Executives at Sabra Health Care REIT (Nasdaq: SBRA) said after they close on a couple transactions in the next couple months, “that’ll pretty much be the end” of a capital recycling program they have been pursuing.
They anticipate a quiet year on the acquisition front, with debt a constraint, while the skilled nursing environment remains challenging. Labor in particular remains “a slog,” with improvement happening but “very slow,” Matros said. Still, the feared effects of a “tripledemic” did not materialize, and Sabra is not currently in any negotiations with tenants related to lease restructurings.
Although the REIT execs declined to offer guidance for 2023,, they are looking forward to getting back to earnings growth in 2024.
Analysts at BMO Capital Markets said that for Sabra, no bad news is probably good news.
“Positively, SBRA is executing on dispositions/transitions, which should hopefully improve its credit and go forward earnings, but the SNF operating environment remains challenged with key uncertainties/risks still looming,” analysts noted. Analysts at Stifel echoed these sentiments, writing that “4Q22 results are unexciting, in a good way.”
Sabra shares were down 2.05% in late afternoon trading on Wednesday, after having risen 4% in after-hours trading following the Q4 2022 earnings release. The REIT’s FFO of $0.37 per share beat consensus estimates by $0.02, while revenue of nearly $165 million beat consensus by about $6.8 million.
Fourth quarter results
The REIT had a busy fourth quarter with the transition of a 24-property portfolio previously leased to North American Health Care Inc. to The Ensign Group and Avamere Family of Companies. The transaction closed effective February 1st.
Both existing tenants, Ensign (Nasdaq: ENSG) through this transaction became one of the real estate investment trust’s (REITs) largest tenants — representing about 8% of annualized cash net operating income. Avamere continues to be one of Sabra’s largest tenants and also accounts for roughly 8% of annualized cash NOI.
Matros said both operations held up well during and after the transition, and replacing North American with Ensign resulted in an improvement in Sabra’s credit quality.
“Avamere has also picked up in Washington state, densifying a key market for them which is allowing them to enter into managed care contracts that should help both occupancy and revenue overall in that particular market,” he said.
Matros said that occupancy held steady over the holidays, with some skilled operators up and some slightly down. Yet overall, with very little impact from the flu, RSV, and COVID, it was a better than expected outcome.
“Our sequential quarterly performance on the skilled space showed improved occupancy and skill mix, labor pressures persist but have slowly been improving,” he said.
Keeping ‘quiet’ for the coming year
Sabra executives described continued investor interest in skilled nursing but said that deal flow is slower , citing the limited availability and cost of bridge to HUD financing.
“I think we’ll continue to see a queue of deals with various sellers but it’s all taking longer because debt is tougher to procure at the levels and at the amounts that people were easily able to obtain six months ago,” Chief Investment Officer Talya Nevo-Hacohen said.
Despite last year being a “really healthy” year for the REIT in terms of transactions, the changes in market conditions have constrained opportunities, Matros observed.
“The activity is kind of light out there,” he said. He said that cost of capital is also an issue, and until investors believe the industry has recovered from the pandemic, “we think most everybody’s going to trade relatively sideways.”
Still, executives said based on the activities of last year, they expect the overall portfolio to continue to improve over the course of the coming year.
“A lot of those transactions are operations that are also improving, recovering over the course of the pandemic, that are going to be accretive to earnings next year,” Matros said.
Staffing and Medicaid
In regard to the prospective federal minimum staffing mandate, Matros said that it is too early to speculate as to what the impact will be on operator financial health, although it may play out differently in each state depending on lobbying efforts.
“The lobbying effort on the part of the trade association and operators is really twofold,” he said. “Anything that you’re going to do needs to be paid for and certainly those discussions have occurred with CMS who seems to acknowledge that [funding] would be important …The other is, why would you put a mandate in place when there simply aren’t nurses out there?”
Matros said that in some states that have recently enacted “reasonable” staffing mandates, the result has been manageable for operators.
Matros added that in light of staffing shortages, if operators are able to demonstrate to regulators that they’ve made good-faith efforts to hire more staff, they should not be penalized.
Furthermore, although he said it is impossible to predict how quickly the market will improve, Matros is expecting to see better-than-historical Medicaid rates come July.
“This summer, we’ll start seeing that reflected really for the first time,” he said. “Next summer, it will really be reflected even more. We do expect some outsize Medicaid rates this summer, so that’s going to help the operators quite a bit.”
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