Sabra Health Care REIT saw “progress in all key areas” in the second quarter, CEO, President and Chair Rick Matros said Thursday on the Tustin, CA-based real estate investment trust’s latest earnings call.
In the senior housing part of the portfolio, that progress was demonstrated via increased occupancy, net operating income growth of 17.7% and increased rent coverage, he said.
Overall, Chief Financial Officer Michael Costa said, “[W]hat shines through is that the earnings growth we have experienced over the last two quarters was driven by the continued improvement in our managed senior housing performance, which translates to 6% year-over-year growth in both normalized funds from operations and and normalized adjusted funds from operations per share.”
Occupancy up
Sabra’s managed senior housing portfolio includes 82 properties, and its same-store managed senior housing portfolio includes 70 properties, 46 of which are in the United States and 24 of which are in Canada, Chief Investment Officer, Treasurer and Executive Vice President Talya Nevo-Hacohen said.
The REIT, she added, is seeing “consistent growth” in occupancy in assisted living and independent living across the managed same-store portfolio.
“In fact, together, they’re currently around the same occupancy,” she said.
Nevo-Hacohen noted that the REIT’s portfolio of Holiday by Atria communities reached an occupancy level of 83% at the end of July, “and that puts them 200 basis points below where they were … at the end of 2019 right before the pandemic, when we were all worried about increasing supply and what we were going to do with all that supply. So I think the momentum is there.”
In the leased senior housing portfolio, three-fourths of operators are seeing occupancy of 85% or more. “So it’s really looking good. It just seems to be growing,” Nevo-Hacohen said.
The numbers are especially impressive considering the “substantial” additional supply that came on the market going into the pandemic and throughout the pandemic, she said.
“That’s being absorbed, and that’s in excess of a 10% increase in supply in senior housing in total,” Nevo-Hacohen said. “So it’s a big number, and yet these numbers are going up.”
RevPOR growth slows
Senior housing revenue per occupied room increased by 3.1% year-over-year in the second quarter, she said.
But RevPOR growth has slowed, and Nevo-Hacohen said the slowdown is due to “customer willingness to pay 10% year-over-year increases.”
“I think senior housing operators … are really trying to manage occupancy growth versus RevPOR growth,” she said. “And at some point … you want to fill up your building and have it fuller, even if it means you’re not making really high increases.”
In the recent past, Nevo-Hacohen said, operators, particularly in assisted living and memory care, justified their rate increases to themselves by saying they were needed due to increased labor costs during the pandemic.
“Frankly, it’s much harder to justify the 10%-plus increases year-over-year that were being demanded,” she said. “I think a year ago, even I was saying that our expectations were that we were going to be seeing 5% to 7% annual increases, and that is what we’re, in fact, seeing for in-place residents.”
Operators must balance the desire to raise rates with the desire to increase occupancy, Nevo-Hacohen said. “What operators are also trying to avoid [is] having a situation where they’re losing residents because of financial reasons,” she said, noting that currently, more than 50% of senior living move-outs occur because residents die or need a higher level of care, such as skilled nursing.
“You want to maximize length of stay, and so that’s the balancing act,” Nevo-Hacohen said.
$750 million in deals under review
The REIT has announced $136 million in new investments, and Matros said that Sabra expects to “remain active as the year progresses in all our asset classes as opportunities arise.”
As of June 30, Sabra’s senior housing managed portfolio accounted for 17.3% of the asset class concentration in the REIT’s overall portfolio, and the senior housing leased portfolio accounted for 11%. Sabra’s portfolio also includes skilled nursing and transitional care (52.9%), behavioral health (14.1%) and specialty hospitals (3.9%).
Nevo-Hacohen said that Sabra is seeing “a significant amount of deal flow” related to managed senior housing, with about $750 million in deals under review.
“That does not mean we’re committed to them or have LOIs [letters of intent] out on them,” she said. “It just means that’s what we’re looking at. A small portion of that will proceed to LOIs submitted, and then we’re being very selective of where we’re placing our capital, because our intent is to make those investments in a way that really enhances and improves Sabra’s portfolio.”
Matros said the potential transactions do not include any whole portfolios.
“At this point, we’re just not seeing quality portfolios out there, and we’re not willing to take on anything that’s going to create a lot of work or a lot of noise,” he said. “We’ve made a commitment to our shareholders that we are going to be predictable and disciplined and rigorous in everything that we do. We’re more than happy to do small, digestible deals and do as many of those as possible than to take on a portfolio that, at least in the case we’re seeing out there, can require some work.”
Acquisition made after quarter ends
After the end of the quarter, Sabra closed on the $75.8 million acquisition of two managed senior housing communities operated by the Leo Brown Group. Matros called the company “one of our strongest operators” and said the deal was a sign of good things to come for the REIT.
“We’ve been doing business with them for years, both from a development and an operating perspective,” he said. “And so to enter into these new investments with an operator that is so familiar to us and has had so much success, I think, bodes well for the growth going forward.”
Costa said that performance in the REIT’s same-store senior housing operating portfolio, combined with the stability in its triple-net leased senior housing portfolio “is really what’s driving our optimism for the back half of the year.”
