Sabra Health Care REIT (Nasdaq: SBRA) dropped the news late Monday that its largest operator, Senior Care Centers, had stopped paying rent — and on Tuesday, its CEO framed the issue as an attempt to force the company’s hand amid a pending sale.
The Irvine, Calif.-based real estate investment trust (REIT) had already entered into an agreement to sell its 36 Senior Care Centers-operated skilled nursing facilities — along with two senior living properties — in the second quarter of the year, and had expected to continue receiving rents through the sale process. But the deal hit a snag, according to CEO Rick Matros.
“Senior Care Centers had been unhappy with the buyer that we had at the table initially, because the buyer didn’t want to retain them as tenants,” Matros said on his company’s third-quarter earnings call with investors and analysts. “Holding back on the rent was really a way for them to try to create some pressure points to affect our decision-making on who we would go with.”
After Sabra eventually rejected the initial buyer’s terms, a new suitor stepped in and Senior Care Centers began discussions with a “legit” financing source, according to Matros. But negotiations regarding ongoing rent payments fell apart last week.
“It became clear that they just couldn’t pull it off despite best efforts,” Matros said. “Historically, we’ve always gotten out ahead of issues and been transparent … It simply wasn’t the case in this particular circumstance, that we were in a position to talk about the default at the time we had the Q2 call, because we had different expectations as to outcome.”
A spokesperson for Senior Care Centers declined to comment on the situation.
The rent drama forced Sabra to cut its guidance for the year, and it no longer expects to receive any additional funds from Senior Care Centers; the REIT has a tentative plan in place to sell the facilities by the first quarter of 2019, with an executed agreement expected in the coming weeks. Sabra also has a back-up “Plan B” buyer in case the first deal falls through, according to Matros, though the company pegs the chances that it will ever recover its back rents from Senior Care Centers at less than 50%.
The REIT sees potential in the properties, with Matros predicting that the buildings could thrive under new ownership — while also taking a few swipes at the current operators.
“We saw tremendous instability of management, an inability to execute things that we see as operationally basic,” Matros said.
But the CEO repeatedly emphasized that Sabra was already in the process of offloading the Senior Care Centers properties before it announced the rent issues, a move that will reduce the REIT’s overall skilled nursing exposure to 55% and shrink its footprint in Texas — a state that, Matros said, has a difficult Medicaid reimbursement environment and an oversupply of new SNFs in certain markets.
“That gives us plenty of room to do skilled deals with operators that really fit our profile, and still have a nicely balanced portfolio,” he said. “It just gives us a lot of play in that regard. For us, we’d rather let someone else get the upside with the portfolio with different operators. We call it a day and move on.”
While the company’s $350 million pipeline still consists primarily of senior living assets, Matros expressed optimism about the skilled nursing mergers-and-acquisitions landscape for 2019 as small operators drop out of the industry rather than deal with the new Patient-Driven Payment Model. But he also noted that bed prices remain high in the skilled space, driven by private equity interest and larger operators’ perception that PDPM will bring higher reimbursements.
“Everybody sees the light at the end of the tunnel, both in the terms of the demographics, in terms of decreasing supply, and in terms of the positive benefits of the PDPM reimbursement system,” he said.
Sabra additionally provided updates on the other major divestiture on its plate: The so-called Genesis Exodus, which saw the REIT divest the vast majority of its properties operated by Genesis Healthcare (NYSE: GEN). As of the third quarter of 2018, there were only 16 Genesis properties left to be sold, with 13 under contract for sale before the end of the year — and remaining three undergoing the Department of Housing and Urban Development approval process for offloading during the first quarter of 2019.
Written by Alex Spanko
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