Sabra Holds On New Enlivant JV, Announces $150M Senior Housing Deal

Sabra Health Care REIT (Nasdaq: SBRA) is turning its attention to returning to growth in 2020 and beyond, having spent 2019 revamping its portfolio and implementing a dynamic pricing strategy for its Enlivant senior housing communities.

For the time being, The Irvine, California-based REIT is taking a wait-and-see approach before making any further moves with Enlivant, but Sabra CEO Rick Matros did not dismiss the possibility of entertaining a joint venture to recapitalize the portfolio.

Sabra is working with its partner in Enlivant, private equity firm TPG, on a solution that will keep measuring the health of the assets, while keeping the ownership structure as simple as possible for the moment.

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“Our option [to exercise a new JV] expires on Dec. 31. We want to give ourselves some more time to see if Enlivant strengthens,” Matros said Monday during Sabra’s Q4 2019 earnings call.

Sabra acquired a 49% stake in Enlivant in 2017, representing 9.9% of the company’s concentrated net operating income. The portfolio consists of 170 assisted living communities.

Additionally, Sabra announced it is negotiating a $150 million senior housing joint venture that, when completed, will provide accretive dividends later in the year. And the REIT is seeing opportunities to add senior housing to its $1 billion acquisition pipeline, at more favorable pricing compared to nearly six months ago.

Sabra’s total mixed-asset portfolio includes skilled nursing, rehabilitation and behavioral health facilities, in addition to private-pay senior housing.

Insulated from market headwinds

Sabra posted $155.8 million in total revenues in the fourth quarter of 2019 — an 11.9% increase year-over-year. The REIT posted $111 million in total expenses in the quarter, a 20.9% dropoff.

Enlivant’s dynamic pricing strategy paid off for a second consecutive quarter with growth across all major performance metrics. Recorded revenue per occupied room (RevPOR) for the quarter was $4,418 — a 4.3% increase over the previous year. Occupancy rose 60 basis points year-over-year to 82.2%. And same-store cash NOI improved 1.7% over the previous year, to $10.09 million.

This marks the second consecutive quarter the Enlivant portfolio posted positive growth, but Chief Investment Officer and Treasurer Talya Nevo-Hacohen warned that this does not mark the beginning of a trend.

Sabra is content to remain patient with the Enlivant portfolio to see if a trend emerges. In the meantime, it is in continuous communication with TPG and Matros is confident the two sides want to continue working together.

But Sabra knows it has options, should the relationship take a turn. That includes a partial takeout, which Matros noted that TPG is willing to consider.

“All we’re doing is focusing on lifting occupancy. We want to see a path to accretion. TPG is in alignment for now; we will take it from there,” he said.

Nevo-Hacohen noted that Sabra’s wholly-owned portfolio of Enlivant communities — which total 11 properties — was hit hard by flu-related move-outs, particularly in two communities, in the fourth quarter. That portfolio has shown some bounceback in the first quarter of 2020.

Sabra believes its senior housing focus — middle-market communities in secondary markets — will provide some tailwinds and insulate the REIT from the operational pressures facing the industry, Nevo-Hacohen said.

Other senior housing REITs, notably “Big 3” REITS Ventas (NYSE: VTR) and Healthpeak Properties (NYSE: PEAK) have had to contend with a confluence of pressures in secondary markets, particularly on pricing.

Ventas announced a multi-pronged strategy to turn around its senior housing performance during its Q4 2019 earnings call last week. The biggest move involved hiring Justin Hutchens as executive vice president, senior housing. He was most recently CEO of UK-based home health company HC-One, and was chief investment officer, and later president, of Healthpeak when it was known as HCP. He also is a previous CEO of National Health Investors (NYSE: NHI). Hutchens will report directly to Ventas CEO Debra Cafaro.

Other REITs — notably LTC (NYSE: LTC) — have noted that the deal environment for senior housing remains tough, with pricing high. But Sabra sees potential for deals in 2020, and believes it can capitalize on the current M&A environment and find opportunities to add to its senior housing portfolio at favorable cap rates, Matros said.

The new $150 million joint venture falls in line with this philosophy. When completed, it will be revenue neutral in the first half of 2020, but will begin to show accretive results in the second half. Because Sabra is still actively negotiating the deal, Matros declined to provide any further details.

Lease structures may play a role in Sabra’s future acquisition opportunities. The industry shift to operating agreements is resulting in less appetite for triple-net lease structures.

“Maybe the switch will flip in the future. but the interest [in triple-net] right now is virtually zero,” Nevo-Hacohen said.

Sabra is focusing on its balance sheet in 2020, and offered normalized FFO guidance of $1.76, a -6.9% decline over the previous year.

“Assumptions in guidance include $159 million of acquisitions at a 7.4% yield (vs. $80 million in 2019), $77 million of which have not yet been completed; with $111 million of dispositions and loan repayments at a 6.3% yield, and $130 million of [at-the-market proceeds] raised,” BMO Capital Markets Analyst John Kim wrote in a note to investors.

Sabra stock closed trading on Monday up slightly, to $22.35 per share.

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