Q1 2023 Sabra Health Care REIT Inc Earnings Call
Participants
Lukas Michael Hartwich; SVP of Finance; Sabra Health Care REIT, Inc.
Michael Lourenco Costa; Executive VP, CFO, Principal Accounting Officer & Secretary; Sabra Health Care REIT, Inc.
Richard K. Matros; Chairman, President & CEO; Sabra Health Care REIT, Inc.
Talya Nevo-Hacohen; Executive VP, CIO & Treasurer; Sabra Health Care REIT, Inc.
Austin Todd Wurschmidt; VP; KeyBanc Capital Markets Inc., Research Division
Joshua Dennerlein; VP; BofA Securities, Research Division
Juan Carlos Sanabria; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research
Michael Anderson Griffin; Senior Associate; Citigroup Inc., Research Division
Michael Stroyeck
Omotayo Tejamude Okusanya; Analyst; Crédit Suisse AG, Research Division
Steven James Valiquette; Research Analyst; Barclays Bank PLC, Research Division
Vikram L. Malhotra; MD; Mizuho Securities USA LLC, Research Division
Presentation
Operator
Good day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Health Care REIT First 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 Michael Hartwich
Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our 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, 2022, as well as in our earnings press release included as exhibited 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-Q, earnings release and supplement can also be accessed in the Investors section of our website.
And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra Health Care REIT.
Richard K. Matros
Thanks, Lukas, and good day, everybody. Thanks for joining us. We're continuing to see traction in operational recovery. Occupancy in our skilled nursing portfolio has now improved every month in the fourth quarter and continued through January.
Occupancy October through January in our skilled nursing portfolio improved 130 basis points. Our skilled mix jumped up dramatically in the first quarter as well. Labor trends are improving, but it's still tough, and it's going to be a bit of a slog there, I think, for a while, but we're certainly off our highs in terms of inflationary increases and agency utilization. So we feel good about the progress that's being made there as well.
EBITDARM coverage without PRF, and that's really the only way we think everyone should be looking at it at this point, has improved sequentially on a trailing 12-month basis and even more so on a trailing 3-months basis.
I want to comment on a couple of specific operators. I think everybody saw and noted Signature Health coverage decline. Signature Health had a tough second half. They sold 24 facilities, closed 2 and right-sized their corporate infrastructure to accommodate a leaner company, and so that was quite distracting for them.
However, their first quarter rebounded dramatically, and I went back over 1.5 years to find a quarter that was as strong as the first quarter is for Signature Health and wasn't able to find one. So we feel really good about where SIG Health is on a current basis.
Similarly, Avamere, while their coverage was fine as reported, they also had a strong first quarter as well. Comment quickly on the transition from the old North American portfolio. That's going well for Avamere, and it's going well for Ensign. Ensign noted on their earnings call, they're ahead of schedule, even though there's still a lot of upside to be had there. So in terms of our 3 largest operators, SIG Health and Avamere and Ensign, we feel like we're in a really good place with all 3 of those operators right now.
We're pleased with the proposed 3.7% market basket, and we do expect better than historical Medicaid rate increases. Most of those rate increases for our portfolio will be effective on July 1. We'll have some more clarity probably over the next several weeks on what those rates will be.
Our expectation, though, is that some states will be extending COVID rate add-ons, and some will update the cost report base year to reflect more current data, and that's a reflection of the fact that many states do acknowledge the impact of COVID on the industry and the lack of viability of some of the Medicaid rate increases in certain states. So as we saw last summer, we're seeing some of the same things this summer as states are being more generous with their Medicaid rates.
Investment activity is light and will remain so in the near-term. Competitive landscape has changed with lender loans and liquidity needs driving sales. Pricing uncertainty exists, and I'm sure Talya will talk a little bit more about that as well.
On Enlivant, as noted in the press release, we have terminated our position in the JV. There is no impact on earnings or any other ramifications to the company other than the fact that there are a number of folks out there, rating agencies and others, who still look at the debt carried by the JV, and so -- that obviously is gone. So from that perspective, for those that looked at the JV debt, it's a de-levering event for us.
We're now focused on transitioning the 11 wholly-owned facilities to a new operator. I would note on the 11 wholly-owned facilities, they are different than the JV portfolio. The JV portfolio was part of the original ALC acquisition. The 11 facilities that we own came afterwards, and these are larger facilities in larger markets that are primarily a combination of AL and memory care patients or residents.
And with that, I will turn the call over to Talya.
Talya Nevo-Hacohen
Thank you, Rick. I'll first turn to the results of our managed senior housing portfolio and then provide a brief update on our investment activity in behavioral health. Our wholly-owned managed senior housing portfolio continued its recovery throughout 2022, but it was essentially flat in the first quarter of 2023.
Having worked to manage and overcome labor and wage challenges for nearly 2 years, operators are now focused on building occupancy by bringing in new residents in numbers that materially exceed departing residents who, for the most part, are not leaving by choice.
Expenses are continuing to moderate, which is a positive, and the continued evolution of an investment in customer acquisition strategies is now seen as foundational. Our operators first became attuned to this when the pandemic began, and they were forced to pivot to virtual sales, and they have embraced this change.
The headline numbers for the wholly owned managed portfolio on a same-store basis, excluding non-stabilized assets and government stimulus, are as follows. Occupancy for the first quarter of 2023 was 80.7%, a 140 basis point increase over first quarter of 2022, and a 100 basis point decrease over the prior quarter.
REVPOR in the first quarter of 2023 increased by 7.3% over the first quarter of 2022, driven by nearly 10% annual rate increases achieved in our holiday [environment] and wholly-owned Enlivant portfolio. REVPOR for the first quarter was $6,484 in our assisted living portfolio, flat to the prior quarter, and $2,771 in our independent living portfolio, 110 basis points higher than the prior quarter.
Including government -- excluding government stimulus funds, cash NOI for the quarter was slightly off the prior quarter, but nearly 33% higher than in the first quarter of 2022, driven by continued margin recovery, particularly in our wholly-owned Enlivant portfolio, demonstrating the benefit and challenges of operating leverage.
We continue to see strong rate growth and continued seasonal occupancy gains across our senior housing portfolio. Our net leased stabilized senior housing portfolio has seen consistent occupancy increases since the low in February of 2021. As of February of 2023, occupancy had recovered to 88.2%, which is equal to the occupancy level immediately before the pandemic and 11.5 percentage points above the pandemic [level].
Our leased portfolio skews to assisted living and memory care, which have had a more robust occupancy recovery than independent living, as they are needs-based. In addition, we have transitioned some poor performing leased communities to the managed portfolio, allowing us to participate in their financial recovery.
Move-out rates, driven mostly by higher care needs and death, seem to be stabilizing, but at an elevated rate relative to pre-pandemic averages. This may be a temporary phenomenon, as we are seeing average length of stay reverting to pre-pandemic levels after spiking in early 2021. We speculate that residents that moved in during the first rounds of COVID vaccine clinics at communities, what we then characterize as pent-up demand, are driving higher move-outs now, 18 months later.
As mentioned in prior calls, high-yielding, time-efficient, and cost-effective customer acquisition strategies have become critical to filling communities. Larger operators who have the benefit of scale and capital are successfully using digital marketing to generate qualified leads that have a high rate of conversion to leases.
Although, the conversion rate from personal referral sources is higher, the absolute number of move-ins that are sourced through operators' digital presence far exceeds those from other lead sources. We are still in the early stages of the evolution of customer acquisition in senior housing and expect to see further changes as the target customer also evolves.
Comparing the first quarter of 2023 results of our wholly-owned managed portfolio by country, excluding government stimulus, we see that our Canadian assets have slightly outperformed our U.S. communities compared with the prior quarter. In Canada, we see a similar phenomenon as we described in the U.S. of higher move-out rates offsetting occupancy gains, likely for the same reason. The labor cost availability in Canada that we noted in last quarter's earnings call also seems to be resolving. As an example, in the first quarter of 2023, our Canadian joint venture reduced agency costs by 85% compared to the prior quarter.
Turning briefly to our behavioral health portfolio. At the end of the first quarter, Sabra's investment in behavioral health included 17 properties and 2 mortgages with a total investment of $793 million at the end of the first quarter, which is expected to total $837 million once the balance of committed capital is deployed. We have identified additional properties within our owned portfolio, as candidates for conversion and are in active discussions with potential operators regarding those locations.
And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.
Michael Lourenco Costa
Thanks, Talya. For the first quarter of 2023, we recognized normalized FFO per share of $0.33 and normalized AFFO per share of $0.34. These results are consistent with the normalized FFO and normalized AFFO run rates we articulated on our fourth quarter earnings call and are in line with our expectations.
As of March 31, 2023, approximately 5% of our NOI was below 1x EBITDARM coverage, which is consistent with previous quarters. Also, as of March 31, 2023, our annualized cash NOI was $451.4 million, and our SNF exposure represented 56.7% of our annualized cash NOI, down 140 basis points from the fourth quarter of 2022 and down 500 basis points from 1 year ago. We expect this percentage to continue moving lower throughout 2023 as a result of further earnings recovery in our senior housing managed portfolio and through any future SNF dispositions.
G&A costs for the quarter totaled $10.5 million, compared to $10.9 million in the fourth quarter of 2022. Excluding stock-based compensation expense, cash G&A for the quarter was $8.3 million, compared to $8.8 million for the fourth quarter of 2022.
Now turning to the balance sheet. Our balance sheet continues to be a source of strength for Sabra, allowing us to confidently withstand the market headwinds of tightening credit and high interest rates. As of March 31, 2023, we are in compliance with all of our debt covenants and have ample liquidity of nearly $1 billion, consisting of unrestricted cash and cash equivalents of $34 million and available borrowings of $920 million under our revolving credit facility. We have no material near-term debt maturities. Our next material debt maturity is in 2026, and our weighted average debt maturity is currently at 6.3 years.
Our net debt-to-adjusted EBITDA ratio was 5.52x as of March 31, 2023, and in line with our expectations. We expect our leverage to decrease in future periods as our portfolio continues its operational recovery and through proceeds from any future disposition activity.
Excluding our revolving credit facility, which makes up just 3.3% of our total debt, we have no floating rate debt exposure, and our cost of permanent debt is 3.93% as of March 31, 2023. The combination of a low leverage fixed rate balance sheet with meaningful liquidity and no near-term maturities affords us the luxury of not needing to access the capital markets in the foreseeable future.
On May 3, 2023, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on May 31, 2023, to common stockholders as a record, as of the close of business on May 16, 2023. The dividend represents a payout of 88% of our normalized AFFO per share.
Lastly, we did not issue earnings guidance this quarter, but we are hopeful to be in that position to do so sometime in 2023. Until then, we still believe that the $0.33 to $0.34 quarterly run rate of normalized FFO per share and normalized AFFO per share that we provided on our fourth quarter call is still appropriate.
And with that, we will open up the line for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Michael Griffin with Citi.
Michael Anderson Griffin
Maybe we can go back to the fundamentals around SNFs. And Rick, I'm curious, in your assumptions for the rest of the year, I mean, how are you thinking about expectations -- you kind of gave a high level of agency and labor costs kind of decreasing. But if we were to quantify that, let's say, at the beginning of the year, maybe you're thinking flat agency utilization or something, where might that be at the end of the year? And has your thoughts around it changed?
Richard K. Matros
So, no, my thoughts haven't changed around it. I think occupancy, we still think 34 to 40 basis point improvement a month is doable. We'd like to see more, obviously, but we think that, that's doable. And it's still hampered by labor issues. But we've seen -- so Signature Health, for example, in the first quarter, sequentially had a drop of 5% in their labor costs. So -- and I don't want to suggest that it's going to continue at that rate, but that was a relatively nice drop with occupancy improving pretty dramatically in that portfolio. Their occupancy was up almost 300 basis points in sequential quarters.
So, I just think it's going to still be sort of a slow kind of improvement. I think there'll be a greater shift -- continuing greater shift from agency to in-house staff with increased wages, but the rate of inflation on those wages has also slowed down. And I would expect that to continue as well, because last year, especially the second half of the year, there were significant wage increases that were passed on to staff in the facilities.
To the extent that there needs to be more of that, I think there's nothing but good news really on the reimbursement front, both in terms of Medicaid this summer and the Medicare market basket. So that's going to help with margins, obviously, but it's also going to help provide more cash for people to use and set this to hire staff as well.
Michael Anderson Griffin
And then just one clarification on the coverage. I think you said ex PRF, which is probably the right way to think about it, It was about 1.55 this quarter versus 1.48 last quarter. If we go back to December of '21, like you have laid out in your deck, would that number be lower than the 1.55 this quarter, or should we be thinking about it on a year-over-year improvement basis?
Richard K. Matros
We have to dig that one up, because I don't have that at my fingertips. But certainly, it's higher on a year-over-year basis, but we'd have to go back and look at that quarter specifically. If we can find it while we're still on the call, we'll let everybody know.
Operator
Our next question comes from Tayo Okusanya with Credit Suisse.
Omotayo Tejamude Okusanya
2 questions for me. First of all, senior housing on the lease side, EBITDA coverage of 1.14, I believe. Again, that kind of suggests EBITDA is still probably less than 1. So just kind of wondering, how do we kind of think about that portfolio? Again, what's happening fundamentally that suggests coverage ultimately improves over time? Is there some risk of tenants within that pool possibly needing some assistance going forward?
Talya Nevo-Hacohen
Tayo, I can give you some color there. So, first of all, really would -- first of all, it's a kind of a stale number, right? It's trailing 12 1 quarter [year-over-year]. So we kind of know that you still have the impact of the agency costs and labor issues in that number, and we're expecting that that's going to roll off.
We've also seen occupancy increases, as I mentioned in my remarks, in that portfolio, and even into this past -- even into this coming quarter. So we're optimistic that coverage is going to turn, especially once -- as the labor issues are embedded in that number, in the expense part of that number, and the EBITDARM are going to start to roll off.
Richard K. Matros
We also -- let me just add, Tayo, what is worth in all of our asset classes. Almost all of our inflation is in the labor category. We're not seeing much inflation in the non-labor category. So that actually helps quite a bit as the operators get better on recruiting and retaining staff that we're not worried about other sort of inflationary levers.
Omotayo Tejamude Okusanya
And then from the Enlivant perspective, I mean, you withdrawn from this thing, you guys have no economic interest, no impact, nothing at all going forward. But could you just help us understand what exactly a withdrawal entails? Does that mean you just kind of gave up your ownership in the JV for free, or you didn't get any economic benefit from giving it up? If you just kind of give us, like, details of just exactly what this entails to be able to kind of walk away from this kind of clean and fair?
Richard K. Matros
There's a provision in the JV documents -- a JV agreement rather that allows either side to give notice and just walk. So there's no compensation. It's not like a management agreement or anything like that, where one side has to claim a fee -- a term fee or something like that.
You just sort of walk. And look, the lenders have the assets. They're transitioning assets to other operators. There's just -- there's nothing there anyway.
Talya Nevo-Hacohen
Those loans are non-recourse anyhow, so there was no obligation -- recourse to Sabra.
Richard K. Matros
Yes, unfortunately, Tayo, the downturn in the debt markets really took away all the obvious potential buyers for the portfolio. So you sort of had the double whammy of the pandemic impact on the business, and then the debt markets turned down, and so you sort of wiped out a whole potential audience of buyers.
Operator
We'll take our next question from Josh Dennerlein with Bank of America.
Joshua Dennerlein
Yes. I just wanted to follow-up on the Enlivant JV. I get that you can walk away from it, but I would have thought you would get a benefit because there was debt on the portfolio, and now that wouldn't be flowing through your income statement. Is that a correct assumption or…?
Michael Lourenco Costa
Yes, so it's not a correct assumption. Here's why. So that joint venture was accounted for under the equity method, and when we wrote that thing down to zero last quarter, as you recall, we no longer recognize any revenues, any expenses, any FFO, any AFFO from that joint venture. Period. It's 0. Not that it was much before we did that, but going forward because of the way the accounting rules work, it's 0. So there's nothing flowing through our financials as a result of our writing it down to 0. There's nothing flowing through our financials as a result of us exiting that joint venture.
The debt, since it was an unconsolidated joint venture, it was not appearing on our balance sheet anyways. So literally, there's no impact to our financial statements as a result of this.
Joshua Dennerlein
So the impact was already in the 1Q results, and there was nothing on the go forward?
Michael Lourenco Costa
There was nothing in the 1Q results. There was 0 FFO, 0 earnings, 0 everything, 0 balance sheet, value 0. There's nothing in our first quarter results for that Enlivant joint venture.
Joshua Dennerlein
And then, Rick, in your opening remarks, you mentioned you expect Medicaid increases to come in kind of on the better side. I guess, what are you seeing or hearing that kind of gives you confidence that the boosts are going to be on the better side?
Richard K. Matros
Well, it's the actual dialogue that's happening with the trade associations in the various states and the state legislatures and the folks that are in charge of the budgets there. So that's really where it's coming from. Look, it's not going to be all 50 states. Last year, when we had more clarity on those states that we're giving out size rate increases, we published that. I think that was our second quarter '22 earnings release.
So, we'll do the same. We'll do a business update if we know sooner than later on that as well. But it's coming from direct discussions. And I think the biggest question mark that -- on the states that we're in is Texas. So I think everybody's got a comfort level now that Texas legislature will make permanent the 1962 that was part of the FMAP add-on and some additional amount above that.
The issue is with PHE going away May 11, the states -- in this case, Texas has the option of extending that 1962 until the full rate increase goes into effect in September. But we just don't know yet if they're going to do that. So I think worst case scenario for Texas is you have a 4-month kind of hole where they lose the FMAP add-on. They'll get it back in September, but they're going to have that 4-month period where there isn't anything. So that's what we know about Texas.
But, again, on all the other states, our assumptions are based on actual dialogues and things being put in budgets and stuff like that.
The other thing I should point out, too, is some of this is just organic. So the cost report process itself starts to capture inflation. There's a lag time between when the state cost reports are filed and when reimbursement rates actually occur. But those cost reports do capture inflation. It's one of the reasons that we expect next summer's -- so 2024, next summer's Medicaid rate increases to be even better, because they'll really be capturing a lot of the worst period of inflation that we had during COVID. So the fact that there may be a couple of states that are willing to accelerate the base period for the cost report now and not wait another year is a positive for those particular states.
Operator
And we'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Todd Wurschmidt
I have a question on the $0.33 to $0.34 run rate. When you layer in sort of the 25 transition assets you guys highlighted last year, I think they were generating cash rent around the $5 million to $6 million range on an annualized basis with upwards of $15 million upon that ultimately commencing. How much of that has commenced and is captured in that run rate?
And then also, does the $0.33 to $0.34 assume any acceleration in NOI from the senior housing managed portfolio?
Richard K. Matros
So the run rate is based on what we reported this quarter, right, or even based on what we reported in Q4. So it doesn't assume any acceleration in the senior housing managed. So that would be incremental to that number. Obviously, we didn't want to bake that into the run rate, because -- I don't have a crystal ball, but yes, so if there is improved performance there, which we expect there to be, then I would expect that number to improve as well.
In terms of the transition, those are ongoing, as we've talked about, for the last several quarters. We expect those to be fully transitioned and that NOI pickup that you alluded to, to be realized by the end of 2024. Again, it's going to vary by situation. It's going to vary by project in terms of when those things roll in. But they're incrementally getting picked up in our earnings and we expect it to still be fully in there by the end of '24.
Michael Lourenco Costa
Nothing was impactful in the current run rate.
Austin Todd Wurschmidt
Do you have a sense what those 25 assets are generated in the first quarter on an annualized basis relative to the $5 million to $6 million in the second quarter of last year?
Richard K. Matros
It's higher than that $5 million to $6 million, but it's less than the $15 million. I mean, it's -- again, like I've said before, if there's 25 projects, there's probably 20 different stories there. So it's hard to pin down exactly what that run rate is going to be on an overall basis. It's going to be dependent on timing and a whole lot of other factors. But it has increased since that $5 million we disclosed back in Q2.
Austin Todd Wurschmidt
And then just as far as the 11 assets -- wholly-owned assets leased to Enlivant, were those kept in the same store pool this quarter? Just curious how they performed? And then can you shed some light on the timing of a transition, whether you have any operators lined up or sort of a short list? Just any detail around that would be helpful.
Talya Nevo-Hacohen
So they are in the same-store pool. And they actually are -- have been one of the drivers of performance of the assisted living component of the pool, because they've had a strong recovery over the last 12 months. If you recall, they were, call it breakeven 1 year ago or so. So -- and they actually have a real margin now between recovery on occupancy and strong REVPOR growth.
Michael Lourenco Costa
Yes. In terms of the transition, well, we're just trying to work cooperatively with Enlivant and TPG on that. So it should happen in the coming months, but I can't give a specific timeframe. We know of a number of operators that have an issue in the portfolio. So identifying the right operator in and of itself is not going to be a concern or an issue for us.
Operator
Our next question comes from Steven Valiquette with Barclays.
Steven James Valiquette
A couple of really more just kind of housekeeping questions around the supplement. I guess on pages 4, 5, and 6, I guess first on page 5, normally I think that page is normally delineated as like the same-store data, but this quarter it was not -- I don't know if that is still same-store data on page 5 as far as the EBITDARM coverage ratios that are there in occupancy or exactly which properties are included on that data? So that was kind of housekeeping question number one.
And then number two, I guess -- sorry, go ahead. Maybe that would be a good follow-up.
Richard K. Matros
No, go ahead.
Steven James Valiquette
Yes.
Richard K. Matros
I'll answer it as we go through. So the answer to your question is, that is not same store. That is for our entire stabilized portfolio, and the majority of our portfolio is included at stabilized pool. We took out the same store triple net information this quarter, as you've noted. Just periodically, we review our disclosures. We review our peers' disclosures. We take an evaluation of what is helpful disclosure for the market and for investors, and we noticed that not many people present triple net same-store information. So we were kind of an outlier in that regard, and we thought the overall portfolio was more indicative and more useful for investors.
Michael Lourenco Costa
And we did seek out some feedback from investors about that, as we typically do when we -- before we change disclosures.
Steven James Valiquette
And then just to triangulate that, then, like the footnotes on pages 5 and 6 are the same around the sort of stabilized portfolio. Looks like the property count in the stabilized portfolio might be that 356 number that's on page 6. And then on page 4, you show 396 total properties in consolidated. So are there basically roughly 40 properties give or take that are not in the stabilized set of properties? Am I doing that math right? And if we need to do it offline or follow up offline, I'd be happy to do it, too, if it's kind of hard to do this on the slide. But hopefully that question makes sense.
Richard K. Matros
Yes. Let's follow-up offline on that one so I can do that math softly.
Operator
Our next question comes from Vikram Malhotra with Mizuho.
Vikram L. Malhotra
So I just wanted to follow-up on the -- just ins and outs to the FAD run rate. You talked about the transition in '22 benefiting through the year into '24, but then you also alluded to additional transitions. Potentially, I think, in Canada, you said, or maybe there was also some additional senior housing conversions. Can you just walk us through that again? Are there -- is there an additional bucket of assets that you will start to transition, leaving Enlivant aside, that sort of may impact the FAD going into the end of '23, early '24?
Richard K. Matros
I mean, I'd say that we're no different than any other company. We're always looking at our portfolio and evaluating the best outcomes for our portfolio. We did that to a significant degree last year, which led us to our conversations around dispositions and transitions, but that doesn't mean it stopped. We're still looking at our portfolio, and there may be opportunities to transition assets to new operators, may be opportunities to underperforming assets to new operators. There may be opportunities to transition or convert properties to behavioral health. That's always going to be something that's in our portfolio than quite frankly, anybody else's portfolio.
The material stuff that is impacting our portfolio, or that will impact our portfolio, is what we've talked about since Q2 of last year. So, incrementally, nothing material.
Vikram L. Malhotra
So, it's not like a similar size bucket as last year. It's a much, much smaller bucket that you would look to tackle through the year…
Richard K. Matros
That's correct.
Vikram L. Malhotra
over and above Enlivant. Okay. And then just looking at sort of investment opportunities, I know Richard mentioned things are slow and evolving, but can you sort of walk through maybe the broader capital structure in terms of assets, but also, potentially, additional, say, preferred equity investments or additional loans that you may decide to make as investments, given all that's going on in the debt markets around skilled nursing, but even broadly, senior housing?
Talya Nevo-Hacohen
Sure. I'll try to answer that. We are seeing reasonable flow of assets and opportunities coming to us. Few of them are interesting. We look at our cost of capital, and we think about ways to invest, and that leads us to focus more on preferred equity, or higher yield, or mezzanine debt, or something that has higher yield, or a greater opportunity in the longer term.
Right now, what we are seeing our remains to be underperforming assets that want full pricing. It is unclear what exactly is full pricing today. I think that's a bit of the challenge, and why we are continuing to look at things, because we are interested in price discovery, with debt being at the levels in terms of interest rate and a significantly reduced proceeds level in terms of availability, there is -- we are seeing both a liquidity as well as a credit issue for borrowers, developers, et cetera. And that we would hope would create opportunities for us.
So far, we haven't found them, but we continue to look, and we continue to try to be creative there. There are a lot of assets that are recovering at this point, particularly in senior housing, that are recovering well, but their cost structure and their capital stack is so upside down, and frankly, values are probably not where they used to be. So, there's a lot of readjustment that's going on, and a lot of recalculating of capital, and the outcome of the tensions between borrowers, lenders, and other investors is going to play out over the next period of time.
Vikram L. Malhotra
Just in this one thing, I wanted to clarify. If I remember, maybe it was last quarter, you had alluded to the fact that -- there was a lot of talk in the healthcare space about PLRs, and I believe you had, in 2018 or 2019, received one yourself. Correct me, if I'm wrong. I'm just wondering what the goal or objective of obtaining that PLR was?
Michael Lourenco Costa
Yes, so we did receive that. We were the first in our space to get that, as we discussed last quarter, and the reason why we got that PLR was to enable us to have independent living facilities in a non-lease structure. That was it. Absent that PLR, we could not have -- the only way we could own independent living facilities was through a triple net lease, and as you're aware, we have that holiday portfolio, which is all independent living, and it is not under a lease structure. So that was the whole reason and the rationale behind getting that PLR.
Richard K. Matros
It also provides optionality for us, which is something that we always strive to maintain in as many aspects of the company as possible, so that if at some point in time we choose to approach things differently from an operational perspective, we have the ability to do that. It's not our intent at this point in time, because of the quality of the operators that we have in our independent living facilities at this time.
Operator
Our next question comes from Michael Stroyeck with Green Street.
Michael Stroyeck
One follow-up on the wholly-owned Enlivant portfolio and operator transition, I know you mentioned they're performing well, but could you take us through just a reasonable base case in terms of potential degradation we could see to NOI as a result of the transition?
Richard K. Matros
Yes, I'll take that. So we don't have a degradation base case. There may be some frictional costs, as there always are when you transition to a new operator. But given the distractions -- the understandable distractions that the Enlivant management team has had, with the sale process, working with lenders, transitioning an entire portfolio of facilities to a variety of different operators, bringing in an operator that has none of those distractions that is known to us, we think any frictional costs will be temporary. We actually think that there is upside in the operational results of that portfolio.
Michael Stroyeck
And then one quick one on shop expense growth. I know you called out it's been moderate over the past few quarters. How much of that is agency labor just coming back to earth versus a normalization in other expense line items?
Talya Nevo-Hacohen
It's largely exactly what you said. It's largely the labor, the agency costs.
Richard K. Matros
Yes, as I noted it's a little bit earlier on the call, we're just not seeing significant inflation in the non-labor category. So as the operators get a better handle on their labor costs, then the top-line improvements will just flow through better without anything else getting in the way.
Operator
We'll take our next question from Michael Griffin with Citi.
Michael Anderson Griffin
I appreciate the follow-up. I just wanted to touch on bridge-to-HUD in terms of external growth stuff. I don't think it's been mentioned so far, but if we think back to low interest rate regime, maybe that permanent financing was in called the mid-3s. It's probably moved up since then. Do you have a sense, Talya, maybe when you're underwriting transactions, where that might be after that sort of longer-term permanent financing?
Talya Nevo-Hacohen
Yes. I don't have it post-Fed rate hike yesterday, so but I figure it's probably in the 7s. I will tell you that we are seeing other debt quotes non-HUD, non-bridge to HUD, but just, like construction debt and stuff being quoted as a floor of 7 in a quarter, currently at about 8.5, and that's at around 50% loan-to-cost, just to give you scale.
Richard K. Matros
Hey, Michael, just a follow-up to your question earlier on where coverage was, ex-PRF, a year ago. It was basically flat to where it was today, exactly flat, 1.55 times on a trailing 12-month basis. And when you consider what happened in that intervening timeframe with labor expenses spiking, you have annual rent increases and the like, the fact that it has stayed flat and is increasing, is pretty encouraging.
Operator
(Operator Instructions) We'll take our next question from Juan Sanabria with BMO Capital Markets.
Juan Carlos Sanabria
A couple of questions. I guess on the coverage, you talked about how it's improving. Would you be able to give the T3 coverage, ex-PRF, for the SNF and Seniors Housing Portfolio?
Michael Lourenco Costa
We'll say, Juan, is that, because, yes, we did not disclose it. It is higher than our trailing 12-month number.
Juan Carlos Sanabria
Would that be the case for Signature and Avamere, as well?
Richard K. Matros
In the case of Avamere, it might be slightly up. I don't have that at my fingertips. In the case of Signature, they had a tough second and third quarter. So, once they’ve got all those sales, and closures behind them and got corporate right-sized for the leaner company that they are today, they really refocused and bounced back super dramatically in the first quarter. I'm talking about current first quarter, not a quarter in arrears.
Michael Lourenco Costa
Yes, and the trailing three-month numbers we're talking about, again, are trailing three months ended December 31. There's been four months since then, and as Rick alluded to earlier, the preliminary numbers we've seen come in for the actual first quarter of calendar year '23 are encouraging and headed in the right direction.
Juan Carlos Sanabria
And then, on the dispositions you guys completed, curious if you could share the yields or cap rates or the NOI that was booked for modeling purposes in the first quarter, just to help us on a run rate basis?
Michael Lourenco Costa
Yes. So, in terms of the dispositions, we disclosed the vast majority of our disposition activity for the quarter. We disclosed, like, in February. And as we said back then, the yield on that was called mid-single digits. So, whatever incremental sales we had between that point and the quarter one were small, and 2 really didn't change that overall metric. So, I think that's still a good number to go with.
Juan Carlos Sanabria
And then, like, the investments you did make in the quarter were at 8%. Is that kind of a new how do you think, for where assets are trading today, or are those deals -- one of them was from the development pipeline? Is that indicative of today's pricing, or those are unique situations and not necessarily…?
Talya Nevo-Hacohen
Those are unique situations. One, as you just said, the bulk of it was from a development pipeline and the other one -- so that was a pre-negotiated yield -- if you will, or cap rate. And then the other one was a small property that is allowing us to create a campus with an operator of ours who's in a substantially larger building across the way. So, it was an unusual piece. We didn't have a lot of folks rushing to buy a small building on the campus of another building.
Juan Carlos Sanabria
And one last one, if you don't mind. The loan book, anything that we should be aware of in terms of potential risk you've had? Some news in the broader healthcare REIT space of some loans going? I'm just curious how you feel about your current loan book?
Talya Nevo-Hacohen
I don't think there's any change, and the bulk of it is not really at risk. It's not a large portfolio. It's nothing like the Ventas loan that they had to foreclose.
Michael Lourenco Costa
Yes, these are -- they're not mezz loans that we have, Juan.
Operator
We'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Todd Wurschmidt
Yes, just one quick follow-up for me. Can you guys remind us what percent of your operators are on a cash basis and what the plan is for those tenants over time, whether you're maybe looking to sell some of those assets or enter into long-term contractual leases with either the current operator or potentially a new operator?
Michael Lourenco Costa
Yes. So in terms of our cash basis tenant pool, like I've said in the previous quarters, the part that we really focus on are the portion of our cash basis tenant pool that pays us various amounts. They'll pay us a different amount this month versus next month, right? And that pool has come down. It was before 5%, 6%. Through some of the sales and some of the transitions we've done, it's now somewhere, call it 3% of our NOI. So it is coming down. And like we've talked about before, through the activities we're doing on the portfolio, whether it be sales or transitions, that's going to address a large component of that.
Operator
And there are no further questions at this time. I'd like to turn the call back over to Rick Matros.
Richard K. Matros
Thanks, everybody, for joining us. It feels good to at least believe that we've gotten the worst behind us and really do feel pretty good about things going forward. So again, thanks for the support. Thanks for joining us today, and have a great day.
Operator
And this concludes today's conference. You may now disconnect.
