Matros: COVID-19 Has Shown Importance of SNFs — But That Won’t ‘Flip’ Investor Sentiment

The skilled nursing sector has been roiled by the pandemic, but it’s also proven itself to be a critical part of the care continuum for patients coming out of a hospital stay.

For Rick Matros, the CEO of the Irvine, Ca.-based real estate investment trust Sabra Health Care REIT (Nasdaq: SBRA), that won’t necessarily be enough to draw investors to a sector they’ve been historically shy of. But the government has proven that it will support SNF operators throughout the crisis.

The future, however, lies in the will of all stakeholders to focus on the challenges and problems highlighted by the pandemic – and whether that comes to fruition at all is still up in the air.


This conversation with Matros was conducted by Alex Spanko, editor at Skilled Nursing News, at SNN’s Rethink conference held September 30.

Where would you say we are now, relative to where things were during the peak of the crisis in terms of the key indicators – PPE [personal protective equipment] infection rates, testing – and what are some of your top concerns for the fall as we look forward?

I’m getting more optimistic since the start of the pandemic. At the start, no one knew what was going on. There was no PPE, there were no guidelines, and all that. The negative part now is, we continue to have these spikes as a country, we’ve never gotten our arms around the pandemic, we’ve never gotten the curve down. So we’ve never created a break between the first wave and the second wave.

But the good news is that we’re seeing hotspots continue to pop up around the country, and we have COVID-positive tests and facilities – we no longer have any big outbreaks. It may be one or two residents and one or two employees. And that’s really a function of everybody’s operationalized all the protocols, they’ve got it down, they’re doing a really good job of it.


PPE is still an issue, but it’s not the issue that it was. A lot of operators are able to build inventory. There’s still an issue with gowns and with gloves, but that helps. There’s not anywhere near as much testing, as they say there is, but there’s more testing than there’s ever been. And that should continue to get better.

Testing to me is really the answer, because even when a vaccine becomes available – and I think from a distribution perspective, we’re looking at this spring, at the earliest, maybe mid-year next year – testing is really the answer, when you can test as much as you want to test.

In terms of anticipating the coming season, even though we don’t have enough people in our country, that adhere to wearing masks and social distancing, there are plenty that do. And I think that that’s going to mitigate some of the impact of the flu, along with all the protocols in place in the facilities. The downside is we want to start opening up the facilities and and helping the residents get away from all the social isolation that they’ve had. And to the extent that the flu hits with an increase in COVID, then it’s going to cause us to keep a lot of those restrictions in place, which makes it really tough for the residents and patients.

So that’s sort of a mixed bag, but at least I feel like we’re not seeing the big outbreaks, that the operators really do have their arms around how to contain this.

When Sabra and a lot of the other publicly traded REITs and operators in the space reported last time [on the second quarter], there was a lot of optimism about how CARES Act funding helped stave off a lot of the immediate financial struggles. From your view, how much longer can this money be sustainable? When are we going to start to have to see conversations about rent deferrals or restructurings?

There’s the remaining $2 billion of what was announced whenever it was, a couple months ago, that’s being filtered out over September, October, November and December, with a little bit in January. But there’s $45 billion left in the HHS [Department of Health and Human Services] fund. And we are cautiously optimistic that that will be distributed. How and when, we’re not sure – CMS does appear to be targeting the use a little bit more than they were originally, which is fine, because they’re doing a lot of that in dialogue with the industry, particularly with the American Health Care Association (AHCA). So we do believe that’s going to be there.

We also believe that there’s going to be additional funding for assisted living. It took a long time and a lot of lobbying to get that initial help, which was announced not that long ago. We weren’t sure if it was won and done, because I think policymakers still weren’t convinced. But we’re hearing that there will be assistance for assisted living as part of that $45 billion as well.

So my belief is that that may be enough to carry us through to the point where there is as much testing as we need, and the efficacy of the testing is there. Now that said, lenders have been holding off on taking action against providers. I think after the first of the year, they’re going to be tiring of that.

Is this just showing that in a a crisis, skilled nursing will come out on top just because it’s a more essential service, kind of the opposite of what you normally hear about: ‘stroke of the pen’ risk and headline risk around skilled nursing investments?

Absolutely. It’s been clear that the government is treating skilled nursing almost as a protected asset class. And look, most of the reimbursement is Medicare, Medicaid. So they have a vested interest; those are their dollars.

I think that’s part of the problem for senior housing, is that it’s private pay. Even though occupancy in senior housing hasn’t taken the hit that skilled has, skilled is much better off. Any assistance has been tremendous. And I’ve been as public as I can be in expressing my appreciation to not just the CARES Act, but to Seema Verma and CMS specifically, that they really stepped up and really worked in partnership with the industry. That’s been that’s been great to see. But senior housing I’m really concerned about.

In terms of looking at the senior living and skilled nursing landscape as a target for investment, is this a scenario where skilled nursing becomes a more attractive investment going forward? Is this going to create a long-term flip in the way that we look at these assets and the way that investors look at the space going forward?

It’s an interesting question, and I do think the narrative has shifted, and it shifted over the past few months. It goes to the stroke of the pen point that you raised a couple of minutes ago. What we’re hearing from investors is: Hey, maybe it’s not so bad after all, to be dependent upon government reimbursement, because they’ve been there for the space.

That said, I don’t think it’s enough to really flip it. And even if senior housing takes a while to recover – and skilled will as well – the demographics is still there, this supply-demand issue has changed favorably, because new supply has been shut down. So I really don’t think that it’s going to flip that dramatically. The senior housing providers that are really going to struggle the most are the ones that don’t have good capital partners with them.

It will create some opportunities for those that have financial strength behind them, whether it’s a PE [private equity firm] or REIT, or they just happen to have a strong balance sheet and through some other mechanisms. But I don’t think it’s going to flip. I think the sentiment will be more positive towards skilled nursing. But to think that PEs are all of a sudden going to start showing up in numbers for skilled nursing, the way they have in senior housing? I really don’t see that.

I want to keep keep the conversation on this idea of investing and where the money should be going. One of the biggest things we have seen is the kind of failure of the old-school physical plant of nursing home, the failure of the Medicaid-focused, multiple people per room. How are we going to generate investment into replacing this infrastructure that’s been on the market for 40 to 50 years? There hasn’t been a lot of will, there hasn’t been a lot of push. What’s your take on that?

You’re not going to see much new development, outside of Texas. The regulatory burdens are just too much. It’s too expensive to build facilities in most markets. And it takes too long. A new facility that was built in California took four years; that would have been 14 months in Texas.

There’s an obsolescence factor in senior housing, because so much of the original product was built almost apartment-looking, and it just doesn’t work in today’s market, and you almost can’t do anything about it. But for skilled nursing, if you have a facility that’s in a good market, and you have the capital, you can modernize the whole thing.

Modernizing means – and this is going to create an access problem because it’s already been happening – you take a 100-bed building that’s got a bunch of three-bed wards. You take take it all out, you have only private rooms and semi-private rooms, you expand all the common space, and you have a beautiful facility. But guess what, you only have 70 beds.

Between facility closures and the modernization of older plants, and the reduction of beds that goes along with that modernization, it is going to create access problems. And where the real fallout is is with the indigent Medicaid patient, because those smaller facilities are going to be very Medicare-focused. Most post-acute operators aren’t taking those lighter-care, traditional long-term care Medicaid patients anyway. They can’t go to senior housing, because that’s private pay, they can’t afford it. And so they’re just going to get squeezed out, they’re not going to have a place to go.

And I think we’re going to have some really terrible stories before there’s a reaction from the government. And then what are they going to do about it? Is lightening up on CONs [certificate of need regulations], is that going to be the answer? That’s not the only answer. Because there are enough states that don’t have CONs where there are still a lot of other regulatory burdens that make it too expensive to build.

So there’s going to have to be significant changes from a regulatory perspective that make the investment worth investors’ time and money to build SNFs. I don’t see a good answer. I think there’s going to be blood on the streets before people actually wake up and see that we have a crisis in our country.

I want to end with asking: What are some of the top things you would focus on going forward when you think about post-COVID reform, if you could wave a wand and have it all work out?

Wage support for staff, that would be number one. We have to be able to pay them more than they’re getting paid.

From an enforcement perspective, to truly have enforcement enforcement on things that most affect outcomes. Let’s help on helping operators get to where they need to get to on infection control, disaster preparedness, get away from some of the paper stuff and have it truly be outcome-focused. That’s been talked about a lot but it’s still very inconsistent across the country.

I think adding regulations is not the answer. I think shifting the focus of regulations, so that it really truly is an outcome-oriented process, and have it be a little bit more collaborative than it’s been. Along with the wage issues. Those would be my top priorities.

This interview has been condensed and edited for clarity.

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