While Sabra Health Care REIT (Nasdaq: SBRA) saw occupancy improve across its portfolio in the third quarter, the real estate investment trust fell short of industry expectations as its rent revenues declined from $100.6 million in the third quarter of 2020 to $85.4 million a year later — leading to a drop in its stock price this week.
Sabra CEO Rick Matros pointed to staffing shortages as one reason why rent revenues declined, though the problem is impacting each operator differently.
“Labor pressures are really different by market,” he said during Sabra’s third quarter earnings call on Thursday. “In California, the northeast states and Texas, the labor shortage just hasn’t been as bad as in other markets. It’s also better in states that have kept up with wage increases.”
He said Florida and other southern states are much further behind in terms of wage equity.
Labor shortages remain the primary impediment in Sabra’s occupancy recovery.
Excluding provider relief funding (PRF), skilled nursing rent coverage is down sequentially for Sabra on a trailing 12-month basis. Nationwide labor shortages coupled with the rise of COVID-19 infections from the delta variant slowed the speed of the recovery during the latter part of the third quarter.
“The sequential drop was due specifically to labor costs,” Matros said. “Our skilled occupancy, which lost momentum in the late summer, is now showing some improvement.”
The third quarter earnings call occurred just a few hours after the Centers for Medicare & Medicaid Services (CMS) released its guidance on the COVID-19 vaccine mandate, requiring health care workers to be vaccinated by Jan. 4.
Vaccine Mandate Impact
Forty percent of Sabra’s operators have issued self imposed vaccine mandates and 80% of its operators’ workforce have been vaccinated, above both the industry average and national average.
“We feel pretty good about that,” Matros said. “For those that haven’t mandated, there still is a fear that they’re going to lose too many employees if they mandate but the data just hasn’t supported that. All the operators that we are aware of that have mandated simply haven’t lost that many employees.”
On top of that, the operators that have mandated it have used that as a recruiting tool at a time when staff recruitment and retention is a top priority in the skilled nursing space.
“Now they’re just going to have to mandate whether they like it or not and we think that’s a good thing,” Matros added.
Plan For Avamere Moving Forward
After falling below December 2020 levels earlier this year, a low point for many skilled nursing operators, Sabra tenant Avamere Family of Companies has seen substantial occupancy improvement thanks in part to opening COVID units.
Sabra Chief Financial Officer Harold Andrews Jr. provided insight to the changes in accounting for the Avamere lease after it was announced in September that the REIT would use an $11.9 million letter of credit to fund rent for Avamere from September through November.
“Their letter of credit to satisfy their rent obligations is expected to cover rent through a portion of their December 2021 amounts due and we expect the full amount of rents due to the end of 2021 to be paid,” he said. “Even with the encouraging pickup in census we concluded that the lease no longer meets the high threshold to continue accounting for it on an accrual basis.”
From the beginning of the pandemic through October 2021, Sabra has collected 99.7% of its forecasted rents including $7.9 million from the letter of credit for Avamere to cover rent for September and October.
The Wilsonville, Ore.-based Avamere leases 27 skilled nursing facilities and one continuing care retirement community (CCRC) with Sabra.
“We concluded that some level of rent adjustment in the future may be necessary,” Andrews said. “We expect this determination will not be made until sometime during 2022.”
Third quarter earnings were slightly below the expectations of Stifel analysts due to operating difficulties with Avamere, though their recommendation is still to invest in the stock.
The analysts assumed that Avamere will end up paying 75% of its $44.1 million annual rent with none of its December rent being paid.
“We believe the provider relief funds along with improved fundamentals should allow Avamere to survive their current issues,” the analysts wrote in a note published Thursday.
Sabra’s deal pipeline continues to be “very active”, with approximately $2 billion in the pipeline, though “not much” is skilled nursing.
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