Exceptionally tight labor markets are causing senior living worker shortages even in positions that usually are easier to fill — and these workforce challenges could slow the pace of post-pandemic occupancy recovery.
“If you have 10 patients or residents that you’re going to admit over the next week or two, you have to have enough staff to be able to accommodate those folks and provide the right level of care. You may only be able to take six of them,” Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), said during a recent SHN+ TALKS appearance. “The operators who do it right are going to self-monitor that stuff.”
Matros also foresees wage pressure, and believes that one of the most pressing questions for the industry is how to raise pay rates for frontline workers. The good news is that, in his view, high-quality operators will not take too much hit to margin as a result of rising wages, and occupancy should return to pre-pandemic levels by late 2022.
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
— Why exiting the Enlivant joing venture with TPG is likely
— Why he sees Medicare Advantage as a “game changer”
— How Covid-19 strengthened the senior living value proposition
— What is in the robust deal pipeline, and Sabra’s future growth strategy
As of March 31, Irvine, California-based Sabra had 609 investments across 73 operator relationships, with about 21% of the portfolio in managed and leased senior housing assets, with skilled nursing and transitional care facilities and specialty hospitals and other healthcare settings among other major property types.
[vimeo 564383445 w=640 h=360]The following has been edited for clarity.
[00:01:50] Tim: We can jump right in. When do you anticipate that senior housing occupancy will return to pre-pandemic levels?
[00:02:10] Rick: Senior housing, probably towards the end of 2022. I know there are more conservative estimates out there, ’23 and ’24. No one’s right or wrong. I think we have a pretty good trajectory now, so that’s what we looked at. A little bit sooner on skilled [nursing].
[00:02:28] Tim: In terms of coming back sooner in skilled, do you think that’s because it’s more needs-based and that’s coming back quicker? Why do you think that’s going to bounce back faster?
[00:02:35] Rick: I think it’s because it’s more needs-based. We were already seeing before the pandemic, the impact of the demographic was hitting skilled nursing more quickly than senior housing, again, because of the health issues.
[00:02:47] Tim: Got it. I’m curious, maybe this is sort of skipping ahead in our conversation a little bit. I know Enlivant’s portfolio, at least the properties that are with Sabra right now, were in more secondary, maybe even tertiary markets outside of the big metros. In terms of how COVID hit different parts of the country, obviously, it hit the East Coast first, and hard, and [hit] some of companies like Enlivant later, maybe more on the second wave. Do you think that companies that were hit later in the pandemic are coming back more slowly because they had a more recent big occupancy hit?
[00:03:30] Rick: Intuitively, you might think so, but we’re not experiencing that. Specifically for Enlivant, the JV, which is where most of the properties are with Enlivant, bottomed out towards the end of March. We’re up over 300 basis points since then. It’s actually rebounding pretty nicely. The wholly-owned Enlivant portfolio, which is 11 facilities, bottomed out after that, but is up 600 basis points, which is pretty remarkable.
That’s also because just circumstantially the wholly-owned portfolio has a much higher percentage of memory care patients and so that took a much bigger hit with COVID, but that’s because that is so needs-based. We’re seeing that pent-up demand push occupancy up even more quickly than more traditional assisted living.
[00:04:30] Tim: Got it. You just used the phrase pent-up demand. I think there’s been some discussion in the last couple of weeks about pent-up demand, how people are defining that. There was a lot of back and forth on the Ventas earnings call about whether the demand that they’re seeing now was pent-up, in terms of folks moving in now who otherwise would have moved in last year except for the pandemic. They were saying they’re not really seeing that, but they think it is a strong return of demand.
I’m curious, how are you thinking about what is pent-up demand, and are you seeing some of those folks that maybe deferred moving in from last year?
[00:05:13] Rick: Yes. Maybe another way to think about pent-up demand, in terms of how you define it is, I think clearly, in the absence of the pandemic, people that are coming in now would have come in sooner.
I think we’re seeing sicker residents now than we would have otherwise seen, which also may imply a shorter length of stay until we get through this cycle. I actually do think that there is some pent-up demand because we know, for example, some of our operators were tracking all their leads and making sure they were seeing communication with them.
A number of those folks didn’t want to come in, because they didn’t want to come in to just get isolated as soon as they came in the facility. If they were okay enough and had the support system or infrastructure at home, they were going to stay at home a little bit longer. But in the absence of the pandemic, a number of those leads would have materialized into admissions earlier. I do think that there’s some pent-up demand; how much of it is open to debate.
[00:06:22] Tim: Have referrals from the health care system started to come back, those move-ins, or is that still waiting to materialize?
[00:06:46] Rick: No, I think those have started to come back. Hospital capacity is normalized in most communities. That flow of rehab patients or patients that have other more complex issues has in most markets gotten pretty much back to normal, so that flow is happening.
[00:07:05] Tim: Then on the more lower acuity side on senior living, like an independent living, one other thing we’re hearing that’s maybe affecting occupancy is accelerated move-outs. There might have been some constraint on move-outs during the pandemic as people didn’t want to move to higher levels of care, or couldn’t, and now that’s starting to happen. Are you seeing that in any of your lower acuity properties?
[00:07:30] Rick: Yes. May was our big move-out month. We’re not through June yet but that’s already tapered off.
We did see that in May … actually, the move-ins were strong enough that even though the move-outs escalated in May, they offset each other. We were actually pretty flat in May, which was not a bad outcome, given how high the move-outs were.
The other point I would make is we never saw the same negative impact on occupancy in independent living as we saw in AL, memory care, and skilled. Our Holiday portfolio, for example, still hovered around 80% even with a pandemic.
[00:08:28] Tim: That’s good to know. I’m thinking back to what you said about how quickly the Enlivant occupancy seems to be bouncing back. Obviously, some of that seems to be the pent-up demand. Is there something Enlivant is doing or you’re seeing other operators do that might be important in helping them win some of those move-ins?
[00:09:05] Rick: With the best operators, I never think it’s just serendipity. They were incredibly active, maintaining contact for long periods of time, with everybody that they had some interaction with a facility, whether it was a virtual tour, or whatever form that lead took.
I don’t know how many other operators were as extreme in that as they were, so just ongoing communication, just showing a lot of care and concern and things like that. I do think in the case of Enlivant that that was a factor in addition to people just needing to come in and get care.
[00:09:53] Tim: The occupancy is one piece of the recovery puzzle, there’s the financial side as well. I think back in November you anticipated margin would recover faster for the occupancy. I just want to check in and see if you still think that, or if your thinking has changed on that.
[00:10:10] Rick: No. We’re seeing that. I still think that. There’s one impediment, which I’ll circle back to in a second, but essentially as cohort restrictions get start easing and you can start having group activities and group dining and group therapy, you’re going to have a much more normalized environment and visitations, and you’re not going to have as much of a labor need as you did before, because when we converted to doing everything one-on-one, we needed a lot more labor to accommodate that. Because there is always a shortage, that labor took the form of an awful lot of overtime, double-time, and temporary agency, all of which is extremely expensive.
That normalizes with the easing of restrictions. Then, of course, on the supply side, operators have had time to build up their inventory of PPE. It’s stopped being a recurring cost. Now, with the surge that we had at the end of 2020, that inventory got depleted again. You had some of those costs again in the first quarter. Now, you’ve got inventory built up again. I do think all of that is easing. You do have margin improvement because of that, ahead of the occupancy growth or ahead of occupancy recovery.
The impediment that we’re seeing with our operators is I think the same thing that we are hearing about every industry. You’ve got 9.7 million jobs out there that people just aren’t even applying to because unemployment benefits were extended. We’re seeing the same thing in our space.
Where it’s really manifested itself in a way that we haven’t seen historically is that operators are short-staffed in dietary and laundry and housekeeping, which, that just doesn’t happen. Nursing and therapy, you’re always going to have that battle. Everybody expects that to pass as the unemployment benefits pass, but I think that was a little bit surprising that became an issue.
[00:12:32] Tim: On that labor question with the unemployment, I’ve heard other people say essentially the same thing, and that there’s an expectation, which I think is reasonable, that as the unemployment benefits go away, people come back into the workforce.
We’ve talked to some workers in senior living who are making the point that the unemployment benefits have been higher in some cases than the wages they were earning and they’re reevaluating why. “Why are my wages so low, lower than unemployment?”
Do you think there’s going to be pressure on wages? Obviously, we’re seeing legislatively some pressure on minimum wage, but do you think there’s going to be more, I don’t know what the term is, grassroots pressure, or union-based pressure to raise wages even beyond the unemployment benefits?
[00:13:17] Rick: I think, one, they need to get paid more money. It’s just unacceptable in certain cases what folks are getting paid. I think it could be more grassroots pressure and not union pressure, only because the union, which is primarily the SEIU in our space, doesn’t have that much of a presence really in senior housing, and even in skilled nursing. It’s stronger in certain states than in other states.
There was a big settlement in Connecticut where the SEIU is extremely strong on the skilled nursing side, and it was a great outcome. The workforce is getting paid significant raises, and it’s being passed through the Medicaid system.
On the skilled side, I think that’s how, in most cases, you’re going to see it happening. There’s going to be a lot of cooperation to have that happen. No additional profitability for the operator, but let’s have a component of the reimbursement that passes through directly to the workforce so they benefit from that.
It’s a little bit more difficult, obviously, on senior housing because it’s private pay, but I think those same pressures are going to be there. You can’t have complementary wage increases sector to sector and think that the folks that are in senior housing are just going to accept that they are not going to get what they would get in skilled nursing even though the work might be a little bit more challenging.
[00:14:41] Tim: What do you think the effect is going to be on operating margin if that wage pressure does come to senior living?
[00:14:47] Rick: I think if you look at national averages, you would think that the margin pressure is going to be greater than it’s going to be. I only say that because the good operators have been paying well above minimum wage, to begin with. The incremental increases that they should execute on are going to impact the margin but not to a material amount because they’re already paying well over minimum wage, to begin with. The pressures out there and the staffing shortages that we’ve all lived with since I’ve been in the business force that on a regular basis.
[00:15:29] Tim: Can you just talk a little bit more about the labor crunch that’s out there right now in terms of what operators are facing? You mentioned there are some positions that are hard to fill now that usually aren’t. Any other color you can provide about what’s happening on the ground with workforce?
[00:15:48] Rick: Yes. I thought it would be a bigger factor, because we’re hearing about this with hospitals, with health care workers just getting burned out on the pandemic and wanting to leave health care. I never view that as a permanent problem only because health care is mission kind of work. You’re going to go work for a retail or a restaurant, that might be good for a while, but are you really going to do that long term? What we’re seeing in our space is, we’re not seeing people leaving the industry, not to any sort of material extent, not like we’ve heard about hospitals. I think it’s just specifically the issue that I talked about earlier, this unemployment benefit issue.
What it does, the impact, is that it will slow down occupancy recovery. For example, if you have 10 patients or residents that you’re going to admit over the next week or two, you have to have enough staff to be able to accommodate those folks and provide the right level of care. You may only be able to take six of them. Again, the operators who do it right are going to self-monitor that stuff. That is a mitigant to everything normalizing in the recovery.
It could slow down census recovery until we pass this unemployment benefit thing. That’s the biggest impact other than the fact that you’re paying more overtime and double time. For the first time ever, operators are actually using temporary agency for dietary, which they’ve never done before.
[00:17:33] Tim: If it does slow down the occupancy bounce-back, is that baked into your thinking when you say that you think end of ’22 is when occupancy will come back, or do you think it could push it out further than that?
[00:17:46] Rick: On my estimates, and I’m more first-quarter ’22 for skilled nursing, I believe to the extent that I’m off, I’m going to be off, because of these things, by a couple of months, not by a year.
[00:18:02] Tim: Let’s talk about Enlivant a little bit more. I know you just spoke at the Nareit conference, and there you said that you would prefer to exit the Enlivant joint venture rather than acquire the portfolio outright. I know you spoke about this in Nareit, but for anyone here who didn’t tune into that talk, can you share your reasons behind that preference?
[00:18:30] Rick: Yes. It’s a shame really, because the pandemic just changed everything. Prior to the pandemic, we liked the momentum in the portfolio; we love the management team; we like having a portfolio in secondary markets that seniors can actually afford to go to, because over half our seniors can’t afford senior housing and it’s going to become a real crisis. We liked all that about it.
The hurdle, that we had to start maximizing returns, has been set back dramatically because of the pandemic. Again, no one’s fault, but it is what it is.
The question is, one, can you even economically strike a deal with the private equity fund to acquire it at a price that sends the positive of buying that other 51% — we have 49% — he positive of taking out the 51% is you could ride that SHOP growth over the next couple of years, but that’s a lot of noise on the way to do that and you’ve got other issues.
Like most PE-owned companies, the leverage is higher than a publicly held company would normally have. That leverage, because of the pandemic and occupancy and EBITDA dropping, has soared relative to where it was prior to the pandemic.
The amount of equity that we would have to raise to de-lever that portfolio to a level that’s acceptable to us and to maintain our investment-grade ratings is pretty extraordinary and it’s dilutive. That part is a problem.
Then the other problem is the operating company — most operating companies, everybody knows, aren’t profitable, but the pandemic and the deterioration or the negative impact on occupancy has made that bleed bigger. You’ve got to fund those losses while things recover as well.
That’s a lot of negative outcome with a lot of noise around the company that we will be talking about every quarterly call, on every investor conference, on every interview that we do for the next two years.
If we were to step away from the portfolio, there’s no recourse to us on the debt. It’s immediately de-levering, and it’s immediately accretive to the extent that TPG gets anything for selling the portfolio that we have proceeds to put to work as well. One of the things that I committed to our shareholder base exiting 2018 was we had done a lot of work and restructuring around the merger and getting to investment grade and divesting of tenants that we didn’t feel good about.
In 2019, we said the noise is done, we’re going to be more predictable. We did some cool things on the balance sheet in 2019, and as a result, our shareholders were rewarded. The stock rebounded really nicely over the course of the year. Towards the end of the year, we hit the second-highest multiple that we’ve ever traded at. That was a commitment that I was serious about, and it’s a commitment that I want to adhere to now. Divesting of the portfolio allows us to maintain that commitment and have a clean slate.
Despite the size of the JV, it doesn’t shift our asset mix very much; it increases our exposure to skilled nursing just by four percentage points, so it’s not material. We’ll continue to grow the company in all the asset classes that we currently have. That’s how we think about it.
You can’t get attached to things. As much as we like the portfolio and love the management team, the pandemic just changed everything. We have to think about what’s best for the company and its shareholder base and you have to separate yourself from the reasons that you made those investments because the pandemic was nobody’s fault.
[00:23:02] Tim: Is there an estimated timeframe that you’re thinking that the portfolio could sell in?
[00:23:08] Rick: It’s hard to tell. It takes up to six months to close from a regulatory perspective. It could be the middle of ’22, but for us, the impact is really immediate because it’s not on our balance sheet. Once we decide to step away and we take, let’s say, an estimated one-time write down, it’s done, it’s over. It’s one line item in our supplemental. We could change the disclosure on that because we’re going to be as if it was sus-ops, even though it’s not formally treated that way.
For us, even though it may take until the middle of ’22 to actually sell it and get the proceeds, the impact on the portfolio and just getting behind us and having a clean slate happens immediately.
[00:24:01] Tim: To the extent you can talk about it, can you talk about where you are in the process? I’m curious to get a little bit of insight into your confidence, I guess, in selling it at all and getting a decent price for it given there’s some wonkiness in the M&A market, I think, although we are seeing big portfolios trade.
[00:24:22] Rick: You have portfolios that are trading, and we wouldn’t be the ones selling it, it would be TPG.
[00:24:28] Tim: TPG, I should say.
[00:24:29] Rick: Right. Look, there are portfolios out there that are problematic portfolios. This is a really well-run portfolio, it just needs to recover from the pandemic, so there should be a market for it.
If you can’t sell the whole portfolio, do you sell in pieces, like Healthpeak did with Brookdale? There are different options there. I think it’s too good a portfolio not to be able to sell, it’s just a question of how much. Whatever we get is great, but our decision isn’t based on what we think we could get for the portfolio.
In terms of the process, we’re still going through analysis. I don’t want to get ahead of myself. It’s been foremost on everybody’s mind. It’s all anybody wanted to talk about at Nareit. It’s all anybody wanted to talk about in the non-deal roadshow we did two weeks earlier. I think I have a reputation of being really transparent with our shareholder base and the analysts. I’m going to respond honestly to how we view it, but we’re still going through the analysis. We’ll have a board meeting coming up and discuss it with the board and then make a decision and then communicate that decision to TPG. All that’s near term.
[00:26:00] Tim: I’m curious about growth and acquisitions. What do you see in the pipeline right now? What do you anticipate being able to get across the finish line in terms of senior living versus skilled nursing or some other kind of asset?
[00:26:35] Rick: The pipeline is actually extraordinarily busy. It’s primarily senior housing and some really interesting things. Most of the $65 million that we closed on already this year, it’s senior housing primarily. We’re starting to see skilled come in now. There’s not very much of it. Because of all the assistance from the federal government, sellers haven’t had to sell. We expect more of that later on, but we’re starting to see some of it. We’re also seeing some interesting opportunities in the behavioral and the addiction space.
The behavioral we got into in 2017 through the CCP merger, and the addiction space we got into before the pandemic. We have three operators now that we work with in those spaces. We see some interesting opportunities there. I think we’re relatively optimistic that we’ll be able to get enough done this year that people will see that we’re focused on growing the company again. No noise, grow the company. Those two hand-in-hand.
The other thing I would note is we have some larger portfolios that we’re seeing as well in the pipeline across all business lines. People tend to think that we like doing larger deals because we’ve done a number of larger deals going back several years now, certainly for a REIT our size. I think for us, we like the bread and butter stuff, the deals that are under $100 million. We would totally be open to doing a larger deal, but it’s got to be clean.
In other words, we’d rather stretch a little bit and buy a really good portfolio that has clear upside, than get something a lot less expensively that’s going to require a lot of work and a lot of time over the next couple of years.
[00:28:34] Tim: On that point, Sabra’s done big deals over the last few years. There was the CCP merger, there was the Enlivant deal, there were some other ones. In your previous professional experience, I know you’ve done some pretty intensive turnaround situations. Doing these stable deals, trying not to create a lot of noise, I know this sounds glib, but are you afraid that you’re going to be bored? What’s got you excited? Where do you see opportunities when you wake up in the morning that have you jazzed up?
[00:29:14] Rick: Things change at different points in your life. Earlier on, work and my career and the companies were so much a part of it that getting juiced up over doing bankruptcies or mergers or whatever was awesome, but we’ve built a really nice company with Sabra, and I love it. We’ve got some cool initiatives just out of the growth piece. We just last night released our inaugural ESG report, and so we have a lot of work to do on ESG. I look at everything in the context of just how I live my life. It isn’t just about Sabra for me. We have, believe it or not, 13 grandchildren, all nearby us. We do quite a bit of non-profit work as well.
My life is a lot more well-rounded than it was X number of years ago. Those things that get me going when I wake up in the morning come from a variety of different places, but I love Sabra. We have an amazing team. We’ve had one change in our middle and senior management team in 11 years. We have a great culture, we really care about each other and everybody very much. I just get a lot of joy in that.
When I was running Sun, I had 30,000 employees. It’s hard to do everything you want when you’ve got tens of thousands of employees, but at Sabra, we’ve got several dozen, and so you can do everything that you’ve always wanted to do for the people on your team.
There’s enough there, and I have no intention of retiring or anything like that.
[00:31:17] Tim: Great. Since you just brought up the word retirement and also the stability of the workforce at Sabra, which is great, but we also are anticipating maybe some turnover within the senior living industry as a whole.
We’re looking at numbers coming out from some of the firms that track CEO turnover, and within the health care sector at large, there is an increase in leadership turnover coming out of the pandemic, which I think makes sense from a burnout perspective, from a new strategic directions perspective, but the leadership in senior living I think has proven to be very entrenched, for better or for worse.
What are you anticipating or hearing or seeing? Do you think that we’re maybe coming up on a new generation of leaders in the next year or two?
[00:32:14] Rick: I think that we will. We have one operator who, as a result of the pandemic, and he’d been in the business for decades, is done. Burnt him out, he’s done.
Some of the deals we’ve done over the past few years are with relatively young teams across all of our spaces, including addiction. It’s been really nice to see. Some of it is generational, but some of it’s not. We’re seeing a lot of new blood coming in, and I would anticipate that we’ll have movement within Sabra as well. We’ve focused a lot of effort on building a really deep bench so that we have the ability to promote from within and accommodate that.
I love change, so for me, every change that happens within the company is invigorating, but across the space, to your question, we’re seeing a lot of new folks come in. I think the example I gave of the operator that we had that was just burnt out, I think there’s going to be more of that. The question is, do they recognize it, or is performance deteriorating because they’re burnt out and they have to be pushed a little bit? I think that it’s going to be some of that as well.
[00:33:35] Tim: The example you talked about from Sabra, with one of the operator CEOs getting burnt out, was that on the senior living side or in a different type of asset?
[00:33:42] Rick: That was skilled. We talked about that I think on our last earnings call, a few facilities in New York that we’re going to have to transition to one of our other operators.
[00:33:55] Tim: Got it. Do you think that senior living is being seen now as a part of the health care system kind of writ large in a way that it wasn’t before the pandemic?
[00:34:19] Rick: The answer is yes, but I think it’s more than senior living. I think apart from hospitals, the whole post-acute space was discounted historically. I think the value proposition for assisted living, memory care, independent living, skilled nursing, home health, I think that’s all gotten better.
I think the hospitals understand … how critical those partners were. If you didn’t have skilled nursing operators that were able to take care of all those COVID patients, as the hospitals were being overrun, what would have happened to our health system? I think that value proposition has improved.
I think at the policy level, even though you’ve got some negativity out there with the Senate saying they want to do this and the other thing on senior housing or against private equity or whatever, there’s also been a change of tone at the policy level about the importance of these spaces. When it comes to Medicaid, there’s been a change of tone at the state level as well because it’s been so underfunded, so chronically underfunded.
[00:35:34] Tim: We have some questions coming from the audience. One is on the Provider Relief Fund. How much money do you anticipate will be disbursed to senior housing and skilled nursing? Any insight you can provide on the timing of the distribution?
[00:35:52] Rick: I think we’re days away, hopefully days away from actually having an announcement. We do think there’s going to be a distribution. We’ve asked for — when I say we, I mean the industry has asked for — $10 billion of the $24 [billion] that’s sitting there. There’s that other $8 billion that’s designated for rural. I don’t know whether we’ll get to 10, hopefully we will.
Those discussions didn’t really get answers relative to timing and methodology and how much goes to skilled and how much goes to senior housing.
We’ll see, but I think that anything that we can get there is really going to be helpful. In combination with the other programs that are being extended through year end, hopefully that gives everybody time to recover, and to the extent that it doesn’t and that capital partners like Sabra need to provide more assistance, at least now it’s going to be of a defined duration that you can see yourself getting past.
When I go back and look at the projections we made in March of 2020, they were pretty scary, so whatever happens now, we’re in much better shape than we were because we’re on the road to recovery. But I do think we’ll be getting a decent amount.
[00:37:13] Tim: Another audience question: you mentioned “clean with clear upside potential.” This was in reference to acquisitions you might make in senior housing. There are two questions related to that. One is; what are you seeing as upside? Is it margin, occupancy, or rate growth? What does the deal as you describe it look like from a cap rate or valuation perspective?
[00:37:35] Rick: It’s all three of those. You hate to talk about any opportunities or silver linings from the pandemic because it was nothing but horrible, but prior to the pandemic, it was really getting difficult to find SHOP deals with upside because occupancy had been growing and then you had supply and demand issues that were creating issues and things like that. Well, because of the pandemic, it’s almost like there’s been a reset.
If you go back to when the original SHOP deals were done by the big REITs, most of those were put in place in 2012 and 2013, and there was a lot of upside to ride still at that point in time. We’re at that point again, where you can find … a good portfolio that’s well-run, that got hammered on occupancy but that’s going to recover.
You can ride that recovery. It’ll be less difficult to find SHOP deals that have more upside on occupancy and on margin. On rate, rate’s a little bit different because it depends on the operator. There are some operators — and some I won’t mention, because we all know who they are — that do unbelievably deep discounting on a regular basis. Our operators don’t do that. They may waive admission fees or things like the entry fees, things like that, but nothing that material.
You have to look at that within the portfolio that you’re interested in buying is whether they’re doing that deep discounting. Rate may be a little bit malleable, but certainly on occupancy and margin, there should be plenty of upside there. From a cap rate perspective, it just depends on if you’re looking at it on in-place NOI, it’s going to be a pretty low cap rate, but at least at this point, we’re not seeing any indications that pre-COVID cap rates for senior housing are going to be different on a go forward basis.
I think for us if we’re looking at something and it’s a lower cap rate than we would normally want to pay given where our cost to capital is, we’re going to have to feel really certain about the rate of recovery for that particular portfolio, [when] we get back to that pre-COVID cap rate and NOI.
[00:40:19] Tim: All right. We have another audience question, but I just want to maybe set the stage for this one a little bit. We’ve been talking about Enlivant and Holiday. These are two senior living operators in your portfolio, and they both serve that middle market price point. I’m wondering if that was strategic as you were assembling the senior housing portfolio, or if it was more happenstance.
Do you have a preference as you are looking at making acquisitions going forward for that price point versus something more market rate or luxury?
[00:40:52] Rick: It was strategic, and a lot of that, at the time, had to do with our cost of capital. At the time, it was less expensive to buy middle-market properties, although we actually paid a pretty hefty price for Holiday. We also viewed Holiday … it was $500 million deal at the time, which given our size was pretty significant, but it was strategic and it completely changed the profile of the company.
We saw the results of that in the months that followed with our stock price and our multiple hitting an all-time high and things like that. You have to think about it strategically, if you’re paying up a little bit. But some of that really did have to do with our cost of capital. Putting aside Holiday, buying something in New York versus Wausau, Wisconsin, it’s just going to be more reasonable to [buy in] Wausau, Wisconsin.
Wausau, Wisconsin is a great senior community that’s actually very established and the economics are really good there, it’s just not Manhattan. That said, part of our focus right now in having a stable portfolio, and not having noise, and having our leverage lower is to improve our multiple so that we could look for assets in other demographics and geographic areas that are just secondary, so that we’ll be in a better position to afford some of those other things and have more diversity demographically and geographically, economically within those specific asset classes.
[00:42:43] Tim: The question from the audience is related to affordability of senior housing. I wanted to provide the context in terms of your current portfolio and what you might get in the future but this question is more about making communities more affordable. Do you have any thoughts on trade-offs and building amenities or services that can be made to increase affordability?
[00:43:07] Rick: I think that’s a really tough proposition. We actually tried that a few years ago with a portfolio. When we do senior housing deals, we tend to stay away from Medicaid, because depending on the state, it’s very different. In a lot of states, it’s really inadequate, and it could change overnight, but we had picked up a portfolio that really was focused on folks that normally couldn’t afford [senior living], so there were less amenities.
The physical plants were nowhere near as fancy, no difference in the care that was provided, but all the stuff around the care was a lot less. Social Security and Medicaid had to be a big component of the income stream for that portfolio and it just didn’t work. It didn’t work economically. It was really, really disappointing because I believe that one of the responsibilities we have is to try to provide services to those folks that can’t afford it.
It’s really one of the reasons we got into the addiction space. We just saw an unmet need there, and people can talk about upside there and all that kind of stuff. My first job was as an activity director in a nursing home, so that mission component of what we do has always been critical to me. It’s always been a driver, but we’re going to continue to look for those kinds of opportunities, even if they’re small.
Small might be the only way to do it right now because it won’t impact the rest of your portfolio to the extent that it struggles a little bit or doesn’t work out.
[00:44:52] Tim: In terms of meeting that middle-market need, do you think that the solution is going to be taking some of these older buildings and maybe doing a little bit of renovation, and just charging a lower rent over time?
[00:45:20] Rick: Well, some of the older properties can’t ever be accommodated for that. You have a lot of older properties out there that would build by sort of multifamily guys who said, “We did this. How different is this?” There’s a lot of product out there that just doesn’t accommodate the needs of today’s resident.
Back in the day, when a lot of that stuff was built, assisted living was pretty much independent living and it was a hospitality model.
That all changed through the recession and aging in place and all that, and people got older and acuity rose. Those facilities that look more like apartments … You’re just limited to what you could do to renovate that building. I think that’s really difficult.
I think there’s a better answer with not doing that with those buildings, but building product that’s prefab, some of the things that Bill Thomas is focused on with his company, just a lot less expensive to build. Yes, it’s not very fancy, but it’s still nice. It’s nice and it’s clean and it can be pretty. It’s just not built quite the same way with all the stuff in it. That’s a much better option than trying to convert some of these older properties.
[00:46:57] Tim: You mentioned Bill Thomas. He’s involved in a bunch of different companies, but one is with this Tealwood Senior Living deal, the company Lifesprk acquired them and they are a home-based care model with a lot of Medicare Advantage. Their idea is to bring a lot of services onto that senior living campus and have it reimbursed through Medicare Advantage. Do you see solutions like that gaining legs and becoming more common and helping meet the middle market?
[00:47:25] Rick: Yes, I’m actually glad you brought that up. I think the loosening up of the rules there with MA and senior housing, I think that’s a game changer. If not for the pandemic, we would’ve seen more operators embracing that. We started seeing that before the pandemic, just doing the work and understanding it, so that’s going to pick up once we get through some of this recovery.
That’s going to address some of the affordability issue, because now all of a sudden, you’re going to have a payer that can pick up some of these ancillary costs. Yes, I’m actually a big believer in that. We’ve talked to a number of our operators about it and tried to connect them with some of those organizations.
I think all of that is going to help provide a higher quality care and in a more affordable way, so I think it’s great.
[00:48:23] Tim: That’s interesting to hear. What do you think the impediments are to growth of that model? I’m just wondering if it’s a matter of time and proving it out with a few of the pioneers that are doing it, because we have talked to a lot of people over the last maybe two or three years that say they’re interested in it. It makes sense intellectually to them, but they’re kind of wait-and-see.
They don’t want to make the investment. They’re hesitant to start to actually take steps to implement that.
[00:48:55] Rick: Look, there’s a capital investment there, so there’s a certain level of risk. On the senior housing side, you’ve got much more fragmented industry than skilled nursing. You have a lot of really, really small operators and it’s hard for a small operator to take that on. I think that we’re going to need to see a handful of regional operators and some of the larger operators actually take that on and be successful with it and go from there.
There are groups out there that act as a third party to help facilitate it. I think that’s the way — we know operators, for example, on the Medicare Advantage piece that had their own plans, but they’re pretty decent sized regional operators, so they can afford to do that, but they don’t take the risk of doing any third party. Then you’ve got these third parties, AllyAlign and some others, and that’s where I think the answer is going to be.
I think the industry is always going to be fragmented to a large extent, and there’ll always be more smaller operatives than larger operators, so I think it’s going to take those third parties to work with these operators in executing these things. There’s risks and people are fearful of risks. On the senior housing side, doing anything with government reimbursement is a new thing.
[00:50:19] Tim: I should mention, AllyAlign is one of those third-party companies that’s helping drive this. They just got a $300 million investment they reported on this week.
[00:50:31] Rick: One of our board members has involvement there, Lynne Katzmann.
[00:50:36] Tim: [Lynne is a] huge driver in that trend with The Perennia Consortium. I want to talk about CapEx a little bit. I just had a talk with Senior Living Communities CEO Donald Thompson. We got onto this a little bit. He told me, on average, they are investing around $4,400 a year per unit on CapEx. They mostly have CCRCs, but he pointed out that their lenders underwrite to about $1,500 a year on CapEx.
I’ve heard from some other operator CEOs that there’s maybe a little bit of disconnect between what was seen as reasonable in the past for CapEx versus what actually needs to be in place today. What do you think is a reasonable allocation for senior living?
[00:51:26] Rick: That example, that’s a lot. We’re not seeing that kind of spend, but CCRC is a little bit different as well. The $1,500 in most cases is inadequate because there isn’t enough new product out there yet. I think $2,500 is probably reasonable for most properties. Not all, but most properties that have some vintage to them.
[00:51:54] Tim: We’ve got a question from the audience. Have you seen your operators invest more than usual in new technologies during the pandemic?
[00:52:03] Rick: It actually started before the pandemic. The main focus in terms of technology investment during the pandemic was telehealth. That really accelerated. We had some operators that already had initiatives on telehealth pre-pandemic, but they accelerated it during the pandemic. Then other operators who didn’t, like Holiday, but completely embraced it, and early on in the pandemic provided free telehealth services to everyone in the residence.
Which I think is one of the things that resulted in a more stable occupancy, all things considered, for them over the course of the pandemic. Telehealth, obviously, that acceleration is going to continue, but most of the operators are behind on IT investments. Most of them get it, but I just don’t think that’s going to pick up again outside of telehealth until you’ve got full recovery, just because the numbers aren’t there, unless they have capital partners that are willing to make those investments for them under some arrangement that doesn’t come back to them until it makes sense.
[00:53:19] Tim: I’m glad you brought that up because that was my follow-up question. I’m hearing from other people that coming out of COVID there’s a need now, especially for technology, but even in other areas of operations, the need to invest more money on technology, maybe just to have the basic infrastructure that probably should’ve been placed already.
There is a little bit of tension with the capital providers. Mainly, I’m hearing, not the REITs so much, but the private investors who maybe have granted some leeway, but now they’re looking to get back to pre-pandemic expectation with returns.
There’s a little bit of tension there and some discussion about misalignment of the capital structure. Do you think that that is a problem in the industry? Do you think that that might lead to opportunities for the REITs if some of these relationships break apart?
[00:54:30] Rick: I do think it’s a problem. Look, it’s a bigger problem for senior housing than it is for skilled, because senior housing, the medical model is a relatively recent phenomenon. That investment just didn’t need to be there 10 years ago, so they have more catching up to do.
We had different models. I think the private investor is looking for a different kind of return and a different duration relative to exit. Even though we all know investment of technology creates some some efficiencies, it’s not the thing that gets calculated into their returns. They may be willing to invest in CapEx to expand a facility or to renovate a building, things like that, but not technology. We haven’t seen it. So I think it’s a real problem. It’s different for the REITs because we don’t really look at IRR.
We’re underwriting an asset for 10 to 15 years, so we’re willing to make investments that will improve life for that operator and the efficacy of that business over the long haul. We’re willing to do those things. We’ve said that to a number of our operators when it’s come up, but it’s different for the private investor. It’s a problem and we always like to think we’re better capital partners anyway, [so] to the extent that creates opportunities for us, it’s all good.
It’s tough for the private investor because at some point in time, you’re going to have to look for another private investor.
[00:56:06] Tim: Right. I guess on the REIT side, in terms of the capital structures we are hearing and seeing, obviously, with the rent deferrals, the rethinking of the triple net lease structure. Do you have a philosophical preference for SHOP versus leases?
[00:56:25] Rick: I think we were all complicit in making it difficult for the triple net lease structure to continue to exist on the senior housing side. We had extremely low rent coverages and very high escalators in a lot of cases. We were all complicit in that. That’s why you see SHOP all over the place. The deal that Omega did with Brookdale was unusual because those leases were already in place, but if you’re going to be in that space, you’re not going to find triple net.
It’s possible it could come back, so in terms of preference, we like SHOP. If we were to do triple net again, and I would hope we’ve all learned our lessons, it would have to be structured differently relative to a lot more breathing room on rent coverage. It doesn’t necessarily have to be where skilled is, but it needs a lot more breathing room and escalators that are a lot more reasonable as well. You actually have a structure in place that could withstand projected downturns.
[00:57:39] Tim: Are there any changes coming specifically to senior living, or you can talk about skilled nursing as well, if you want, changes coming as a result of the pandemic that we haven’t talked about yet?
[00:57:58] Rick: Well, I think mostly on the senior housing side, there would be regulatory changes. I don’t believe we’re going to have federal regulations for a variety of reasons, but state regulations — obviously it’s different state by state — are going to be much stricter. I think there’ll be more regulations. I think some of the things that you see in skilled nursing we’ll be seeing in senior housing, so a lot more focus on infection control, disaster preparedness, inventory, maintenance, things like that.
Going back to your earlier point about technology investment, that’s even going to be more critical in a more regulated industry because you’re going to have to demonstrate outcomes as well. The best way to do that is having, obviously, the kind of technology that shows the outcomes that you’re having as a result of the care that you provide.
[00:58:54] Tim: Got it. What’s keeping you up at night from a business perspective?
[00:58:59] Rick: Nothing really keeps me up at night. Part of it is I’ve been around a really long time. I’ve been through, it’s probably bad to say, I’ve been through every single cycle, you know?
My attitude always is, it’s cliché to say, you can’t control what you can’t control, but I believe that if you’re thoughtful about the decisions you make and how you build your company, then those things that happen that are out of your control will impact you less than the folks down the street because you’re building your company the right way.
For Sabra, that showed during the pandemic. All the things that we did on our balance sheet prior to the pandemic, all the restructuring we did, and then we were the first ones to cut the dividends to preserve liquidity, so that’s how I approach it. You can’t second guess certain things and just move forward with thoughtfulness.
[01:00:07] Tim: If you could get the CEOs of the 100 largest senior living operators all together in a room and ask them one question, what would that question be?
[01:00:17] Rick: What do we have to do to have a wage base that allows everybody in our workforce to live good lives? They don’t work two jobs, and could be with their families at the end of the day, just like the rest of us can. That’s the big one to me.
[01:00:45] Tim: That’s a good one. We’re just past the hour. I think that’s a good question to leave everyone pondering. Any last words, Rick?
[01:01:00] Rick: No, thank you for everybody listening and participating with the Q&A. Tim, thanks for inviting me to do this. This is fun. I think everybody knows that I’m easily accessible so if anybody has any follow-up, I will be responsive.
[01:01:18] Tim: Great. I really appreciate you coming on doing this. It was an interesting conversation as it always is with you. Thanks for your candor and reminder, everyone who’s listening in … the next talks will be on July 13th at 11:00 AM with another REIT CEO, Wendy Simpson, from LTC Properties. Thank and good luck to everyone.
[01:01:50] Rick: Thanks, everybody. Stay safe out there.
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