Sabra’s Surging Medicare Mix Helps Offset Skilled Nursing Occupancy Drops During COVID-19

Occupancy at Sabra Health Care REIT’s (Nasdaq: SBRA) skilled nursing facilities tumbled 811 basis points since the start of the COVID-19 pandemic, but executives remained upbeat about the shift toward Medicare-funded services — even if the rafts of federal relief cash muddy the overall valuation picture.

That census decline sits slightly higher than other industry reports that CEO Rick Matros said he had seen, though he pointed to the concurrent 176-basis-point gain in Medicare mix at Sabra’s skilled and transitional care facilities as reason for optimism.

“What we haven’t seen anywhere is skilled mix actually up this significantly,” Matros said Thursday on the real estate investment trust’s (REIT) second-quarter earnings call. “We’ve seen it flat in various reports, but we haven’t seen it up as significantly, and that’s critical, because the Medicare rate — as many of you know — is two and a half to three times higher than the Medicaid rate for the majority of facilities. So it does help to mitigate the occupancy drops.”

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The positive reimbursement trends justify Sabra’s focus on primarily post-acute skilled nursing assets, as opposed to Medicaid-heavy long-term care facilities, Matros said.

“I think that’s going to bode well going forward, because we believe we’re going to continue to see acuity increases; we’ve got more and more of our operators that are specializing and taking care of COVID patients,” he said. “So we think all of that will accrue to our benefit over the longer term once we get through the pandemic.”

The Irvine, Calif.-based Sabra has yet to provide any rent deferrals to tenants during the COVID-19 pandemic, according to chief financial officer Harold Andrews, and executives praised the amount of federal aid provided to the nursing home sector.

Sabra estimated that the operators in its portfolio could access up to $410 million from various government relief efforts, including both direct aid and tax deferrals; that number also does not consider the additional impact of the $5 billion in extra direct nursing home aid from the Department of Health and Human Services (HHS) announced July 22.

Moving forward, the buoying effects of that federal largesse could make potential transactions more difficult to evaluate and eventually underwrite, chief investment officer Talya Nevo-Hacohen observed.

“It becomes really challenging to do this — you have to peel out the stimulus money so that you can see what the real underlying economics are, as opposed to numbers that are offsetting losses in occupancy,” Nevo-Hacohen said. “You have to make an assessment of the fundamentals of the location and that particular building, or those particular buildings — how they’ll recoup occupancy and normalize.”

Looking through the summer and fall, Matros expressed confidence that the public and federal response has improved, at least since the earliest days of the pandemic.

Part of that improvement is, at least in Matros’s view, a result of media and public discourse around long-term care changing along with the ongoing nature of the crisis.

“There’s an awful lot of conversation now about the inadequacy of Medicaid rates,” Matros said. “The whole narrative has shifted from all from the horror of all these headlines, and how many people are dying in facilities, to: Hey, wait a second — what’s wrong with the system, and what could the system do differently? What could we do differently, because we weren’t there to support these facilities to begin with?”

The CEO also pushed back against the prevailing narrative in the ongoing debate about liability protections for nursing home operators.

Providers in the space have argued that they cannot adequately care for residents with the threat of malpractice lawsuits looming in the distance, especially given the unprecedented nature of the pandemic and an insufficient government response; resident advocates have passionately argued that lawsuits represent the only means of pursuing justice for those who died from the novel coronavirus.

New York notably rolled back partial legal immunity granted to health care operators — including nursing homes and hospitals — earlier this week in the face of public and political pressures. Currently 29 states have some sort of protections on the book, Matros noted, though the issue remains a sticking point in negotiations over the next federal stimulus package for health care providers and workers.

“The industry has no issue and is not lobbying for blanket immunity regardless of real negligence and things like that,” he said. “Those people should always be taken to task. But just the mere fact that you have COVID in a facility doesn’t mean that you should get sued.”

Sabra logged $29.6 million in net income during the second quarter of 2020, down from $83.7 million in 2019. The REIT’s shares closed Thursday’s trading at $15.12 for a gain of $0.47, or 3.2%.