Nursing home operators continue to reevaluate their position at this stage of the pandemic, as the industry continues to tackle a historic workforce shortage – some, like North American Health Care Inc., have decided to downsize in order to better manage existing properties.
This shift to a more conservative strategy serves as the backdrop to Sabra Health Care REIT’s (Nasdaq: SBRA) decision to divvy up a 24-SNF portfolio previously leased to skilled nursing operator North American.
The Irvine, Calif.-based real estate investment trust (REIT) announced on Monday its plan to transfer 20 SNFs of the 24-property North American portfolio to the Ensign Group (Nasdaq: ENSG), and the remaining four to Avamere Family of Companies.
Stifel analysts indicated that Ensign has already overtaken Genesis Healthcare as the largest SNF operator in the country, even without the 20-property transition expected to close by February 2023. Ensign now operates 269 health care facilities across 13 states.
North American’s board of directors eventually decided to downsize the company, Sabra CEO Rick Matros said during the REIT’s third quarter earnings call on Tuesday. The company considered other options, such as rent reduction, but Sabra leadership felt the option wasn’t in line with portfolio performance.
“I’m not sure how much it’s appreciated, how brutal the last three years have been. Recovery is taking much longer than any of us ever expected,” Matros said of SNF lease negotiations. “Everybody’s thinking much more conservatively, [long-term care leaders are] taking a much more conservative approach to how long recovery is going to take and just having more breathing room.”
Matros said full recovery for the SNF industry within more than a year represents an optimistic perspective, and that any projections of margin recovery within that time frame would “even more so.”
Steady, conservative strategy
Ensign’s reputation as a strong operator, and its public status, has helped ensure upside through credit quality and reliable, steady future earnings, he added.
“The credit quality is obviously quite different from having a private operator – their market equity cap, corporate guarantee, and the transparency for being public, which most investors don’t have with REITs because most of our tenants are private – we think that’s an added plus,” said Matros.
He said he looks forward to expanding Sabra’s relationship with Ensign as well, even if it meant a 12%rent reduction. Matros said the exchange was “well worth it.”
Stifel analysts said the transition is designed to improve operator quality, though, added Mizuho analysts, the move may disappoint investors near-term depending on timing and magnitude of the change.
The new tenants are expected to bring in a combined initial annual rent of $34.5 million. Ensign will become one of Sabra’s largest relationships, representing about 8% of annualized cash NOI. Avamere remains one of Sabra’s largest relationships also, representing 8% annualized cash NOI.
Sabra expects to see these facilities generate $14.7 million in revenue during the fourth quarter of 2022.
“It’s just really a function of negotiation. The cash flow stream is pretty steady, and every once in a while you can transition a portfolio and get an increase in rent. We’ve done that with smaller portfolios, historically,” said Matros. “We didn’t see the 12% reduction being significant enough to offset the positive aspects of moving to Ensign.”
The properties transferred to Avamere are located in Washington, which just received a nearly 20% increase to its Medicaid rate, This made the decision to deepen its footprint in those markets an easy one for the operator, Matros said.
“These four buildings have really filled in their market needs, providing some really terrific opportunities from a managed care contracting perspective,” added Matros.
Performance and occupancy
Despite these struggles, the company did see improvement on the occupancy front.
Occupancy increased 180 basis points on the skilled side between June and October, which Matros said was a direct result of labor pressures getting better.
This aligns with the views of some industry observers. Occupancy is trending in the right direction, labor pools are improving and industry leaders are seeing a more supportive reimbursement environment, Mizuho analysts indicated in a second-quarter research note earlier this year. The positive reimbursement trends are the result of state plans to increase Medicaid rates permanently through budget updates.
Many Medicaid rate increases were introduced as temporary add-ons tied to the public health emergency (PHE).
Stifel analysts noted that Sabra’s operating statistics will likely improve as the economy reopens and seasonality “turns into a tailwind.”
Sabra reported a net loss of 22 cents per diluted common share for Q3, compared to 5 cents per diluted common share in Q3 last year. Normalized FFO was 3 cents below analyst estimates.
Funds from operations rose to 28 cents per diluted common share for the quarter, up from27 cents in the prior year’s quarter. Total Q3 revenue reached $140.764 million, an increase from $128.591 million in Q3 2021.
Sabra also reported the acquisition of two senior housing managed communities for $71.2 million during Q3, along with $23.1 million generated in gross proceeds from the disposition of three skilled nursing facilities.
Additional SNF dispositions are expected to generate gross proceeds of more than $200 million, with sales under contract expected to close by Dec. 31 of this year. Matros originally announced plans in May to divest between $100 million and $300 million in SNF assets.
As of Sept. 30, Sabra’s investment portfolio consisted of 407 properties – including 270 SNFs, 52 seniors housing communities, 54 seniors housing properties operated by third-party property managers, 16 behavioral health facilities and 15 specialty hospitals and other facilities.
Companies featured in this article:
Avamere Family of Companies, Genesis HealthCare, Sabra Health Care REIT, The Ensign Group
