Sabra Health Care REIT made waves Monday when it announced it is moving 24 skilled nursing facilities from one tenant to two others.
A second ripple came Tuesday, when Sabra President and CEO Rick Matros acknowledged during a third-quarter earnings call that the REIT had not accepted the highest bid for them, and that the deal includes discounted rent rates.
The Ensign Group and the Avamere Family of Companies will land 20 and four facilities, respectively, that are currently under the North American Health Care banner. The combined rent will be $34.5 million, which reflects a 12% discount for at least the Ensign facilities.
North American’s new leadership approached Sabra in summer about downsizing or getting rent discounts.
“We didn’t [think] the rent reduction is something that was necessary given our assessment of the performance of the portfolio, and we’re actually happy to accommodate them on their request to downsize [to] the 12 [remaining] buildings,” Matros explained on Tuesday’s call. ”This is a very good portfolio. We’ve always gotten inbounds on it, so we knew that we would have some terrific options in terms of transitioning the portfolio.”
Matros said North American has been “terrific” about the deal, which led to “robust” bidding after discussions began in August. Ensign, on its way to being the largest nursing home operator in the US, and Avamere, which has enjoyed a rebound in Sabra’s eyes, were chosen for different reasons.
Avamere on the upswing
“[Avamere has] really been doing pretty well since we addressed their [recent operational] issues. Adding these four buildings really fills in their market needs, provides some really terrific opportunities for them from a managed care contracting perspective,” Matros noted.
The deal lifts Avamere to 13 facilities overall, which will benefit greatly from a 20% Medicaid increase in Washington state.
“It just makes them a stronger tenant from our perspective,” Matros explained. “As to Ensign, everybody knows Ensign. They’re an extremely strong operator, so we see that as real upside. The credit quality is obviously quite different from having a private operator. Their market equity cap, the corporate guarantee and the transparency from being public, which most investors don’t have with the REITs, because most of our tenants are private. So we think that’s an added plus. We felt like the trade-off for this upgrade in exchange for the 12% reduction on rent was well worth it.”
Sabra foresees Ensign’s strong expense controls with the acquired facilities and bulk purchasing power as powerful levers moving forward.
The transfers are expected to close by Feb.1, 2023. North American is expected to pay full rent throughout.
“It was a unique situation and it had a lot to do with the [North American] board’s involvement and the changes in management and their reevaluation of the portfolio,” Matros said. “Sometimes things happen that are unique and you don’t anticipate but you shouldn’t extrapolate. No one should extrapolate this to any other aspect of the portfolio.”
Strong operating attributes win out
Analysts on the call repeatedly quizzed Matros about giving rent concessions to the new operators, something he said that will not be “baked in” to future deals.
“The cash-flow scene is pretty steady,” he said of the transferring facilities. “Every once in a while, you can transition a portfolio and increase rent. We’ve done that with smaller portfolios. But in most cases, people know you have to transition and it just becomes a part of the negotiation.
“We didn’t see the 12% reduction being significant enough to offset the positive aspects of moving to Ensign. Frankly, there were offers slightly higher, but we thought the attributes of going with Ensign and strengthening Avamere were more important than some incremental difference on the rent.”
Matros said that Avamere has already had favorable discussions with insurers, who are expected to offer better managed care contracts, and at better rates, particularly in the Seattle area.
Labor picture improving
On other topics, Matros noted that the slowly improving labor situation is helping boost occupancy. The REIT’s skilled nursing properties improved occupancy by 180 basis points from June through October after a flat second quarter.
There has not been significant movement over the last quarter on state Medicaid pay rates, but Sabra is keeping a close watch.
“One state we’re all anxious to find out about is Texas,” he noted. “Our operators on the ground are cautiously optimistic that they’ll be successful in getting rate increases next year. We’ll see. Medicaid rates have been historically low there and the industry has been underfunded. The pandemic demonstrated some real issues in the system there.”
While expressing overall optimism, and saying that COVID is not fundamentally affecting business operations now, he still emphasized recovery is, and will be, slow.
“I’m not sure how much it’s appreciated how brutal the last three years have been. This recovery is taking much longer than any of us ever expected. Everybody that we’re aware of is taking a much more conservative approach as to how long a recovery is going to take and just having more breathing room,” he said.
“This industry has never gone through anything like this. We’re probably still at least a year away from recovery from an occupancy perspective, and a little bit more so from a margin perspective. So everybody’s trying to give themselves more breathing room, and I think that’s really understandable.”
That ties into the Ensign and Avamere deals, he noted.
“Because this recovery is taking as long as it is, we believe we will need to help tenants out for some period of time,” he said. That could mean rent relief or capital loans, for example. “We leave the door open to step up and help our tenants as they try to get to the other side of this whole three-year experience.”
For additional coverage of this earnings call, see McKnight’s Senior Living and the McKnight’s Business Daily.