Sabra Health Care REIT, Inc. (SBRA) Q4 2022 Earnings Report, Transcript and Summary

Good day, everyone. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sabra Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. I would like to turn the call over to Lukas Hartwich, Senior Vice President, Finance. Please go ahead, Mr. 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 Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the financials page of the Investors section of our Web site at sabrahealth.com. Our Form 10-K, earnings release and supplement can also be accessed in the Investors section of our Web site. And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra Health Care REIT.

Thanks Lukas, and good day, everybody. Thanks for joining us. We appreciate it. First, I just want to comment on our asset recycling program. We've got a couple of transactions that we're hoping to close over the next couple of months or so, and that'll pretty much be the end of the program. After that, we'll continue to have dispositions but it's more ordinary course of business disposition. So we're looking forward to that. Just quick comment on the North American transition. As we put out earlier that transition closed effective to February 1st, as we anticipated, the operations held up really well throughout the the period prior to the transition, and continue to do so in addition to the improvements in credit quality that we get from replacing North American with Ensign. I did want to point out that for Avamere that will strengthen their portfolio, as well as the four facilities that Avamere is picking up or has picked up in Washington State densifies key market to them, which is allowing them to enter into Managed Care contracts that should help both occupancy and revenue overall in that particular market. Next, there's been a lot of talk about PLRs recently. And I just wanted to remind everybody that Sabra got a PLR in February of 2020 right before the pandemic hit, and that came shortly after we converted the holiday portfolio from triple-net to managed allowing us to not have holiday [indiscernible] structure. One point we had some internal discussions about whether we were going to do anything else relative to management, because at the time, there was a lot of -- it was an unsure environment relative to what Fortress was going to do with the portfolio. But after Atria wound up taking over the portfolio, we decided that we would just keep that as an optionality for us going forward. We've been really pleased with what Atria has done with the portfolio and happy to collaborate with them operationally. And as I said, just to provide some optionality for us going forward, but we don't anticipate doing anything with it at this time. Moving on to the operating environment. Occupancy held steady over the holidays with some skilled operators up and some slightly down. So overall, a better outcome than we anticipated. We've had very little impact, if any, from flu, RSV or COVID. So that's been helpful as well. Our sequential quarterly performance on the skilled space showed improved occupancy and skill mix. Labor pressures persists but has slowly been improving, but that's still going to take quite some time. Our sequential occupancy for our senior housing triple-net portfolio was up materially by 240 basis points, and over the fourth quarter moved up very nicely as well. Not quite at that pace but at a pretty healthy clip. We currently don't have any discussions ongoing with any tenants relative to lease restructurings. Our coverage in our skilled portfolio is down primarily due to the quarter dropping off, having lower labor costs than the one coming on. So we anticipated that, and I think most everybody else did as well. Our skilled nursing exposure is now down to 58%, that's 1% higher than our old time low. It will continue to drop this year and resulting in the most diversified by asset class the Sabra portfolio has ever been. We don't anticipate at any point that it would drop below 50%, because we still anticipate doing skilled nursing acquisitions. But we like being in a different place relative to the level of diversification in our portfolio. Our investment pipeline is lighter than historical. We’re starting to see some skilled opportunities and continue to see behavioral opportunities. The bulk of what we’re seeing continues to be senior housing. As everybody knows, the PHE expired or is expiring effective May 11th. There is no real impact, [indiscernible] place become negligible as acuity is normalized post-COVID breakouts. That's not to say that we would have liked that to stay in place, but it just doesn't seem to be in the cards at this particular point in time. The [SMAP] increase of 6.2% is no longer attached to the PHE and is unaffected by the May 11th date. We are not issuing guidance and it appears that there is some consternation about the fact that we are still not issuing guidance, but we issued guidance in '21 and we see some of our peers that issue [Technical Difficulty] just particularly when you have the managed portfolio, it's really impossible to project the velocity of recovery. And until we have a little bit more clarity there, we just don't want to be in a position where we put the number out and then we have to change it again, which is what we see happening throughout. So Mike will talk a little bit more about that in his talking points. And hopefully, at some point this year, we will be able to put guidance out. Generally speaking, we expect a relatively quiet year as our asset classes continue to recover. And we do expect, based on all the initiatives we have embarked on, the asset sales that we have done, the transitions that we have talked about and the general recovery of the managed portfolio, all to -- result in nice earnings growth for us as we look at 2024. And with that, I'll turn the call over to Talya.

Thank you, Rick. Let me turn first to the results of our managed senior housing portfolio, including our joint venture investments in Canada and then to an update on our investment activity in behavioral health. Our wholly owned managed senior housing portfolio continued its recovery throughout 2022 with revenue increasing through a combination of materially higher REVPOR and growing occupancy. As operators have worked diligently to recruit higher and trained staff and reduce agency to pre-pandemic levels and even zero, expenses have plateaued and began to decline, allowing for cash net operating income to grow significantly and margins to decline. The headline numbers for the wholly owned managed portfolio on a same store basis excluding government stimulus are as follows: occupancy for the fourth quarter of 2022 excluding non-stabilized assets was 81.8%, driven by a 2.4 percentage point increase in our assisted living communities over the prior quarter; comparing fourth quarter 2022 to fourth quarter 2021, occupancy increased 5.9 percentage points in our assisted living communities and 90 basis points in our independent living communities. REVPOR for the fourth quarter excluding non-stabilized assets was 6,608 in our assisted living portfolio, a 5.3 percentage point increase over the prior quarter and an 8.9 percentage point increase over fourth quarter 2021, driven largely by the October 1st annual rate increases in our Enlivant portfolio. REVPOR corporate the period excluding non-stabilized assets was 2,751 in our independent living communities, a 1.6% increase over the prior quarter and a 6.6% increase over fourth quarter 2021. We anticipate that rate increases in 2023 will be in the same 5% to 10% range as those seen in 2022. Excluding government stimulus funds, cash NOI for the quarter was 22.9% higher than the prior quarter. Similarly, cash NOI margin in the fourth quarter grew to 26.9% from 22.7% in the prior quarter and 20% in the fourth quarter of 2021, as top line increases and active expense management impacted the bottom line. Senior Housing operators continue to drive revenue to offset materially higher costs by raising rates and focusing on more efficient customer acquisition. The investment in digital marketing that began during the pandemic has continued to produce better qualified leads with more move-ins than other sources. Move-in rates are above pre-pandemic levels while move-out levels seem to have stabilized. With expenses underwriter control our wholly owned managed portfolio had nearly 50% growth in cash NOI in the fourth quarter of 2022 compared with the same quarter in 2021. If you compare the fourth quarter same store revenue, occupancy and REVPOR results of our wholly owned managed portfolio by country excluding government stimulus. Our Canadian assets have outperformed our US communities relative to the fourth quarter of 2021. In those same periods, occupancy in our Canadian portfolio rebounded by 7.2% with revenue growing 19% compared to our US portfolio, which saw occupancy growth of 1% and revenue growth of 10%. However, expenses in the Canadian portfolio rose 14% in that period while staying flat in the US. Both portfolios saw significant growth in cash NOI with our domestic portfolio outpacing our Canadian portfolio by combining significant cost controls with high REVPOR growth. Sabra’s was unconsolidated joint ventures in Canada now [across] 15 communities in Ontario, Saskatchewan and Quebec. Our 50/50 joint venture with Sienna Senior Living, which includes 12 properties, has performed well since closing midyear 2022 with occupancy and revenue continuing to rise steadily. As part of the effort to significantly cut agency spending we incurred additional employee costs in the fourth quarter of $200,000 as US dollars [Indiscernible] [app] share to hire, incentivize and retain employees at those communities. We shared this to illustrate that availability and cost of labor in the early post pandemic economy is not limited to the US market. Turning to our behavioral health portfolio. At the end of the fourth quarter, Sabra’s investment in behavioral health included 17 properties into mortgages with a total investment of $784 million at the end of the fourth quarter. We intend to invest an additional $53 million of capital to complete the conversion of six of these properties and an additional identified property all of which have been leased to operators. During the fourth quarter, we entered into a lease on one of these properties with an experienced operator that is new to Sabra. As part of our ongoing initiative to recycle assets, we continue to review opportunities to convert more of our properties into higher yielding assets that will deliver the types of care needed most in their communities. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Thanks Talya. For the fourth quarter of 2022, we recognized normalized FFO per share of $0.37 and normalized AFFO per share of $0.37. Compared to the third quarter of 2022, normalized FFO per share increased $0.01 and normalized AFFO per share increased $0.02, primarily due to increased triple-net NOI due to the timing of rents from leases accounted for on a cash basis, which we highlighted on last quarter's call. This accounted for a little over $0.01 of additional normalized FFO and normalized AFFO per share this quarter that is not expected to reoccur. In addition, normalized FFO and normalized AFFO per share were higher this quarter as a result of increased NOI from our senior housing managed portfolio. These increases were partially offset by lower NOI from Enlivant joint venture and higher interest and G&A costs. Normalized FFO and normalized AFFO for this quarter included $1.2 million of excess rents paid by Genesis pursuant to the memorandums of understanding entered into in 2017 when we began the disposition of a majority of our Genesis exposure. As we noted last quarter, these rents had a burn off period of just over four years from the date the properties were sold and are now reaching the end of that burn off period. We expect the amount of excess Genesis rents we recognized in earnings to decrease to $1.1 million in the first quarter of 2023 and decline to approximately $200,000 per quarter for each of the five quarters after that. When the excess rent amount steps down in the second quarter of this year, we expected to result in a reduction toward quarterly earnings run rate of just under $0.01 per share. During the quarter, we successfully completed the transition of the portfolio formerly leased to North American healthcare to Ensign and Avamere. As noted on last quarter’s call, the earnings impact from this transition is expected to result in a reduction to our quarterly earnings run rate of just under $0.01 per share. As of December 31, 2022, less than 5% of our NOI is below 1 times EBITDARM coverage, which is in line with previous quarters. Also as of December 31, 2022, our annualized cash NOI was $456.2 million and our [indiscernible] exposure represented 58.1% of our annualized cash NOI, down 190 basis points from the third quarter and down 330 basis points from a year ago. We expect this percentage to continue moving lower throughout 2023 as a result of our recently completed [indiscernible] sales and further earnings recovery in our senior housing managed portfolio. G&A costs for the quarter totaled $10.9 million compared to $9.7 million in the third quarter of 2022. The majority of this increase is due to adjusting our estimates for compensation that is based on 2022 annual performance. Cash G&A for the quarter was $8.8 million compared to $7.6 million in the third quarter. After factoring in the adjustment and estimates that I noted, cash G&A is basically flat sequentially. Now turning to the balance sheet. On January 4, 2023, we amended and restated our credit facility, improving our debt maturity profile, while keeping capacity and pricing consistent with our prior credit facility. As a result, we have no material debt maturities until 2026. Shortly after amending and restating our credit facility, we entered into a series of current and forward starting interest rate swap agreements that cover the entire five year duration of the term loans under our credit facility. Because of these hedging activities our term loans totaling $540.7 million will have an average fixed rate of approximately 4% over the next five years, providing us with significant cost certainty and eliminating any long term exposure to floating rate debt. The earnings benefit of this proactive approach to managing our interest expense is meaningful as our annual interest expense would be over $12 million higher if our term loan debt remains floating at today's rates. We are in compliance with all of our debt covenants and our liquidity as of December 31, 2022 totaled $852 million, consisting of unrestricted cash and cash equivalents of $49 million and available borrowings of $803 million under our revolving credit facility. Subsequent to December 31st, we received approximately $159 million of gross proceeds from the sale of assets and repayments and the net proceeds were used to repay borrowings under our revolving credit facility, further increasing our liquidity. These asset sales and repayments are expected to reduce our quarterly earnings run rate by approximately $0.01 per share. As of December 31, 2022 and pro forma for the investment and disposition activity subsequent to December 31st, our leverage was 5.38 times, a sequential decrease of 0.12 times. We expect our leverage to further improve in future quarters as a result of continued recovery in our senior housing managed portfolio and from any potential future asset sales. We continue to focus on strengthening our balance sheet and portfolio without having to access the capital markets until the cost is more favorable and we are well positioned to do just that. On February 01, 2023, our Board of Director declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on February 28, 2023 to common stockholders of record as of the close of business on February 13, 2023. The dividend represents a payout of 81% of our normalized AFFO per share of $0.37. Lastly, as Rick noted, we do not issue guidance this quarter. We continue to closely monitor the operational recovery of our portfolio and we are encouraged by the progress we continue to see on the occupancy and cost side. With that said, labor pressures and operating headwinds still remain and visibility is limited to when these factors will normalize in a way that would allow us to confidently estimate our earnings over the next several quarters. However, when you aggregate the various moving pieces I highlighted earlier and assuming all else remains equal, the run rate for fourth quarter normalized AFFP per share would be between $0.03 to $0.04 lower than the reported number. And with that, we will open up the lines for Q&A.

[Operator Instructions]. Your first question comes from the line of Michael Griffin from Citi.

This is Avery Tiras on for Michael Griffin. My first question is on just the labor environment. I mean, what are your expectations around labor in the [indiscernible] portfolio? And any additional color you can provide on what your operators are seeing on the ground?

Look, it's still a slog. It's certainly better than it was and it continues to show some improvement, but it's really slow. I think the thing that the operators are most looking forward to, to helping out on the labor side is, a very positive expected market basket on Medicare from October 1st. But before that, and obviously this depends on the state you are in, but we expect to see in July and August better than historical Medicaid rates. As you may know, there is a course of court process in each state and there is a lag time before the actual costs get reflected in new rates. And this summer we will start seeing that reflected really for the first time. Next summer, they will really be reflected even more, but we do expect some outsized Medicaid rates this summer. So that's going to help the operators quite a bit. But other than that, it's impossible to project sort of the pace of this thing getting any better.

My follow-up question is little bit on the transaction market. What are you seeing in the transaction market in terms of investor appetite for skilled assets? I know the capital recycling program’s largely complete. But I mean what are your thoughts and any additional color there would be helpful?

The limiting factor is the availability and cost of bridge to HUD financing above all else. So the interest is there. And I think we'll continue to see a queue of deals with various sellers. But it's all taking longer because that is tougher to procure at the levels and the amounts that people were easily able to obtain six months ago. That's really the challenge is to take, I think, longer for various sellers, various buyers to get their deals done and that applies to all the sellers out there and there are many.

Your next question comes from a line of Juan Sanabria from BMO Capital Markets.

Just a follow-up question or a question for my question today, with regards to, you kind of gave a run rate. So I was hoping you could maybe break the major pieces that you kind of went over at the very end of your prepared remarks just to get a better sense of how we should think about the model forward?

So I mean, the major pieces are, like I said, in the prepared remarks, we had cash basis rent, there’s a tiny difference, which I talked about on the third quarter call, where we received some rents from tenants on a cash basis in the fourth quarter. That should come into the third quarter. So that brought third quarter down lower than it should have been about fourth quarter up higher than it should have been. So just to normalize for that, it's a little over a penny per share per quarter. You also have the sales. All the dispositions we completed throughout the fourth quarter and subsequent to the fourth quarter, that's going to be another $0.01 per share reduction. And then a combination of the North American transition as well as starting in the second quarter you have the Genesis excess rent stepping down that altogether, and that's how I come up with the $0.03 to $0.04 reduction in run rate.

And then just on the disposition transitions. What is less dollar wise to sell and/or to transition there that's left, and you guys have done a lot here in the fourth and the early to '23 to start the year. But just curious the quantity of what's contemplated to be that's left at this point?

So we haven't disclosed what we have left. The only thing I will say is that what's left is substantially less than what we just diclosed that we got done post year end.

Your next question comes from a lineup Vikram Malhotra from Mizuho.

Maybe just to start off, can you clarify, you had some comments on collections. I just want to make sure is there a number you can give us in terms of rent collections in the quarter? And then is there any percent of the tenant, the skilled nursing tenant base that is on that partial paid in the quarter?

So I mean, in terms of rank collections, that's been pretty steady as it has been throughout the pandemic in the high 90 percentile range. And the hard part about using that number, Vikram, is that because we have a percentage of our portfolio called 5% to 6%, that's on a cash base -- true cash basis were the amounts we receive every month vary. It's going to jump around a little bit. But again, it's a small percentage of our portfolio that has remained consistent.

So there are no new tenants that kind of were partial of being in the quarter?

We did not put any tenants on cash basis this quarter.

And then just to clarify, so the AFFO run rate, given the $0.03 to $0.04 that you mentioned, I think you reported, if I'm not wrong, $0.34 and -- or $0.37 and adjusted $0.34. Without you redeploying the proceeds you have for new acquisitions is the right runway somewhere in the low-30s, is it like 31 in that range?

Well, our normalized number is $0.37. So I think you would take that and make those adjustments as you did…

And then just last one, any broader comments you can you give on a potential mandate around minimum staffing and even anecdotally, what you've heard from a federal perspective, any specific states you would call out? And what's the impact theoretically could be on operator financial health?

Vikram, it's really impossible to say now, those discussions are still ongoing. And there isn't a whole lot of specificity to them. The lobbying effort on the part of trade association and operators is really twofold. One, anything that you're going to do needs to be paid for. And certainly those discussions have occurred with CMS, who seems to acknowledge that that would be important. I don't want to speak to them but that was kind of our take on that. But the other is, why would you put a mandate in place when there simply aren't nurses out there? So now there was one state, I believe that was Missouri, but I might be off on that. And this is very recent, that did come out with a staffing mandate. However, they worked with the industry and the industry actually -- and that state was supportive of it, because the mandate itself; number one, was reasonable; number two, there were incentives for being able to meet the mandate; and there were qualifications around the effort being made to procure new staff. So in other words, if there were staffing shortages but operators were able to demonstrate to the regulators that they've made real good faith efforts and had that documented that they wouldn't be penalized for it, so as a result of that net state that got operator support. So there are [Technical Difficulty] making this work but it would have to be, I think, along those kind of lines. But at this point, we have no idea where it's going to fall.

Your next question comes from a line of Rich Anderson from SMBC.

I think it was said that you're expecting rate growth of 5% to 10% in your senior housing portfolio. Does that hold true and where it shows up in your portfolio, so whether it's the joint venture with TPG or your managed, wholly managed assets or even your triple net/ Is it all that in that 5% to 10% range or is it more or less in some of those buckets?

I can say it's probably for our managed portfolio that that's the case. And even that more narrowly all the operators within our wholly owned same store numbers, that's very much the case because that is actually where that information comes from is -- I think that's a reasonable range for the rest of the portfolio as well.

Do you have any concerns around the country about future nursing strikes? We had some of that going on in New York in the conventional acute care hospital system. But is that something when you think about unionization of nursing around the country that you are keeping an eye on and has keeps you up at night to a degree?

Well, it definitely doesn't keep me up at night. But I would say the answer is no. One, those strikes happen typically in states that are pretty fully unionized and not just in our space, but in other spaces. And we don't have a whole lot of exposure in states that are sort of a more [Technical Difficulty] union environment. So no, it really doesn't concern us. Even in the State of California, unions are strong in the north, not so strong in the south. But of our entire California portfolio, we have three facilities that are unionized.

Last from me is, I know you are going to kind of keep it quiet, or how we put it this year and sort of get your portfolio back into shape and return to growth next year. To what degree are you missing -- by taking that path, is there anything going on transaction wise that if you were a little bit more active, you could actually get more stuff done? Or is this giving you a time to be quiet because there is not a whole lot going on anyway, so kind of works out for you timing wise?

No, it's a fair question. We did actually a lot of transactions last year. It was a really healthy year for us. And a lot of those transactions are operations that are also improving and recovering over the course of the pandemic that are going to be accretive to earnings next year. This year, I think there are a couple of factors. One, the activity is kind of light out there. The debt markets change things and as Talya talked about on the skilled nursing comment. So it's just -- it's life in terms of opportunity. And secondly, cost of capital is an issue and we don't think until you all and the investment community believe that the industry really recovered or has gotten a lot closer, we think most everybody is going to trade relatively sideways, and so we want to be cognizant of that as well. And if we didn't -- but again, it's all because we feel really good about where we are going to be next year based on all the activity that we have done. And as we have said on past calls, Rich, for us, a lot of the focus of the pandemic has been to better position Sabra to grow as we come out of the pandemic. And I think between all of the initiatives with the transitions and the asset recycling, all the balance sheet and the new credit facility and the overall quality of the portfolio improving as a result of all these activities, I just think we’re going to be much, much stronger REIT coming out of the pandemic.

Your next question comes from the line of Joshua Dennerlein from Bank of America.

I guess, I just wanted to follow-up on a comment you mentioned in your opening remarks Rick about guidance. Sounded like you might issue it later this year. I guess what are you waiting to see as far as like reinstating it, just kind of curious given your comment?

It's primarily a trajectory that we actually think is predictable on senior housing. So that's really the main thing. We experienced the inability to project in '21, we're actually were giving guidance. And with some of our peers who have chosen to give guidance where in the next quarter they have to make some changes on it, iIt's just really difficult. We've kind of jokingly said, but it's true is -- and for me, for all my decades in the business, I've never been as wrong in terms of predicting as I've been these last three years. So we just want a little bit more certainty in terms of the rate of the velocity of recovery.

And then you brought up public letter ruling you received in February 2020, I think. Just curious why you brought that up, and does it apply to any other assets or just the holiday assets, just kind of…

It applies to the independent living assets in the states, which for us is primarily holiday. And I quoted up because it's gotten a lot of attention since Welltower received there. And so it is something that's really good to have from an optionality perspective, even if you don't want to use in a way they have this time. Also it allows for us to transition holiday and non-data structure. So I just wanted to remind everybody, because the pandemic feels like it's been longer than two years, that we actually have a private letter ruling as well. And I believe that we were the first in our space to have one that had that outcome.

Your next question comes from a line of Steven Valiquette from Barclays.

So it’s a lot of the operational stuff has been covered so far, but one thing just on kind of interest expense and balance sheet. As you guys renewed, extended the credit facility in early January closing dispositions, obviously, things were already improving this year. Despite those favorable developments amongst some of the healthcare REITs today given '23 guidance, one of the trends seems to be that interest expense headwinds for '23 have been greater than what was reflected in street consensus, at least for a few companies. So I know you've not given '23 operational guidance. But I'm wondering if you can least just talk directionally and just where you think interest expense might shakeout for '23 versus $105 million just reported for '22, just directionally, just based on the variables you're aware of today to make sure we’re not…

I mean the two variables there would be any variable rate debt part [indiscernible] that we have in our portfolio. Going in -- right before we did the credit facility, all of our variable rate debt excluding our credit -- excluding our revolver balance was effectively fixed. We had already swaps in place. And as I mentioned in my prepared remarks, we’re attuned to additional swaps and kind of starting enforced already swapped to lock in that interest for the next five years. So if you look at the predominance of our debt that's outstanding, it's all fixed rate, between our public bonds and our term loans and we had a little bit of mortgage debt as well. It's all fixed rate. The only variability you would experience, that we would experience, from the debt side would be on our revolver balance. But we've paid that down significantly subsequent to your end and we'll continue to look to pay that down through a double cash flow, there's additional sales proceeds, as we generate more earnings out of our senior housing managed portfolio, that's all going to help reduce that balance down even further to then reduce whatever exposure we may have to variable rates.

One other kind of random question here. You talked about the PLR. Obviously, that's for independent living and kind of just for data structure overall. But I guess I'm kind of curious, if you do believe that there's a potential turnaround in the [indiscernible] sector longer term. Does it make sense at some point to explore even doing every day a structure for him for [indiscernible] skilled nursing. There are some other REITs that are involved in that and where that's ever crossed your mind, or if that's something you want to steer away from for other reasons? Just curious to get your higher level thoughts around that.

So how people will say never say never. This is like never, ever will it happen. There's only one REIT out there that's done that they’re private non-traded REITs. No, I think the liability is tremendous. It's different with skill, because in the skilled nursing space, there's a national database called Nursing Home Compare and that's where the trial attorneys go. They go into that database and they go fishing and they look for facilities that have had certain numbers of efficiencies or issues with the regulators, it's right there for the taking and it put classes around that. So whereas in senior housing, the private pay industry with no federal regulations that doesn't exist. So to me, there's huge, huge liability risks there. And this has come up on occasion over the years, and just won't do it. Just not going to happen. And the other thing I want to just point out, it wasn't majority that has the state mandates that the industry supported, it's the State of Virginia, I just wanted to clarify that.

Your next question comes from the line of Tayo Okusanya from Credit Suisse.

I just wanted clarification on the Enlivant JV. I think, Mike, you made commentary that the JV had net contributions to your bottom line this quarter than last quarter, which again, seemed contrary to what's happening in your wholly owned portfolio. So could you just talk a little bit about kind of the outlook for the Enlivant JV and maybe any updates on top with TPG about a potential sale?

So the sale process is ongoing. And you're right about the trends there are counter to what we're seeing elsewhere in the portfolio, which was since really great gains on the AL side. And the issue really is for anybody that's ever taken a company through a sales process that creates a lot of uncertainty and instead of a very big distraction from management. In this case, the sale process was supposed to start at the Labor Day 2021, which is why we had to make the announcement on our second quarter call of '21, that the sell was going to happen and we had to address it in terms of the write down as well. So then they decided not to start the sale process at that point in time. You've had 18 months now where this thing was hungover ahead of the portfolio, and it's created problem. There has been a lot of attrition and there has been a big distraction for the management team. And given management team there, a lot of credit for intentionally being able to sort of publish steady through this whole process. But it is being marketed now. From our perspective, we don't expect much and kind of…

And Tayo, the only thing I would add to that, to what Rick said on the operating performance, if you recall, that's a pretty highly levered portfolio. So debt service costs have been getting away at AFFO as well.

I mean, is occupancy down? Is occupancy continue to kind of trend down versus the rest of your portfolio that's improving, or just give us a faint understanding of what's happening?

It's just flat. It's just flat, it's not going up, it's not going down. And that's why I said they are basically holding serve and I give them credit for that given everything that they have gone through. But the other thing I want to remind everybody that relative to the support payments that have been ongoing for the operating company, we don't contribute anything to those. Some of that comes from Sabra.

[Operator Instructions] Your next question comes from the line of John Pawlowski from Green Street.

Maybe just a follow-up to that last question. Assuming the credit markets remain challenging, Rick, would you expect or do you expect to have to invest additional capital in Enlivant JV, if TPG can't find a seller or a buyer?

So, we don't have that expectation, we've made that clear to TPG as well. So we haven't been investing anything and we don't intend to invest anything. The debt is non-recourse. We actually could just walk, if we think that's the right thing to do.

One for you, Talya. With respect to your mortgage loans and preferred equity investments. Can you give me a sense for how well covered the debt service costs are today, and if you're becoming incrementally more concerned about just credit behind any of your properties?

There's only one loan that's really more substantial and that is our loan to RCA, which is collateralized by fixed assets, and their operations are improving. So we are not really concerned. Those are core assets to their operations, A and B, they are on the upswing from occupancy and EBITDAR and coverage perspective. So we have a degree of confidence there.

And on the preferred equity side, any concerns there?

No, that's a pretty small amount of money at this point. So, no.

Rob, I think we’re done then.

Well, thanks everybody for your participation today. We appreciate it. We are available as always for any follow-up, and have a great day. Thank you.