Sila Realty Trust, Inc. (SILA) Earnings Call Transcript & Summary

Good morning, and welcome to Sila Realty Trust Fourth Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to your host, Miles Callahan, Senior Vice President of Capital Markets and Investor Relations for Sila. You may begin.

Good morning, and welcome to Sila Realty Trust's Fourth Quarter and Year Ended 2024 Earnings Conference Call. Yesterday evening, we issued our earnings release and supplement, which are available on the Investor Relations section of our website at investors.silarealtytrust.com. With me today are Michael Seton, President and Chief Executive Officer; Kay Neely, Executive Vice President and Chief Financial Officer; and Chris Flouhouse, Executive Vice President and Chief Investment Officer. Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts, such as statements about expected financial performance are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in our results compared to these forward-looking statements is contained in our SEC filings. Please note that on today's call, we will be referring to non-GAAP measures. You can find the reconciliation of these historical non-GAAP measures to the most directly comparable GAAP measures in our fourth quarter earnings release and our earnings supplement, both of which can be found on the Investor Relations section of our website and in the Form 8-K we filed with the SEC. With that, I will now turn the call over to our President and Chief Executive Officer, Michael Seton.

Thank you, Miles. Good morning, and I sincerely appreciate everyone taking the time to join us this morning. Let me first say that I am tremendously proud of the work by the leadership team and all of my colleagues to bring about the results that we are presenting to you today. I am pleased to report an extremely positive quarter to end 2024, capping one of the most eventful years in Sila's history. Throughout the year, we were prudent and thoughtful in our investing and yet remained very proactive with our existing portfolio, executing over 1 million square feet of lease renewals and extensions for the portfolio. One of the most significant lease modifications was the long-term extension of our largest tenant Post Acute Medical, in the fourth quarter. We also continued to successfully position our balance sheet from both a strength of portfolio and capital perspective. As you know by now, Sila listed on the New York Stock Exchange on June 13, 2024, and I am very proud to convey, outperformed the S&P and RMZ on a total return basis between our listing date in June and year-end 2024. Sila is already realizing the benefits of our direct listing with significantly greater overall market visibility to the investor and analyst communities. We believe that our increased access to the capital markets and liquidity position will allow for meaningful opportunities to grow and enhance value for our existing shareholders and prospective shareholders. Our forward-footed positioning starts with the recent recast of our revolving line of credit, with which we realized a $100 million increase in our total aggregate commitments to $600 million. Commitments to our facility were oversubscribed by 70% and hence, our decision to upsize the facility. This over-subscription demonstrates the confidence that the REIT lending community has in Sila's strategy, assets and balance sheet management. The size of the facility is expected to allow us to execute on our external growth objectives to enhance the diversity, quality and size of our health care real estate portfolio. While the seemingly higher for longer interest rate environment may present challenges for some of our competitors in the market, we believe Sila can use this time to take advantage of existing portfolio and new growth opportunities while others sit on the sidelines. First, the lack of new health care real estate development coming online limits opportunities for existing tenants to relocate to new buildings, creating what we believe is a stickier re-leasing environment. Second, while there may be more discrete limited new construction in markets that are in need of increased health care delivery, developers and operators often need to fill a gap in their capital stack of the construction as traditional lenders remain more restricted than in a typical stabilized market environment. These situations create an opportunity for Sila to step up and to fill the gaps in the capital stack, providing the necessary funding to allow for the construction and access to an ultimate ownership of the completed property. We took advantage of exactly this type of opportunity in the fourth quarter, executing 2 mezzanine loans for the development of an inpatient rehab facility and a behavioral health care facility in Lynchburg, Virginia, which include the purchase options at Sila's election for each facility once they are completed. We believe these loans are an outstanding use of Sila's capital, providing a mid-teens return during the development and funded period and the opportunity to acquire brand-new build-to-suit health care facilities upon completion with long-term leases with investment-grade health care sponsorship. We are seeing more types of these type of opportunities arise through our relationships with developers, brokers and some of the largest health care operators in the U.S. and we look forward to increasing returns and growing our pipeline with these types of transactions. We remain very enthusiastic about our investment thesis, targeting high-quality health care facilities and strategic locations leased to reliable tenants in a geographically diverse manner. Beyond the mezzanine loan activity, in 2024, we acquired over $164 million of accretive investments, which included 8 assets that all fit the anatomy of our ideal property. These transactions reinforce the effectiveness of Sila's capital allocation strategy and the belief in our long-term goals. We believe that the ultimate tailwind, the aging U.S. population, paired with our 99.9% net lease structure sets Sila apart from the rest of the REIT space and will allow for outperformance over time by having long, predictable, durable income streams supported by underlying businesses, which are growing. Pivoting to tenant operations. Overall, our portfolio showed improved EBITDARM coverage ratios over the prior quarter and demonstrated an increasing upward trend and we now have less than 2% of our ABR with an EBITDARM coverage ratio that is less than 1x, down from third quarter of 4.5% of ABR. There were only 3 tenants at 2 properties with EBITDARM below 1.0x in the fourth quarter versus 6 tenants spread across 9 properties in the third quarter, a significant improvement quarter-over-quarter. Also, our overall portfolio EBITDARM coverage ratio for the fourth quarter improved to 5.3x, signifying, we believe, our tenant's skill in navigating the health care operating environment. Since the fourth quarter of 2023, we increased exposure to investment grade and rated tenants, guarantors or affiliates to 66.9%. We take an active and engaged approach to continually monitor the financials and creditworthiness of our tenant base, and we are very pleased with the improving trends in our portfolio that we have seen throughout the course of the year. While we were faced with the bankruptcy of 2 tenants in our portfolio in 2024, GenesisCare and Steward, we successfully resolved all of our GenesisCare exposure by re-leasing, leasing or selling all 17 assets owned by us. We successfully resolved the final 2 remaining vacant properties that were formerly leased to GenesisCare in December 2024 by selling one and leasing the other to an investment-grade rated tenant for 10 years. Our only exposure to Steward's bankruptcy has been a single property located in Stoughton, Massachusetts, which we are actively marketing for sale or lease through a national broker and which we feel confident about the progress. Since our listing, our shareholder base has changed materially, particularly with Sila being added to certain indices, including the S&P Total Market, the CRSP U.S. Total Market, the FTSE NAREIT, the S&P Completion, the MSCI U.S. IMI Real Estate 25/50, and most recently, the RMZ. With these additions, we have seen our shareholder base become more institutionally diversified and trading volumes have increased. This momentum should continue as we expect to be added to other indices this year, including the Russell 2000. We believe that over 50% of our initial 100% retail shareholder base has turned over, which compares more favorably to other REITs that have entered the publicly traded REIT markets in a similar manner to us. I confidently convey to you that the Sila team's hard work paid off with tangible results in 2024 and I am excited to continue to have the opportunity to demonstrate to you that we can carry this positive momentum into the future. Our REIT industry-leading balance sheet will continue to be the foundation of our long-term success as we search out and find the best risk-adjusted returns in the property markets. I say with the greatest sincerity, we appreciate all of you who have already joined us as shareholders of our company. We have enjoyed getting to know a large number of you for the first time over these last several months and we look forward to expanding on all of our existing and new relationships for years to come. 2024 has been a memorable year filled with significant milestones, and our Sila team is beyond enthusiastic to continue executing on our growth strategy in 2025. Now, Chris will provide more details on the activity in our portfolio.

Thank you, Michael, and good morning, everyone. Sila's 2024 operating results were highlighted by robust renewal demand and improving tenant fundamentals across the board. We executed renewal leases and lease modifications for an excess of 1.1 million rentable square feet, which represents approximately 20% of our total real estate portfolio over the course of the year, extending many of our partnerships with some of our largest tenants. Although certain leases in the portfolio reset to fair market value at expiration, which in turn reduced the ABR at these properties, these resets were agreed to by us in exchange for longer lease terms with compounding annual rent escalations that will benefit the company in the long run. In the fourth quarter, we renewed all 15 of our leases with our largest tenant Post Acute Medical, extending each of their remaining lease terms to 20 years with no change to the base rental rates. We believe this is a testament to our strong relationship with Post Acute Medical, like many of our tenants, demonstrating their commitment to these facilities in our joint investment and the successful operation at these properties. These renewals, along with others, extended our wallet by approximately 1.5 years to 9.7 years at year-end. Our wallet, combined with our weighted average annual contractual rent increases of 2.2% has positioned Sila's portfolio for consistent internal growth for a long time to come. Entering the fourth quarter, we had 2 former GenesisCare properties remaining. On December 10, we sold the Yucca Valley Healthcare facility for $1.7 million. Just days later, on December 13, we entered into a long term lease with the Regents of the University of California, an investment-grade rated tenant at the El Segundo Healthcare facility. These 2 successful transactions concluded the selling or reletting of all former GenesisCare. The outcome highlights our ability to move swiftly and creatively should there be weakness with a tenant at one of our properties. As it pertains to our former Steward asset in Stoughton, Massachusetts, we are actively marketing the property and have hired a national brokerage firm to help us facilitate the sale or leasing of that asset in an expeditious manner. At the end of the fourth quarter, our portfolio weighted average lease rate increased 50 basis points to 96% compared to 95.5% at the end of the third quarter, driven largely by the resolution of the final 2 GenesisCare properties. After the planned sale of the Stoughton property, which accounts for approximately 3.4% of the square footage in our portfolio, this number is expected to increase to be more in line with our historical level of over 99%. Perhaps more importantly, the strength of our tenancy in place increased throughout the year. Of our tenants or guarantors who report financials to Sila, which accounts for approximately 72% of our in-place ABR, we saw meaningful increases in EBITDARM coverage ratios to a weighted average of 5.3x. All 3 of our property subcategories, medical outpatient buildings and patient rehab facilities and surgical and specialty facilities realized improvements in their financial results. It is important to note that of the approximately 28% of our obligors that do not report financials, approximately 17% or 2/3 of those are associated with an investment-grade rated tenant, guarantor or sponsor. In our disclosure, you may also notice that only 1.8% of our ABR comes from reporting obligors with EBITDARM coverage ratios below 1x, down from the 4.5% last quarter, leaving only 3 obligors in this category. We are pleased by the direction in which our tenancy is headed and we are excited to continue to build upon these positive fundamentals going forward. Turning to external growth in 2024, we closed on approximately $164 million of acquisitions, highlighted by the $85.8 million portfolio acquisition of 5 Class A health care facilities in the first quarter. In the fourth quarter, as previously disclosed, we closed on the 2 mezzanine loans, one for the development of an approximately 62,000 square foot inpatient rehab facility and the other for the development of an approximately 60,000 square foot behavioral hospital, both of which are 100% pre-leased to a dominant investment-grade rated regional health care system and nationally recognized operator. This $17.5 million combined mezzanine loan investment includes purchase options for each facility at accretive pre-negotiated cap rates. As Michael mentioned earlier, we believe in appropriate capital allocation to development funding as we can realize a solid return during the construction period and enhance our future acquisition pipeline with options to purchase these high-quality facilities at completion. If there is an option to ownership at the end of a deal structure like these, we will gladly evaluate more transactions like these in the future. Looking ahead, we continue to see attractive opportunities across the continuum of care, albeit not as much as we likely would, given the higher for longer rate environment, which we currently find ourselves. However, relative to the last 2 years, we do see a pickup in volume and the number of potential transactions that we're able to underwrite, both on and off market. We're still particularly focused on opportunities within the Sunbelt or the Smile States, as we like to call them, but we look at all opportunities with strong sponsorship across the U.S. We continue to feel encouraged by what we see in the transaction market today and remain confident that our team will continue to exercise diligence as an active and thoughtful buyer in the market, transacting on opportunities that are expected to be accretive to both earnings and the quality of the portfolio. I will now turn to Kay for a discussion of our financial performance.

Thank you, Chris, and good morning, everyone. Throughout the year, we executed on many accretive transactions that resulted in positive momentum in our financials. However, some of this was offset by events that took place in late 2023 and into 2024. Our GAAP net income for the year-ended 2024 was $42.7 million or $0.75 per diluted share compared to $24 million or $0.42 per diluted share for year-ended 2023. Our cash NOI was $41 million for the fourth quarter as compared to $42.8 million for the same period in 2023 or a decrease of 4.3%. This was driven by the timing of our net investment activity after the sale of a significant asset in December 2023 as well as sales of property in 2024, the amended master lease with GenesisCare, the closing of the former Steward property and a decrease related to certain amended leases at lower rental rates in exchange for extended lease terms. This was partly offset by increases in our other same-store properties of approximately 2.4% over the fourth quarter of 2023. Cash NOI was $168.6 million for the year-ended 2024 or a 3.6% decrease from $175 million for 2023. This is a result of the items previously described as well as a decrease in lease termination fee income. The cash NOI decrease was partially offset by a severance payment received in exchange for amending the GenesisCare lease and an increase in same-store cash NOI, excluding GenesisCare and Steward of approximately 2.3% in 2024, largely driven by our annual rent escalators. Total same-store cash NOI increased 1% year-over-year. The disposition of a significant asset in December 2023 was impactful to our non-same-store cash NOI year-over-year as we deployed the proceeds throughout 2024. As we discussed on our third quarter earnings call, we used the net proceeds of the significant asset sale to reduce the company's variable rate debt, acquire accretive real estate at higher cap rates relative to the sales cap rate and to fund the modified Dutch Auction tender offer that concluded in July 2024, all of which were accretive to the company. Our AFFO was $30.2 million or $0.54 per diluted share during the fourth quarter compared to $32.7 million or $0.57 per diluted share during the same period in 2023. For the year-ended 2024, AFFO was $131.1 million or $2.31 per diluted share compared to $132.7 million or $2.32 per diluted share for 2023 or a decrease of $0.01 per diluted share. This is a result of the cash NOI items previously described, partially offset by the positive impacts of redeploying some of the proceeds from the sale of the significant asset in 2023 to pay down variable rate debt, resulting in lower interest expense as well as the repurchase of our shares through the modified Dutch Auction tender offer. Turning to our fourth quarter capital markets activity. On December 31, 2024, we had 5 interest rate swaps mature with an aggregate notional of $250 million. In preparation of these maturities, we entered into 4 forward starting swaps on November 27, 2024 and December 6, 2024, with aggregate notional of a $150 million and $100 million, respectively. These 4 swaps were effective on December 31, 2024, and mature on March 20, 2029, coterminous with our $250 million term loan, inclusive of the 2 12-month extension options available to us. The maturing swaps had a weighted average fixed rate of 0.93% and the new swaps have a weighted average fixed rate of 3.76% or an increase of 283 basis points. While we knew this interest rate reset was coming, we are pleased with where we executed these hedges in comparison to where rates are currently and are expected to be for the foreseeable future. Subsequent to year-end, on February 18, 2025, we closed on our new $600 million revolving credit agreement, replacing our prior $500 million revolving credit agreement that was due to mature in February 2026. The successful recast of this transaction, resulting in a significant oversubscription, allowed us to increase the initial size of the facility by $100 million, providing additional runway for Sila to execute on our near-term external growth objectives. This revolving line of credit provides Sila the capacity to lever up to our desired long-term net debt-to-EBITDAre range of 4.5x to 5.5x, though we may run lower or we may run higher at times through future accretive transactions that fit Sila's investment thesis. With a net debt-to-EBITDAre ratio of 3.3x at year-end, we believe maintaining a strong and low to moderately leveraged balance sheet, financial flexibility and ample liquidity is the hallmark of a strong and sustainable REIT, particularly in the current environment, which continues to bring uncertainty around inflation, interest rates, geopolitical tensions, et cetera. We appreciate our lenders' enthusiastic support and belief in Sila's long-term strategy as these partnerships are important to our ability to make accretive transactions and ultimately bring greater value to our shareholders. On October 18, 2024, the Board approved a change in the frequency of the company's distributions to its stockholders from monthly distributions to quarterly distributions effective in 2025. This change saves the company money and time related to the processing of more frequent dividends and allows us to better align the dividend payments with quarterly company financial performance. On February 25, 2025, the company's Board of Directors approved and authorized a quarterly cash dividend of $0.40 per share, payable on March 26, 2025, to stockholders of record as of the close of business on March 12, 2025. We believe that Sila's enhanced liquidity position and prudent leverage philosophy has set us up to continue to be opportunistic, drive external growth and create shareholder value into 2025 and beyond. I will now turn the call back over to Michael.

Thank you, Kay. And thank you, again, to everyone who took the time to listen to today's call. We appreciate your support and confidence in our ability to continue to drive value for you as shareholders in Sila Realty Trust. That concludes our prepared remarks. Operator, please begin Q&A.

[Operator Instructions] Your first question comes from the line of Nate Crossett with BNP Paribas.

I don't think you guys gave a formal 2025 guide. So, it might be helpful for you to kind of just walk through the main guideposts, I guess, of what we should be thinking about for this year?

Sure. Nice to hear from you, Nate. As you know, and we've spoken to you in the past and others, we don't have a very complicated business. It's a simple business, which we think allows investors and analysts such as yourselves to fairly easily model our earnings. And we've designed our business to be simple to understand which we think is favorable to new and existing investors. From a 2025 outlook perspective, we've generally said as an indication, we're targeted to grow the enterprise roughly between 7.5% and 15% per annum. So, our enterprise value today is, roughly speaking, $1.9 billion, $2 billion. So that gives you a sense of external growth that we would seek to achieve, I think, if all things line up. From a market perspective, I would have told you, in the middle of last year, as the market expected more Fed reductions both through the middle and at the end of last year, I think the market became very bullish and as it related to possible transaction activity, I think some of that has quelled a little bit, as you can probably imagine, with the latest outlook given by the Fed as well as by some of the economic reads of inflation. From a transactional activity standpoint, we're going to be very disciplined. So, I gave you some indications of how we'd like to grow the business, but we're going to stick to our knitting to be disciplined and target those assets that we think are accretive to us, the portfolio to earnings, of course. And again, to reiterate, we are focused on long-term net lease investments in the right locations with the right tenancy, sponsorship. So, I hope that gives you some sense of what we're trying to achieve in 2025.

Yes, I think it's helpful. But maybe just like you're obviously doing these kind of loan type things. What do you kind of expect the mix to be this year, I guess, between loans and just straight acquisitions? And how should we think about what the blended rate could even be, because there's a pretty wide gap, I think, between the 2. So any comments, if you could provide?

Yes. And I think that's correct. Just from a loan perspective, as you can tell by the most recent transaction that we did, we were able to achieve kind of -- on those mezzanine loans, mid-teens returns during the, I'll call it, funded period. And then, of course, those transactions have an option to purchase each of those 2 buildings. As it relates to -- but loans, of course, begin and end, right? Real estate ownership can continue in perpetuity. From a volume perspective, we are seeing more opportunities, and Chris can speak to this more, with the opportunity to fill some gaps in development budgets for transactions. But the vast majority of transaction volume that I think that we will do in 2025 will be acquisition fee ownership. Chris, maybe you can speak a little bit and give a flavor as well for some of the transactions we're seeing. Nate, would that be helpful to you as well?

Yes, yes.

Yes, Michael. Nate, good to speak with you again. I think as Michael had alluded to, the transaction market, when you kind of look at on-market type transactions did slow a bit going into the end of the year. What I will say is, coming into the beginning of this year, our conversations for what I would call and characterize more relationship off-market deals has picked up materially. And again, we are going to be prudent and we'll not grow for growth's sake. But we do have a number of opportunities that we're evaluating and that we do think that these opportunities come to us for a couple of reasons. One, our strong capital position. Two, our relationships that we have out there across various different property types and owners, operators, developers, et cetera. And three, our track record to close. And so I think when you kind of think about that as a whole, it does present some opportunities. As it relates to the different types of deals, I agree with Michael, it is going to be overwhelmingly weighted towards acquisitions. It is still a mix of medical outpatient facilities as well as inpatient rehab and surgical centers. And we're seeing different opportunities, whether that's smaller portfolios, whether that's other one-off acquisitions in the markets that we're targeting. And again, what we're focused on is lease term as well as the underlying credit of the sponsor, guarantor or ultimate tenant. I do think we are on track around acquisitions for the numbers that Michael walked through are on a full year basis. We do have a very near-term pipeline that we are executing that we hope to be able to speak more about in the not-too-distant future.

Okay. Maybe just one on tenant [indiscernible]. Obviously, the credit metrics improved in the quarter. Is there anything we should be aware of that's new that could be a credit issue this year? Or are there any like known move-outs that tenants have told you about? So, just anything on that would be helpful.

Let me take that kind of in 2 parts. Let me speak about actually in 2024, from re-leasing perspective of existing space, we had actually only 1 very small tenant leave us. So we had a very high 90s percent renewal rate for our tenancy. We were already working not just on 2025 possible expirations, but also 2026. So, as you could see by our results that we displayed, for the fourth quarter, particularly with the Post Acute Medical transaction as well as actually some others that we're working on now, we are very proactive about managing the existing portfolio to push out lease expirations. We think there's a lot of benefit to our stockholders and, of course, creates that durable, predictable income stream. As it relates to -- we do think we've had an improvement in credit metrics. I think it's reflective of the health care industry doing better each and every quarter, and frankly, every year since coming out of COVID and particularly really over the last, I would say, 24 months, managing labor issues, managing supply issues for their businesses. And I think that's really what you see, because as mentioned, which you note, we only have 3 tenants in 2 properties under 1x coverage. And I'll just mention, of those 3 tenants, one of those tenants is a very high investment-grade rated tenant. And I will also mention to you that all 3 of those tenants are current on rent. So, we feel very good about the portfolio. In terms of sort of where our focus is, if you're asking, I think, really about watch list, and we've often said, "Hey, everything in our portfolio is on our watch list because we're watching all the time." We're very focused on, I would tell you, selling the Stoughton asset. It's admittedly a drag. And we've hired a nationally recognized broker, and they are deep into the process -- sale process, and we're pleased with the feedback that we're getting. I think the push that the team hears from me every day is, I would like it sold last week or leased last week. So, that's a big focus of ours. I think we've actually had probably a reduction to a certain degree in our most high monitoring as we've gotten, of course, through -- I mean, Stoughton is resolved in the sense that we own the only asset, and it's obviously vacant at this time. We've gotten through GenesisCare, as we had mentioned. So our -- I would tell you, from a high monitoring perspective, we've had things kind of improve what I think is dramatically.

And your next question comes from the line of Rob Stevenson with Janney.

Michael, what drove the Post Acute extension timing? I believe there was still term left on the prior lease. Was this just renewing early or was it something else sort of driving the timing in the fourth quarter here?

Rob, it's great to hear your voice. What really drove it, I think, was our proactivity. Post Acute Medical is our largest tenant. We have a very close relationship with them at all levels. I've known Tony Misitano, the CEO, for a very long time. And of course, they're being our largest tenant, it was 15 separate leases that -- to each property and benefit from parent company guarantees. And there was a lot of term, I'll say, roughly speaking, remaining term was 10 plus years. They varied slightly in each case, but it was over 10 years. And there was just an opportunity where I think as they grow their business, they would also like more certainty. We, of course, appreciate that certainty and think it benefits our business, and so extended out. So, quite frankly, it came about, I would tell you, more out of a phone call by us to them saying, "Would you be interested?" And them saying, "We'd be interested."

Okay. And are these still independent leases? Or do they get aggregated into a master lease, given the timing of the renewal?

They're all individual leases. However, they're also all guaranteed by essentially the parent Post Acute Medical. We get reporting on each and every property on a very frequent basis. Of course, we get reporting and audited financials on the parent company as well. So, I would tell you that I think the master lease, by the way, concept benefited us well through the GenesisCare bankruptcy. But -- and those are, in some ways, optimal, but I don't think we're hindered in any way structurally in this transaction as a result of being structured the way it is.

Okay. And then, Michael, I guess, as we're thinking about G&A in 2025, you added Chris to the team in '24. How are you and the Board thinking about any additions of note that you might want to make over the next 18 months, personnel-wise? Are you where you need to be? Are there still more senior positions that you anticipate adding to the firm over the next year or 2? How should we be thinking about that?

I'm going to answer the broader question. I'll actually let Kay speak a little bit to give you a picture of sort of a run rate G&A as we had some onetime events last year, which she can speak to. But overall, we don't expect any adds at the C suite level, if you will, meaning we're staffed up. Throughout the organization, at the mid and low levels, we're also staffed up and structured to be scaled from a G&A perspective. We believe we can grow from the current $2 billion to $3 billion with very incremental adds at the lower level. So these would be folks like not when we add 1 property adding a property manager or a property account, but rather adding a number of properties, adding, say, a single property manager or property accountant. And again, those are lower-level people. So, not too impactful to the overall G&A perspective. Kay, maybe you can speak and answer more directly, Rob, as well as it relates to on a go-forward basis.

Sure, Michael. Rob, as we look at our G&A year-over-year, and if we remove severance, it's fairly consistent amount hovering a little over $22 million. And so, I would say a reasonable run rate is somewhere in that [ $22.5 million to $23.5 million ] range, just given some increases expected, including increases we're currently experiencing and will continue to experience as a large accelerated filer just on the various regulatory front as it relates to audit costs and things of that nature.

Okay. And then, Kay,, while I have you, anything in the fourth quarter FFO or AFFO numbers that were non-recurring and aren't indicative of a good run rate going forward, either positively or negatively?

In the fourth quarter AFFO numbers, we did not have any material severance. We did not have any lease termination payments or other or other onetime items that are large that I can think of. No.

Okay. And then with the Stoughton facility, are you still thinking that the most likely result there is a non-health care use? And if you do release it, what type of facility is that likely to be, you think, at this point?

The facility actually, due to really its location, has a fair amount of flexibility. So, of course, it was previously a health care facility leased by Steward. We've had a lot of interest on the residential front because of the location, because of the large parcel of property that it's situated on. There is an existing building there, could be converted to residential, could remain a health care facility. In terms of being partial to sale or lease, I think we're impartial. I think we are seeking really the maximum outcome for the company, whether it's proceeds or whether it's a tenant leasing situation. If it's a tenant leasing situation, I would think the building would need some capital, which, of course, we could and are in a position to provide. But we're, I would tell you, agnostic as it relates to sale or lease.

Okay. And then last one for me. Chris, where are you seeing the best acquisition opportunities these days among the sort of medical outpatient, the rehabs and the surgical specialty assets? What's sort of looking most attractive to you at this point, given where rates are, et cetera?

Yes, that's a great question. No, really, I would say it's between what we're seeing around inpatient rehab, again, across various different operators as well -- as well as outpatient medical. Certainly, you're seeing opportunities, both in kind of on or near campus that really fit our criteria. And what we're always going to be cognizant of is really just the pricing of it. And again, we're focused in on term as well as the underlying credit of that tenant. And so, as I mentioned in my earlier comments, the conversations have certainly picked up kind of coming into the new year after a bit of a slower kind of late Q4. And we do think that there are opportunities out there in both of those different property types. We're also seeing potential opportunities around micro hospitals as well as think about urgent cares or emergency departments or hybrids thereof.

And your next question comes from the line of Michael Lewis with Truist Securities.

Could you talk about the timing of the 2 mezz loan investments as they get drawn down and maybe the cadence of recording investment income? Does that start to ramp up in '25?

Michael, it's great to hear from you. As it relates to the 2 mezz loans, we anticipate them beginning to fund in Q1 and to be both fully funded by the end of Q2, 2025. We will start recording interest income on those loans, of course, as we fund the dollars. So, from an earnings perspective, we will see that Q1 and Q2. Those will get funded. And then, of course, thereafter, as we had previously mentioned, there is a senior loan. So these loans will remain outstanding until such time they're repaid either through our purchase or otherwise some other sale or refinance.

Okay. Prefect. And then you noted...

Construction by the way is just -- I'll just add, Michael, construction because I think this is a relevant point to make. Construction is expected to be completed really in about the first half of next year, which is 2026. So, as you think about how long -- what's the shortest period arguably, we could have these, right? It would be, of course, that period of time and then presumably perhaps sometime thereafter outstanding earning that interest.

Okay. Perfect. You noted the fewer operators below 1x EBITDARM coverage. The overall coverage is up. But there was a bigger increase in those between 1x to 2x. I was just wondering if there's anything notable, anybody deteriorating a little bit on the coverage side or if it's really just a function of maybe you have some operators dancing around that 2x artificial threshold and sometimes they're in and sometimes they're above.

So, you hit the nail on the head as it relates to some operators dancing right around the 2x coverage. We've got some percentage in there that's right at about 1.95x and 2x. So, 1.99x, right in that percentage. I'll also note, as folks moved out of the below 1x, they went up to the between 1x and 2x. So, the between 1x and 2x increase, first of all, as a result of folks moving out of the below 1x and then some folks dancing around the 2x. And I'll also mention to you, a little bit of it has to do with when we receive financials and the financials that we're getting. The financials are evaluated on a trailing 12 basis. And arguably, that should take away some of the cyclicality as it relates to health care. However, as we know, for instance, flu seasons and cold season exists in the fall -- in the winter months, in the fall and in the very early spring of each year. And so if the '23, '24 flu season and admissions were lower than, for instance, in the '24, '25, but we're using 06/30/24 financials, those wouldn't be reflected in the same way if we were using 12/31/2024 financials. So, it's a little bit of that as well. So I think there's a science to reading these charts, but there's also a little bit of art. And so you see it move around a little bit in that manner.

Okay. Great. And then I'm going to go all the way back to the first question you were asked, which is, there's no 2025 guidance, but maybe you could tell me if this is kind of a fair way to think about it, right? So you already talked about growing the portfolio 7.5% to 15%, more acquisitions than loans funded with the line of credit. You don't have debt maturities. The term loan is hedged. We know what the new rate is, very low lease expirations, hopefully no credit issues. We talked about the mezz loan getting funded. Did I kind of cover the highlights of the building blocks as we think about '25? Or did I miss anything?

I think you did. I think one area of I'll say, "upside" as it relates to operations is the sale or lease of Stoughton. And Rob previously asked about Stoughton, would we rather sell or lease? I mean, a sale transaction immediately obviously takes that off the books. If there was some lease scenario, there can be, of course, a scenario where there could be a ramp-up period of capital funding. So, I would tell you we're indifferent as to the outcome because we want to maximize for our stockholders. A sale clearly cuts off that aspect of that transaction and the carry costs associated, which are meaningful, and I think we've talked about that before. So I think that's an upside aspect, if you will, to our operations. The other thing I would mention, 2 other things to consider. One is, from a cap rate perspective, generally in the market, you have asked us this question, what we're seeing? And as you know, we're focused on everything from the MOB space to the inpatient rehab to the specialty hospital space. And from a cap rate range perspective, at the lower end, of course, we have MOB. At the middle and upper range, we're going to have those other asset types, and we'll bob and weave and seek out the best risk-adjusted returns. But that cap rate ranges between 6.5% and 7.5% overall. And I think we've talked about that range. More recently, it can move around a little bit. But my own view is that we're talking about higher interest rates for longer. My personal view is, we have a new normal. That new normal has set in. And in our prepared remarks, and I want to just bring your attention to it, we indicated a target leverage level of 4.5x to 5.5x, which is generally consistent with our prior indications. We stated, as you well know, that we're a moderate leverage borrower relative to our peers. It does appear the interest rate environment has reached this new normal I just mentioned, slightly higher than what the market, of course, expected a year ago. As you well know, expectations changed, particularly in the middle to the end of last year and certainly the beginning of this year due to the anticipated inflation rate, presumably being higher than the Fed's 2% target rate. So, I don't think the market is expecting as many interest rate decreases as they anticipated, let's say, for example, in May or June of last year. So as we think about stabilization of cap rates, again, don't expect big expansion or contraction for what we're targeting, utilizing moderate leverage. We're really sort of giving you more specificity around a view towards when we would raise equity to delever the balance sheet, and that's really at kind of the 5.5x level. So, hopefully, that's helpful as well as it relates to your modeling.

And there are no further questions at this time. I would like to turn it back to Michael Seton for closing remarks.

Thank you, operator. We continue to be grateful for all of your interest in Sila. We hope to see some of you tomorrow during the Wolfe Real Estate Conference and in March at the Citi Conference. Have a wonderful rest of the day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.