SBRA - NASDAQ

Good day, everyone. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the

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-Ks for the year ended December 31, 2023, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-Ks we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances. 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-Q, earnings release, and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, CEO, President, and Chair of Sabra Healthcare REIT.

Thanks, Lukas, and thanks, everybody, for joining us. To start, I would note that we have now had several quarters in a row of continuing improvement in all of our primary asset classes. We have really distanced ourselves from the pandemic. We are hitting highs in several statistical categories.

So we really feel good about where we are right now. Occupancy for our SNF portfolio was up 130 basis points sequentially. Our skill mix continues to increase, up 110 basis points sequentially, and higher now than it has been for quite some time. Occupancy for our same-store shop portfolio is up 90 basis points sequentially, and margins in both those portfolios continue to strengthen. Occupancy in our triple net senior housing has been hovering around 90% for four quarters now. Our EBITDA coverage for our skilled nursing and triple net senior housing portfolios at 1.94 and 1.37, respectively, are at levels that are much higher than we have seen for years, certainly well before the pandemic. As noted in the press release, only Avamere of our top ten saw a decrease, but that was specifically due to the percentage rents that we have been receiving and was still a strong 1.87. I think the fact that we have been getting percentage rents for a number of months now as anticipated, and yet they still have rent coverages as high as it is, shows that this particular lease restructure worked out really exactly as anticipated, and our safe in the operator certainly has been rewarded. Coverage and occupancy in our behavioral and other category were essentially flat, occupancy stabilized, and the addiction treatment center that was added to the pool last year. Our leverage has continued to decrease. We increased guidance at the midpoint and have strong growth at something over 6% on a year-over-year basis, and we expect that to carry over into 2025 as well. Investments for the quarter, both new and previously announced, totaled just under $100 million. We are now seeing more activity in our investment pipeline in past months, primarily deals of one or two assets, which start to see some more portfolio opportunities as well as more off-market opportunities. As we have talked about really all year, we are really focused on doing high-quality investments with good yields and operators that we really trust. We are not interested, nor do we need to do larger portfolio deals. Usually, at least some portion, if not most of the facilities in those larger portfolios, do require a lot of work, and we just do not need that noise around us right now. And the way we have approached our investments to date and will continue to approach them, all of which is helping fuel the year-over-year growth that we are seeing and expect to see going forward. There are older assets, primarily shop, and much of what we are seeing in the pipeline. But as I said, we will look at those, we will continue to look at those, but we are just going to stay focused on what we have been doing, which is high-quality, newer vintage assets. We are starting to see enough skilled nursing opportunities, although not dramatically so, and are committed to doing skilled investments as well. And with that, I will turn the call over to Talya.

Thank you, Rick. Sabra's 84-property managed senior housing portfolio, including joint ventures at share, had a strong quarter. On a sequential quarter basis, the total managed portfolio, including non-stabilized communities and the joint ventures assets at CHF, had a 140 basis point increase in occupancy along with 60 basis point growth in cash NOI margin. Sabra's managed portfolio continues to grow through the addition of high-quality, well-performing properties while operations continue to improve within the existing portfolio. Sabra's same-store managed senior housing portfolio, including joint ventures at share, had excellent results this quarter. Excluding non-stabilized assets, the headline numbers are revenue for the quarter grew 7.6% year-over-year, with our Canadian communities growing revenue by 10.8% in the same period. Occupancy in our assisted living and independent living portfolio was nearly even at 84.1% and 84.9%, respectively. Cash NOI for the quarter grew 17.8% year-over-year, above last quarter's results. In our US communities, cash NOI grew 15.3% on a year-over-year basis, while in our Canadian communities, cash NOI for the quarter increased 24.8% over the same period, benefiting from the strong performance of our joint venture properties. RevPOR in the third quarter of 2024 had robust growth of 4.2% year-over-year, while ex-POR was nearly flat for the same period. The minimal increase in ex-POR is a function of occupancy growth and limited cost increases, reflecting the impact of operating leverage across this portfolio. We continue to see strong revenue increases across our senior housing portfolio, accompanied by very modest expense growth. With operators skillfully balancing the levers of occupancy and rate to achieve continued outsized cash NOI growth, we believe that the portfolio as a whole has reached the point where operating leverage will contribute materially to cash NOI growth. As Rick mentioned, our net leased stabilized senior housing portfolio continues to thrive with consistently rising rent coverage, reflecting the underlying operational recovery. Sabra's total investment in behavioral health remains static this quarter. We see growing interest in this asset class among real estate investors as well as brokerage firms, which have staffed up to cover the sector. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Thanks, Talya. For the third quarter of 2024, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.37. This represents a $0.01 increase to normalized AFFO per share from our second quarter results and year-over-year growth of 9% on the back of steady improvement in our managed senior housing and continued stability in our triple net portfolio. In absolute dollars, our normalized AFFO totaled $86.9 million for this quarter. I would like to highlight a few key components of this quarter's earnings. Cash rental income from our triple net portfolio totaled $91.8 million for the quarter, which was better than the $90 million quarterly run rate provided on our second quarter call, driven primarily by percentage rents collected during the quarter. NOI from our managed senior housing portfolio totaled $22.9 million for the quarter, compared to $20.8 million last quarter. This increase was driven by the addition of the two-property portfolio we acquired for $75.8 million at the beginning of the third quarter and continued sequential same-store growth. Recurring cash G&A was $9.5 million this quarter, slightly better than the $10.4 million per quarter run rate provided on our second quarter call. We expect fourth-quarter recurring cash G&A to be closer to that previously provided run rate. As noted in our earnings release, we updated our full-year 2024 guidance on a diluted per share basis as follows: net income, $0.48 to $0.49; FFO, $1.35 to $1.36; normalized FFO, $1.39 to $1.40; AFFO, $1.41 to $1.42; and normalized AFFO of $1.43 to $1.44. This represents an increase at the midpoint of our normalized FFO per share and normalized AFFO per share guidance of two pennies and one penny, respectively. At the low end of our range, our triple net cash NOI for the fourth quarter is approximately $90 million, which is the same as the quarterly guidance we provided last quarter and conservatively assumes no percentage rents are collected. This triple net cash NOI assumption is in line with the actual results of the third quarter, excluding percentage rents as noted earlier. Our guidance incorporates all announced investment and disposition activity as well as announced activity under our ATM program and does not assume additional investment, disposition, or capital transactions beyond those already disclosed. Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 5.3 times as of September 30, 2024, a decrease of 0.15 times from June 30, 2024, driven primarily by the continued NOI growth in our managed senior housing portfolio. Steady and continued improvement in our balance sheet strength, together with increasingly attractive industry operating dynamics, was a key driver to Moody's recent upgrade of our outlook from stable to positive. As of September 30, 2024, we are in compliance with all of our debt covenants and have ample liquidity of $947.8 million, consisting of unrestricted cash and cash equivalents of $63 million, available borrowings of $847.4 million under our revolving credit facility, and $37.4 million related to outstanding forward sales agreements under our ATM program. This year, through September 30, 2024, we utilized the forward feature on our ATM program to allow for the sale of up to 7.3 million shares at an initial weighted average price of $15.41 per share, net of commissions. As of September 30, 2024, we had $386.7 million available under our ATM program. Finally, on October 31, 2024, Sabra's board of directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 29, 2024, to common stockholders of record as of the close of business on November 15, 2024. The dividend is adequately covered and represents a payout of 81% of our third quarter normalized AFFO per share. And with that, we will open up the lines for Q&A.

We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nick Yulico with Scotiabank. Your line is open.

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

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

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

Yeah. I think all the rating agencies, they obviously have their different pain points or areas they are focused on in terms of leverage levels and debt service coverage levels. But those are probably the two main aspects that they are focused on, which is going to be where our leverage is at, what the trajectory of that leverage is, and then our fixed charge coverage ratio, both of which are, by themselves, investment-grade rated. And I think for Moody's, what they want to see is that sustain and continue to improve as it has the last couple of quarters. Getting that positive outlook was a big step in that direction. And we are hopeful, at some point in the near future, the next step with them, which would be investment grade, is forthcoming.

Okay. Got it. Thank you. And that is it for me.

Our next question comes from the line of John Pawlowski with Wells Fargo. Your line is open.

Thank you. Maybe if we could just start on the shop guide going back to that. You know, it looks like another good quarter, and at the beginning of the call, you mentioned RevPOR up 4.2% and ex-POR relatively flat. I guess, could you talk about what was underlying your expectations coming into the quarter? What did this performance look like? I know your guidance is a little bit vague. Maybe does this number land a little bit higher than lower than the midpoint of your expectation? And is there a little bit of conservatism in not updating your guidance here?

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

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

This is Talya. I think the opportunity remains robust, particularly while the cost of debt remains relatively high compared to what it had once been. That really pulls the leverage buyers out of the market or forces them to bid at prices like you have seen our initial yields. So I think that is the positive right now. So with our cost of capital, I think we can be quite competitive, and you have seen our peers be quite competitive as well. We are being selective, but we are seeing some high-quality new or newer vintage assets, particularly in senior housing, that are performing well, either stabilized or close to stabilized, so that we feel that we are getting a strong yield with a very low-risk profile in place and going forward. Now I think the opportunity set is large. I think that the private equity funds are, I am sure, salivating and wanting to execute, but the pricing is still tough. We are seeing them still be sellers into the market. And we will see what happens. It is all about the cost of debt.

And the only other thing I would mention is everything is connected, right, John? So our performance has been really solid these last several quarters. Our cost of capital has improved, and that is going to make it that much easier for us to compete and do more going forward. But even though we believe we will be able to do more, and per Talya's comments, we are still very committed to being very selective, to not doing anything that is going to create a lot of noise because of the work involved or because of the structures that have to be put together to make it happen. And I think that is a commitment that we have made to our investors starting last year as we started exiting the pandemic. And we have gotten a lot of support and very positive feedback about that, and we are just not going to veer off course. And if staying on this course produces this kind of earnings growth, even at the midpoint, which is at the higher end of the REIT world, I think it is a good strategy.

Got it. Thank you.

Next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open.

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

Yeah. I think behavioral is not a target for acquisition for us right now. As you recall, I have spoken in the past about it. It began as a vehicle for us to reuse existing assets that were no longer viable as other skilled nursing or senior housing. That is a fixed amount of assets, so we have depleted that, and we have converted those. So right now, we are sitting tight on that. The opportunities in that arena are rarely of institutional quality these days in terms of acquisitions. And the opportunity set is very much in senior housing and skilled nursing today. On the skilled nursing front, in terms of volume and what we are seeing and how come we have not executed billions of dollars versus what we have seen, it really goes to being selective, understanding the risk in some of the assets we have seen because they really tranche out into assets that are challenged, whether they are skilled or senior housing, reference that. Which is not those have not been risks we have been willing to undertake. Most of the higher quality assets we have been bidding on. Sometimes, we do not win the bid, but we are generally right there, and it has been our choice whether to pursue or not pursue.

Yeah. I had a couple of other comments. On behavioral, we have been in it long enough to come to the conclusion that there is a very particular model that we like from a capital perspective, and that is what we had with two of our partners. The operating platform is owned by a private equity fund. We like that relationship because there are deep pockets other than us that were in the deal. So if we can find more opportunities like that, we will pursue them. Those are very, very few and far between. As everybody knows, most operators in the skilled and senior housing business do not have much in the way of balance sheets, but you have got operators in a very good bit over a long time, and that gives you a lot of confidence. But in the behavioral space, most folks are new and untried, and there just is not a history there. So if we can find more opportunities like we have with two of our partners, that is great, but we expect them to be few and far between. On the skilled side, I would also just add to what Talya said. Most things are still off-market. There was a big portfolio recently that everybody saw. We saw that too. We just chose not to do it. We just did not think it was right for us. We are starting to see some more skilled opportunities, but they just have not been that great yet. So we are not really holding back. As we have been saying, we are being selective, and most of the good opportunities that we are seeing are on the shop side. So as soon as we see better opportunities on the skilled side, we expect to see more of those. As NOI continues to stabilize and folks that have not had to sell feel comfortable putting their assets in the market, you will see more skilled deals.

It is all really helpful. I mean, how should we take your comment about the fact that you stated we are seeing more portfolio opportunities, but then I think you said we are not as interested in those deals and all that comes with it. Can you just marry those two comments, please?

Well, yeah. The portfolio deals that we have seen have some hair on them. You know? And at this point, you know, where we are developmentally as a company, we have taken big swings in the past. We felt it was necessary because of other circumstances. And we were willing to take on the work to do that. But we do not need to do that now. We need to be focused on doing the kinds of deals that give us durable and sustained earnings growth, of high quality, and, you know, that is kind of good. And it is, you know, let others do the stuff that requires a lot of heavy lifting.

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

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

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

Hi. Good morning. Just on the shop business, curious if you have any early signs or thoughts on how RevPOR could trend given I am assuming you are already talking about or have sent January 1 rate increases here. So just curious about your thoughts on whether pricing could actually accelerate or hold or how you guys are thinking about it.

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

Okay. Great. And then just on the seniors housing triple net side, it looked like occupancy dipped a little bit sequentially. Could you just give a little backstory as to that? And then as part of that, what is the backstory or the driver for percentage rents just to think about that on a go-forward basis?

Yeah. So your first question on senior housing lease, I mean, it went from 90% last quarter to 89.6% this quarter. So not a real meaningful drop and pretty steady if you look over the last two to five quarters. You know, 90% is a pretty healthy occupancy for that facility type. So nothing really to point to there and nothing of concern at all as far as that goes. It is a small pool of assets. So you know, any movement by any facility affects the whole pool. These also are not big facilities. So all that kind of goes into it. But if we have a steady state around 90% going forward, I think we will be pretty good with that. Right.

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

And we have a long window on making that decision. It is at least a couple of years. So we will have a lot of time to monitor that.

Thank you, guys.

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

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

So the increase in occupancy, there has never been a need or referral issue. It has always been a function of labor and how much labor is available to admit as many patients as possible. So, yeah, it is just that labor has gotten better. So that has allowed occupancy to continue to tick up. And it has improved over the last year a little bit more than we would have thought given labor issues. So we expect it to keep ticking up. I mean, the industry for skilled and senior housing projects to be fully occupied in the next few years given the dynamics with the demographic and no new supply on the senior housing side, a declining supply on the skilled side. So it is going to be interesting to see what happens with seasonality. Normally, once we got out of the pandemic, I would expect to see seasonality come back in. But on the skilled side, for example, with supply continuing to decline, you think about eight to nine hundred buildings closing over the last four plus years, only fifteen new facilities built last year. It is just going to continue that way. So it is possible that that could mask some of the seasonality. That remains to be seen, but I think that is a real possibility that we are still not going to see sort of the normal seasonality we have historically seen. So time will tell. But that is kind of the way we see it right now.

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

Lenders, so you know, we do not use mortgage financing as a matter of course, and so Mike can talk more about balance sheet debt. But what I hear in our times at NIC and ULI and speaking with other operators and owners and lenders is there is definitely an interest among the lenders to be back. I think though there is an issue of price. Now Fannie Mae still has a substantial bad book of senior housing loans. It is overwhelmingly the majority of their bad debt right now. So and they foreclosed on additional assets. So Fannie Mae is not really actively lending, but Freddie is. I have not spent a lot of time in the Bridge to HUD world recently. But there is still definite activity in the Bridge to HUD space. And it is non-bank lenders, and it has been for a while. And they will, you know, I think their risk appetite may have shifted down somewhat from where they were a few years ago, but also results on operating results on skilled nursing have improved and kind of gotten closer to kind of a normalized place. So they do not have to take as much. HUD is still extremely slow. Extremely.

Great. That is it for me. Thanks for the time.

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

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

I think a couple of things. It is one, it is a big playing field, but the other is when it comes to skilled nursing, we all value these assets the same way. It is going to be between a nine and a ten cap. So even if someone's cost of capital is a little bit better than ours, they are not going to come in at an eight cap to beat us on it. So we can compete on any of the skilled stuff that is out there. If we wanted to do bigger stuff that had a little bit more work required to it, if we chose to do that, we could do that. So when it comes to the skilled, the cost of capital piece just is not an issue. It is not a barrier at all. On the shop side, in terms of our peers, you know, not very many. Our other peers are not really doing shop. You know, we do not view Ventas and Welltower as the same, obviously. Right? So, you know, we are the only ones right now that are out there doing it.

Yeah. In your size category, you mean?

Right. Right. Yep.

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

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

Yeah. And look, Rich, we get that, but it is, have a ton of excess cash, we understand why some of our peers would find a place to park that and put that to work. You know, everybody is different. So I totally understand that, but that is just not a place that we are at. And if the strategy that we have been executing resulted in anemic year-over-year growth, that would be different, but that is not the case. This is working. So and as you know really well, there are still folks out there waiting to see when we are going to take that next big swing or have that thing that is going to require a call to discuss and do not believe that we are going to stay this focused and disciplined and all that kind of stuff right there. You know, we are ill-equipped to be a little boring. Right? So we are just sticking with it as long as we continue to get the results that we are getting, which are pretty good.

Okay. On the shop growth, you know, it is a nice turnaround. The beginning, I think it was the beginning of the year where you did 9%, and everyone was like, why is it so low? And then you said, yeah. We have got to work on it. What happened to flip the switch and to get, you know, requisite levels of double-digit growth out of your shop portfolio? Was there something strategic or was there something one-time-ish back then that sort of muddied the story on a temporary basis? Apologies for not remembering exactly.

No. It is all good. The 9% was really an outlier, and we talked about it a couple of quarters ago. It is really a tough comp from the previous year. If you look at the other quarters this year, the growth has been, you know, squarely in that mid to high teens level. And it has been, you know, even going back to last year, if you look at year-over-year growth, growth has been really strong in that portfolio. And it is really effectively what we expected in terms of the natural recovery in the portfolio as you start picking up occupancy, operating expenses start to moderate, operating leverage kicks in, all this stuff Talya talked about every quarter. That was what we expected, and it is playing out that way.

Yeah. So it was an anomaly. Not that it was a bad comp. That is all.

Alright. Yeah. So no strategic change or anything like that that changed the landscape. Last for me, we are kind of past the happy point of coverage, I mean, I should say, of reimbursement perhaps from Medicare and Medicaid, and maybe this time next year, we will be talking about a more typical number. Do you think we are sort of at the sweet spot of coverage gains and that we will, by this time next year, you know, the coverage improvements that you are seeing and perhaps the, you know, other metrics, occupancy, and so on, start to come, you know, sort of decelerate down to a more typical growth pattern, or do you see that there is more than a year left in that piece going forward? Thanks.

Yeah. So I have seen more than a year left for a couple of reasons. One, I think we probably have one more year from a Medicaid and Medicare perspective. Because of the lag time in capturing inflation, we will have some outsized rate increases. So I think next summer, which is when we get about 70% of our Medicaid rate increases, and October 1st of 2025, I think we will still have three good rate increases. Not as good as this year. I do not think we are going to see over 7% again on Medicaid. And not necessarily even 4% on Medicare. But I think we have at least one more year of somewhat outsized compared to, you know, years past on both Medicare and Medicaid. The other thing I would note is that we expect to continue to increase. So even when the rate increases moderate, the operating leverage is so significant in both these asset classes that we would expect to continue to see margin growth and rent coverage. So, I mean, I think it was you, Rich, two quarters ago that said, hey. Is it possible that we are going to see two times coverage in the ad get at some point? And we are almost there. Right. So and the other thing I would note, particularly on skilled more so than senior housing, is that operating leverage inflection point kicked in lower than it has historically because the revenue per patient day has grown at such a pace that it has outpaced what has happened with inflation. So, in other words, we were already at pre-pandemic margins when occupancy in the skilled portfolio was still 200 basis points off pre-pandemic levels. Right. So I think it is, well, I think it is for sure more than a year.

Okay. Thank you.

The next question is from Alec Feygin with Baird. Your line is open.

Hi. Thank you for taking our questions. First one for me is, what are you seeing as the best risk-adjusted returns currently in the pipeline?

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

Yeah. Helpful. And how much of our upside is there from having your rent? And do any other tenants have meaningful upside for percentage rent?

To answer your second question, there are not any other tenants with meaningful percentage rents baked into their leases. The upside for Avamere, I mean, I do not think there is technically a cap on it. So, you know, it is going to be just as they can continue to improve on their operations, we are going to see that benefit. So it is hard to say how much that upside could be, but we still think there is a bit of upside to capture there.

Which could be most important is taking that window that we are going to have starting next year to reset to a fixed rent. I have been taking the right moment that works, but frankly, not just for Sabra, but works for Avamere as well. It has got to work for both of us. So that will be an ongoing conversation over the next year plus. Then we will not have anything left really with percentage rents.

Got it. Thank you. That is it for me.

Our next question comes from Michael Stroyeck with Green Street. Your line is open.

Thanks, and good morning. So I know you called out the operating leverage impact on NOI growth within the shop business. Can you just quantify the flow-through of incremental occupancy to NOI that you are currently seeing today across the shop portfolio?

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

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

Well, I think, you know, because of the pandemic, you had a lot of the assets that were active were sort of lender-forced distressed assets. And I think a lot of sellers who did not have to sell but ordinarily would sell have simply been waiting for their NOI to become stable enough and predictable enough that they do not feel like they get hosed on price. So and I think with the Medicaid rates that are now baked in, and Medicare just happened October 1st. So with the reimbursement increases baked in, hopefully, as we go into next year, we will see more SNF opportunities that are not off-market.

Great. Thanks for the time.

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Our next question is from Omen Tayo Akusanya with Deutsche Bank. Your line is open.

Yes. Good afternoon, everyone. This conversation around acquisition is very interesting. It is like, damn, did you do, damn, did you not? Anyway, first question around the senior housing triple net portfolio. I think one of your peers on their earnings call talks about increasing interest in trying to convert some of their triple net senior housing to Redia. The market seems to kind of respond positively to that. Just wondering whether that has crossed your mind, whether it makes sense within your portfolio.

Well, we have been doing that all along. That is why the senior housing triple net portfolio is so small now. So we have already been active in doing that on a regular basis, so we are kind of out of those opportunities. Because right now, the remainder of that triple net portfolio is legacy stuff with really good operators. The coverage is so 1.37, so they do not have an incentive at this point. They are doing really well. They do not have an incentive at this point to convert to shop. So the others are mostly transitions to newer operators. So I think I do not think that number is going to change dramatically. You will, though, see you are going to see our mix of assets change because you are going to see more shop growth with the company, which will decrease the percentage that is triple net senior housing. It is also going to decrease the percentage of IL that is in our senior housing portfolio because most of the shop that we will be doing does not have much or any IL in it. And because the behavioral opportunities that we would like are going to be so few and far between, that percentage of NOI is going to drop and kind of accrue to shop. So I think you will see skilled sort of hover somewhere around where it is. We can do a really large-scale deal tomorrow, and it is not going to change the percentage that much. So I would expect to see that hover around where it is. Shop will increase. IL will decrease. The triple net will decrease. And behavioral will decrease.

That is helpful color. And then one more from me. Just again, really, could you talk a little bit about kind of from a regulatory perspective, what you are expecting going forward, whether that is election particularly related or again, you also have CMS out there talking a little bit tougher about 2025. And their viewpoint on, you know, they are going to keep moving ahead on minimum staffing, unless something dramatically changes. It is again, there just seems to be full steam ahead on, like, regulatory changes they want to implement and curious what your thoughts are on that.

Well, they can say what they want, and I respect that. But my point of view has not changed on the fact that we believe minimum staffing is going to go away because it is just a really, really bad idea. Beyond that, though, I think the impact of Chevron is much broader than how it is going to impact the outcome of the staffing mandate. Because it goes to the way regulators have arbitrarily and unilaterally made decisions. So I think it is going to be tougher for any of these regulatory bodies to just arbitrarily say we are going to do this to you now, we are going to do that to you now. And I would suggest that our trade association, which really represents the industry when it comes to this kind of stuff, both legislatively and as we have seen with the staffing mandate with lawsuits, I think they are going to be much more aggressive post-Chevron in just not sort of sitting back and accepting things just being done to us without any real rationale or without any focus really on what is really going to improve the quality of care to the patients and residents that we care for.

That is helpful. Thank you.

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

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