Ongoing portfolio restructuring suppressed first quarter earnings for Sabra Health Care REIT (Nasdaq: SBRA), but executives are bullish on improving market conditions and metrics for skilled nursing.
“It feels good to at least believe that we’ve gotten the worst behind us, and I really do feel pretty good about things going forward,” CEO Rick Matros said during an earnings conference call.
Notably, some of Sabra’s skilled nursing operators that were struggling in 2022 — including Signature HealthCARE — bounced back with solid results to start 2023.
“We’re continuing to see traction and operational recovery,” Matros said, adding that occupancy within Sabra’s skilled nursing portfolio continued to improve every month in the fourth quarter and through January during the first quarter. “Our skilled mix jumped up dramatically in the first quarter as well.”
Occupancy from October 2022 through January 2023 in the company’s skilled nursing portfolio improved 130 basis points, Matros said. Meanwhile, a monthly improvement of 34 bps to 40 bps is “doable” going forward, he said.
The California-based real estate investment trust (REIT) is expecting to continue pursuing diversifying its portfolio.
“We believe the continued diversification of our portfolio over the course of this year with our skilled nursing exposure at new lows, will be an additional factor in creating long-term value,” he said.
Still, even as non-labor inflationary pressures have eased, labor issues continue to plague the sector and Sabra is not alone, executives said.
“Labor trends are improving but it’s still tough, and it’s going to be a bit of a slog there I think for a while,” Matros said.
Labor shortages are still hampering the company’s speed of recovery, he said, despite slow improvement in labor trends, including in use of agency labor.
“We feel good about the progress that has been made [in agency utilization],” he said. “I think there’ll be a greater shift … from agency to in-house staff with increased wages, but the rate of inflation on those wages has also slowed down.”
This is an improvement over the second half of last year when “significant wage increases” pressured the company’s bottom line, he said.
For the first quarter of 2023, Sabra reported FFO of $0.33, which missed Wall Street estimates by $0.01. The REIT reported a revenue of $161.32 million, which missed analyst estimates by $0.33 million.
Sabra shares closed down 2.1% Thursday, after trading 1.6% lower in after-hours trading following the Q1 2023 earnings release.
Yet again, the company did not share guidance. BMO Harris Capital Markets analysts said they were encouraged by Sabra’s progress on its dispositions and rent coverage improvements for SNFs, adding however, “Big picture, the SNF operating environment remains challenging and we remain vigilant despite occupancy and labor trends improving.”
Meanwhile, Stifel analysts said Sabra had reached a “trough” in quarterly earnings. “We believe SBRA will resume bottom-line growth in 2024, driven by SHOP recovery,” Stifel analysts wrote.
As for Earnings Before Interest, Taxes, Depreciation, Amortization, Rent, and Management Fees (EBITDARM) coverage for skilled nursing, Matros said that — excluding Provider Relief Fund (PRF) dollars — it improved over the prior quarter on a trailing 12-month basis and “even more so” for the trailing 3-month period.
Investments in 2024
Sabra executives said that investment activity is expected to be light in the near term.
“All in all, we anticipate a relatively quiet year, positioning us to constructively move forward as the industry continues to recover from the pandemic,” Matros said.
Executives were optimistic that the REIT will return to earnings growth in 2024, irrespective of the level of investment activity for the remainder of the year.
The REIT’s three largest operators – Signature HealthCARE, Avamere and Ensign — are doing well. Matros said, “We’re at a really good place with all three of those operators right now.”
Previously, Sabra expanded its relationship with Ensign Group (Nasdaq; ENSG) and Avamere through the transition of 24 properties formerly leased to North American.
Matros noted that Avamere also had a strong first quarter, adding that the transition from the old North American portfolio was going well.
Commenting on tenant Signature HealthCARE, Matros said, “Signature Health’s coverage declined…[it] had a tough second half” during a time when the Kentucky-based operator was preoccupied with the sale of its facilities. But then, things turned around favorably.
“They sold 24 facilities…right-sized their corporate infrastructure to accommodate a leaner company. And so that was quite distracting for them. However, their first quarter rebounded dramatically … So we feel really good about where [Signature] is on a current basis.”
The Signature portfolio showed some improvement on the labor front as well, Matros said.
“In the first quarter, sequentially they had a drop of 5% in their labor costs,” he said. “I don’t want to suggest that it’s going to continue at that rate, but that was a relatively nice drop with occupancy improving pretty dramatically in that portfolio.”
Signature’s occupancy was up almost 300 basis points in sequential quarters, Matros shared.
‘Nothing but good news’ on Medicaid reimbursement
Sabra executives said that they are looking forward to better reimbursement rates and federal funding, which should ultimately help the company’s margins.
“There’s nothing but good news, really on the reimbursement front, both in terms of Medicaid this summer and the Medicare market basket,” Matros said. “So that’s going to … help with margins, obviously but it’s also going to help provide more cash for people to use and … hire staff as well.”
The sense that reimbursement rates will be generally favorable is generated from “direct discussions” with state lawmakers and trade associations in various states, Matros said, adding that rates won’t rise across all 50 states, however.
“Our assumptions are based on actual dialogues and things being put in budgets,” Matros said.
In Texas, where Sabra has a presence, Matros said that there’s a good likelihood that the state will make the FMAP add-on permanent.
Moreover, for 2024, Matros said he is expecting Medicaid rate increases to be even better due to a lag between inflation’s impact and adjustment of rates.
“There’s a lag time between … when state cost reports are filed and when reimbursement rates actually occur. But of course, reports do capture inflation,” Matros explained. “It’s one of the reasons that we expect next summer’s [Medicaid] rate increases to be even better because they’re really capturing a lot of the worst period of inflation that we had during Covid.”
In the meantime, a sign of better rates to come: “A couple of states that are willing to accelerate the base period for the core support now and not wait another year, is a positive for those particular state,” Matros said.
Companies featured in this article:
Avamere, Ensign Group, Sabra Health Care REIT, Signature HealthCARE
