Sabra Health Care REIT (Nasdaq: SBRA) has made some major skilled nursing waves over the past year, with its acquisition of Care Capital Properties and ongoing attempts to shed assets operated by troubled provider Genesis Healthcare (NYSE: GEN).
Rick Matros, the Irvine, Calif.-based real estate investment trust’s (REIT) CEO, has been outspoken about the changes sweeping the industry, flatly declaring that Genesis’s large-scale business model “does not work” and extolling the potential virtues of turning skilled nursing into an industry built on higher-acuity patients.
Senior Housing News asked Matros about some other burning questions in the SNF world, from the advent of the new Patient-Driven Payment Model (PDPM) to the misconceptions that some investors still have about the industry.
Want more insight from inside Sabra? Come to the Senior Housing News Summit in Los Angeles, California on September 6th, when Sabra’s chief investment officer Talya Nevo-Hacohen joins other industry leaders for discussions on the present and future of the senior housing and care space.
This interview has been condensed and edited.
From an investment perspective, what would you say are some of the biggest misconceptions about skilled nursing?
If you look over the history of the space, it’s actually been remarkably stable. In terms of the last couple years, there’s clearly been some headwinds, and much of it has been caused by a Medicare reimbursement system that has solely incentivized operators to go after short-term rehab patients. Which then, by definition, create length-of-stay pressures, which then reduce occupancy — and even your occupancy comes down to where it is on a national average basis right now.
Then the wage pressures … they’ve been there for as long as I’ve been in the business. There’s always been a shortage of therapists and nurses, but when you’re running 82% occupancy instead of 90, there’s no coverage any longer. The impact of those wage pressures becomes disproportionate. So I think you really can point to the way the reimbursement system was structured as being at the root of a lot of the issues.
That said, one of the biggest misconceptions is how good operators are. If you look at the space, you had a couple of the big guys like ManorCare and Genesis having problems for years — mostly self-inflicted because of how they grew their companies. Being big like that just simply has no advantages any longer, just disadvantages. So it doesn’t work.
But if you look at the broader space, and if you look at the health care REITs … because there are so few publicly held skilled operators, the REITs are really the best place to look to get a sense of what’s happening in the space. The great majority of our tenants — while it’s been difficult — are managing through it. You see that in any business when there’s a paradigm shift of any sort. There’s always going to be certain operators that don’t make it, and most of them do. We’ve got dozens and dozens of skilled operators and got — count ’em on less than one hand the ones that have struggled, same with Omega.
Sentiment is actually changing on skilled nursing now.
It’s changing because there are some tangible things that are all converging at the same time to make skilled nursing a more positive investment vehicle. You’ve got the market basket increase this October, you’ve got PDPM [the Patient-Driven Payment Model] in October of 2019, you have elimination of the therapy caps, you have demographics … And then of course of you’ve got declining supply with skilled nursing.
So all those things kind of bode well, and PDPM should go a long way towards correcting sort of misaligned incentives that RUG-IV [the Resource Utilization Group] created.
What lessons can investors take away from the different changes that have occurred in skilled nursing, and how should they proceed going forward?
I don’t think they’ll ever learn lessons. Investors have really short memories. No, seriously, if you just go back to October 1, 2011, CMS did that clawback on RUGs when, from their perspective, providers got overpaid — which I think the provicer community would agree that they got overpaid. The clawback may have been greater than the industry believed it should have been, but it also was during the recession, so sort of extraordinary circumstances.
At that point and time if you go and look at investors’ sentiment, if you look at what happened to the stock then, we all tanked, it was the end of the world, bankruptcies going to be all over the place. And guess what? Nothing happened.
Over the subsequent year, you saw stocks coming back, you saw investments improve again. And it was interesting because over the next couple years after October 2011, sentiment around skilled nursing investment was over-the-top positive, like as much as I think it’s gotten too negative … it was almost too positive then. So it’s sort of one extreme or another.
But that said, it doesn’t concern me because the dynamics of the industry are changing so dramatically over these next few years that it’s going to be hard for sentiment to be this negative again.
At the Jefferies 2018 Healthcare REIT Summit, Sabra listed growing private-pay exposure and purpose-built senior housing as part of its investment strategy. What qualities is Sabra seeking when it looks for investment opportunities that will fit these priorities?
It’s just all about the quality of the operators. So the operators that we’re divesting are operators that we think kind of don’t get it. They don’t understand what it’s going to take strategically to change their business to benefit from the positive changes in the reimbursement system.
in the case of Genesis, I just think they’re way too big, and in the absence of seeing a restructuring plan … it makes no sense to be aligned with a provider that will never be able to compete. Our analysis comes down to not just market and physical plant and all that kind of stuff, but who is the operator? Do they really understand what’s going on?
And I think because I spent my whole career on the operating side and I’ve got a lot of members of my team by design … that have the same kind of background, I think we are uniquely positioned to make those assessments.
One thing that’s been mentioned in the company’s materials is Sabra’s ability to be creative in deals. What does it mean for you for a deal to be creative?
I don’t know that there’s any particular creative deals out there. I think most of the deals are bread-and-butter kinds of deals. I mean, some people might point to the Welltower-ProMedica deal as being somewhat creative, but because ProMedica and ManorCare have almost no overlap in almost any markets, I don’t see that. I look at it as a good acquisition; I don’t view it as something that is strategically going to affect anything.
I think that’s the only one out there that people might point to and say: “Isn’t that creative, these guys think they’re going to have a sort of vertical delivery system” and I don’t see it. We’ve all been down the vertical track in our careers numerous times, so I don’t see anything there that would cause me to believe it would be different and effective in that regard, although I think it’s a good acquisition.
Have the experiences with Genesis and Signature led to any changes in how Sabra assesses operating tenants, whether existing or prospective ones?
We inherited Signature from the CCP merger, and Signature’s issues had nothing to do with their operating abilities. Signature’s issues had specifically to do with the fact that a big chunk of their portfolio is in Kentucky, which happened to be one of the worst patient liability states in the country, so they got swamped with a lot of claims and that just created a liquidity crisis for them. It was a specific trigger that was specific to an environment in that state.
And you can’t necessarily predict which states are going to be better or worse when it comes to patient liability. If you look out over the next five years, there aren’t patterns that are that clear, so I’m not sure that there’s anything to take away from that other than that you may not want to have an operator that is overly dependent on any one state.
In the case of Genesis, there’s nothing to be taken away from that. They simply did too many acquisitions. And we’ve seen that before, getting to 500 buildings, there’s never ever been a company in this space that could operate effectively at that size. The only company that was ever that size before that was in the ’80s, was Beverly Enterprises. And that was in a much much simpler time when people were running full occupancy, and they still couldn’t make it work.
Look, you’ve got to be nimble on the ground to be effective in this business. And if you are so big … by definition, you have to have so many checks and balances in place that you take away the single most important attribute that your local operator has, and that is their ability to be nimble and make decisions. You’re simply not going to be effective. There’s no benefits any longer, there’s no economies of scale, there’s no purchasing power. There’s nothing. There’s not one positive that you get out of being that big. There are group purchasing organizations — we have operators with two buildings that are in group purchasing organizations, and they pay the same price for food and medical supplies that a Genesis does. So there’s just nothing there any more except inefficiencies.
You and other Sabra executives have talked on earnings calls about expecting provider behavior to change as a result of PDPM. What specific changes are you expecting from skilled nursing providers as a result of the new model?
Well, you have the rebalancing in incentives, right? You’ve got a little bit less incentive to go after short-term rehab, and now you’re going to have an incentive to go after nursing patients. So operators are pretty predictable. They’re going to follow the incentives; they always do. And people criticize operators for having the majority of their patients in the top two RUG categories, so they must be doing something, right? No, that’s how the system was designed! The system was designed that way, so if you’re an operator, you’re going to admit patients that fall into the highest reimbursement categories — pretty simple.
If you’ve got a better incentive right now, or you will have a better incentive to go after more complex nursing patients, 1) you’ve got a broader palette of patients to go after, 2) those nursing patients by definition have a longer length of stay than the short-term rehab patients.
On Sabra’s recent earnings call, you described large deals as “messy and not compelling,” at least the ones that you’ve seen. What has been the issue with them?
It’s how those companies were built, a lot of aggregation of assets without regard to — I think — quality of assets or operators. They’re not portfolios in my mind that were grown to create long-term strategic value.
Written by Maggie Flynn