Sabra CEO Questions Vaccine Logistics, Says Margin Will Rebound Before Occupancy

Senior living owners and operators are eager for a Covid-19 vaccine, but leaders with Sabra Health Care REIT (Nasdaq: SBRA) believe that operations can largely normalize without a vaccine — as long as rapid testing is widely available.

Sabra CEO Rick Matros is hopeful but skeptical that a vaccine can be distributed in senior housing and care communities by January or February of next year, and he has doubts about how readily staff and residents will want to be vaccinated, he said Friday on the company’s Q3 2020 earnings call.

He also noted that “a lot of the conversation” in the industry has focused on occupancy rates, which continued to fall in the third quarter, but margin recovery will come before occupancy bounces back. That’s because labor expenses will begin to fall as communities can return to more standard operating procedures, while costs for supplies and personal protective equipment (PPE) will moderate as providers create stockpiles.

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Still, increasing occupancy is of critical importance. Like other senior living owners and operators, Sabra observed an increase in discretionary move-outs in the third quarter, while Covid-19 surges around the country have also discouraged move-ins. Residents who are making the move tend to have higher acuity, meaning revenue might increase due to more care services being delivered, but length of stay might decline, noted EVP, Treasurer and Chief Investment Officer Talya Nevo-Hacohen.

On the acquisition front, senior housing deals are being stymied by divergent buyer and seller expectations, but Sabra executives do expect opportunities to arise within the next several months.

Irvine, California-based Sabra has a diversified portfolio of skilled nursing, senior housing and other health care assets. As of Q3 2020, about 15% of its annualized cash net operating income was generated by its managed senior housing portfolio, with about 51% of that stemming from communities managed by Chicago-based Enlivant, and 34% related to communities managed by Winter Park, Florida-based Holiday Retirement. The REIT also has some communities in triple-net leases.

Vaccine hopes, doubts

Matros has been skeptical about the likelihood of an imminent Covid-19 vaccine, and he is hopeful but not counting on the latest predictions.

Within the last week, Centers for Medicare & Medicaid Services (CMS) Administrator Seema Verma and American Health Care Association/National Center for Assisted Living President and CEO Mark Parkinson both stated that a vaccine could be distributed in senior living communities by January or February.

“I’m cautiously optimistic, but we’ll see,” Matros said Friday.

And even if this quick timeline holds, he wonders how eager residents and staff will be to take the vaccine.

“I’m not sure you can mandate that workers and patients actually have to take this … what do you do if one-third of the staff decide that they don’t want to take the vaccine, they don’t want to be first in line?” Matros asked. “Does that mean they don’t come to work, and you don’t have enough folks to take care of patients and residents?”

Given all these uncertainties related to the vaccine, Sabra’s leaders are focused on the potential for rapid tests as a way to normalize operations. If staff and visitors to buildings are able to be tested on the spot before entrance, this would serve to support normalized activities within communities.

While the federal government has distributed rapid antigen tests to assisted living providers, wider and more routine accessibility to reliable rapid tests is needed.

Margin vs. occupancy

Occupancy in senior living building continued to wane in the third quarter, hitting historically low levels across the country. Within Sabra’s portfolio of managed senior living communities, occupancy fell 270 basis points sequentially, to 79.1%.

Covid-19 fear gave way to Covid-19 fatigue among residents and their family members, particularly as a result of ongoing visitation restrictions preventing loved ones from visiting residents of assisted living communities, Nevo-Hacohen observed. This in turn led to an increase in discretionary move-outs. She delivered her remarks one day after executives with Capital Senior Living (NYSE: CSU) observed similar trends in their portfolio.

Concerns over visitation restrictions are also discouraging prospective residents from moving into communities until their needs require the transition. Therefore, acuity is rising within communities. Revenue might increase given that higher acuity residents pay more for robust care services, but their length of stay also tends to be shorter, Nevo-Hacohen observed.

So, even though lead generation has bounced back and move-in volume is recovering, rebuilding census will take time and is dependent on rapid testing and/or a Covid-19 vaccine — but Matros emphasized that the financial health and performance of senior living communities is not tied to occupancy alone.

Margins should start to recover more quickly than occupancy, as providers are able to control expenses. This is already underway. For example, Enlivant has decided to maintain a six- to nine-month inventory of PPE.

“This has given them some latitude in timing their purchases in order to achieve better pricing,” Nevo-Hacohen said.

Within the managed portfolio, cash net operating income (NOI) margins increased to 26.8% from 23.1% in the preceding quarter, although that reflects $4 million in federal relief funds. Excluding those funds, the cash NOI margin would have declined to 22.5%.

Acquisition, disposition opportunities

Sabra’s current pipeline of potential acquisitions totals $600 million and is primarily senior housing, Matros said. However, a bid-ask gap exists between buyers and sellers.

This situation could change in early 2021. Banks have been forgiving defaults in senior housing due to Covid-19, particularly for smaller operators.

“We believe, based on what we’ve heard, that after year-end, they’ll start exercising legal remedies,” Matros said.

Expanding on this theme, Nevo-Hacohen noted that the last three years brought an influx of new senior housing supply. Some new properties were still in lease-up when Covid-19 hit, making their pro forma expectations unrealistic.

“We think there are assets out there that are going to come to market at an odd time, during a pandemic, but where recapitalization is really important,” she said.

As for whether future acquisitions might take the form of RIDEA versus triple-net lease structures, Matros observed that few operators are interested in triple-net at the moment. As the wave of aging baby boomers begins to move into senior living, he sees the potential for triple-net to make a comeback, but he hopes that leases would be structured with higher coverage than in the past. Recent history has shown that thin coverage of 1.1x and 1.2x puts too much pressure on operators when industry headwinds hit.

“Hopefully, everybody’s learned their lesson,” he said.

And despite the pressures of Covid-19, buyers are still actively pursuing senior housing. At least once a week, Sabra receives a call from an interested buyer asking if the REIT has selling — the inquiries are not necessarily about a particular property or properties, Nevo-Hacohen said. Often, these calls come from individuals in the multifamily space who are interested in senior housing.

“So, there’s a lot of capital there looking to find a home, and we frankly haven’t tested the market to see whether something we bought at a seven [cap] we can sell at a five-and-a-half,” she said. “And then you have to make a judgment as to whether, long-term, that makes sense. We’d have to measure how we’d redeploy that capital and how we think about the long-term improvement in the sturdiness of the returns that we can get over time.”

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