Higher Assisted Living Acuity Drives Sabra’s Development Strategy

Assisted living has undergone substantial changes from its original model, and Sabra Health Care REIT (NASDAQ:SBRA) has seen that trend and gone one better by launching a development platform for assisted living communities specifically designed for higher acuity residents.

“The model has changed dramatically, and it makes assisted living and memory care facilities great partners for hospital physician groups and skilled nursing facilities as hospitals focus on lowering their unnecessary rehospitalization rates,” said Rick Matros, CEO of Sabra, during the REIT’s presentation at REITweek 2013, held last week in Chicago. “Now hospitals have the option of discharging to assisted living.” 

Assisted living residents used to be relatively independent individuals, with communities providing meals and activities and light assistance. “Now, it’s operational, and there are high-needs residents who three years ago may have been living in a skilled nursing facility,” Matros said. 

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“One of the reasons we’re focused on new development is that the [primary inventory of] senior housing facilities that were built in the 90s and early 2000s were built for a more independent individual,” Matros said. “It makes them less efficient, and less sufficient for administering the level of care for today’s resident and the resident of the future.” 

The communities in Sabra’s pipeline are purpose built for higher acuity. “We’re bringing new assets into our portfolio specifically built for the resident that needs that kind of care today and in the future,” he said. 

The development is a key part of the REIT’s strategy in terms of the Affordable Care Act (ACA).

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“We have a very specific viewpoint on asset classes,” Matros said, stemming from his operational background. “We’re not aggregators of assets—we’re a healthcare REIT, trying to build a REIT in alignment with healthcare reform.” 

As acuity continues to rise in assisted living, operators are going to have to reconfigure some of their facilities in order to have more efficient staffing. That could look like converting units to memory care, and then needing to take out units in order to provide common areas, such as a separate dining room, because later-stage memory care residents generally need to be segregated. But this could cause some compression on margins, Matros said. 

“The care in the program needs to drive what the facility looks like,” said Talia Nevo, Sabra’s chief investment officer. “Part of that is the creation of new models for assisted living and memory care.”

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Sabra has a forward purchase pipeline agreement with First Phoenix Group, announced last August, to provide some preferred equity for up to 10 assisted living and memory care facilities and then eventually purchase those facilities upon stabilization. There’s also an agreement with Meridian Equity Investors to develop two other properties in Texas, and Nevo said Sabra expects to enter into additional, similar development arrangements with Meridian. 

The way the deals are structured is that the developer provides the construction guarantee and bears most of the risk, while Sabra provides some preferred equity so the developer doesn’t have to find a third-party equity source. 

“The positives of this approach is that it’s not a lot of capital up front, but we are locking in [those new assets] for future acquisitions and investments,” Nevo said. “The development reduces reliance on sellers selling into the market—this is an opportunity for us to actually be ahead, and we are picking what we want to own, as opposed to waiting to see who’s got what to sell, and then going into the scrum.”

While it’s nearly impossibly to specify what changes will take place in the healthcare system as the ACA continues its implementation, there’s a clear move away from fee-for-service, Matros said. 

There’s also buzz about a change to “site neutral” reimbursements, where providers get the same reimbursement for providing the same care to a patient, regardless of whether it’s in an inpatient rehabilitation center, a long-term acute care facility, or a skilled nursing facility.

“LTAC and rehab hospitals don’t have a high probability of viability in the long run,” Matros said. “Skilled nursing, assisted living, and memory care are the best asset classes [for investment].” 

Written by Alyssa Gerace

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