Despite senior housing industry headwinds, don’t expect real estate investment trusts (REITs) to be taking aggressive steps to cut rents or lower escalators for operators as they have been for skilled nursing tenants.
That’s according to Rick Matros, CEO of the Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA).
Some other REITs are more focused on whether their tenants can make rent payments, rather than on their overall financial flexibility and ability to invest in the business. But the potential upsides of providing tenants with breathing room if their debt becomes burdensome outweigh any financial hits REITs must take on rent, Matros reckons.
Learning from history
Ensuring operators have plenty of “breathing room” has long been a point of pride for Sabra. In fact, it’s a prerequisite for the senior housing providers it chooses to work with—“not one of the senior housing acquisitions that [Sabra has] done since [its] inception” has involved a great deal of leverage, according to Matros.
The company’s reasoning draws from what’s happened historically in the senior housing and skilled nursing spaces.
“If you go back 20 years to 1997 when you had a bunch of companies going bankrupt, the companies that went under during that period were the companies that had too much leverage,” Matros told Senior Housing News. “You see it time and time again.”
When Sabra merged with Care Capital Properties in August 2017, several CCP skilled nursing tenants did not have enough excess cash to invest in their own businesses. This, Matros suggested, needed to change—and quickly.
So, in September 2017, Sabra announced a repositioning strategy that would reduce the rent of 16 CCP tenants by as much as $33.5 million.
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“Because of how accretive the deal was, we were able to provide rent relief to a number of the operators who we believed in and needed it,” Matros explained.
The move was consistent with Sabra’s overall strategy to help its operators flourish.
“Anytime you put too much debt on an operator, or you’ve got rent that’s too high or escalators that are too high… you impede that operator’s ability to do better,” Matros said.
Sabra stands out from other REITs in this regard, Matros believes.
“[With CCP,] we saw a value creation opportunity because we knew a lot of the operators,” Matros said. “We saw a group of good operators who had a landlord in CCP and, prior to that, Ventas (NYSE: VTR), who were interested really in just cashing the rent checks.”
Sabra is also in the midst of what it’s dubbed a “Genesis Exodus,” or a plan to fully divest all of its skilled nursing facilities operated by Genesis Healthcare, Inc. (NYSE: GEN). Genesis has high leverage—7.3x on a pro forma basis. Health care REIT Welltower (NYSE: WELL) also recently reduced its rent escalators on Genesis from 2.9% to 2.0%, effective Jan. 1, 2019.
Bumpy ride ahead
On the whole, senior housing investors are in for a slightly bumpy ride, Matros suggested. He’s in a position to comment, as Sabra has a mixed portfolio of skilled nursing and private-pay senior living assets, with about 384 of its 507 total properties being skilled nursing and 101 being senior living.
“My point of view, on the senior housing side, is that everybody’s a little bit too bent out of shape,” he said. The sector, for instance, is experiencing a downturn, challenged by several factors including tight labor markets and falling occupancy linked to oversupply issues.
Senior housing occupancy was 88.8% for the fourth quarter of 2017, which was unchanged from the third quarter, according to the National Investment Center for Seniors Housing & Care (NIC).
So, the industry is definitely experiencing a “downturn,” but it could be worse. In general, senior housing landlords aren’t at a point where they’re considering or making rent cuts, Matros said.
“Most operators are doing a good job sort of working their way through this,” Matros said.
All the while, it’s important to remember that debt isn’t necessarily the the most pressing problem for senior housing operators. The root of Brookdale Senior Living’s (NYSE: BKD) recent problems, for instance, isn’t debt—it’s the 2014 acquisition of Emeritus Senior Living.
“It was a bad strategic move for them to buy Emeritus,” Matros said.
Still, Brookdale does not represent the greater senior living industry, he emphasized. Looking ahead, he believes that occupancy will start to tick up in 2020.
That’s roughly in line with what some other senior living leaders have said, including the new Brookdale CEO, Cindy Baier. Short-term challenges should be surmounted as new supply tapers off and the demographic wave of aging baby boomers gather momentum, they argue.
Written by Mary Kate Nelson