Thanks in large part to dynamic pricing that took effect over the summer, Sabra Health Care REIT (Nasdaq: SBRA) just posted best-ever quarterly revenue and margin numbers for its joint venture portfolio of Enlivant senior housing communities.
Irvine, California-based Sabra in 2017 acquired a 49% stake in the Enlivant portfolio jointly owned with private equity firm TPG. Currently, that portfolio consists of 170 buildings managed by Chicago-based Enlivant, representing about 17% of Sabra’s annualized cash net operating income (NOI). Enlivant is the largest operator relationship for Sabra. In addition to private-pay senior living, Sabra has significant investment in skilled nursing facilities.
In Q3 2019, revenue per occupied room (RevPOR) in the Enlivant JV portfolio reached $4,307, a 6.9% increase on a stabilized, same-store, year-over-year basis. At the same time, the cash NOI margin hit 26.7% in the quarter, up from 23.9% a year ago.
Those are the best RevPOR and margin numbers that Sabra has seen since investing in the portfolio, Sabra Chief Investment Officer Talya Nevo-Hacohen said Thursday on the REIT’s earnings call.
The portfolio’s occupancy did slip 0.9% on a year-over-year basis, to 81.4%. Pushing rate while sacrificing some occupancy is a worthwhile tradeoff, in the view of Sabra CEO Rick Matros — and others in the industry, who prioritize NOI versus raw occupancy.
“Our senior housing operators stay focused on rate and expenses and they don’t give up rate for occupancy,” he said. “We think over the long-haul, that’s a much better strategy to have.”
A stratified portfolio
Sabra’s Q3 earnings come against a backdrop of industry headwinds, including persistent challenges related to a glut of supply that has come online in recent years. Other senior housing REITs have taken hits on their senior housing operating portfolios, with Chicago-based Ventas (NYSE: VTR) citing “unprecedented” market conditions leading to pricing challenges, and Healthpeak (NYSE: PEAK) calling out Denver and Houston as specific tough locations.
“I’ve seen a lot of postings about negative SHOP results for facilities that are in secondary markets; we’ve obviously got a lot in secondary markets, but we just aren’t experiencing that,” Matros said.
Enlivant’s overall portfolio stretches across 26 states, and the company focuses on serving secondary and tertiary markets at a more accessible price point than many private-pay providers. The company arose out of the troubled Assisted Living Concepts in 2014, and since that time has been striving to right the ship on multiple fronts.
The dynamic pricing system that was put in place over the summer appears to be an important milestone in that effort.
“The JV portfolio experienced 126 move-ins in the third quarter, more than any other previous quarter, providing real, measurable success of this initiative,” Nevo-Hacohen said.
Dynamic pricing refers to a more adaptable approach to setting room and board rates, taking a variety of factors into account, such as prevailing market rates and the desirability of a unit within a building.
“S.E.E.R. (Selling Enlivant Effectively Resource) is a proprietary and dynamic pricing system that we developed internally over the past several years in partnership with a global consulting firm,” Enlivant CEO Jack Callison told Senior Housing News.
While dynamic pricing is a common practice in hospitality and other industries, it is less prevalent in senior living. Lake Oswego, Oregon-based independent living giant Holiday Retirement was an early industry advocate of dynamic pricing, and it too created a proprietary software platform.
Holiday still uses that system, Sabra Executive Vice President of Asset Management Peter Nyland confirmed to SHN. Sabra counts Holiday as an operating partner, having transitioned the triple-net portfolio of 21 communities into a management agreement earlier this year.
Enlivant’s S.E.E.R. system has been especially effective for buildings with low occupancy, Nevo-Hacohen said on Sabra’s earnings call. Of 19 communities that had average Q3 occupancy of 64.9%, their spot occupancy at the end of October was 70.9%.
The impacts were notable even for communities that had lower than 85% occupancy, she added.
Enlivant has reached a new stage, in which parts of its portfolio have been stabilized and are driving toward peak performance while others still require more attention, Matros said. Accordingly, Enlivant leadership has stratified the portfolio to direct more resources where they are most needed. A big push next year will be the implementation of an electronic medical record system.
Longer term, Sabra sees significant upside to the portfolio given its price point and locations, and the economic challenges in today’s environment to building more affordable communities, Nevo-Hacohen said.
Still, Sabra is negotiating to keep the portfolio in a JV rather than take 100% ownership, as it could have done next year under contract terms. This is mainly a balance sheet consideration, to avoid the dilution that would occur if Sabra were to write a big check to take full ownership, Matros said.
Sabra is in active talks with a potential JV partner or partners, but executives declined to elaborate further on what a transaction might look like, except to say that they still intend to take a majority stake.
Overall, Sabra posted Q3 normalized FFO per share of 47 cents, matching the Bloomberg estimate. Its Q3 total revenue of $149.8 million came up short of the average analyst estimate.
But with shares trading up 3.19% at market close on Thursday, investors appeared to be bullish on the quarterly results and the progress that Sabra is making on its balance sheet. The REIT closed on a $2.2 billion credit facility amendment, sold 4.2 million shares of common stock during Q3, and is on track to achieving its target leverage of 5.50x net debt to adjusted EBITDA by year end.
Going into 2020, the balance sheet will be the strongest in Sabra’s history, Matros said.
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