higher than we've seen for years, certainly and well before the pandemic.

As noted in the press release, only Avamere of our top 10 saw a decrease, but that was specifically due to the percentage rents that we've been receiving and was still a strong 1.87%. I think the fact that we've been getting percentage rents for a number of months now as anticipated and yet they still have rent coverage as high as it is, shows that this particular lease restructure worked out really exactly as anticipated and our faith in the operator certainly has been rewarded.

Coverage and occupancy in our behavioral and other category were essentially flat sequentially as these now include 4 quarters of a lower occupancy stabilized addiction treatment center that was added to the pool last year. Our leverage has continued to decrease. We increased guidance at the midpoint and have strong mid -- at the midpoint, strong growth at something over 6% on a year-over-year basis, and we expect that to carry over into 2025 as well.

Investments for the quarter, both new and previously announced, totaled just under $100 million. We're now seeing more activity in our investment pipeline than in past months, primarily deals of 1 or 2 assets. We're starting to see some more portfolio opportunities as well as more off-market opportunities. As we've talked about really all year, we're really focused on doing high-quality investments with good yields, operators that we really trust. We're not interested nor do we need to do larger portfolio deals, usually at least some portion, if not most of the facilities and those larger portfolios do require a lot of work, and we just don't need that noise around this right now.

And the way we've approached our investments to date, and we'll continue to approach them, which helping fuel the year-over-year growth that we're seeing and expect to see going forward.

There are older assets primarily SHOP and much of what we're seeing in the pipeline. But as I said, we'll look at those. We'll continue to look at those, but we're just going to stay focused on what we've been doing that is these high-quality new vintage assets. We're starting to see an uptick in skilled nursing opportunities, although not dramatically so, and are committed to doing skilled investments as well.

And with that, I'll turn the call over to Talya.

[Talya Nevo-Hacohen, executive]

Thank you, Rick. As Sabra's 84 property managed senior housing portfolio, including joint ventures at share had a strong quarter. On a sequential quarter basis, the total managed portfolio, including on stabilized communities and the joint venture assets at share at a 140 basis point increase in occupancy, along with 60 basis point growth in cash NOI margin. Sabra's managed portfolio continues to grow through the addition of high-quality well-performing properties while operations continue to improve within the existing portfolio.

Sabra's same-store managed senior housing portfolio, including joint ventures at share, had excellent results this quarter. Excluding nonstabilized assets, the headline numbers are: revenue for the quarter grew 7.6% year-over-year with our Canadian communities growing revenue by 10.8% in the same period; occupancy in our assisted living and independent living portfolio was nearly even at 84.1% and 84.9%, respectively; cash NOI for the quarter grew 17.8% year-over-year above last quarter's results.

In our U.S. communities, cash NOI grew 15.3% on a year-over-year basis, while in our Canadian communities, cash NOI for the quarter increased 24.8% over the same period, benefiting from the strong performance of our joint venture properties. REVPOR, in the third quarter of 2024 had robust growth of 4.2% year-over-year, while exPOR was nearly flat for the same period. The minimal increase in exPOR is a function of occupancy growth and limited cost increases reflecting the impact of operating leverage across this portfolio.

We continue to see strong revenue increases across our senior housing portfolio accompanied by very modest expense growth with operators skillfully balancing the levers of occupancy and rate to achieve -- to continue to achieve outsized cash NOI growth. We believe that the portfolio as a whole has reached the point where operating leverage will contribute materially to cash NOI growth.

As Rick mentioned, our net leased stabilized senior housing portfolio continues to thrive with consistently rising rent coverage, reflecting the underlying operational recovery. Sabra's total investment in behavioral health remained static this quarter. We see growing interest in this asset class among real estate investors as well as brokerage firms, which have staffed up to cover the sector.

And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

[Michael Costa, executive]

Thanks, Talya. For the third quarter of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.37. This represents a $0.01 increase in normalized AFFO per share from our second quarter results and year-over-year growth of 9% on the back of steady improvement in our managed senior housing performance and continued stability in our triple net portfolio.

In absolute dollars, our normalized AFFO totaled $86.9 million for this quarter. I would like to highlight a few key components of this quarter's earnings. Cash rental income from our triple net portfolio totaled $91.8 million for the quarter, which was better than the $90 million quarterly run rate provided on our second quarter call, driven primarily by percentage rents collected during the quarter.

NOI from our managed senior housing portfolio totaled $22.9 million for the quarter compared to $20.8 million last quarter. This increase was driven by the addition of the 2-property portfolio we acquired for $75.8 million at the beginning of the third quarter and continued sequential same-store growth.

Recurring cash G&A was $9.5 million this quarter and slightly better than the $10.4 million per quarter run rate provided on our second quarter call. We expect fourth quarter recurring cash G&A to be closer to that previously provided run rate.

As noted in our earnings release, we updated our full year 2024 guidance on a diluted per share basis as follows: net income, $0.48 to $0.49; FFO, $1.35 to $1.36, normalized FFO of $1.39 to $1.40; AFFO, $1.41 to $1.42; and normalized AFFO of $1.43 to $1.44. This represents an increase at the midpoint of our normalized FFO per share and normalized AFFO per share guidance of $0.02 and $0.01, respectively.

At the low end of our range, our triple net cash NOI for the fourth quarter is approximately $90 million, which is the same as the quarterly guidance we provided last quarter and conservatively assumes no percentage rents are collected. This triple net cash NOI assumption is in line with the actual results of the third quarter, excluding percentage rents as noted earlier.

Our guidance incorporates all announced investment and disposition activity as well as announced activity under our ATM program and does not assume additional investment, disposition or capital transactions beyond those already disclosed.

Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 5.3x as of September 30, 2024, a decrease of 0.15x from June 30, 2024, which was driven primarily by the continued NOI growth in our managed senior housing portfolio. The steady and continued improvement in our balance sheet strength, together with increasingly attractive industry operating dynamics was a key driver to Moody's recent upgrade of our outlook from stable to positive.

As of September 30, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $947.8 million, consisting of unrestricted cash and cash equivalents of $63 million, available borrowings of $847.4 million under our revolving credit facility and $37.4 million related to outstanding forward sales agreements under our ATM program. This year, through September 30, 2024, we utilize the forward feature under our ATM program to allow for the sale of up to 7.3 million shares at an initial weighted average price of $15.41 per share net of commissions. As of September 30, 2024, we had $386.7 million available under our ATM program.

Finally, on October 31, 2024, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 29, 2024, to common stockholders of record as of the close of business on November 15, 2024. The dividend is adequately covered and represents a payout of 81% of our third quarter normalized AFFO per share.

And with that, we'll open up the lines for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Nick Yulico with Scotiabank.

[Elmer Chang, analyst]

This is Elmer Chang on with Nick. So over the last year, you've had a few quarters of accelerating year-over-year occupancy growth at the SHOP segment. And it seems like labor cost inflation continues to improve. Does that give you more confidence in providing additional segment guidance items for 2025 as you evaluate your expectations there?

[Michael Costa, executive]

Yes. I think as we -- it's a little too early for us to talk about 2025 guidance. That's something that we'll address when we release our fourth quarter earnings and evaluate what is meaningful to provide with a high degree of confidence.

[Elmer Chang, analyst]

Okay. Okay. Makes sense. And then maybe just on the balance sheet, as you touched on there briefly. You're seeing leverage improvement driven by the SHOP portfolio and it's a key driver of why you got the credit rating upgrade or sentiment upgrade. What do you credit rating agencies want to see in terms of your leverage target or operating metrics to maybe earn an upgrade in the future?

[Michael Costa, executive]

Yes. I think all the rating agencies, they obviously have their different pain points or areas they're focused on in terms of leverage levels and debt service coverage levels. But those are probably the 2 main aspects that they're focused on, which is going to be where our leverage is at, what the trajectory of that leverage is and then our fixed charge coverage ratio, both of which are by themselves will be investment-grade rated.

And I think for Moody's, what they want to see is that sustain and continue to improve as it has the last couple of quarters. Given that positive outlook was a big step in that direction and we're hopeful at some point in the near future, the next step with them, which would be investment grade is forthcoming.

[Operator]

Our next question comes from the line of John Kilichowski with Wells Fargo.

[William John Kilichowski, analyst]

Maybe if we could just start on the SHOP guidance going back to that. It looks like another good quarter. And at the beginning of the call, you mentioned REVPOR of 4.2 and exPOR relatively flat. I guess could you talk about what was underlying your expectations coming into the quarter? What this performance look like? I know your guidance is a little bit vague, maybe does this number land a little bit higher than lower than the midpoint of your expectation? And is there a little bit of conservatism not updating your guidance here?

[Michael Costa, executive]

Yes. I mean, so what we said last quarter when we put out our guidance on SHOP growth was mid- to high teens growth. And I think this fell squarely within our expectations. And similarly, for the fourth quarter, we're still saying mid- to high teens growth. And if we have another quarter that's close to what we had this quarter, it would be in line with what we're expecting. We're hoping that it performs the upside. But where we came in is very much in line with what we expected.

[William John Kilichowski, analyst]

Got it. And then maybe on the acquisition front. Obviously, you preannounced the larger deal, you gave us another deal here. But maybe talk about -- Rick made some comments about seeing ample opportunities in the space. Can we talk about how yields have trended over the quarter? Maybe what you're seeing here into 4Q? And then is there a larger opportunity set and maybe even the potential to accelerate into next year? I understand we're not giving guidance right now, but just any color on how the landscape is changing? I understand some competition is coming back, but just where can volumes go from here?

[Talya Nevo-Hacohen, executive]

This is Talya. I think the opportunity remains robust, particularly while cost of debt remains relatively high compared to what it had once been. That really pulls the leverage buyers out of the market or forces them to bid at prices like you've seen our initial yield. So I think that's the positive right now.

So with our cost of capital, I think we can be quite competitive and you've seen our peers be quite competitive as well. We're being selective but we are seeing some high-quality new or newer vintage assets and particularly in senior housing that are performing well, either stabilized or close to stabilized so that we feel that we're getting a strong yield with a very low-risk profile in place going forward.

Now I think the opportunity set is large. I think that the private equity funds are I'm sure they are salivating and wanting to execute, but it's -- the pricing is still tough. We're seeing them still-be sellers into the market. And we'll see what happens. It's all about cost of debt.

[Rick Matros, executive]

And the only other thing I'd mention is everything is connected, right, John? So our performance has been really solid these last several quarters. The cost of capital has improved, and that's going to make it that much easier for us to compete and do more going forward. But even though we may be able -- even though we believe we'll be able to do more and to Talya's comments, we're still very committed to being very selective to not doing anything that's going to create a lot of noise because of the work involved because of the structures that you have to put together to make it happen.

And I think that's a commitment that we've made to our investors starting last year as we started exiting the pandemic. And we've gotten a lot of support and very positive feedback about that. And we're just not going to veer off course. And if staying on this course produces this kind of earnings growth even at the midpoint, which is at the higher end of REIT world, I think it's a good strategy.

[Operator]

Our next question comes from the line of Austin Wurschmidt with KeyBanc.

[Austin Wurschmidt, analyst]

Rick or Talya, I appreciate the comments, first of all, on kind of remaining disciplined. But last quarter, you had referenced kind of a pickup in opportunities, particularly skilled nursing, I think, was one. And to the point you just made, your cost of capital has only gotten better since then. I guess what's held you back from buying more since this past quarter? Curious if you're losing out on deals or everything is just taking a little bit longer to materialize? And I also don't believe you referenced behavioral this quarter as a target. What are the latest thoughts there?

[Talya Nevo-Hacohen, executive]

Yes. I think behavioral is not a target for acquisition for us right now. As you recall, I have spoken in the past about it began as a vehicle for us to reuse existing assets that were no longer viable as either skilled nursing or senior housing. That is a -- was a fixed amount of assets. So we've depleted that and that we've converted those. So right now, we're sitting tight on that. The opportunities in that arena are rarely of institutional quality these days in terms of acquisitions and the opportunity set is very much in senior housing and skilled nursing today.

On the skilled nursing front, in terms of volume and what we're seeing and how come we have an executed billions of dollars versus what we -- the billings we've seen, it really goes to being selective, understanding the risk in some of the assets we've seen because they really tranche out into assets that are challenged, whether they're skilled or senior housing, Rick referenced that which is not -- those have not been risks we've been willing to undertake.

Most of the higher-quality assets we have been bidding on, sometimes we don't win the bid, but we're generally right up there and it's been our choice whether to pursue or not pursue.

[Rick Matros, executive]

I'll add a couple of other comments. On behavioral, we've been in it long enough to come in the conclusion that there's a very particular model that we like from a capital perspective, and that's what we have with 2 of our partners where the operating platform is owned by a private equity fund. We'd like that relationship because there's other -- there are deep pockets other than us that are in the deal. So if we can find more opportunities like that, we'll pursue them. Those are very, very few and far between. As everybody knows, most operators and the skills in the senior housing business don't have much in the way of balance sheet, but you've got operators that are very good bid around a long time, and that gives you a lot of confidence.

But in the behavioral space, most folks are new and untried and there just isn't the history there. So if we can find more opportunities like we have with 2 of our partners, that's great, but we expect them to be few and far between.

On the skills side, I would just add to what Talya said, most things are still off market. There was a big portfolio recently that everybody saw. We saw that too. We just chose not to do it. We just didn't think it was right for us. So we're starting to see some more skilled opportunities but they just haven't been that great yet. So we're not really holding back. As we've been saying, we're being selective and most of the good opportunities that we're seeing are on the SHOP side.

So as soon as we see better opportunities on the skilled side, and we expect to see more of those, as NOI continues to stabilize and folks that haven't had to sell, feel comfortable in putting their assets in the market, then you'll see us do more skilled deals.

[Austin Wurschmidt, analyst]

That's all really helpful. I mean how should we take your comment about the fact that you stated we're seeing more portfolio opportunities? But then I think you said we're not as interested in those deals and all that comes with it. Can you just marry those 2 comments, please?

[Rick Matros, executive]

Well, yes, the portfolio deals that we've seen have some hair on it. And at this point, where we are developmentally as a company, we've taken big swings in the past. We felt it was necessary because of other circumstances, and we're willing to take all the work to do that. But we don't need to do that now. We need to be focused on doing the kinds of deals that give us durable and sustained earnings growth or high quality. And that's kind of good and let others do the stuff that requires a lot of heavy lifting.

[Austin Wurschmidt, analyst]

And then just the last one for me. The asset you acquired subsequent quarter-end senior housing managed, is that sort of the profile you're speaking of last quarter, newer assets well leased, and that's really why you were able to acquire it at the yield that you did above 8%? And I guess, how deep is that opportunity set at those types of yields?

[Talya Nevo-Hacohen, executive]

I don't think every deal is going to be in 8.5-plus initial yield, but I think we can still do deals that will make all of us pleased with the spread to our cost of capital on the senior space. And yes, that is a pretty good example. We got that deal because we know the operator well and plan to keep them in place, which helped us out on a competitive basis.

[Operator]

Our next question comes from the line of Juan Sanabria with BMO Capital.

[Juan Sanabria, analyst]

Just on the SHOP business, curious if you have any early signs or thoughts on how REVPOR could trend? Given, I'm assuming, you're already talking about or have set January 1 rate increases here. So just curious on your thoughts whether pricing could actually accelerate or hold? Or how you guys are thinking about it?

[Talya Nevo-Hacohen, executive]

I think mid-single digits is the right way to think about it. It's hard to -- I think that's -- whether it's 4%, 6%, it's in that zone. I haven't heard any operator talk about numbers higher than that unless they're taking -- unless they're turning around a building that's been under leased and under managed.

[Juan Sanabria, analyst]

Okay. Great. And then just on the senior housing triple-net side, look like occupancy dipped a little bit sequentially. Could you just give a little back story as to that? And then as part of that, what's the back story or the driver of percent rents just to think about that on a go-forward basis?

[Michael Costa, executive]

Yes. So your first question on the senior housing lease, I mean, it went from 90% last quarter to 89.6% this quarter. So not a real meaningful drop and pretty steady if you look over the last 4 or 5 quarters. 90% is a pretty healthy occupancy for that facility type. So nothing really to point to there, nothing of concern at all as far as that goes.

[Rick Matros, executive]

It's a small pool of assets. So any movement by any facility affects the whole [indiscernible]. And these also are big facilities. So all that kind of goes into it. But if we have a steady state around 90% going forward, I think we'll be pretty good with that right.

[Michael Costa, executive]

And sorry, what was your second question, Juan?

[Juan Sanabria, analyst]

Percentage rent.

[Michael Costa, executive]

Yes. That was -- yes. So in terms of percentage rent, I mean, we've been collecting it now for several quarters this year under that lease, which has obviously been helping our cash NOI from our triple net portfolio. In terms of expectations on that, I mean we do expect there's going to be some amount we continue to collect going into the future. That lease also has the ability to reset terms. There's a window that opens in 2025 to reset the terms on that to a fixed lease. And we'll continue monitoring and seeing how that portfolio performs. It's performed really well, as Rick alluded to in his opening remarks. And when we think the time is right to flip it from having percentage rent, a base plus percentage rent, just a fixed amount, we'll explore that. But that portfolio continues to perform well. We're getting percentage rents, it's been additive to our earnings and we're really happy with that outcome.

[Rick Matros, executive]

And we have -- it's a long window we have on making that decision. It's at least a couple of years. So we'll have a lot of time to monitor that.

[Operator]

Our next question comes from the line of Michael Griffin with Citi.

[Michael Griffin, analyst]

I wonder if you can give some additional color just on the occupancy gains in the SNF portfolio during the quarter? Is it a function of better staffing at the facilities, maybe greater referral numbers or just this kind of continued upward trajectory and occupancy recovery that we've seen over the past couple of quarters? And then maybe as you think ahead, obviously, we've seen a material uptick in occupancy this year. But is it fair to assume there's going to be more seasonality as kind of the industry normalizes over the next year or so?

[Rick Matros, executive]

So the increase in occupancy, there's never been a need or a referral issue. It's always been a function of labor and how much labor is available to admit as many patients as possible. So yes, it's just that labor has gotten better. So that's allowed occupancy to continue to tick up. And it's improved over the last year, a little bit more than we would have thought given labor issues. So we expect it to keep ticking up. I mean the industry both skilled and senior housing are projected to be fully occupied in the next few years, given the dynamics with the demographic and no new supply on the senior housing side and declining supply on the skilled side.

So we -- so -- and it's going to be interesting to see what happens with seasonality. And normally, once we got out of the pandemic, I would expect to see seasonality come back in. But on the skilled side, for example, with supply continuing to decline, I mean you think about 800 to 900 buildings closing over the last 4-plus years, only 15 new facilities built last year, it's just going to continue that way. So it's possible that, that could mask some of the seasonality that remains to be seen. But I think that's a real possibility that we're still not going to see sort of the normal seasonality that we've historically seen. So time will tell, but that's kind of the way we see it right now.

[Michael Griffin, analyst]

Great. Appreciate the color there, Rick. And then maybe just one question on capital availability. Obviously, the demand, I think we've seen for both seniors and skilled with the demographics sets up well over the next couple of years, but seems like lenders are still relatively apprehensive to provide debt capital. In your conversations and kind of what you're seeing out there, has there been more appetite for lending? And maybe if you could give some color on kind of the availability of bridge to HUD, that would be helpful as well?

[Talya Nevo-Hacohen, executive]

Lenders -- so we don't use mortgage financing as a matter of course. And so Mike can talk more about balance sheet debt. But what I hear in our times at [indiscernible] and [indiscernible] and speaking with other operators and owners and lenders is there's definitely an interest among the lenders to be back. I think there's an issue of price.

Now Fannie Mae still has a substantial bad book of senior housing loans. It is overwhelmingly, the majority of their bad debt right now. So -- and they foreclosed on additional assets. So Fannie Mae is not really actively lending, but Freddie is.

We haven't -- I have not spent a lot of time in the bridge to HUD world recently, but there's still definite activity in the bridge to HUD space and it's nonbank lenders, and it has been for a while. And they'll -- I think their risk appetite may have shifted down somewhat from where they were a few years ago, but also results on operating results on skilled nursing has improved and kind of normal -- gotten closer to kind of a normalized place, so they don't have to take as much [indiscernible] still extremely slow, extremely.

[Operator]

Our next question comes from Rich Anderson with Wedbush.

[Richard Anderson, analyst]

I hear you on complications, the CTR deal with JV and preferred equity is not your cup of tea. But I'm wondering if run into any of your REIT peers and that makes it a little bit more difficult to find stuff given that they have -- your cost of capital has gotten better, but there's -- and 1 or 2 others is better than yours as well? So are you finding that you're running into other REITs? Or is it just too big of a playing field and it's not an issue?

[Rick Matros, executive]

I think a couple of things. It's -- one, it's a big playing field. But the other is when it comes to skilled nursing, we all value these assets the same way. It's going to be between the 9 and the 10 [ cap ]. So even if someone's cost of capital is a little bit better than ours, they're not going to come in at an 8 cap to beat us on it. So we can compete on any of the skilled stuff that's out there. And if we wanted to do bigger stuff that had a little bit more work required to it. If we chose to do that, we could do that.

So when it comes to the skilled, the cost of capital piece just isn't an issue. It's not a barrier at all. On the SHOP side, in terms of our peers, -- not very many. Our other peers aren't really doing shop. We don't view [indiscernible] and [indiscernible] is the same, obviously, right? So we're the only ones right now that are out there doing it.

[Richard Anderson, analyst]

Yes. In your size category, you mean?

[Rick Matros, executive]

Right. Right.

[Richard Anderson, analyst]

What about is investing in debt incrementally from here also too much of a complication or are you willing to go down that path more?

[Michael Costa, executive]

I mean we did a loan earlier this year. It was a smaller loan on a skilled nursing facility that had a clear pathway to ultimate ownership of that. I mean that is more within our wheelhouse than going out and doing very large mezzanine loans or something like that. But by and large, like Rick's alluded to or Rick said earlier and you said on previous calls as well, the bigger and more complex, those things become the more complex our story, the more noisy our story becomes, which is precisely what we're trying to avoid. So there may be opportunities that present themselves with a trusted operator on an asset that we own eventually that could make sense, like the one we did earlier this year. But you shouldn't expect that to be a large driver of our investment activity.

[Rick Matros, executive]

Yes. And look, Rich, we get that, you had took an excess cash, we understand why some of our peers were to find a place to park that, put that to work. Everybody is different. So I totally understand that, but that's just not a place that we're at. And if the strategy that we've been executing resulted in anemic year-over-year growth, that would be different. But that case this is working.

So -- and as you know really well, there are still folks out there waiting to see where we're going to take that next big swing or have that thing that's going to require a call to discuss. And I don't believe that we're going to stay this focused and disciplined and all that kind of stuff, right, that we're -- we're ill-equipped to sort of be a little boring, right? So we're just sticking with it as long as we continue to get the results that we're getting, which are pretty good.

[Richard Anderson, analyst]

Okay. On the SHOP growth, it's a nice turnaround from the beginning. I think at the beginning of the year where you did 9% and everyone was like, why is it so low? And then you said, yes, we got to work on it. What happened to flip the switch and to get requisite levels of double-digit growth out of your SHOP portfolio? Was there something strategic? Or was there something onetime-ish back then that sort of muddied the story on a temporary basis? Apologies for not remembering exactly.

[Michael Costa, executive]

No, it's all good. The 9% was really an outlier, and we talked about -- whenever it was a couple of quarters ago, is really a tough comp from the previous year because if you look at the other quarters this year, the growth has been squarely in that mid- to high teens level. And it has been -- even going back to last year, if you look at year-over-year growth, the growth has been really strong in that portfolio.

And it's really effectively what we expected in terms of the natural recovery in that portfolio as you start picking up occupancy. Operating expenses start to moderate, operating leverage kicks in, all the stuff Talya talked about every quarter, that was what we expected and it's playing out that way.

[Rick Matros, executive]

Yes. So it was an anomaly, not that it was a bad comp. That's all. .

[Richard Anderson, analyst]

Yes. So no strategic change or anything like that, that changes the landscape. Last for me, we're kind of past the happy point of coverage. I mean, I should say, of reimbursement perhaps for Medicare and Medicaid and maybe this time next year, we'll be talking about a more typical number.

Do you think we're sort of at the sweet spot of coverage gains and that we will, by this time next year, the coverage improvements that you're seeing and perhaps the metrics, occupancy and so on, start to come sort of decelerate down to a more typical growth pattern? Or do you see that there's more than a year left in that thesis going forward?

[Rick Matros, executive]

Yes. So I'd see more than a year left for a couple of reasons. One, I think we probably have one more year from a Medicaid to Medicare perspective because of the lag time and capturing inflation that will have some outsized rate increases. So I think next summer, which is where we get about 70% of our Medicaid rate increases on October 1 of '25. I think we'll still have pretty good rate increases, not as good as this year. I don't think we're going to see over 7% again on Medicaid and not necessarily even 4% on Medicare. But I think we have at least one more year of somewhat outsized compared to years past on both Medicare and Medicaid.

The other thing I'd note is that we expect occupancy to continue to increase. So even when the rate increases moderate, the operating leverage is so significant in both these asset classes that we would expect to continue to see margin growth and rent coverage. So I mean, I think it was you, Rich, 2 quarters ago that said, is it possible that we're going to see 2x coverage in the aggregate at some point, and we're almost there, right?

So -- and the other thing I would note, particularly on skilled more so than senior housing, is that operating leverage inflection point kicked in lower than it has historically because the revenue per patient day has grown at such a pace that it has outpaced what's happened with inflation. So in other words, we are already at pre-pandemic -- we were already higher than pre-pandemic margins when occupancy in the skilled portfolio was still 200 basis points of pre-pandemic levels. So I think it's, for sure, more than a year.

[Operator]

Our next question is from Alec Feygin with Baird.

[Alec Feygin, analyst]

First one for me is, what are you seeing as the best risk-adjusted returns currently in the pipeline?

[Talya Nevo-Hacohen, executive]

I think it's the kinds of assets you've seen us buy. Like we've said, newer, vintage, high-quality, well-performing senior housing assets. And I think there are going to be some SNFs that fall into that category as well. Newer vintage may be more loosely defined in the case of SNFs than senior housing, but nonetheless, newer. And I think those would all make sense for us.

[Alec Feygin, analyst]

Yes, helpful. And how much more upside is there from Avamere rent? And do any other tenants have meaningful upside for percentage rent?

[Michael Costa, executive]

Yes. To answer your second question, there's not any other tenants with meaningful percentage rents baked into their leases. The upside for Avamere, I mean, I don't think there's tell a cap on it. So it's going to be just as they continue to improve on their operations. We're going to see that benefit. So it's hard to say how much that upside could be, but we still think there's a bit of upside to capture there.

[Rick Matros, executive]

Yes. What's going to be most important is taking that window that we're going to have starting next year to reset to a fixed rent and picking the right moment that works, frankly, not just for Sabra, but works for Avamere as well. It's got to work for both of us. So that will be an ongoing conversation over the next year plus. And then we have anything left really with percentage rates.

[Operator]

Our next question comes from Michael Stroyeck with Green Street.

[Michael Stroyeck, analyst]

So I know you called out the operating leverage impact on NOI growth within the SHOP business. Can you just quantify the flow-through of incremental occupancy to NOI that you're currently seeing today across the SHOP portfolio?

[Talya Nevo-Hacohen, executive]

Frankly, I have not done that -- tried to back into that math. But we're seeing the numbers I gave you on exPOR can tell the story. So even though expenses increased somewhat, it's really variable costs that increase with occupancy not fixed cost. The fact that exPOR is essentially flat now, kind of tells you where that spot is. And so at that point, it's just revenue minus the variable cost that's really going to the bottom line, and that's it's senior housing, that's going to be a substantial portion.

[Michael Stroyeck, analyst]

Got it. That's helpful. Maybe going back to the SNF transaction environment and conversation. What's driving the increase in SNF opportunities out there? And what type of sellers are you seeing start to become a bit more active?

[Rick Matros, executive]

I think because of the pandemic, you had a lot of the assets outright there were sort of lender force distressed assets. And I think a lot of sellers who didn't have to sell, but ordinarily would sell, has simply been waiting for their NOI to become stable enough and predictable enough that they don't feel like they can get hosed on price.

So -- and I think with -- we've got the Medicaid rates that are now baked in and Medicare just happened on October 1. So with that -- with the reimbursement increases baked in, hopefully, as we go into next year, we'll see more SNF opportunities that are off market.

[Operator]

Our next question is from Omotayo Okusanya with Deutsche Bank.

[Omotayo Okusanya, analyst]

Those conversation around acquisitions is very interesting. It's like damned if you do them, dammed, if you don't. Anyway, first question around the senior housing triple-net portfolio. I think one of your peers on their earnings call talks about increasing interest in trying to convert some of the triple-net senior housing to RIDEA. The markets seem to kind of respond positively to that. Just wondering whether that's crossed your mind whether it makes sense within your portfolio?

[Rick Matros, executive]

Well, we've been doing that all along. That's why the senior housing triple-net portfolio is so small now. So we've already -- we've been active in doing that on a regular basis. So we're kind of out of those opportunities. Because right now, the remainder of that triple net portfolio is legacy stuff with really good operators, the coverages. So 137. So they don't have an incentive at this point. They're doing really well. They don't have an incentive at this point to convert to SHOP. So the others are mostly transitions to new operators.

So I think -- I don't think that number is going to change dramatically. You will though see -- you're going to see our mix of assets change because you're going to see more shop growth with the company, which will decrease the percentage that's triple net senior housing. It's also going to decrease the percentage of IOL. That's in our senior housing portfolio because most of the SHOP that we'll be doing doesn't have much or any IO in it. And because the behavioral opportunities that we would like are going to be so few and far between that percentage of NOI is going to drop and kind of accrue to SHOP.

So I think you'll see skilled sort of hover somewhere around where it is. We can do a really large scale deal tomorrow, and it's not going to change the percentage that much. So I would expect to see that hover around where it is, SHOP will increase, IO will decrease, the triple net will decrease and behavioral decrease.

[Omotayo Okusanya, analyst]

That's helpful color. And then one more for me. Just again, Rick, if you talk a little bit about kind of from a regulatory perspective, what you're expecting going forward, whether that's election, particularly related? Or again, you also have CMS out there talking a little bit tougher about 2025 and their viewpoint on -- they're going to keep moving ahead on minimum staffing unless something dramatically changes. Just seem to be full steam ahead on like regulatory changes they want to implement. And curious what your thoughts are on that?

[Rick Matros, executive]

Well, they can say what they want, and I respect that. But our point of view hasn't changed on what's -- on the fact that we believe minimum staffing is going to go away because it's just a really, really bad idea. Beyond that, though, I think the impact of Chevron is much broader than how it's going to impact the outcome to the staffing mandate because it goes to the way regulators have arbitrarily and unilaterally made decisions. So I think it's going to be tougher for any of these regulatory bodies to just arbitrarily say we're going to do this to you now. We're going to do that to you now.

And I would suggest that our trade association, which really represents the industry when it comes to this kind of stuff both legislatively and as we've seen with the staffing mandate with lawsuits, I think they're going to be much more aggressive post-Chevron and just not sort of sitting back and accepting things just being done to us without any real rationale or without any focus really on what's really going to improve quality of care to the patients and residents that we care for.

[Operator]

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

[Rick Matros, executive]

Thanks, everybody, for your time today. As always, we're available for follow-up. We look forward to talking with you. And in a couple of weeks, we'll look forward to seeing a lot of you in Vegas for NAREIT. Have a great day.

[Operator]

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