Sabra Health Care REIT, Inc. (SBRA) Q3 2023 Earnings Report, Transcript and Summary

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

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 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.

Thanks, Lukas. For those unfamiliar, the song leading into the call is Hatikvah. It’s the national anthem of the State of Israel, and it means The Hope. Today is the 1 month anniversary of the massacres and the hostage taking. There’s a saying that we Jews have, Am Yisrael Chai. It means The People of Israel Live. And it’s never been as important to us as it is today. We’re here. We’re not going anywhere. With the levels of anti-Semitism in the U.S. and Europe hitting levels that we haven’t seen since the ‘30s, your Jewish friends don’t feel good, they’re not okay. Their kids don’t feel safe. It’s really important for all of us that you use your voices that you reach out. We all know where silence leads us. Thank you. Now on to the quarter. I’m pleased to report the work we put into improving our portfolio has positioned it to be stronger than it was pre-pandemic. Our dispositions and transitions have enhanced the quality of our portfolio and our credit quality. Our EBITDARM coverage is up in all asset classes. Occupancy in our skilled nursing, triple-net Senior Housing and SHOP portfolios continue to improve. Our two significant transitions, North American to Ensign and Enlivant to Inspirit continue to show material growth, validating our decision to move those portfolios to those particular operators. Our skilled nursing concentration continues to drop and is now at its lowest point since inception, enhancing the diversity of our portfolio. Our balance sheet is exemplary with no near-term maturities, no floating rate debt outside our revolver. And leverage has ticked down and will continue to improve. As our cost of capital continues to show improvement, we look forward to being a net acquirer again in 2024, focusing on singles and doubles in all of our asset classes. Although we are not providing guidance yet, we do plan on providing full year guidance for 2024 early in 2024. A couple of other comments, one regarding the mandate and the final rule and timing. The original goal for the industry was to submit 10,000 comments to CMS. There have now been over 40,000 comments submitted, the great majority by far against the rule. CMS is required to go through all these comments. So it’s going to take quite some time we believe before there’s a final rule, and then the actual impact of the rule, if it should come to pass, is probably a couple of 3 years down the line. In terms of our Behavioral segment, we saw some concerns in the notes about the Behavioral segment. It’s performing well, and you’ll hear more comments about that as we go through today’s discussion. And with that, I’ll turn the call over to Talya.

Thank you, Rick. Our wholly owned managed senior housing portfolio has shown strong positive momentum over the past five quarters with a significant increase in cash net operating income as a result of strong revenue growth and expense control. 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 third quarter of 2023 was 81.9%, a sequential increase of 170 basis points, the highest occupancy we had in the past 5 quarters. Quarterly occupancy in our independent living portfolio improved significantly, increasing 240 basis points on a sequential basis. REVPOR in the third quarter of 2023 increased by 5.8% over the third quarter of 2022. Annual rent increases in our portfolio begin to rollout October 1 and continue from there into early 2024. We expect that rent increases will be more tempered compared to recent years, probably in the 5% to 7% range. Excluding government stimulus funds, cash NOI for the quarter grew 5.3% sequentially and more than 28% over third quarter 2022. All of our larger portfolios saw a substantial increase in cash NOI propelled by revenue growth, leveraged by flat to lower expenses. We transitioned 11 assisted living properties from Enlivant to Inspirit in early July. That portfolio’s third quarter occupancy increased 70 basis points and cash NOI increased 16.4%, both on a sequential basis. Average occupancy in September was more than 230 basis points higher than in June, while cash NOI increased 88% in those same periods. We are optimistic that we will see continued improvement in operations as the portfolio continues its recovery. Our Holiday same-store portfolio has continued to have positive net occupancy growth, a trend that began this past June with 220 basis points of occupancy gains and 7.9% cash net operating income growth on a sequential basis. Inquiry volume as well as conversion to move-in rates, have increased meaningfully quarter-over-quarter. In addition, move-outs have declined to their lowest level in a year. After trending up since third quarter of 2022, move-out levels appear to have peaked in the first quarter of this year and have since trended down, with acuity and death continuing to drive more than half of the move-outs. Our net leased stabilized senior housing portfolio continues to perform well, growing occupancy that is now – that remains at pre-pandemic levels and improving rent coverage. At the end of the third quarter, Sabra’s investment in Behavioral Health included 17 properties and 2 mortgages with a total investment of just over $800 million. RCA Monroeville, a residential treatment center that opened in late 2020 was added to the stabilized pool in the second quarter, bumping coverage up for the pool shown in our supplemental by 0.05x, but nudging occupancy down 2.5% on a TTM sequential basis. This reflects that the breakeven point of this property types occurs at a much lower occupancy level than in skilled nursing and senior housing. In late September, Sabra completed the first phase of the redevelopment of a 132-bed residential treatment center in Greenville, South Carolina, which is pre-leased to one of Sabra’s operators. We continue to spend time on Behavioral Health, including meeting with established as well as smaller operators to assess the best path for Sabra to continue to invest in this underserved sector. And with that, I will turn the call over to Mike Costa, Sabra’s Chief Financial Officer.

Thanks, Talya. For the third quarter of 2023, we recognized normalized FFO per share of $0.33 and normalized AFFO per share of $0.34, in line with our earnings reported for the second quarter of 2023 and consistent with the expected normalized FFO and normalized AFFO run rate of between $0.33 and $0.34 per share we have communicated over the last several quarters. In terms of absolute dollars, normalized AFFO increased $2.1 million sequentially, driven primarily by a $700,000 increase in NOI from our managed senior housing portfolio, a $600,000 increase in cash rental income and a $200,000 decrease in cash interest expense. Also as of September 30, 2023, our annualized cash NOI was $453.5 million and our SNF exposure represented 54.3% of our annualized cash NOI, down 140 basis points from the second quarter and down 570 basis points from a year ago. This annualized cash NOI reflects the impact of sales completed during the quarter as well as some of the realized upside from our managed senior housing portfolio, property transitions and behavioral conversions. Like last quarter, we have included a table on Page 14 of our supplement which illustrates the upside opportunity in our annualized cash NOI from the recovery in our managed senior housing portfolio as well as from the stabilization of our previously disclosed property transitions and behavioral conversions. This table has been updated to reflect the impact of sales completed during the quarter, which accounted for the majority of the change in our expected NOI from last quarter, with the remaining difference due to quarter-to-quarter NOI in our cash basis tenant pool. Now turning to the balance sheet, which continues to be a source of strength, especially in the current lending environment. Our net debt to adjusted EBITDA ratio was 5.57x as of September 30, 2023, and is down 0.04x from the end of the second quarter as a result of improved performance in our triple net and managed portfolios as well as from the impact of asset sales completed during the quarter. We expect leverage to naturally decrease as we realize the upside opportunities in our portfolio that we have outlined in our supplement. We remain committed to a long-term average leverage target of 5x. And because of the embedded upside in our portfolio together with proceeds from any potential future disposition activity, we are confident we can achieve that target over time without needing to access the capital markets. Our opportunistic long-term debt issuances and proactive hedging together with having a well-laddered maturity schedule and no material maturities until 2026 result in a predominantly fixed rate balance sheet that provides us with significant cost certainty for the foreseeable future. Excluding our revolving credit facility, which makes up just 1.4% of our total consolidated debt, we have no floating rate exposure and our cost of permanent debt is 3.95% as of September 30, 2023. Additionally, through our hedging activities, we are currently saving over $16 million per year in interest expense, which provides a solid foundation to realize earnings growth in future periods. As of September 30, 2023, we were in compliance with all of our debt covenants and have ample liquidity of $1 billion, consisting of unrestricted cash and cash equivalents of $33 million and available borrowings of $967 million under our revolving credit facility. Finally, on November 6, 2023, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on November 30, 2023, to common stockholders of record as of the close of business on November 17, 2023. The dividend represents a payout of 88% of our normalized AFFO per share. And with that, we will open up the lines for Q&A.

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

Yes, hey, guys. Appreciate the time. Rick, I heard your comment in your opening remarks about being a net acquirer in 2024. Just kind of curious on where you are seeing the opportunities and what kind of cap rates you are seeing out there?

I can take that. It’s Talya. Cap rates is a really, really tough question to answer in this environment. I think we have seen mostly off-market opportunities brought to us by operators that have – and those have been the deals that have been more interesting and less capital – sometimes capital stack issues, which is easy for us to solve. But the hard part, of course, is if we’re trying to buy deep value add. That’s more challenging for us because we can’t affirmatively solve that. We need an operator to resolve that, and that takes time. So the off-market deals have been most interesting. But we’re actually seeing a pickup in deal flow. I think a lot is going to trade at unit value. I think we’re already seeing that. I think the banks are also going to be addressing some of their load, if you will. So I think there could be opportunities that arise with that. But right now, it hasn’t – the deal flow is stronger and it’s still more mainstream than I would expect it to be. There is not massive distress yet coming through yet.

Appreciate that, Talya. And then maybe just on sources of capital, like kind of – or maybe a better question would just be like how far away are these like opportunities away from like kind of how you think about your cost of equity or cost of capital?

Yes. I mean in terms of cost of capital, as you know, the last 2 years, any investment activity we’ve been doing has been funded by selling off underperforming assets, which provide a really cheap cost of capital. But we’re largely done with that. So that’s not necessarily going to be a meaningful source of anything going forward. It’s really going to depend on where our stock starts trading to be completely blunt. We’re trading around NAV right now, which is great. We would like to see our stock price be a little bit higher than that, comfortably above NAV before we start using that as a form of currency. And at that point, I think we have the ability to use a combination of equity through our ATM, our revolving credit facility, and any potential sales proceeds to finance acquisitions that are going to be in the cap rate ranges that we’ve seen in the past, call it high single digits. At that point, that becomes something that we can make accretive.

One thing I would add to that is that we keep trying to emphasize so people really understand. Outside of our revolver, we have no floating rate debt. So using our revolver to match, as Mike just talked about, would still put us in a very, very good position, given where the rest of our debt lies.

Thanks, everyone.

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

This is George Young for Vikram. Can you just comment on any [indiscernible] potential small tenants that could be at risk? And could you please provide more color on Landmark and what’s your exposure there?

Yes. So we don’t have tenants that we really view at risk at this particular point in time. Our tenant base that’s under 1x remains in the 5% to 6% level, which is where it’s been really throughout the pandemic and before. As far as Landmark is concerned, they are less than 1% of our NOI. And we saw the note. There were some issues raised around it, but as they are staying current on rent. And that’s just immaterial to us. But they are staying current on rent. So we just don’t see any issues there right now.

Okay. Great. That’s helpful. And can you just please walk us through the changes in timing of the long-term NOI growth opportunity?

Yes. I mean the biggest change that I would focus on is the bottom-line number, and that number came down sequentially basically because we sold assets during the quarter. That’s really it. The steps between what our actual annualized NOI was in our pro forma number, those change quarter-over-quarter. But that’s because, again, we sold assets. There is some of that upside that we’ve already realized that’s already in our baseline number. So I think the main thing to focus on is what the change in that bottom line number was, and that’s predominantly related to sales.

Great. Thank you so much for taking the question.

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

Hi, good morning. I just wanted to follow-up on Joshua’s line of questioning. You mentioned you could fund accretively with the revolver given the low leverage and low floating rate exposure. So would you be willing to temporarily lever up to do acquisitions in the current environment and what’s more appealing to you, skilled nursing given the higher yields or senior housing?

We’re still as laser-focused as we’ve been at trying to keep our leverage low. So we don’t want to lever up. And we’re pleased it came down a little bit. It’s going to continue to come down. We’d like to see it under 5.5x. So it’s more a function of the stock price getting a little bit better. So that’s actually currency that we can use. And then we can have a balance between using our stock and using the revolver so that the leverage doesn’t go up. In terms of which asset classes are the most appealing, we see upside in all of them. We think there is a nice run ahead in skilled nursing. If you look at the demographic combined with the declining supply, which, as we’ve talked about, has accelerated during the pandemic. And in senior housing, new supply just isn’t going to be an issue. And so occupancy in both those asset classes are going to continue to rise on the behavioral side. Those opportunities just don’t come up very often. As we’ve talked about, it’s a very young space and there are a lot of tried and true operators. So I think any growth there will be incremental. So essentially what I’m saying, one is we’re going to go where the opportunity is. We’ve done a good job diversifying the portfolio with growth in other spaces through dispositions and transitions and the like. And I think it’s an important point to make that even though we’ve been focused on diversifying and getting that skilled exposure down, which is the primary driver of the diversification, we’re not going to bypass doing a good skill deal. So we’re not sort of digging our heels in and saying we don’t want to go up a point or 2 on exposure for skill, so we’re just not going to do this deal. We need to grow earnings again. There is nothing more important to us than growing earnings again. And so we will take advantage of any of the opportunities that we see out there. But also as we said in the press release, we’re going to be focused on singles and doubles. We don’t need to do anything large, anything transformative, anything noisy. It’s just singles and doubles and just have steady predictable growth.

And then just as a follow-up. Just curious on the SHOP business, had a big sequential improvement in occupancy. Was any of that driven by discounting or just being a bit more conscious of the price and occupancy trade-off? It looked like the REVPOR growth slowed. And then if you could just – you gave the comments on the rent increases expected for this coming year that have already started. What was the amount that you got last year just to think about a year-over-year comp perspective?

Sure. So last year, it was a high single to low double-digit growth on asking rents and – in place. So it was – operators felt they could justify it because – and customers were aware of it because labor rates have gone up so much, and everyone was experiencing what was going on with inflation and labor. So as inflation has softened, the view is the – I mean, I said 5% to 7%. I think I said something very similar last quarter. Our operators are somewhere at 5% like in Canada, some of our domestic operators are closer to 7%. That’s what our expectation is. In terms of discounting, that’s a good question. We have not seen any substantial discounting outside of normal and standard operating procedures. So I don’t think it’s that. I think it was just a seasonal matter and just the blend of assets that came together. You saw the growth on all the other stats. And frankly, cash net operating income is a real important one.

Thank you.

Sure.

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

Thanks. Good morning, out there. And heartfelt opening comments there, Rick, thanks for that. In terms of the going on offense sort of motif that you’re talking about here, if someone said to me, Rich, don’t do anything and we will pay you, I’ll be like, Sign me up. And so in this case, you’ve been rewarded sort of for doing that. And I don’t mean you’re not working, of course. But do you think that at this current stock price, you’d still kind of let this marinate and perhaps not go on offensive? Or do you need sort of extra effervescence to your stock price before you can actually go into this sort of net acquirer strategy for next year?

Yes. So we’re definitely – we’re not going into Aaron Judge mode here, okay? So as Mike said – Talya doesn’t get that.

No. Out of my head.

We need the stock price to improve more. Just being around NAV isn’t good enough. So we are going to let it marinate more. We think that we’ve created a really good story here. As I said in the opening remarks, we’re much better positioned than we were really at any point in time, however far you want to go back and not just before the pandemic. So we think as we let this marinate, to use your term, as we put guidance out for ‘24, people see earnings growth coming, we think that our cost of capital will improve and then we will be able to do what we said we’re going to do.

Okay. You said on the issue with CMS and the 40,000 responses, you said 2 to 3 years for implementation. Is that – are you saying like a phase-in type of phenomenon? Is that what you think ultimately comes of this? I mean can you picture how this gets rolled out to the industry?

Yes. So if you go back and look at the proposed rule, there was a 2- to 5-year phase-in period. It’s broken down into different components. It was going to take some period of time before the final rule actually came out and then went into effect after that. It can take 6 to 12 months for the final rule to actually go into effect. So if you start playing all that out, you’re really looking at a few years from now before you start to see the beginning of the impact. So that’s why we’ve been saying to investors at conferences is really chill about this. It’s not today’s issue. The industry has to deal with it. Our lobbyists have to deal with it. But today’s issue is dealing with the shortage that we have. The actual mandate if it happens – because the industry also isn’t going to sit by if the final rule is something that we don’t believe we can live with. Then it’s a ways way down the line. So that’s really what I was referring to.

Okay. I just wanted to know what you meant by the 2 to 3 years. I get it now. And so last question for me. You have had some nice numbers out of Medicaid in terms of growth, Medicare 4% for the coming year. Talya, you said inflation has softened to a degree, of course, you are correct. But do you have a concern that if inflation continues to improve, that we could be looking at some sort of Medicaid/Medicare hangover event for the following year where you don’t quite keep up with what you are getting this year? And then suddenly, your external growth underwriting process becomes more difficult, and we go back to more like nominal 2%-ish type growth going forward. Is that the expectation that you will be sort of underwriting into your external growth process, or do you see Medicare/Medicaid sort of keeping a CPI-plus type of number for a period of a couple of years going forward?

Yes. So, I get the question, Rich, but there is a lag time for Medicare and Medicaid, particularly Medicaid with the cost support process. So, we fully expect next year’s Medicaid rates will be higher than the 5%-plus aggregate we got this year. And we expect Medicare to be higher also as it will capture current inflation more. So – and if you remember, there was a component of the Medicare rate increase that was a takeaway. It happened over 2 years. Without that takeaway, the 4% would have been I believe, 6.2%. So, we think that number is – I am not going to sit here and tell you today that it’s going to be 6.2% next year, but we believe it’s probably better than 4%. So, we think we have at least another year of robust rate increases from both Medicare and Medicaid, which also buys you that much more time for occupancy to start exceeding pre-pandemic levels. The industry is about 200 basis points below pre-pandemic level now. If you look at the NIC report, it says 82%, but the NIC report – NIC data when it comes to SNF isn’t really very good. It’s a small subset. NIC is really good for senior housing, not for SNF. So, we are getting pretty close. And as I have said in my opening remarks, given the decline in supply and obviously, it’s market driven, we fully expect occupancy to go beyond pre-pandemic levels on the skill side as well as senior housing. And that combined with these outsized rate increases will compensate for the increase in labor and get us not just back to margins that – or where they were pre-pandemic, but we believe margins that will be better. And the other point I would make just specific to our portfolio is we were able to take advantage of a lot of the opportunities presented to us during the pandemic to sell assets and transition assets. So, we have got a much stronger group of operators now than we did before the pandemic. So, I think that helps as well. Look, before the pandemic, you had operators that were good. They did a nice job. And you had great operators and you had weaker operators. But the operators that were okay, it wasn’t good enough anymore with the pandemic. So, it really separated operators out even more. And again, we were able to take advantage of some of those opportunities, so we feel pretty good about where we are.

Yes. And the other thing I will add to that, Rich, you alluded to underwriting. And in this environment where inflation has been where it’s at, it’s not like we are underwriting annual increases of 5%, 6% going forward into the future. And in fact, our existing portfolio and most everything we underwrite has largely fixed rate increases that are going to be between 2% and 3%, which again would insulate our operators in the event inflation comes down. They are not seeing those rate increases they are getting now, while their fixed cost is only going up by a smaller amount as well.

Okay. Great. Thanks for the color.

Your next question comes from the line of Wes Golladay with Baird. Your line is open.

Hey. Good morning to everyone. We talked a lot about the revenues in the managed care. Just can we talk about the expenses a little bit? Do you expect any normalization next year in the easy comps, whether it’s having more open positions, taxes or anything that needs to be called out?

I think on the operating expenses, it’s really been labor, that’s a big driver. The rest of the operating expenses held in pretty reasonably. And labor, it’s still going to be tough going for a while. The level of wage increase has come down. Registries come down, temporary agency that is. So – but you are still going to – you still have some inflation on the wage side. I think because labor is the only impediment to growing occupancy even more quickly, operators are willing to pay a little bit more to fill those spots so they can increase their admission rates because that’s going to more than compensate for the difference.

Got it. And then on the labor, are you still seeing some shortages where maybe it’s been a governor on occupancy gains?

Absolutely, I mean we have gotten a pretty decent chunk of those folks that burned at our back, but we still have ways to go. So, it’s not normal yet. And it’s going to – it’s still going to take some time. So, I hope you are not hearing that everything is hunky dory from anybody else on labor because it isn’t. It’s just better than it was and it keeps improving and the wage increases in 2023 are not nearly as high as they were in 2022. And then when you bring temporary agency down because that is so expensive, particularly with the price gouging that occurred during the pandemic that net-net, even when you are raising wages on your employees you are in better shape from a margin perspective because of the cost of that temporary agency.

I guess maybe just a quick follow-up on that, just trying to get out of me head, obviously flattish spend this quarter is amazing. But when we look out to next year, I mean how much of that is just burning off an easy comp on these temp workers who are potentially gauging? And then next year, we get to a more normal environment? Would that be more of a, I guess normalized growth year next year?

Yes. I think on the senior – because I think you are talking about senior housing, correct?

Correct. Yes, the managed side. Yes.

Yes. I mean in our senior housing, the agency labor and the temp labor was predominantly on the SNF side. We didn’t – I think in the comps that we are looking at, there wasn’t that much, if any agency labor in those comps.

And we also talked about sequential comparison. So, expenses have come down if you look year-over-year, but on a sequential basis, it’s basically holding – people are holding tight.

Okay. Thanks so much.

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

Great. Thanks. On the recently transitioned assets, I am curious if you can give us any color, I mean what Inspirit is doing different relative to Enlivant in order to get that occupancy uplift? And can we continue to see occupancy increases despite getting into a more seasonal time of the year?

Yes. So, some of it is just basic blocking and tackling. With Enlivant, you had a company that was being sold that we are losing people and management, basically every week. And so the portfolio was just floundering. So, bringing in an operator one that it happens to be very good and we knew. But secondly, they are laser-focused and they are supporting the business and putting the initiatives in that are necessary to grow occupancy, it’s really kind of as simple as that. There is still plenty of room for occupancy to grow that portfolio was in the mid-90 percentile before the pandemic.

It sounds good. And then just on the asset sales this quarter, I am curious if you can comment on maybe buyer appetite for those or kind of the IRRs or anything that they are underwriting to on those type of transactions?

I would say that there continues to be strong appetite for skilled nursing facilities, and we certainly continue to get reverse inquiries on various parts of our portfolio, geographic parts of our portfolio. That’s one. Pricing, I think is more unit or bed based as opposed to cap rate base for the most part because most of the buyers that we are seeing are owner-operator or owners with – capital partners with affiliated operators. So, they are capturing 100% of NOI, let’s say, in skilled nursing, whereas we would capture a rent stream, which would be certainly less than 100% of NOI.

Thank you.

Your next question comes from the line of John Pawlowski with Green Street. Your line is open.

Hey. Good morning. Thanks for the time. I just had one question related to senior housing triple-net business. Curious what you think sustainable EBITDARM coverage level ratios are today given potential deferred CapEx in the portfolio and probably some higher interest expense on kind of short-term working capital lines for operators?

Yes. Senior housing, we don’t see ABL lines as a prevalent mode. In skilled nursing, where you are paid – essentially, you have to bill and then get paid, you see ABL lines being prevalent. In senior housing, people pay their rent the first of the month, which is in advance. It’s not really a factor. Do I think we are going to get back to 1.25, 1.3, yes, I don’t think that’s – I think that’s within reason. On CapEx, there is room for CapEx in that coverage number for sort of usual maintenance CapEx. Any sizable capital projects, we would as the landlord consider participating in that and essentially financing that for an operator, because it enures to the landlord’s benefit because it’s – we are improving our fixed assets. Does that make sense?

Okay. Yes. Maybe just one follow-up to the 1.25, the 1.3, that’s a level where you sit back and you are really not losing any sleep at night in terms of the ability of tenants to pay rent?

That’s what we underwrote to back pre-pandemic.

Okay. Thank you.

Thank you.

[Operator Instructions] There are no further questions at this time. I turn the call back over to Rick Matros.

Thank you all for joining us today. I appreciate your time and appreciate your support. See a bunch of you at NAREIT, and we look forward to that.

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