Sabra Health Care REIT Inc

NASDAQ:SBRA

Earnings Call Analysis

Sabra Health Solid Q4 Performance, Optimistic 2024 Outlook

Sabra Health Care REIT reported stability and organic growth for Q4 2023, with a 130 basis points increase in occupancy and a 4% rise in REVPOR year-over-year. Cash NOI for the fourth quarter surged by 12.2% from the previous year, and January 2024 saw a jump of over 25% compared to January 2023. Senior Housing occupancy and rent coverage continued to exceed pre-pandemic levels. The company provided optimistic full-year 2024 earnings guidance, expecting net income per share between $0.53 and $0.57, FFO per share from $1.33 to $1.37, normalized FFO per share from $1.34 to $1.38, and normalized adjusted FFO per share between $1.39 and $1.43.

Sabra Health Expects Growth and Dividend Payout Consistency

Sabra Health Care REIT Inc. is projecting a positive year ahead with an anticipated growth of roughly 5-6%. This marks the first earnings growth for the company since the pandemic began. Operating expenses will be more in line with a normal year, with cash general and administrative expenses forecasted to drop to approximately $36.8 million in 2024, from $39.5 million in 2023. Cash interest expenses are predicted to stay even with the previous year, and a maintained quarterly dividend of $0.30 per share, amounting to an 85% payout based on the midpoint of their adjusted funds from operations (AFFO) guidance. These financial movements suggest a shift towards better leverage ratios and a move closer to the company's long-term target, improving from a net debt to adjusted EBITDA ratio of 5.74x at the end of 2023.

Top-Line Growth and Operational Efficiency

The company is witnessing sustained top-line growth through increases in occupancy and revenue per occupied room (RevPOR), coupled with a decline in expenses per occupied room, indicating an improved profitability outlook. There's anticipation of capturing upside within their portfolio, specifically in the Senior Housing managed business as reflected in the 2024 guidance. Overall, the company aligns with the industry sentiment that suggests potential for low to mid-teens growth rate impending, matching the expectations for Sabra's portfolio.

Acquisition Strategy and Market Dynamics

Sabra sets its sight on being a net acquirer across various asset classes, and is open to skilled deals to achieve earnings growth, hinting at an aggressive expansion approach. In the Senior Housing market, there is clear activity with new assets entering the market, providing ample opportunities for acquisition. The dynamics in the skilled nursing market differ, with high-quality deals occurring off-market, demanding a more proactive relationship management strategy from Sabra to seize these opportunities.

Strategic Investment Outlook

While same-store growth predictions do not factor in any potential credit issues, there remains a level of inherent uncertainty regarding the remainder of the year, prompting cushioned guidance ranges without excessive breadth. With revenues per patient day improving significantly, there's a belief that occupancy could surpass pre-pandemic levels in various markets, hinting at a strong recovery and performance potential ahead.

The Current Investment Environment and Future Prospects

The lack of quality skilled nursing deals suggests that cap rates are likely to stay in the 9% to 10% range, with high-quality opportunities expected as market recovery continues. Given the uncertainty caused by the pandemic, specific investment volume predictions for the year are withheld, yet third and fourth quarter activities hint at a higher concentration of investment transactions. In the Senior Housing sector, Sabra aims to ascertain the volume they might achieve, but lacks sufficient trend data to provide a definitive investment forecast for the year.

Optimism for Continued Operational Improvement

Signs are pointing towards further improvements in coverage as operational leverage pushes more net operating income (NOI) to the bottom line, especially within Senior Housing. Anecdotally, while temporary labor has seen a spike, particularly during the holidays, overall trends do not indicate rising agency labor utilization across the portfolio. New hires are filling long-vacant positions, leading to better retention rates, which is a positive sign for the internal workforce strength.

Expectations of More Skilled-Space Opportunities

There is an anticipation for an increase in higher quality opportunities in the skilled nursing space as the market bounces back from the pandemic's effects. With recent shifting of financial climates, REITs now have the chance to step back into providing debt or equity, particularly through sale-leaseback transactions.

Demographic Trends and Market Recovery

Before the pandemic, industry projections based on demographic trends showed skilled nursing facilities reaching full capacity by 2025 or 2026. Although the pandemic has delayed this outlook, closures have actually increased, suggesting that occupancy rates could rise significantly in the future, offering a positive longer-term view for the industry.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone. My name is Mandeep 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. [Operator Instructions].

I would now like to turn the call over to Lukas Hartwich, SVP 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 Financials page of the Investors section of our website at sabrahealth.com. Our Form 10-K, earnings release and supplement can also be accessed in the Investors section of our website.

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

[Juan Sanabria, analyst]

Thanks, Lukas. Good day, everybody. I 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 EBITDARM rent coverage is up 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 it's been growing in 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 a pre-pandemic occupancy. So we see a really terrific opportunity ahead of us in terms of margins improving where they were on a pre-pandemic.

We also continue to see improvement in the Senior Housing lease portfolio. Occupancy is up 130 basis points sequentially and [ DARM ] rent coverage jumped 0.11. Talya will talk in detail about our SHOP portfolio. For both the skilled and Senior Housing portfolios, we expect occupancy to exceed pre-pandemic levels, as I said. But the reason is different for each of the two different asset classes. So for skilled, it's the demographic coupled with the declining product. And for Senior Housing, it's a demographic combined with the negligible new supply for the foreseeable future. We appreciated that CMS and numerous states have been capturing cost increases and 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 portfolio has had 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 AFFO, 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, executive]

Thank you, Rick. Sabra's entire wholly owned managed Senior Housing portfolio maintained positive momentum in the fourth quarter with mid- to high-teen percentage growth in revenue and cash net operating income on a year-over-year basis. This was a function of continued occupancy and REVPOR 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 non stabilized 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 5 quarters. REVPOR in the fourth 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 2024, this portfolio's cash NOI posted an increase of more than 25% compared to January 2023. The performance of Sabra's same-store assisted living portfolio is attributable to strong gains made by nearly every one of the operators managing these communities, while the foundation was set by our ENSPIRIT portfolio, which was transitioned from Enlivant in mid-2023, nearly every operator was able to drive RevPOR while managing [ ExPOR ]. The 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 were occupancy increases and 5.7% higher RevPOR coupled with 9.1% lower ExPOR leading to cash NOI margin expansion of 12.7% in the fourth quarter on a year-over-year basis.

Our now 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, executive]

Thanks, Talya. 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 is 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 the industry enters 2024 with a much improved operational environment and as Sabra specifically enters 2024 with the majority of our portfolio transitions and repositioning 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 2024 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 $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 first 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 $0.30 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 5.74x 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 5x 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 $0.30 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 AFFO 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.

[Operator]

[Operator Instructions] Your first question comes from the line of Joshua Dennerlein with Bank of America.

[Farrell Granath, analyst]

This is Farrell Granath on behalf of Josh Dennerlein. My first question, I wanted to ask about the relationship with Ignite. What are you seeing in terms of 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, executive]

Sure, I'm happy to take that. We have been working with Ignite since we transitioned several nursing home properties in Oklahoma to them several -- 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 announced the deal that we closed on, last year. And we continue to look for opportunities with them. We are not the only REIT with whom they have a relationship. So -- they -- I think they balance us all out and look for the best terms they can get, they like to negotiate, but it but we have tremendous respect for their capabilities as operators and are endeavoring to do more with them.

[Farrell Granath, analyst]

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 that play out into 2024, either in terms of margins or occupancy.

[Talya Nevo-Hacohen, executive]

I think we all wish we could see really rapid increases on the revenue side and decreases or no increases on the expense side. What I think we're -- what we really are starting to see, however, is consistent growth on the top line through both occupancy and RevPOR growth. And I think importantly, we're 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. To me, that signals that the breakeven point is being moved over so that we are now starting to get the benefit of operating leverage.

[Operator]

Your next question comes from the line of Nick Yulico with Scotiabank Bank.

[Elmer Chang, analyst]

This is Elmer Chang on with Nick. 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, executive]

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

[Elmer Chang, analyst]

Got it. Yes, that helps. And I guess just on the Senior Housing managed business as well. I know you mentioned you're seeing increased rent growth in the 5% to 7% range. You talked about seeing occupancy gains, hopefully to pre-pandemic levels. Is that -- was that a target for 2024 embedded in '24 guidance? Or is that more so like a 2- to 3-year objective?

[Michael Costa, executive]

Yes. I mean I wouldn't say it would be a 2- to 3-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, the vast majority of that upside is already captured with a little bit left to capture in '25 and beyond.

[Operator]

Your next question comes from online of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Great. 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, executive]

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

[Austin Wurschmidt, analyst]

That's helpful. And I guess given sort of the acceleration you've seen now in the last couple of quarters, does that 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 that 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, executive]

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 have more people in the cohort and more people moving in. So occupancy is 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 -- is 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, executive]

The other point I would make about guidance is, obviously, we felt that 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 we've aired we've been conservative in our assumptions.

[Austin Wurschmidt, analyst]

That all makes a lot of sense. And just one last one I wanted to hit on was you referenced sort of coverage is certainly trending positively across the overall portfolio. It does look like Healthmark 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, executive]

Yes. They had really been benefiting from PRF, and that's dropped off completely. So that's actually been a big factor. They're a really good operator 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 improving again.

[Operator]

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

[Michael Griffin, analyst]

Just wanted to ask about the acquisition environment heading into 2024. I know in the past, you've talked about you 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, executive]

So I'll start. So in terms of being a net acquirer that is our goal for this year and in all the asset classes and skilled and Senior Housing and behavioral as those opportunities present themselves. So I want to reiterate that even though we 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 because we're dropping so low on our skilled exposure, we're really able to do more skilled deals and still have a much more diversified REIT 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 or boundaries around the asset classes that we're currently in.

[Talya Nevo-Hacohen, executive]

And in terms of the depth of the acquisition pipeline, there are a couple of things I'd say. One, Senior Housing market is very active -- it's -- it was very active mid last year. It has -- since the start of 2024, it has -- everyone is 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 are a lot of assets on the market. There are groups that are -- that have to refinance 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, I'd say the dynamic is a little different. We see -- we don't see that much product that's quality marketed by the brokerage firms. What we have found is that those transactions are happening off market -- and it's been incumbent upon us to insert ourselves into those relationships more actively in order to capture opportunities on skilled nursing. And they're competitive as they are in Senior Housing. But it's active.

[Michael Griffin, analyst]

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

[Rick Matros, executive]

I mean it's hard to predict where they can get to, but a few basis points above where they were pre-pandemic. There's certainly a few percentage points certainly not out of the realm of possibilities. The really -- the 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 10% rate increases and it's private pay, and it's got an advantage over the skilled nursing space.

But the fact of the matter is, the cost report process at the state level and then 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, in this past October 1, and we're going to see that again this year. So you're getting some based -- at least compared to historical trends, some really nice outsized rate increases in 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 has really grown very, very nicely over the past couple of years.

And our non-nursing labor has been relatively flat. It's been really modest inflation. And now we're seeing, as I mentioned, just under 4.5% inflation all in our nursing over the last year. So that's really helped to compensate for the occupancy. So -- but again, how far occupancy can go. We believe it can go beyond pre-pandemic levels, at least in a number of different markets where we're starting to see access issues. So there, I think the margin uplift will be even greater than a few percentage points.

[Operator]

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

[Vikram Malhotra, analyst]

Maybe just first on the guidance. I understand this is obviously the first time post COVID. So I'm just wondering -- can you give us some specifics on what's baked into the low and the high end? You talked about low teens same-store growth. But what else is specifically baked into reach either the lower high end? And is a potential credit issue baked in or not?

[Michael Costa, executive]

Yes, I wouldn't say there's any credit issue baked in or not. I think the range is largely dictated by what Rick said earlier on the call, which it's hard to predict where this is going to shake out. If we knew with certainty we'd just put out 1 number, right? So there is some uncertainty 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 cushion there and 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.

[Vikram Malhotra, analyst]

Okay. And then just on the regulatory side, two things, if you could. Any updated thoughts on kind of how you see the minimum staffing final ruling shaking out component wise or timing-wise? And then Rick, I think you alluded to the fact that there's going to be a good -- a decent Medicare bump. Should we think about it as like 4% to 5% this year. Is that fair?

[Rick Matros, executive]

On the Medicare bump, 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 minimum staffing, there's no update really in terms of timing. They said in 2024, they'll have the final rule. But I think it's fair to say that at this point, we don't believe no matter how much they may order down or maybe they don't order it down. But to the extent that they do, we don't think any staffing mandate is acceptable and particularly given the fact that there are nurses out there. So I think the industry will take a very strong stand and do whatever if things is necessary to ensure it's defeat.

We've got bipartisan support in Congress because the fact of the matter is, even though they're 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, will eventually capture those increased costs, and that will show up in increased rates. So it actually will cost the government billions of dollars a year even if they aren't funding it sort of upfront just because of how the cost report works.

So I think from a relative 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. I think all of those factor into why we're getting so much bipartisan support from Washington and they're not being a staffing mandate.

[Vikram Malhotra, analyst]

Great. And sorry, just one last clarification. In the -- I remember last call, you had mentioned there may be a few more transition smaller ones. So I'm just wondering if you can help us roughly quantify the benefit of the transition that have already been completed in '23 and what the benefit is in '24? And are there any additional transitions planned?

[Michael Costa, executive]

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 and then we put out in the third quarter, you saw that, that number came down because we started capturing a little bit of that. And it's not a large number in totality, I think it's like $4 million I think at the total upside for that piece of the pie was like $4 million. We captured a little bit in Q3, 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.

[Richard Anderson, analyst]

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 on this call, but do you have like sort of a defined kind of pipeline that you're looking at? Or is that still sort of hard to quantify. I'm just curious what more color you can lend on the external growth front for this year.

[Rick Matros, executive]

Sure. So one of Talya's points, we're not seeing much in terms of quality, skilled nursing deals out there. So it's hard to predict the volume and exactly where cap rates are going to settle in, although we think cap rates will stay in the 9% to 10% range. I don't think we're going to see the [indiscernible] handle stuff that you saw pre-pandemic days. So -- but we just haven't had -- so we're not seeing enough volume out there in all three of our asset classes, obviously, as Talya said, we're seeing more in 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.

Prior to the pandemic, we never included acquisition assumptions and guidance, but we would somewhat and say, outside of guidance, we think we're going to get x amount of investments done this year, and we think most of them 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, trend data to even determine are we going to do $200 million this year, we'd do $400 million this year. It's just kind of impossible at this point. Hopefully, as we get a little bit further into the year, we'll be able to be -- have a little bit more granularity on where we think things may go. We'll have the first quarter earnings call not that far out from now. And hopefully, we'll have a little bit more data than that we can share.

[Richard Anderson, analyst]

Okay. Excellent. In terms of the spread investing opportunity, if you say 9 handle on SNFs something lower than that on senior housing. But what do you think the range of return spread -- the spread to your cost of capital will be? Is it like -- or should required to be, I should say, for you to pull the trigger on something that you like? Does it have to be 200 plus basis points? Or is that asking too much? I'm just curious where your mind is at in terms of the accretive nature of your external growth?

[Rick Matros, executive]

Yes. So we don't have a set number at our current cost of capital. The deals we're seeing are accretive to us. So that's amazing. We just want them to be accretive. And I think as we look out over the course of this year, everybody is still in recovery. So if we can do like on the skilled side, like we just did with Ignite deal in the 9% to 10% range, and we know there's more upside, even though you might say, hey, Don't you want to start out with the biggest 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 1. But as long as we know the operator, we know the market, and we see the upside there. We can see what the performance was pre-pandemic, then it's worth it to us because as you know, as we keep kind of hammering home, we just -- we need to get back to strong earnings growth.

[Richard Anderson, analyst]

Yes. Last question for me. You mentioned in the release 1.72x dorm coverage in your skilled space, excluding provider relief funds, is that at an arrears number? Is that a third quarter or a fourth quarter number?

[Michael Costa, executive]

It's a 12-month number as of September 30.

[Richard Anderson, analyst]

Okay. So I took note of the fact that, that same equivalent number was 1.6x in your third quarter release, that's quite an improvement. And it doesn't get the benefit of the Medicare starting point in October 1, if it starts for the third quarter annualized. So what would you say the reason for that big pop in coverage? Is there any moving parts in there that we should know about?

[Rick Matros, executive]

Well, there are a couple of things. A lot of our operators experience larger than average Medicaid rates in July and August. So that starts to impact it. And labor really has moderated quite a bit again, and we always keep saying this, it's still really tough out there. I don't want 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.

[Richard Anderson, analyst]

That -- could you be starting to tease a 2x number if things continue to go in the right direction?

[Rick Matros, executive]

From your lips, Rich?

[Operator]

Your next question comes from the line of Michael Stroyeck with Green Street.

[Michael Stroyeck, analyst]

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?

[Michael Costa, executive]

Sorry, for which portfolio?

[Michael Stroyeck, analyst]

For the [ SHIN ] portfolio or the Senior Housing lease portfolio?

[Michael Costa, executive]

Got it.

[Talya Nevo-Hacohen, executive]

I'm sorry, could you repeat the question? Because now that I know what portfolio you're talking about it and probably be more constructed in my response.

[Michael Stroyeck, analyst]

Yes. Sorry about that. Coverage levels they're back to 2019 in the Senior Housing lease portfolio. Our spot levels mostly captured in that trailing 12-month figure? And if not, should we expect any more meaningful improvement in coverages in that business?

[Talya Nevo-Hacohen, executive]

I think I think we're optimistic that coverage will continue to improve as operating leverage continues to drop more NOI to the bottom line.

[Michael Stroyeck, analyst]

Okay. 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, executive]

Not all hand coming up. We certainly have markets where it's still bad. But we're not seeing increases. I mean, anecdotally, 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, it might -- there was a little bit of a spike, but that's not that's not atypical for the holidays, but it came right back down.

[Talya Nevo-Hacohen, executive]

We're really seeing on the senior housing front, very almost zeroing out of agency or at least back down to sort of so-called normal levels or unaffected by the last few years because we're seeing also at the same time, more net hires filling positions that have been -- that have been vacant for some time, better retention, which is what the net hires is about. and overall just stronger ability to hire, retain and compensate permanent employees.

[Operator]

[Operator Instructions] Your next question comes from the line of Connor Siversky with Wells Fargo.

[Connor Siversky, analyst]

Maybe just to bounce back on the investment environment. It's been a pretty common theme among Health Care REIT earnings that the propensity to invest in 2024 is a dramatic improvement from, say, years prior. And in that context, it seems like Sabra's 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, executive]

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, you might as well have hung in there and wait for top line and margins to improve more.

[Talya Nevo-Hacohen, executive]

The other thing I'd add to that is we saw -- there was a lot of buying by private investors in the skilled space when debt rates were really cheap and bridge to HUD was slowing in unprecedented amounts. That, of course, has shifted in the last, whatever, 6, 8 months. And now the opportunity to provide debt or to sometimes provide equity in the sale-leaseback format has reemerged, which is where the REITs can play. And so I think that explains why you're seeing other REITs provide various levels of debt in terms of the cap stack and then why you're seeing us probably have seen more opportunities on sale leasebacks.

[Rick Matros, executive]

And for you to note, [indiscernible] that we're more conservative than our peers, I guess, shows the impact of the pandemic on our mentality because we've never been accused of being more conservative than our peers.

[Connor Siversky, analyst]

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 [ NCMA ], for example, some markets where occupancy is getting quite high. And I'm wondering if we could expect to see certain states release 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, executive]

Yes. So it's -- what I would say, there are -- obviously, there are actually quite a few markets like that. I think our portfolio in the aggregate is getting closer to 40%. 40% of the operators are or close to where their occupancy was pre-pandemic. But there is no talk right now in the States relative to change in Senior Health. Obviously, there's going to be a huge crisis in the country. And as you know, we're already seeing it in terms of the access problems in certain markets. And so there's going to have to be something different at the state level and perhaps the federal level as well.

The cost of building skilled nursing facilities is exorbitant given the level of regulation. Some states obviously have 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, and 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 don't -- we haven't heard it, and I just don't see it, Connor, I think it's just people keep on growing occupancy.

And then as I said, there will be some really bad headlines and then maybe there will 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.

[Connor Siversky, analyst]

I Guess all roads lead to increasing occupancy in the years ahead.

[Rick Matros, executive]

Yes. And remember before the pandemic, the industry, just based on demographics and the current -- at that point, what was the current rate of decline in supply, which is 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.

[Operator]

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

[Rick Matros, executive]

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

[Operator]

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