Sabra Health Care REIT Predicts Active Year Ahead

Sabra Health Care REIT, a prominent real estate investment trust based in Tustin, California, is forecasting a dynamic year ahead with increased dealmaking activity. CEO, President, and Chair Rick Matros shared this outlook during the company’s fourth-quarter and full-year 2024 earnings call, emphasizing that the volume of transactions is expected to surpass last year’s levels.

Matros noted, “The increased volume we started to see before year-end has accelerated since, with more opportunities than we’ve seen in quite a long time.” These opportunities are primarily in senior living, though there is also a growing interest in skilled nursing facilities.

“The increased volume we started to see before year-end has accelerated since, with more opportunities than we’ve seen in quite a long time,” he said. Those opportunities primarily are in senior living, “but we are seeing more skilled opportunities,” Matros said.

Before the pandemic, Sabra Health Care REIT typically engaged in “several hundred million a year” in deals. Matros expressed optimism about returning to this level of investment activity, stating, “I’m not going to predict that we’ll exactly be there this year, but that’s certainly a goal for us, to get back to the level of investments that we did on a routine basis prior to the pandemic.”

Chief Investment Officer, Treasurer, and Executive Vice President Talya Nevo-Hacohen described the transaction volume in senior living as “significant,” noting that she has been clearing at least 10 confidentiality agreements a week, and it is only mid-February.

“Most of the deals are structured to transact as managed properties rather than leased ones,” she said, further describing the properties as “newer, nearly stabilized senior housing communities that offer care to residents.”

“Some of the deals, she said, involve “private equity funds that have just decided the price is good enough and now let’s just get out” of owning long-term care assets.”

“Assets with care components are, by definition, doing better” because even though they have a higher cost structure, they can rely on rate rather than trying to drive maximum occupancy. Oftentimes, such properties are independent living and assisted living memory care communities. “We are seeing some stand-alone independent living, but not that much,” she added.

Matros predicted that the concentration of assisted living communities in Sabra’s portfolio will increase over time, while the independent living concentration will decrease. He also noted that some operators are further along in their pandemic recovery, and Sabra is looking to do more deals with those who have surpassed their pre-pandemic performance.

“But we’re at the point right now where we don’t have stragglers that we had pre-pandemic,” Matros said. “And it’s also why we’ve been selective as we’ve been in terms of the deals that we’ve done, both in terms of market operator and the age of the assets that we’re buying.”

Nevo-Hacohen emphasized that the REIT considers the quality, vintage, and long-term viability of the real estate, as well as the market, when deciding whether to do a deal. She noted that the current market offers an opportunity to improve the portfolio with high-quality assets.

“Oftentimes, the seller or the operator have an ability to say who the buyer will be,” she continued. “And so relationships come to bear here. We’re also seeing off-market deals where relationships are definitely part of the discussion.”

Occupancy and Workforce Challenges

Same-store occupancy in the REIT’s managed senior housing operating portfolio was 85.5%, up 80 basis points from the previous quarter, with margins up 20 basis points. Occupancy in the leased senior housing portfolio was 89.6% for the 12 months ending Sept. 30, unchanged from the 12 months ending June 30 and down slightly from the 90% seen for the 12 months ending March 31.

Nevo-Hacohen noted that operators are balancing raising rates versus trying to increase occupancy, stating that “not everyone can do both at the same time.”

Matros added, “Occupancy ‘is not going to be a deceleration; it’s just a function of how much it’s going to accelerate.’”

Workforce challenges remain for operators, but Matros said, “Our tenants have been able to implement strategies to mitigate those challenges, and labor has stabilized.” One strategy used by providers has been to use digital marketing to recruit workers, which has been helpful in getting more people to consider employment.

Additionally, operators have undergone a “complete revamping” of their processes to welcome new employees. “The onboarding process has been lengthened,” Matros said. “There typically are mentors that are assigned to new employees, and I think that’s really helped get some traction with longevity.”

The wage rebasing that occurred in 2022 during COVID “has made our operators a more attractive destination as opposed to other service kinds of positions,” Matros added.

Insurance costs saw the largest increase among all expense types but represent less than 3% of total expenses. Labor costs, which represent more than 50% of expenses, grew 2.1% in the quarter on a year-over-year basis, Nevo-Hacohen said.

By asset class, Sabra’s portfolio is 51.3% skilled nursing and 30.2% managed or leased senior living. Among other property types include behavioral health (13.8%) and specialty hospitals (3.9%) as of Dec. 31.

Potential Medicaid Cuts

Regarding the regulatory and political environment, Matros said that Sabra takes the threat of Medicaid cuts “very seriously” but that “there are natural guardrails in place.”

“Congress has been historically protective of the elderly population, particularly those vulnerable institutionalized folks,” he said. “The Medicaid budget, inclusive of matching funds, is critical to the governors of all states, both red and blue. And in fact, the red states have been the greater recipients of Medicare. So in addition to the bipartisan support that we’ve always had in Congress, the governors of the states, again both red and blue, will be united to protect the elderly in our facilities and the Medicaid budgets that are so critical to them.”

Matros pointed out the difference between budget plans being considered by members of Congress. “The House budget has $880 billion of unspecified Medicaid cuts. The Senate version has no Medicaid cuts and overturns the [nursing home minimum] staffing mandate,” he said. “So you’ve got opposite sides of the spectrum. You have no specificity on where those Medicaid cuts are, so a very, very long way to go.”

The strength of Sabra’s portfolio should protect the REIT, he said. “Having margins, rent coverage, SHOP [senior housing operating portfolio] margins where they are, with organic growth still to come in all in both those segments, I think puts us in a very good position to withstand anything that may happen going forward,” Matros said.

According to a 2024 report from the Centers for Disease Control and Prevention’s National Center for Health Statistics, approximately 17% of assisted living community residents were Medicaid beneficiaries as of 2022. Almost half of assisted living communities surveyed in 2018 by the CDC were authorized or certified to participate in a state-federal Medicaid program. The National Center for Assisted Living notes that “a small minority of state Medicaid programs do not cover services in assisted living.”