Sabra Health Care REIT CEO Rick Matros was one of the few executives willing to take a stab at predicting the recovery of skilled nursing occupancy in the first quarter of 2021, with a projection that the numbers would return to normal in the first quarter of next year.
Six months into 2021, he reiterated that prediction, this time during a presentation at the 2021 REITWeek investor conference held by Nareit.
“We do think skilled [occupancy] somewhere around the first quarter of next year, towards the end of the first quarter will be – if not at pre-pandemic levels – close enough that no one’s going to be concerned about it,” Matros said during the presentation.
He also noted that Genesis HealthCare, which announced in March that it was restructuring and voluntarily delisting from the New York Stock Exchange, has not engaged in any discussions about rent with Sabra, despite the Irvine, Calif.-based real estate investment trust (REIT) reaching out about this topic. In fact, the operator is still paying rent, “including excess rent.”
“We’re assuming that things won’t necessarily stay that way, so we do have operators lined up to take over those eight facilities, if in fact that should come to pass,” Matros said in the June 9 presentation. “And that would still be our preference.”
Sabra’s SNF occupancy through mid-May recovered about 500 basis points from the end of December last year, according to the company, and it believes the skilled portfolio is on track to recovery by the time the first quarter of 2022 arrives, according to Matros.
BMO Capital Markets in a recent note argued that the pace of occupancy recovery will be critical for REIT tenants to maintain rents, especially as government financial supports winds down with the waning of the pandemic.
However, Sabra is optimistic about most of its tenants with regard to rent coverage, based on how it has conducted analysis on its tenants for the past couple quarters.
“We took a look at all of our tenants, we normalized the COVID expenses, we removed all the Provider Relief Funds, but we left the depressed occupancy,” Matros explained during the presentation.
With this calculation, the ratio of rent to earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) on Sabra’s triple-net portfolio was about 1.2, Matros said, which he described as “pretty good, given how depressed occupancies were.
“That gave us a pretty good feeling, relative to the strength to the strength of those strength for those tenants,” Matros said. “So we don’t expect any substantive issues with tenants going forward.”
Sabra could end up making some short-term deferrals to tenants depending on the duration of recovery time, but has not agreed to any permanent rent concession as a result of the pandemic, according to the presentation.
In addition, Sabra believes that there will be an additional $10 billion allocation from the Department of Health and Human Services (HHS) Provider Relief Fund, Matros said, which will help support its already stable tenant base in conjunction with the other forms of aid extended by the government to health care providers.
Sabra has skilled nursing, senior housing, and specialty hospital tenants in its portfolio, with roughly about two-thirds of its assets consisting of skilled nursing. And even with the various negative headlines in the nursing home world over the course of COVID-19, Sabra still holds largely the same view of the sector as it did before the pandemic, Matros noted.
“The skilled space, prior to the pandemic, was projected to be almost fully occupied by the middle of the decade,” he said. “That doesn’t change that much. You’ve got declining supply and increasing demographics; the demographics haven’t changed on the senior side, so we still really like that space. The pandemic has actually helped the supply and demand equation, so nothing has changed really in terms of our outlook in any of those spaces.”
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