Sabra’s Matros Defends REITs, Looks Ahead to ‘Quiet Time’ After Senior Care Centers Sale

After a rollicking 18 months that saw Sabra Health Care REIT (Nasdaq: SBRA) substantially restructure its portfolio, the company’s CEO is looking forward to some peace and quiet over the course of 2019 — but not before swiping back at another leader’s assertion that the real estate investment trust (REIT) model has put a strain on the skilled nursing industry.

“The focus of the remainder of the year is to keep the noise behind us — have some quiet time, get some deals done, and de-lever the balance sheet,” Rick Matros said Monday during his company’s fourth quarter 2018 earnings call with investors and analysts.

The Irvine, Calif.-based real estate investment trust (REIT) expects to finally complete its long-planned divestiture of properties operated by Genesis HealthCare (NYSE: GEN) in the second quarter of 2019. The lengthy government shutdown delayed the sale of the three final Genesis-operated buildings set for disposition, as the deal is contingent on approval from the Department of Housing and Urban Development (HUD), CFO Harold Andrews said.

The so-called “Genesis Exodus” has been a long time coming for Sabra, with the $75.7 million sale of 13 buildings in December marking the latest milestone for the REIT as it attempts to distance itself from the operator. Genesis has experienced significant upheaval in recent years, frequently reporting quarterly losses and navigating an exit of the Texas marketplace.

Matros has been a vocal critic of the Kennett Square, Pa.-based Genesis’s national model, asserting that regional operators are better suited to navigating the challenges and opportunities in the current skilled nursing marketplace. In turn, Genesis CEO George Hager declared at a recent industry conference that the current REIT-skilled nursing model has been a “failure,” citing tight lease coverages and annual escalators.

Matros struck back at that characterization when asked about Hager’s comments during Monday’s call.

“I was really disappointed to hear that, particularly since he had a group of landlords that gave him rent relief, debt relief — and quarter after quarter after quarter gave him waivers on default,” Matros said.

Sabra was among those landlords, offering rent deferments and a $19 million annual rent reduction back in the fall of 2017. Matros described Genesis’s problems as “self-inflicted,” noting that other tenants did not require financial assistance — and that some operators have thrived despite the current headwinds in the skilled nursing marketplace.

“It was really disappointing to hear that, given how much the REITs have helped them,” Matros said. “If not for the REITs, the company would be bankrupt.”

Senior Care Centers solution

Genesis isn’t the only troubled operator that will soon see a divorce from Sabra: Matros also expressed optimism about its upcoming breakup with the bankrupt Senior Care Centers, with the two parties announcing a settlement agreement Sunday.

Matros declined to put a dollar figure on that settlement, but he told investors and analysts that it exceeded the approximately $5.7 million in rent that the operator currently owes. If approved by a bankruptcy court judge, the deal will settle the contentious separation between the two parties, which saw Sabra sue SCC for control of its 38 properties before ultimately reaching an agreement to sell 28 of them for $282.5 million.

The entire process, including impairment charges and transition expenses, will cost Sabra $69.3 million, Andrews said.

Sabra management also tried to put an upbeat spin on a decline in coverage at properties operated by North American Healthcare, the company’s fourth-largest tenant. Despite sliding to 1.09 times coverage in the fourth quarter of 2018, that figure has inched back up to 1.25 for January, according to Matros, as the company adjusts to the unexpected departure of its CEO last year.

The company reported a loss of $19.4 million for the fourth quarter, citing a write-off associated with senior housing tenant Holiday Retirement and losses on sale of real estate.

Pipeline plans

Despite Matros’s initial call for peace and quiet in 2019, Sabra leaders hinted at a fairly active M&A pipeline moving forward — with Matros himself pegging the total outstanding pipeline at $1 billion. While Sabra did not include specific prospective acquisitions in its 2019 guidance, Andrews said the company plans to execute $142 million in pickups from the pipeline during the fourth quarter of the coming year.

The company also anticipates disposing of about $300 million in assets for a total loss of $85 million, a figure that includes the sale of the last three Genesis properties up for disposition as well as legacy buildings acquired through the REIT’s 2017 acquisition of Care Capital Properties.

“There’s a lot of senior housing in there, primarily senior housing, but we’re starting to see more skilled deals, and that’s where we expect to get things done this year,” Matros said.

As he had during previous earnings calls, Matros remained upbeat about the prospects for the Patient-Driven Payment Model (PDPM), insisting that all of the skilled operators in Sabra’s portfolio are poised for success under the new Medicare reimbursement system.

“I believe it’s the best Medicare reimbursement system that the industry has ever had,” he said.

Sabra stock finished Monday’s trading down $0.52 or 2.66%, closing at $19.06 per share.