Senior Care Centers Drags Down Sabra’s Q1, But Optimism Remains — With Addiction as Next Frontier

A sizable real estate impairment charge related to the bankrupt Senior Care Centers contributed to a $77.7 million first-quarter loss for Sabra Health Care REIT (Nasdaq: SBRA), but executives remain upbeat that the changes coming to skilled nursing this fall will boost fortunes industry-wide.

The real estate investment trust (REIT) took a $103 million impairment charge primarily associated with the Dallas-based SCC, which filed for bankruptcy last year, amid a larger push toward divesting almost all of its Senior Care Centers skilled nursing facilities.

That number was higher than the originally projected $69 million, in part due to the Irvine, Calif.-based Sabra’s decision to sell off more properties than anticipated. The charge also included the effects of lingering storm damage from Hurricane Harvey in the Houston region, CEO Rick Matros said on the company’s first-quarter earnings call Thursday.

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The REIT had initially planned on dumping all 38 of its SCC-operated buildings before pruning that number to 28 in January for a total sale price of $282.5 million. Of the remaining 10, seven will remain in Sabra’s portfolio under new ownership, with three slated for sale.

But despite the quarterly loss, Matros pointed to improving coverage at five of the company’s top seven skilled nursing tenants as reason for optimism, as well as the coming $887 million Medicare market basket increase and the Patient-Driven Payment Model, both set to take effect October 1.

“We’re not seeing anything that we’re concerned about. We’re pretty close to some better times for the space, both in terms of market basket in October and PDPM — although I think it’s also fair to say that we shouldn’t expect that as soon as PDPM hits on October 1, you’re going to see some upturn,” Matros said. “I think it’s going to take several months to realize that.”

The CEO also hinted at some future expansion plans for the REIT around behavioral health — particularly addiction treatment, an increasingly common idea in the skilled nursing space as operators and investors stare down empty beds and widespread opioid addiction.

“We’ve also been looking at the addiction space, that we like,” Matros said. “There aren’t a whole lot of tried-and-true operators there, but there’s some opportunity there — very small — that would give us at least the opportunity to get into it a little bit and learn more about it without taking any real risk.”

Part of that early exploration could include the conversion of properties in its portfolio to suit behavioral needs, chief investment officer Talya Nevo-Hacohen said during the call in response to an analyst’s question — as well as the acquisition of extant addiction-treatment buildings, Matros confirmed to SNN.

The addiction treatment transformation has been floated many times in recent years as a way to counteract trends in the post-acute and long-term care industry, including declining lengths of stay and increasing consumer preference for home health. At the same time, the need for specialized behavioral and addiction treatment programs has expanded amid the rise in opioid abuse and general awareness of mental health issues — along with decreasing stigma associated with seeking and receiving treatment.

But the road hasn’t always been easy for operators interested in either converting or blending the two models. Last spring, for instance, a non-profit operator of addiction treatment centers was forced to back out of a deal to lease a wing of a nursing home in Urbana, Ill. amid logistical and regulatory issues, while other projects have faced resistance from neighbors concerned about having such facilities in residential areas.

That said, a growing number of skilled nursing operators have found ways to successfully meet the needs of people dealing with substance abuse and other behavioral issues. Highmark Health last fall opened a nursing home designed for residents with secondary diagnoses of drug misuse disorders, while one of Connecticut’s highest-ranked nursing homes serves convicted criminals who have been paroled on the grounds of compassion.

While Sabra’s leadership provided few firm details on the company’s push toward behavioral, Matros expressed optimism about the asset class moving forward.

“It is a space that we expect to see grow, and certainly is a nice complement to what we’re doing on the behavioral side of our portfolio,” Matros said.

SBRA shares fell $0.49 or 2.5% in Thursday’s trading, closing the day at $19.27.

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