The Seniors Housing Capital Environment: A Discussion with Rick Matros of Sabra Healthcare REIT, Inc.

Image of Rick MatrosIn the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, vice president of NIC MAP®, recently interviewed Rick Matros, chairman/CEO, Sabra Healthcare REIT, Inc.

NIC: Your largest tenant, Sun Healthcare Group (NASDAQ: SUNH) has announced their intentions to be acquired by Genesis HealthCare.  Can you comment on how this will impact Sabra Health Care REIT (NASDAQ: SBRA; SABRA)?  Do you see more acquisitions (operating companies buying operating companies) such as this occurring going forward?

Matros: The Genesis acquisition of Sun doesn’t really affect us other than it’s a stronger credit, which certainly has potential implications. The parent guarantee Sabra had with Sun was very good but was materially strengthened in exchange for our consent. The guarantee now cross defaults to Genesis’ term loan, contains a net worth covenant, and has a stronger annual escalator.

In terms of continuing M&A activity, I see it only on a small scale. It’s a small universe of large strategics that are in a position to do anything and I don’t see private equity firms jumping back into the skilled nursing sector, although I could see them being more amenable to seniors housing deals.

NIC: Sabra has announced that one of its strategies is to target acquisitions <$100 million.  Can you describe this market including any sorts of opportunities and associated pricing?

Matros: There are many opportunities to do deals with small- to mid-sized operators and developers. The big REITs have gotten too large for those deals to move the needle. There aren’t many options for capital for deals under $100M, and there are a relatively small number of REITs that we compete with for those deals. This includes skilled nursing and seniors housing. It consists of developers looking for take-out capital for their projects, operators whose debt is maturing, or who have simply built up equity and for whom monetizing real estate has become an option. Additionally, there are distressed situations and turn around opportunities. In terms of pricing, we’re seeing assisted living and memory care deals at 8 caps, give or take, and skilled nursing deals anywhere from 9.5 to 11 caps. These are lease cap rates.

NIC: Notwithstanding the recently announced acquisition of  Sun Healthcare Group by Genesis HealthCare, seniors housing and skilled nursing transaction activity has slowed significantly in 2012.  According to the recently releasedRCA-NIC Seniors Housing & Care U.S. Quarterly Report for 2Q12, 87 properties worth $944.8 million traded hands in 2Q12 which is down 86% and 91%, respectively, from the same period last year.  What do you attribute this slowdown to and what is your outlook for industry volume during the 2nd half of 2012?

Matros: Regarding transaction activity, skilled nursing activity slowed down this year due to the CMS Medicare cut in October 2011. Potential sellers were focused on mitigating that cut and didn’t want to go to market before having stabilized numbers. We’re seeing activity pick up now. As to seniors housing, we’ve seen good transaction activity in our pipeline, but because we look at small deals it doesn’t reflect in what NIC is showing. I don’t see any specific reason for there to be a slowdown in seniors housing transaction activity other than the fact that, because the big REITs did so many large deals last year, integration of those deals may be a distraction and they may be having difficulty finding quality deals of the size they’re looking for.

NIC: The Centers for Medicare and Medicaid Services announced (on 7/27) that Medicare rates in FY 2013 will be subject to a market basket increase factor of 2.5 percent which, when combined with a negative 0.7 percentage point multifactor productivity adjustment mandated by the Affordable Care Act, results in a net FY 2013 payment update of 1.8 percent.  How will this payment update and the possibility of sequestration in early 2013 impact your existing portfolio as well as underwriting of acquisitions?  

Matros: The skilled nursing market basket increase of 1.8% to be offset in January 2013 by sequestration doesn’t necessarily affect our underwriting of skilled nursing deals. Approximately two-thirds of Medicare rate growth in skilled nursing occurs as a result of acuity shift. Increased acuity is where the skilled nursing model is going and where CMS wants it to go. As long as we partner with operators who have the ability to execute that strategy, we expect to see reasonable Medicare rate growth and, therefore, margin growth even in a flat pricing environment.

NIC: With regard to health care reform, the individual mandate was recently upheld by the US Supreme Court.  This results in a largely left intact health care reform package.  Certain aspects like the advent of ACOs will be more likely now as a result.  How does health care reform change/drive your investment strategy?

Matros: We look at what’s happening on the ground when we assess where the health care system is going. This is impacted by ACOs as well as market forces with some sort of bundling to come at some point, the growing trend of physicians as employees both technically, as in the Kaiser model, and de facto, as more join physician groups. We expect reimbursement, both as a function of bundling and CMS policy, to be neutral site based. In other words, the same patient in an IRF or LTACH won’t be paid more than in skilled nursing. As a result, we see skilled nursing and assisted living/memory care (given the model is becoming so much more need based) as the perfect partners for the new world of health system networks. Hospice and home health will do well, also. This is why Sabra has chosen to focus on skilled nursing and assisted living/memory care to the exclusion of those other asset classes. We believe MOBs will be challenged as well in the new world, as physicians abandon the cost and infrastructure of their historical office settings and function more closely with the hospitals in terms of physical location and otherwise. Our challenge is to find partners in those local markets who “get it” and meet the needs of the hospital systems and are, therefore, chosen as partners.

Recovery in Occupancy Varies by Campus Type

Seniors housing occupancy has been recovering modestly since establishing a cyclical low of 87.0% during the first quarter of 2010. As of the second quarter of 2012, seniors housing occupancy in the top 31 metropolitan markets was 88.6%, which was an increase of 30 basis points from the prior quarter and 160 basis points above the cyclical low . While aggregate seniors housing occupancy has been recovering steadily, occupancy performance has varied significantly by campus type.

Freestanding independent living occupancy suffered the steepest decline during the recession, but has subsequently experienced the strongest recovery. After declining nearly 800 basis points, freestanding independent living occupancy has risen 520 basis points since establishing its cyclical low, including a 300 basis point increase during the past year alone.

Assisted living occupancy was the most resilient in terms of occupancy performance during the recession, declining between 300 and 350 basis points depending on the campus type. The only exception being the performance of freestanding memory care properties, which experienced a decline in occupancy of 560 basis points. The decline in freestanding memory care occupancy was mainly supply-related, as supply has grown at an annualized pace of 3.5% during the last four years – far above the pace of other seniors housing property types.

CCRCs have not yet begun to participate in the recovery, with occupancy oscillating near its cyclical low since the third quarter of 2010. As of the second quarter of 2012, CCRC occupancy was 88.9%, which was unchanged from the prior quarter and only 20 basis points above the cyclical low it established during the third quarter of 2010. Occupancy in CCRCs remains 480 basis points below its previous cyclical high.


Profiling the Not-for-Profit Sector in Seniors Housing and Care

Did you know that not-for-profit properties comprise over 21% of all seniors housing and care properties (with 25 or more units) and over 31% (or more than half a million units) of all seniors housing and care units in the top 100 metro markets? For the CCRC campus type, not-for-profits comprise 70% of all CCRCs in the top 100 metro markets and 81% of all entrance fee CCRCs.

Not-for-profit seniors housing properties in the top 31 metro markets have seen a sharper slowdown in construction activity (down 75% from their peak) when compared to their for-profit counterparts (down 37%). In addition, the for-profit construction vs. inventory pipeline is stable at 2.5%; whereas the not-for-profit seniors housing pipeline is at a cyclical low of 1.5%.

NIC MAP reports can help not for-profit communities by providing more complete background on their local markets, including assessing relative strengths of markets and submarkets through standardized benchmarks and identifying emerging market risks or opportunities through analysis of occupancy, year over year rent growth, and entrance fee growth and supply/demand trends. For more information on the performance of not-for-profit communities in the top 100 metro markets, please visit the NIC booth at LeadingAge (booth #2113) or contact John Blumer at

Learn From Our Expert Panelists What Keeps Them Ahead in this Evolving Landscape

With just a few short weeks until the 22nd NIC National Conference, take a few minutes to review this year’s Schedule of Events and reserve your front row seat! Whether a debt provider, equity investor, owner/operator of a seniors housing or SNF property, developer or analyst, this year’s stellar line-up of educational programming offers a dozen breakout sessions featuring over 60 expert speakers discussing subject matter pertinent to our industry today!

Come listen to industry experts during the Partnerships Across the Continuum of Care: Changing the Face of Skilled Nursing session on Thursday afternoon discuss new innovations spurred by changes in reimbursement, funding opportunities by the Centers for Medicaid and Medicare Innovations and how they are working to meet the “triple aim” of improving care, improving population health and reducing the cost of care. This panel discussion, moderated by George Hager, CEO, Genesis Healthcare, LLC, will address some of the key questions on people’s minds:

  • What are the opportunities for tighter collaboration and synergy between acute and post-acute providers and the potential impact/benefits of cross-provider initiatives?
  • Do these initiatives signal greater incentive for all health care providers to communicate and collaborate along the continuum of care- including seniors housing and care/long-term care providers?

By popular demand, our Friday morning breakout session line-up includes a follow-up to last year’s Year of the Health Care REIT. This year’s session, entitled Dealmakers’ Forum: After the ‘Year of the REIT’, will provide insight into the market defining deals of the last 18 months and the factors transforming the landscape of 2013.This experienced panel of investment executives will offer insights into what types of investments are being sought after by REIT investment teams and how that impacts non-REIT investors. Discover where valuations are going, what types of operators REITs are looking to partner with and how and when development may fit into the REITs or other institutional investor’ business plans.

To access conference hotel and travel information, and to view session topics and speaker bios click here. We look forward to seeing you in Chicago, September 19-21, 2012!

Brookdale Senior Living and The University of North Texas (UNT) Health Science Center Awarded $7.3 Million Grant

Brookdale Senior Living in partnership with the UNT Health Science Center, recently received a $7.3 million Health Care Innovation Award from the U.S. Department of Health and Human Services. This award is for a program geared toward the reduction of hospital re-admissions of residents in assisted living properties. The Health Care Innovation Awards through the Affordable Care Act, are funding up to $1 billion in grants to applicants who will implement the most compelling new ideas to deliver better health, improved care and lower costs to people enrolled in Medicare, Medicaid and Children’s Health Insurance Program (CHIP). Brookdale and the UNT Health Science Center will work with Florida Atlantic University to roll out the program in Brookdale properties first in the Dallas/Fort Worth area then throughout the state of Florida before expanding nationwide. Read More about the Award.


The NIC Office Has Moved

On Friday, August 10 NIC moved to our new office space.

New address:
1997 Annapolis Exchange Parkway
Suite 480
Annapolis, MD 21401

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