National Health Investors Inc

NYSE:NHI

Earnings Call Analysis

Increased FAD Guidance Amidst Positive Collections

The company has updated its full year 2023 guidance, increasing its FAD to a range of $186 million to $187.6 million, driven by higher-than-expected deferral repayments and collections, particularly $1 million collected in advance. While net income and FFO metrics remain unaffected, FAD benefits from rent repayments, lower rent concessions, and higher interest income. However, newly anticipated negative straight-line rental income impacts are expected due to leases entering the second half of their terms. The normalized FFO guidance has adjusted to $185.6 million to $187 million, with a midpoint per share of $4.30. The announced dividend is $0.90 a share, payable January 2024, backed by a third-quarter FAD payout ratio of 81.1%. The company maintains strong liquidity, with over $500 million in cash and credit available, and is looking towards the issuance of long-term debt to improve debt maturities.

Robust Quarter Performance and Increased Guidance

The company is reporting a strong quarter with funds available for distribution (FAD) up by 2% year-over-year and 8% sequentially, signaling exceeding expectations. They've shown confidence by increasing their FAD guidance for the year, indicating a good visibility into the robust fourth quarter.

Operational Improvements Drive Success

Improved operating fundamentals by partners have buoyed the results, with tenants like Bickford showcasing enhanced rent coverage and occupancy, hinting at a successful recovery trajectory post-pandemic. This solid operational execution has allowed some tenants to start repaying deferred amounts, suggesting strengthening operations.

Portfolio Optimization Yields Positive Results

The strategic focus on optimizing the portfolio, particularly within needs-driven senior housing, has led to the seventh consecutive quarter of improved coverage, although it still remains below the company's comfort levels. The entrance fee and skilled nursing portfolios continue to deliver strong results, underscoring a stable source of income.

Senior Housing Portfolio Gradually Improving

Despite facing earlier hurdles, the Senior Housing Portfolio (SHOP) shows three quarters of progress with notable occupancy gains. The momentum is expected to continue, as evident by preliminary outcomes, laying the groundwork for future organic growth and expansion opportunities.

Strategic Lease Amendments and Asset Sales

Efforts to amend certain leases and the sale of properties demonstrate the company's proactive approach to managing its assets and enhancing margins. Previous initiatives such as the sale of up to $400 million of underperforming assets have crucially improved portfolio quality.

Solid Financial Positioning for Growth

With a modest leverage ratio and substantial liquidity, the company is well-positioned to navigate the current interest rate environment and leverage opportunities in the well-capitalized REIT sector, staying patient with their strategy for organic growth and SHOP portfolio optimization.

Advice Amidst Rising Cost of Capital

The company notes that sellers' expectations in pipeline discussions have not caught up with the rising cost of capital, and advises a cautious approach to ensure endurance in the changing market conditions.

Future Outlook and 2024 Prospects

The company anticipates a positive trajectory for rental income growth, particularly with Bickford and ongoing discussions for lease amendments hinting at potential gains in the future. Similarly, negotiations such as those with Discovery Senior Living reflect an eagerness to align with improving operations, setting the stage for what could be favorable 2024 guidance.

Q3 Financial Highlights and FAD Guidance Update

The third quarter saw an increase in net income, NAREIT FFO, and normalized FFO, coupled with a rise in FAD buoyed by deferral repayments and lower rent concessions. The company anticipates a slight increase in FAD guidance for the full year to $186 - $187.6 million, driven by a variety of factors including higher-than-forecasted deferral repayments and lower franchise tax expenses, alongside higher interest expense. The proactive approach to managing financials is clear from their focus on FAD and the adjustments made to normalized FFO guidance, amidst a landscape of evolving lease terms and the collection of straight-line rents impacting financial metrics.

Positioned for Years of Growth

Through quality enhancements to the portfolio and strong financial discipline amid improving industry fundamentals, the company positions itself in anticipation of a period marked by exceptional growth in the coming years.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the National Health Investors Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, we are recording the call today, Wednesday, November 8, 2023. I would now like to turn the conference over to Dana Hambly. Please go ahead.

[Dana Hambly, executive]

Thank you, and welcome to the National Health Investors conference call to review the results for the third quarter of 2023. On the call today are Eric Mendelsohn, President and CEO; and Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer.

The results as well as notice of the accessibility of this conference call were released after the market closed yesterday in a press release that's been covered by the financial media. Any statements in this conference call, which are not historical facts, are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance.

All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-Q for the quarter ended September 30, 2023. Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com In addition, certain terms used in this call are non-GAAP financial measures. Reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been furnished on Form 8-K with the SEC.

Listeners are encouraged to review those reconciliations provided in the earnings release, together with all other information provided in that release. I'll now turn the call over to our CEO, Eric Mendelsohn.

[D. Mendelsohn, executive]

Hello, and thanks for joining us today. We're pleased to report a very strong quarter with our funds available for distribution or FAD exceeding our expectations by increasing 2% year-over-year and 8% sequentially. These quarterly results were driven by a number of factors, including a stable cash collection rate record deferral repayments of $2.3 million, discrete catch-up payments of $1 million from 2 cash basis tenants for past due rent and no unexpected rent concessions.

Operating metrics in the real estate investment and SHOP segments continue to trend higher, which bolsters our confidence in the organic growth opportunities. Given the outperformance in the third quarter and current visibility into the fourth quarter, we are increasing our FAD guidance for the year. John will provide more details in a few minutes.

The foundation for the higher results this quarter is the hard work of our operating partners who continue to make steady improvement in operating fundamentals. EBITDARM coverage increased sequentially across all asset classes and largest tenants. Bickford, for instance, has pushed trailing 12-month rent coverage to 1.45x and we're happy to see that their sales focus continue to drive average occupancy gains through the third quarter, including 85.2% in September, the highest it's been since the start of the pandemic.

Bickford repaid over $750,000 in deferrals during the quarter, and we expect a similar or higher amount in the fourth quarter. The portfolio's optimization, particularly within our needs-driven senior housing portfolio, excluding Bickford, continues to bear fruit with coverage improving for the seventh straight quarter to 1.09x on a trailing 12 basis. While this coverage is below our comfort level, we're generally encouraged by the trends.

These operators repaid deferrals of approximately $1.4 million in the third quarter, which we believe is a good indication that operations continue to improve. The entrance fee and skilled nursing portfolios, which contribute approximately 60% of our NOI, continue to generate great results, and this is our expectation for the foreseeable future.

Our Senior Housing Portfolio or SHOP, has certainly had its fair share of challenges and is not generating the performance we would have expected up to this point. That said, we're starting to see more consistency with 3 straight quarters of operating and financial gains. We're very happy with the momentum in occupancy, which has now grown for 7 straight months to 81.2% in September. That is an increase of over 600 basis points from the February low and the highest reported month since November of 2021. The preliminary October results show that occupancy continued to move higher as well.

SHOP is an important vehicle for organic growth and serves as a platform for external opportunities. So we're committed to dedicating the resources necessary to make these communities best-in-class. We announced last night that we are amending Discovery Senior Living's leases on 8 properties, and we continue to work closely with other tenants, particularly our cash basis tenants to optimize their cash flows. To that end, we completed the sale of 3 properties last week and have just 1 remaining property currently held for sale.

I want to remind investors that 2 years ago, I said we would be selling up to $400 million of underperforming real estate assets. We're substantially complete with that process, and I point to our improved coverage as the positive results of these efforts. The balance sheet continues to position NHI for growth with leverage at just 4.4x and over $500 million in available liquidity, we have ample capacity to deploy without the immediate need for equity. Not surprisingly, the interest rate environment has had a clear impact on the financial markets. The dearth of capital and looming debt maturities should favor well-capitalized REITs like NHI.

We will be patient and stay focused on our organic opportunities, including the monetization of our $34 million in outstanding deferral balances and the significant upside in the SHOP portfolio. We note that many of our pipeline discussions over the last year has sellers perpetually about 100 basis points behind the changes everyone is seeing in the cost of capital. That was the case this last quarter as the 10-year treasury hit 5%. We think there is an ungrounded optimism that the cost of capital increases are temporary and we are regularly advising customers to make sure they live to fight another day.

They should be realistic about the hire for longer cost of capital and the growing illiquidity in senior housing and carefully choose a partner that will work with them towards their success in the long run. In sum, we've made great strides to enhance the quality of our portfolio while maintaining our strong financial discipline as industry fundamentals continue to become more favorable, NHI is in a great position to participate in what we expect to be many years of exceptional future growth. I'll now turn the call over to Kevin to provide more details on our operations. Kevin?

[Kevin Pascoe, executive]

Thank you, Eric. I'll concentrate my comments on investment and disposition activity as well as the performance of our major asset classes and operators. We closed on the sale of 4 properties for net proceeds of $8.3 million plus $1.6 million in seller financing in the third quarter and to date in the fourth quarter. These underperforming properties were formally leased by 2 cash basis tenants, which now puts them in better financial health, thereby improving coverage, limiting future rent concessions and accelerating deferral repayment.

We currently have 1 property held for sale, which we expect to sell by the end of 2023 or early 2024. During the third quarter, we amended a loan with CFG that increased the balance from $8.1 million to $25 million and increased the rate from 9% to 10%. We are reviewing several new and recycled pipeline deals that would be immediately accretive. As Eric noted though, the interest rate environment has added more friction to the process. Fortunately, we have buyers today with plenty of capital to deploy and expect that our patients will be rewarded.

Shifting to asset management. Overall, we had a very successful third quarter with strong cash collections, driven primarily by record deferral repayments, continued occupancy and margin gains across the Real Estate Investments segment and encouraging SHOP performance. With industry trends steadily improving, we are seeing fewer tenant issues, which is allowing our team to shift more resources to the few remaining challenges. This is evident in the significant sequential improvement from the second quarter.

Reviewing the need-driven platform, which is 29% of annualized cash NOI, we again saw positive trends with coverage at 1.26x, representing the sixth straight quarter of sequential growth. Occupancy has been improving year-over-year and sequentially, and our operators expect resident rate growth to remain above average in the 6% to 8% range. The coverage increase was driven in large part by Bickford at 1.45x on a trailing 12-month basis. The Bickford occupancy trends have been excellent. Third quarter average occupancy was up 220 basis points sequentially to 84.2%, while September occupancy at 85.2% represents a 400 basis point gain from the April 2023 low.

Agency utilization is down significantly, which is helping to mitigate wage inflation and build company culture. Bickford EBITDARM coverage for the trailing 12 months which better reflects the more recent performance was 1.61x in the third quarter. Bickford's deferral repayments are based on achieving financial performance levels which we think is a good alignment of interest and allows NHI to participate more directly in the company's recovery. This has proved a successful strategy so far as Bickford's repayments have increased every quarter.

We do have a scheduled rent reset on April 1st next year and are in early stage discussions to amend the existing terms. Regardless of the outcome, we expect that our Bickford related rental income grows in 2024. Aside from Bickford, coverage is increasing across the other 37 need-driven properties. We reported coverage of 1.09x, which is the highest since the second quarter of 2020 and in the seventh straight quarter of sequential improvement.

This is certainly encouraging, but some tenants continue to require some financial assistance. As described in our press release, we are in negotiations with affiliates of Discovery Senior Living related to our master lease on 6 properties that was scheduled to reset on November 1st and individual leases on 2 other properties. While still subject to change, we are currently expecting to delay the rent reset on the master lease and temporarily reduced rent on the other 2 properties, resulting in a 10% to 12% reduction in Discovery's 2024 base rent.

Similar to the current Bickford agreement, deferral repayments are expected to be tied to financial performance to better align NHI with improving fundamentals. Continuing with our discretionary senior housing portfolio, this group accounts for 29% of adjusted NOI, including 26% from insurance fee communities. SLC, our largest tenant, increased coverage sequentially to 1.31x from 1.28x driven by another solid quarter of entrance fee sales.

Discretionary coverage, excluding SLC, which largely reflects the performance of our other entrance fee communities improved sequentially to 1.5x from 1.34x. This was driven by strong entrance fee sales during the second quarter which more than offset higher entrance fee refunds in a couple of properties that we mentioned in our last conference call.

The SNF and specialty hospital portfolio, which represents 35% of annualized adjusted NOI, reported solid coverage at 2.62x, which improved sequentially from 2.48x. The move higher was generally across the portfolio, driven primarily by NHC's coverage of 3.29x, up from 3.02x. The 1 SNF operator that received a rent deferral has now fully repaid the balance. We are communicating frequently with SNF operators to better understand the potential impact proposed of [indiscernible] and action plan. The proposed rule [indiscernible] owners was better than [indiscernible], especially with the [indiscernible] time frame to prepare.

Given strong coverage and exceptional operators in our portfolio that are constantly adjusting to regulations, we do not expect disruptive [indiscernible]. [indiscernible] in our SHOP portfolio, we are generating sustained operating and financial improvement throughout the portfolio with our partners, Discovery and Merrill Gardens.

As detailed in the earnings press release, monthly occupancy has been building momentum since February. The SHOP average third quarter occupancy increased 350 basis points to 79% and ended on a strong note with September occupancy at 81.2%. This is setting up for a positive fourth quarter as preliminary results indicate further gains in October occupancy to 82.2%. The third quarter NOI margin improved sequentially by 90 basis points to 18.8%, driven by a 4.9% resident revenue growth and a 3.7% increase in operating expense.

Our focus continues to be on driving occupancy higher, which is [indiscernible] growth. As the early effects of [indiscernible] fall off, we expect operating margin growth to give significant operating leverage in the independent living [indiscernible] long-term view was that the portfolio can generate NOI dollar in the high teens on margins [indiscernible] range which has remained unchanged. I'll now, turn the call over to John to discuss [indiscernible] results of [indiscernible]. John?

[John Spaid, executive]

Thank you, Kevin, and hello, everyone. For the quarter ended September 30, 2023, our net income, NAREIT FFO and normalized FFO per diluted common share were $0.68, $1.08 -- and $1.08 per share, respectively. For the third quarter, our FAD was $48.2 million. Our third quarter FAD increased by $3.6 million compared to the second quarter of 2023. When compared to the second quarter of 2023, third quarter FAD included $2.3 million of deferral repayments, which was an increase of $1.6 million.

The third quarter also benefited from the receipt of $1 million of discrete payments from 2 tenants on the cash basis of accounting. $800,000 in lower rent concessions and $300,000 in higher interest income. The SHOP portfolio's NOI improved modestly to $2.3 million in the third quarter from $2.1 million in the second quarter of 2023.

The SHOP CapEx increased by approximately $450,000, so the impact to FAD was a decrease of $200,000. We also benefited from lower expected franchise tax expense which was $250,000 lower in Q3 compared to Q2 and will continue to benefit our results through the end of the year.

I want to mention 2 items today, which we'll be talking more about as we end the year and issue our 2024 guidance in February. First, we recognize rents from cash basis tenants as received, which include any repayments of deferrals and which impact net income, FFO and FAD when collected. For all other tenants, rental income, including any outstanding deferrals collected is recognized on a straight-line basis. That means any repayment of deferrals collected in advance of one contractually owned will positively impact FAD in the period received but have no effect on our net income or FFO metrics.

Remember, GAAP rental income generally remains consistent from period to period. So the increased cash collected is therefore offset by a corresponding decrease in the straight-line rent revenue component. Of the previously mentioned $2.3 million in Q3 deferral collections approximately $1 million was collected in advance of when contractually owed, thus benefiting FAD, but not net income or the FFO metrics.

Second, in the past, the company's new lease investment activity helped offset the eventual negative, noncash revenue impacts that generally occurs for leases in the second half of their lease term. Base cash rent collected in the second half of a customer's lease term will exceed the GAAP rental income amount, resulting in a negative noncash straight-line rental income. For example, the straight-line rents receivable associated with senior living communities was approximately $40 million as of September 30. Senior Living Communities, plus an increasing number of our leases are entering the second half of their lease lines, and will be generating increasingly more negative noncash straight-line rental income, which represents a reversal of the collection of the built-up straight-line rent receivables.

[indiscernible] lease modifications, our new leasing activity with minimum rent escalators, we expect the company will have negative noncash straight-line rental income, resulting in a growing negative variance between our FFO and FAD metrics.

Turning to the quarter's disposition. During the third quarter, we sold one property for $2.9 million in net proceeds and a $600,000 gain. Subsequent to the end of the third quarter, we closed on the sale of 3 additional properties for $5.4 million in net proceeds, plus $1.6 million in seller financing, yielding 9% on 1 of the transactions. NHI currently has 1 property classified as held for sale with a net book value of $5 million and a contractual fourth quarter rent of approximately $300,000.

Last night, we updated our full year 2023 guidance. Our guidance reflects the repayment of prior deferral balances consistent with levels experienced in the first 9 months of 2023 or approximately $1 million. Our guidance includes continuing asset dispositions and loan repayments, additional rent concessions and continuing fulfillment of our existing commitments, but it does not include any additional unidentified investment.

Finally, our guidance also includes the impacts due to the discovery lease amendments through the end of the year. In February, we'll have more to say on these amendments when we issue our 2024 guidance. We increased our FAD guidance to a range of $186 million to $187.6 million. The slight increase is driven primarily by higher than forecasted deferral repayments and collections from 2 cash basis tenants, lower-than-expected rent concessions, and higher interest income, primarily from the amended CFG loan agreement, lower franchise tax expense, offset by higher interest expense.

We focus a great deal on our FAD results because we feel FAD provides a better picture into our operating cash flow, including routine capital expenditures and our share of the cash flows generated from our unconsolidated activities, all of which support our dividend. We also adjusted the range for our normalized FFO to a range of $185.6 million to $187 million. On a per share basis, this equates to a midpoint of $4.30. The updated normalized FFO guidance reflects improved cash basis and deferred rent collections as well as a reduction in straight-line revenue due to the acceleration of contractual deferred rents collected early and an increase in the credit loss reserve related to 1 nonperforming loan.

Remember, we recognized the expense and income due to changes in our credit loss reserves in all of our FFO metrics, which creates increased volatilities in these metrics from time to time. When compared to our initial February 2023 midpoint guidance for NAREIT FFO and normalized FFO, our November midpoints provided last night or $0.08 and $0.03 higher. While we saw some volatility in our guidance this year, we continue to be focused on over delivery.

For the third quarter, our leverage ratio was 4.4x net debt to adjusted EBITDA, a slight improvement from 4.6x in the second quarter. At the end of October, we had $194 million outstanding on our $700 million revolver, providing ample liquidity of over $500 million in cash and revolver availability. We also have a full $500 million available under our ATM program. On November 3, we paid off $50 million of maturity private placement notes using our revolver.

As previously mentioned on prior calls and after this retirement, our variable interest rate debt today represents approximately 39% of our total debt capital stat. Our strategy continues to be to look to a new long-term debt issuance that will improve our average debt maturities in the next year. In the meantime, we are benefiting from our balance sheet's low leverage to offset the negative impacts from higher than longer short-term interest rates.

Finally, our third quarter FAD payout ratio was 81.1%. As we announced last night, our Board of Directors declared a $0.90 per share dividend for shareholders of record December 29, 2023, and payable on January 26, 2024. That concludes our prepared remarks. So once again, thank you for joining our call today. With that, operator, please open the lines for questions.

[Operator]

[Operator Instructions] This question comes from Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, analyst]

Just wanted to ask about Discovery. Kevin gave some parameters on the potential decrease in rent. But just curious how large the contractual in-place rents are today. Is the lease and a couple of assets being discussed represent all of your triple-net exposure to discovery that's outlined in kind of the pie? And kind of part 2 of this question is, can you quantify the potential other tenants in terms of size of rents that are being discussed as kind of the last [indiscernible] dealing with some of the COVID adjustments?

[Kevin Pascoe, executive]

Sure. Juan, this is Kevin. Just to make sure I understand your question. I mean -- so as we said, we have 8 buildings with them. They represent about 4% of revenues. We're looking at a modest reduction on the cash pay side with some upside on revenues to -- as they continue to improve. And one thing I would highlight is they have been able to improve both occupancy on our triple net and our SHOP side. But again, I want to make sure I'm answering more specifically the question you had in order of magnitude was what again?

[Juan Sanabria, analyst]

No. I just wanted to make sure that the 10% to 12% reduction you kind of highlighted was applicable to the full 4% of revenues that Discovery represents, not a subset. So that answers it. I guess, the Part B was, I think there was an allusion to maybe some other smaller tenants that may need to have some sort of production, whether temporary or permanent, how big that potentially could be? Just to quantify the potential net impact from the third quarter run rate?

[Kevin Pascoe, executive]

I guess the way I would characterize that is more around looking at the coverage that was in place being at the 1.09x exclusive of Bickford. While things have improved quarter-over-quarter, it's not exactly where we want things to be. So while I would say that there's not one specifically that we're overly concerned about. It's more of a, I'd call an allowance for doubtful accounts where you have a little bit of a reserve. We've seen that number come down significantly.

As we talked about this quarter, we didn't have any unscheduled concessions. So we're -- I think we're on the right trajectory. We're also just being cautious in the way we're managing the portfolio and communicating with the Street.

[Juan Sanabria, analyst]

And then on the SHOP business, just curious if you could talk about the rate environment to drive the new customer volumes and the occupancy really ramp up and kind of how the 2 operator discovery in Merrill Gardens you're thinking about annual rate increases versus last year? Just to give us a sense of, again, how pricing is changing.

[Kevin Pascoe, executive]

Sure. I mean as we've highlighted, the priority has really been to get occupancy up. So if you look at our published materials, you see that the RevPOR is up slightly, but fairly flat. So it's been a push to get the occupancy I would characterize the pricing that's been in place as more onetime concessions to get those. So we'll still have our normal increases we're in our budgeting process. Now I would expect on the whole that you'll see something along the lines of what I mentioned in my prepared remarks in terms of in-place increases.

But the fact of the matter is that we're still, again, trying to push that occupancy and using some onetime incentives to get occupancy up, which will -- I would think we'll keep RevPOR a little bit flattish for the near term.

[Juan Sanabria, analyst]

Okay. Great. And then just one last one, if you wouldn't mind. Bickford, we've talked about in the past with regards to their credit profile outside of NHI and stress they've had. Any latest thoughts on how that stands and risk to the OpCo given, again, outside of the NHI lease.

[Kevin Pascoe, executive]

Sure. This is Kevin again. I think as we've articulated in prior calls, they do have some owned properties that have bank financing on them. So again, as we've acknowledged the banking environment is difficult right now. Rates are going up. That does put a little bit of pressure on the cash flow. But we've worked really hard to effectively silo off our portfolio from those effects.

There are some things that they're still working on in terms of some maturities they have over the next year or so. They'll need to work with their banking partners to extend and modify those loans. I know they're in those discussions right now. So stay tuned. That said, I feel like as we can show in our information. They're on much better footing now and they're headed in the right direction.

[Operator]

Our next question comes from Richard Anderson with Wedbush.

[Richard Anderson, analyst]

The situation was -- I'm getting some feedback here. Let me turn it off. [Technical Difficulty] Okay. The situation on the discovery, both in the SHOP and the triple-net categories. Would you be able to draw a parallel in terms of how they're performing and sort of the reasons why you're kind of giving some rent in the triple-net space? And also how SHOP is sort of not quite keeping up with the growth profile that you were hoping? Is it sort of a common knitting with Discovery and specifically how they're operating their asset?

[Kevin Pascoe, executive]

Sure. Rich, this is Kevin. So one thing for Discovery, I will note is they've seen occupancy improvement on both the triple-net and the SHOP side. We've seen more velocity on the SHOP side so far this year than we have on triple-net. That -- we also had one of our first amendments that we made during the pandemic was in this portfolio where we allowed for a reset, we needed a little more velocity to get to where that rent step-up was going to be. And frankly, the portfolio -- the triple-net portfolio just hadn't made it yet.

So we're looking to just push out that step up for a period of time, allow the momentum to continue to build on the occupancy front and then we can reprice. But in the interim, like we did with Bickford, which has worked well we'll be able to have some revenue participation over a threshold where we start to get some additional deferral repayments.

So not what we wanted to see. The fact of the matter is, I think some of it is timing, some of it is just local markets. We have seen a lot more occupancy improvement out of the SHOP portfolio. I would say, furthermore, I mean, I think Merrill and Discovery are doing a good job on SHOP. Merrill had similar challenges on the front end in terms of gaining occupancy within the -- that portfolio. So there are some things we're focused on within that relationship. I don't think, at least as it relates to SHOP they're an outlier in terms of their improvement when just benchmarking them against the other operating partner we have there. I think those properties needed a lot of time and attention to get going in the right direction, and we're finally getting there.

[Richard Anderson, analyst]

Okay. Good enough. So maybe an accounting question for John. You mentioned SLC negative straight-line rent during the second half of their lease term. But is that -- did you make any comment about negative straight-line rent for all of the portfolio when you net it all together or just for SLC, maybe a few others?

[John Spaid, executive]

No, I was making a broader comment. And I just wanted to mention that there's been maybe an assumption that straight-line revenue is always positive. So the expectation going forward, you should see it flip to negative.

[Richard Anderson, analyst]

Okay. That's good to know for modeling purposes. And then just so I can recall correctly, you mentioned the $34 million outstanding deferred balance that remains after everything that's happened this past quarter. I recall when you guys were going through this that you were not recognizing deferred rent in current period quarterly results and leaving open the opportunity that you might actually have like a doubling up scenario when you start to get deferred rents paid back in, say, third quarter of this year on top of what present tenants rent payments. Is that what's going on? Or did you flip that accounting treatment at some point along the way where you're not going to have a doubling up scenario on a go-forward basis?

[John Spaid, executive]

So we transitioned from the pandemic relief provisions provided to us to typical lease amendment under 842. And so during 2022, at the very beginning of the year, we started talking about how some of those modifications to the leases would mean that the deferrals are going to be brought on to our balance sheet through straight-line revenues.

Now we had a lot of things happened at the very beginning of 2022, including the transition of Bickford to cash basis. So we didn't get an opportunity to more publicly sort of pronounced what was happening there. But I think given the results today, we wanted to come back and talk about that again and basically make sure you understand that we have 2 groups of deferrals. We have deferrals that we collect from our cash basis tenants, the ones that are sort of variable in nature. Those flow through everything from net income to FAD.

But we have the deferrals that are a part of our GAAP revenues that are being brought into our straight-line revenues that when we early received them, have no impact on net income or FFO metrics. So we felt like given our results, this is a great time to come back and readdress this situation and highlight it.

[Richard Anderson, analyst]

And so that's the $1 million that you got early, right?

[John Spaid, executive]

That's right.

[Richard Anderson, analyst]

Okay. And then finally for anyone in the room, just a broad question. You've had some success about occupancy lift in senior housing. But if you were to recall how you were feeling 1.5 years ago, would you agree that the low-hanging fruit of occupancy recovery has happened, but it's been really difficult to sort of get back to where we were pre pandemic. I know everyone talks about this high 80s occupancy level for senior housing. I don't know if there's anything magical about that except for the fact that it happened to be the number, pre-pandemic. But do you think that the path to get back to some sort of stabilized number, whatever it is, is taking longer than you thought or any one thought? Or is it sort of tracking the way you expected it was going to track a year or 2 ago?

[D. Mendelsohn, executive]

Rick, This is Eric. Good question. I agree there was kind of a head fake last December. When we were talking to our operators, they were sure that there would be a steady drumbeat of increased occupancy all year. And if you recall, there was another variant, more flu and the occupancy kind of lost steam.

However, this past quarter has made me a believer that there is pent-up demand. If you would have told me that we would have over 300 basis points of improvement in our SHOP portfolio and 4, 5 points of improvement in Bickford in one quarter, I would have bet against that. So I would urge you to suspend your disbelief for another quarter and see what happens if this is a trend.

[Richard Anderson, analyst]

Okay. Suspended.

[Operator]

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Great. On the $34 million deferral balance, does that include the balance from tenants on a cash and GAAP basis or just only from a cash basis?

[John Spaid, executive]

So it was Austin, right? Yes. Austin, this is John again. It's everything.

[Austin Wurschmidt, analyst]

That's everything. Can you give us the breakdown of what percentage that is between cash and GAAP-based tenants?

[John Spaid, executive]

Let's work on that. We've been talking about doing just exactly that. But I'm not prepared yet to do that on the call.

[Austin Wurschmidt, analyst]

That's fair. And then just wanted to check the math. So the 10% to 12% decrease in adjusted rent in the rent for Discovery, is that about a $1 million decrease and then offset by any future deferral repayments? And then can you also share what the contractual increase was on the master lease with Discovery that you intend to push out to a later period?

[Kevin Pascoe, executive]

Sure. Austin, this is Kevin. Your math is in the right ballpark there. And then the step-up was significantly more, hence, why we're having to push it out for a period of time. Their original lease payment on the master lease portfolio was around, I believe, is about $3 million more. So I mean there's a step-up that would have to -- that was looming that, frankly, the properties just weren't ready for, and we want to make sure that they get healed and we're working with our operating partners in an appropriate fashion to get there. So we're looking to move that out for a period of time and let these continue to move on the occupancy front.

[Austin Wurschmidt, analyst]

No, that's helpful. And then just, Eric, you highlighted the SHOP segment kind of serves as a platform for external opportunities and you're now a believer. And I guess I'm just curious, as you talk with the Board, I guess, how close do you think you are to executing on SHOP acquisitions? And do you feel like you're able to complete -- compete in the market for senior housing deals as kind of your existing cost of capital?

[D. Mendelsohn, executive]

I think if we can have 1 more quarter of positive momentum like we've demonstrated that we can get the Board there. They're very, very excited about what's been happening and some of them have even been visiting buildings. So there's an intense level of interest in this as a new growth avenue.

[Austin Wurschmidt, analyst]

And then can you just kind of comment on your ability to compete today? And then also, would you look at new operators to the platform or just expanding with your existing partners? And that's all for me.

[D. Mendelsohn, executive]

Both. There's a lot of good operators out there that don't want to sign a lease, and we're well aware of that. So if we can partner with them or joint venture with them, on better product and better markets. I think that's an exciting way to grow.

[Operator]

Our next question comes from Connor Siversky with Wells Fargo.

[Jesus Garcia, analyst]

Jesus on for Connor this morning. So just on the asset acquisition side, activity for real asset acquisitions and developments has been muted over the past couple of quarters here. So just talk about the more recent trends. I think before you guys kind of highlighted that there was difficulties in the supply chain kind of getting stuff moving. So just -- is that still kind of creating obstacles? And just how should we think about you guys stepping the foot on the gas pedal here into fourth quarter and 2024?

[Kevin Pascoe, executive]

Sure. This is Kevin. The issue has just been, as Eric kind of highlighted the sellers coming to grips with the new cap rate environment. Furthermore, operations, still, frankly, healing as people -- or as groups have continued to improve occupancy, NOI has followed, but I don't -- I wouldn't think -- where there's not as much NOI dropping to the bottom line with those incremental residents.

So there's a little bit of a pro forma impact that I think a lot of people are wrestling with when they think about what is community look like on a stabilized basis. So there's a lot of back and forth between buyer and seller about what the real value is in prospective value. I think we've effectively disabuse people of looking back to 2019 at this point, which is good. But there's still just some underwriting back and forth.

One thing that we've looked at is maybe using some more debt as a vehicle to get it into the building or into the deal, so to speak, and let it season a little bit. That way we have our foot in the door when they are ready to truly sell. So we're looking at some different ways to try and get in with some operating partners, both new and existing -- working on different structures that might be appealing to them. But there is still that push/pull, I think, operator or operators are starting -- or sellers are starting to come around to what the new dynamics are. But we're also, as Eric alluded to, just being cautious on our underwriting and what the operating fundamentals are going forward.

[Jesus Garcia, analyst]

Appreciate the color there. And just kind of switching focus to the SNF on the -- there was a big lift on the coverage side. You guys are approaching 80% occupancy, although it's [indiscernible] one quarter lag. Any moving parts or tenant specific situations that led such a healthy sequential improvement there? And what's the latest you're hearing from your operators in the skilled side of the portfolio overall?

[Kevin Pascoe, executive]

Sure. This is Kevin again. The biggest lift is going to be attributable to NHC just because of their concentration in the portfolio and their -- how that factors into coverage. Good to see their coverage has been down a little bit for them anyway, but still very strong. Seeing occupancy improvements, seeing labor start to level out a little bit. That's kind of been across the spectrum on both assisted or on senior housing and skilled nursing. So also very good news.

So I think those are the bright spots. There's been a few states that we're -- we have communities in that have seen some rate increases on both the federal and state levels. So again, good news there. I think the overhang and we addressed it a little bit in the comments is just what's going to happen with the staffing mandates. Think our operators are devising plans and prepared for it, making comments during this common period to make sure their voices are heard.

So if there's, again, an overhang, it would be just how do they prepare for that. But given the coverages we have with particularly our 2 main operating partners, we're not overly concerned, but we are staying in touch with them and making sure we understand what they're seeing.

[Operator]

[Operator Instructions] Our next question comes from Joe Dickstein with Jefferies.

[Joseph Dickstein, analyst]

Maybe just switch gears to SHOP OpEx. It looks like it accelerated a bit this quarter to roughly 9%. Maybe if you could just touch on labor costs and your operators agency labor exposure would be great.

[Kevin Pascoe, executive]

Sure. This is Kevin again. So you're asking specifically about the SHOP and labor there?

[Joseph Dickstein, analyst]

Yes, correct.

[Kevin Pascoe, executive]

Yes. Fortunately, for us, in the independent living model, we don't have a ton of agency needs. We have seen a little bit of labor pressure in terms of having to pay some higher wages across the Board in most positions. But given that there's not a level of care component, we're not having to hire nurses or if somebody calls out of a shift, there's ways to kind of reorganize the labor pool that you have instead of having to get that agency labor. So it's a pretty small number for us there and not really been a big headwind.

The headwind, if there is one, is really just having to pay a little bit higher pay rate. But that said, I think our operating partners have done a good job of filling the open roles, making sure they have enough staff, revamping the teams where they need to be, which I think is what you're seeing in the occupancy improvement is that they've gotten their sea legs and have the teams set. So I feel like we're in a pretty good place there.

[John Spaid, executive]

Joe, this is John Spaid. Maybe I can tee-up a better question here for Kevin, on your behalf. We've seen some dramatic improvements in labor elsewhere, and that's by -- and evidence of that is through the coverage ratios that you're seeing improved for Bickford. So maybe Kevin can talk more specifically there.

[Kevin Pascoe, executive]

Sure. One specific item, I guess, I can mention as it relates to Bickford, there was a point in time where we were looking at 1,500 hours a week or so of agency labor. That's down to like a couple of hundred, now I believe, in the most recent period where we look at it almost every week with them, so we understand what's going on in their business.

So dramatic improvement on the agency side there, one week does not make a trend. But the overall trend is very positive. And I think that's a good proxy for what we've seen with some of our other operating partners is that agency usage has come way down. They're actually able to start recruiting caregivers from the agencies instead of vice versa, which was a problem for a lot of our operators there for a while. So it's seemingly settling down quite a bit.

[Joseph Dickstein, analyst]

Great. And then just one more for me. Deferral repayments increased to $2.3 million from $700,000 last quarter. How should we be thinking about this on a go-forward basis, should be closer to that $2 million number or kind of moderating lower?

[John Spaid, executive]

So I gave you a number in my prepared remarks for the fourth quarter of approximately $1 million. We're going to try to over deliver on that number, but that was in my prepared remarks.

[Operator]

There are no further questions at this time.

[D. Mendelsohn, executive]

Thanks, everyone, for joining us today, and we'll see many of you at NAREIT next week.

[Operator]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.