As the major publicly traded players in post-acute and long-term care prepare to reveal another set of post-COVID results over the coming weeks, Sabra Health Care REIT (Nasdaq: SBRA) CEO Rick Matros remains confident that the government’s response to COVID-19 has averted severe financial strains for its tenants — at least for now.
The Irvine, Calif.-based real estate investment trust’s (REIT) efforts to support its skilled nursing operators have largely been limited to assistance with personal protective equipment (PPE) and testing, as well as helping providers navigate the bureaucratic web of federal relief efforts under the $2 trillion CARES Act.
But as the novel coronavirus pandemic drags on with no signs of stopping, Matros wouldn’t rule out the potential for rent deferrals and other moves heading into the fall.
SNN called Matros on July 27 for an update on the REIT’s pandemic strategy, as well as the CEO’s thoughts on the state of the landlord-tenant relationship in senior housing and care — and how it might change amid widespread calls for reform across the continuum.
What mechanisms exist right now for REITs to assist skilled nursing tenants?
On the PPE stuff, we’ve been just working with vendors to source for them, and we’ve got a really good relationship with Medline — who’s the largest supplier, I think, of medical supplies in the world now, but they specialize also in the skilled space, in the senior housing space. We were able to procure more PPE at better prices, because of all the price gouging that was going on.
We’ve been accessing information — like when the CARES Act first hit, and people were trying to figure out how to get what from where, we were doing a lot of that legwork, and then also talking to all of our tenants so we could help them figure out how to access everything.
Then on protocols generally, and particularly early on in the pandemic, because of how often the guidelines were changing, we had identified which of our tenants we felt, based on our experience, were just nailing it — and then we would connect that tenant with other tenants and share that information. A lot of it was sourcing on the supply side, and best-practice stuff on the protocols and the guidelines.
On testing, we identified which operators were having the most success with private labs, and which private labs were having the most success, and connecting them.
Then, just through someone I knew, we had a source in Korea that made N95 masks — and this guy was just a really good guy who was manufacturing them at pretty close to cost. We got some of our operators those masks. I don’t want to imply that it was even ever enough; it was just more than they had. We just try to be helpful.
What about direct support such as rent relief?
That’s actually been on the table since day one. We communicated that, but on the skilled side, they’ve gotten so much assistance from Medicare and Medicaid — between the three-day stay waiver, sequestration being suspended, a number of the states stepping up for FMAP.
Some of our operators, but not as many as you might think, accessed the advance Medicare payment program. And the reason more didn’t is because some of the ABL lenders — even though they are the most secure people in the space — if our tenants got that money, then they just used it to pay down the line. And then it’s a loan, right? There was no point for a lot of the tenants to do that.
Some of the ABL lenders, in fairness, were actually good about it and said: You’re going to get it, we’re not going to take it from you to pay down the line. Nor should they; they are the most secure, and AR is all good money.
At any rate, they got so much help — and I’m just talking skilled right now — that they just haven’t needed the assistance yet.
Now, because the first wave seems like it’s just not ending — and I don’t necessarily think there’s a break anymore between the first wave and the second wave, I think there’s one long wave — we’ll see how much assistance they continue to get. PHE [the federal public health emergency] was extended through September 30, so that’s going to help. We don’t have any details on the $5 billion from last week, but whatever it is, that’s going to help. There’s still tens of billions left in the HHS fund, so they should be able to get more assistance.
Even though this thing is going longer than I think any of us would have liked, because we haven’t had to do much yet, we’re still in the same position we were in February or March. If they start really hurting in October, then fine — that’s the new day one that we started giving rent deferrals, which is probably the most likely form that things will take. We have some time on that.
Again, that’s on the skilled side. On the senior housing side, our senior housing portfolio has outperformed the big three, primarily because we’ve always focused on secondary markets and the pandemic, as we all know, is all about location, right? The more densely populated areas are getting hit the hardest. Our triple-net portfolio, which actually isn’t all that big, is only down a couple hundred basis points since the end of February, which is pretty remarkable.
They’re just doing okay. I mean, they’ve had some increased costs, but they’re just doing okay. Some of them got PPP [Paycheck Protection Program funding], so that was somewhat helpful, but as you know, senior housing hasn’t gotten anything from the government. For us, on the senior housing side, it’s been a matter of: Our portfolio has just happened to perform really well through this, that our operators haven’t needed help yet. Doesn’t mean they won’t, and we’ll be there if they are, but at least so far.
In terms of the analysis with the skilled nursing tenants, we typically sit down with them and say: Okay — and we’re tracking this anyway — this is what you need. This is how much you’ve accessed. It’s no different than any other discussion, like even with the rent restructurings that were tied to the CCP merger.
We’ll say: What are you doing? What’s your business plan? You want to assess that people are doing the right things first to help themselves, and then if there’s still a gap, then you fill in the gap.
During all the work with the restructuring and the merger, we only had one tenant that we felt was just sitting back and not doing anything, and just saying, “Write us a check.” And they are no longer part of our portfolio. That’s kind of how that works. Fortunately for us, we came into 2020 in such great shape that we’re going to be able to help folks out.
How do you think the relationship between tenants and investors/landlords should change post-COVID? Clearly there’s a lot of attention and movement toward reform — what suggestions would you make?
It’s just very REIT-dependent, just as I saw when I was running Sun. I had leases with every REIT, so I knew who was a good partner and who wasn’t. But I’m always really averse to taking broad brushes — and it kind of goes to both sides.
For example, we do the CCP deal. Their operators are really hurting, whether they were legacy leases that had been in place for a long time, and then they got hit with the Medicare clawback and then the other headwinds with managed care and stuff like that — and nothing was done for them. All they could do every month was scrape together enough to write the check. They were never reinvesting in their businesses.
I think the structure itself is fine. Is there a way to hold everybody accountable to a certain standard of behavior? I don’t know how you do that relative to really being a partner and making sure that people have enough cash flow, operations are doing the right thing, that everybody has enough cash flow to reinvest in the business, that escalators aren’t choking them off.
When people blame the private-equity plays that happened with Genesis and ManorCare, for example — people are really [quick] to point the finger and say private equity just sucked everything out of those businesses. But the businesses were on the other side of the table negotiating it. They made a lot of money, right? They were all complicit in that.
Why did the board and the management team of ManorCare and Genesis think that they could sustain getting the real estate taken out for that kind of multiple with those kinds of escalators? If you’re going to try to hold people responsible, hold everybody responsible. I don’t care who the private equity guys were — they weren’t negotiating with unsophisticated people. And then you had investment bankers on both sides representing, right? Everybody just grabbed as much as they could.
I don’t know whether there are mechanisms that you can put in place to prevent those kinds of things happening. Fortunately, on the skilled side, it’s different than on the senior housing side — because of all the government reimbursement, there’s very little private equity now. There’s almost none left that play in the business, and I don’t think we’re going to see that again.
Private investors can also include people with institutional knowledge of operations — usually success for any post-acute and long-term care relationship requires a deep understanding of the landscape, and not just assuming that it’s a hotel for the elderly.
When you look on the senior housing side, like with Holiday [Retirement] — everybody, including us, we’re all sort of complicit there. We really like those assets, we like management, and we want to do those deals. I’m talking us, Ventas, NHI, and New Senior. New Senior was a little bit conflicted because of Fortress; Fortress demanded a lot of money for those assets and the market supported that because, as you know, PE’s have just driven valuations to some crazy levels.
So in return for paying up to those assets, we put these really big escalators on the business, and then after a few years … [Along with the other REITs] we just sat down proactively with [CEO Lilly Donohue] and said: Look, let’s change the arrangement, because this isn’t good for you.
They weren’t taking any action or anything like that. They weren’t not paying rent. They weren’t doing anything to trigger it. But I think that was at least a good example, and I think Lilly would tell you the same thing — where the REITs just basically stepped up proactively to restructure those arrangements so that management had a lot more breathing room to do what they needed to do to run the business.
This interview has been condensed and edited for clarity.
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