Why Sabra Bet on Skilled Nursing While Other REITs Bailed

Several publicly traded real estate investment trusts (REITs) have backed off skilled nursing in recent months and years, but one major player recently made an eye-popping investment in the asset class.

The largest health care REITs — Ventas (NYSE: VTR), Welltower (NYSE: HCN), and HCP (NYSE: HCP) — all have either spun off the majority of their skilled nursing assets or trimmed their portfolios by selling these types of properties. They’ve done so for a variety of reasons, from strict regulatory burdens and oversight to uncertainty over Medicaid and Medicare revenue streams in a U.S. health care system that’s currently in flux.

The situation has led to predictions that the future of skilled nursing might lie with mid-sized operators and owners. However, one publicly traded player, Sabra Health Care REIT (NASDAQ: SBRA), appears to be bucking these predictions, recently growing significantly in size by increasing its SNF exposure.

The Irvine, California-based Sabra raised eyebrows in the industry last month when it announced a merger with Care Capital Properties (NYSE: CCP), a “pure play” SNF REIT that Chicago-based Ventas spun off from its portfolio in August 2015. The move represented a significant bet on skilled nursing, but Sabra CEO Rick Matros said that the move represented a bigger-picture play for the REIT, which will retain the Sabra name going forward.

“We have a high percentage of skilled nursing, but we’re going to continue to diversify,” Matros told Skilled Nursing News, describing the merger as a way to provide Sabra with a lower cost of capital and provide a wider mix of operators in its portfolio.

“Our whole diversification effort has nothing to do with our point of view on skilled nursing, but just building a more diversified REIT,” Matros said.

Still, there is a continued need for quality skilled nursing services, and Matros said he and his team have “always liked the asset class.”

“I think it’s a great business. I think it’s a necessary service. I think it’s becoming more complex, but it’s becoming more invaluable,” he said.

Picking Winners

In particular, Sabra is eyeing SNFs that have a solid strategy and capabilities to care for medically specialized patient populations — such as those it bought for $234 million in 2015. Matros specifically pointed to opportunities for providers to capitalize on the move to value-based, neutral-site payment models.

“Providers that can take care of [residents] with the best outcomes, take the highest-acuity patients without concerns about re-hospitalizations, those are going to be the winners. I think skilled nursing is well-positioned to do that,” Matros said, adding that the best SNFs have proven that they can provide the same types of care as hospitals but at lower costs.

Echoing the other experts who have talked to SNN about the future of skilled nursing, Matros expressed concerns about the outlook for mom-and-pop operators, noting that smaller providers that predominantly rely on Medicaid recipients could take the brunt of the headwinds facing the industry.

“They’re going to have a crisis, because they don’t have the capacity to change with the paradigm shifts that we see,” Matros said. “There will be losers. There always are, as well as winners.”

The winners, in Matros’s mind, will be the fast-moving players that can provide a wide range of care and react to the kinds of routine regulatory issues that Dole mentioned.

“Now it is a more complex, strategically operated business, so you have to be aligned with nimble operators that are smart and get it,” Matros said, describing his ideal partner as one that consistently invests in cultural, technological, and operational improvements.

Investor Disconnect

Although he is bullish on this vision of skilled nursing, Matros also pointed out an impediment to successfully navigating the public markets while betting on SNFs: a growing gulf between optimism in certain pockets of the skilled nursing industry and hand-wringing among the investor class, driven primarily by a lack of available data about the state of the marketplace.

Decades ago, Matros said, there were a wide array of publicly traded post-acute providers and REITs, so if one had a bad quarter or two, it generally wasn’t enough to sound alarm bells. But as their ranks shrink, negative quarterly reports have a deeper effect on an industry starved of reliable information — despite the potential for growth in high-acuity care.

Matros isn’t the only REIT chief executive to point out that investors in the public markets might be overly skittish and misinformed about the skilled nursing business — Welltower CEO Tom DeRosa said much the same thing last May.

There’s also been a move toward greater transparency about the skilled nursing industry, with the National Investment Center for Seniors Housing and Care (NIC) starting to issue quarterly reports on metrics such as occupancy.

While educating investors and capturing their interest in the asset class might be a longer-term proposition, those with knowledge of the business are not panicking, Matros said.

“You just don’t have the same angst on the street level as you do at the investor level,” Matros said. “This has been a remarkably stable business for 35, 40 years.”

Written by Alex Spanko