Sabra Healthcare REIT’s (Nasdaq: SBRA) decision to exit its Enlivant joint venture with private equity firm TPG has not soured the company on the operator, nor lessened its appetite for senior housing.
With the wheels already turning on a sale of its 49% stake in the 159-community portfolio, Sabra is turning its attention to growing its wholly owned senior housing assets, which include 11 properties managed by Enlivant, CEO Rick Matros said Thursday during the company’s Q2 2021 earnings call.
“We remain committed in continuing to grow our senior housing [business],” he said.
Sabra also announced a change in its executive leadership. CFO Harold Andrews is retiring on Dec. 21, 2021. He will be succeeded by Michael Costa, the company’s executive vice president of finance and chief accounting officer.
Andrews will remain in a consulting role with Sabra for a two-year period beginning Jan. 1, 2022. A search is underway for Costa’s replacement, and a hire is expected in the fourth quarter of 2021.
Matros praised the transition on the call, assuring investors it would be smooth.
“Our whole team has been together since [Sabra’s] inception,” he said. “It keeps us culturally intact.”
For the quarter, Sabra reported normalized funds from operations (FFO) of 39 cents per share, on $110.8 million in revenue. The revenue marked a 1.7% decrease over the previous year.
The REIT also announced its 2021 full-year earnings guidance: net income loss ranging between 13 cents and 15 cents per share, and FFO ranging between $1.53 and $1.55 cents per share.
Sabra’s senior housing segment is gradually rebounding. Occupancy across its leased portfolio bottomed out in the first half of February 2021, but has improved by 505 basis points, as of mid-July. Occupancy in the REIT’s managed senior housing portfolio improved by 113 basis points in that same span.
Irvine, California-based Sabra’s wholly owned senior housing portfolio includes 62 communities under triple-net leases and 49 operated by third-party managers under property management agreements.
Matros indicated how close Sabra came to striking a deal to purchase TPG’s stake in the Enlivant JV. The company had an option to do so, at a previously agreed-upon strike price, by Jan. 1, 2021.
But the REIT said it would only move on the strike price if the deal would be mutually beneficial to both parties. Prior to Covid-19, the leverage profile of the Enlivant JV was approximately 9.5x net debt to EBITDA.
“It wasn’t unreasonable, and the size of the check that we’d have to write to bring leverage down to levels that were accessible wasn’t an overwhelming amount,” he said.
But Covid-19 severely impacted the portfolio. Same-store net operating income (NOI) in the first quarter of 2021 declined 64.2% over the previous year, and occupancy fell 13.5%, year over year, ending the quarter at 68%.
The occupancy decline and corresponding revenue dropoff, along with increased operating costs incurred by the JV portfolio during the pandemic, increased net debt to EBITDA to 20x as of June 30, 2021. Sabra also calculated an “impairment charge” of $164.1 million in the second quarter, which reduced its carrying value in the JV to an estimated $114 million. The company does not expect to hold on to the portfolio for a sufficient length of time to recoup the decrease in value.
Moreover, TPG requested changes to the management fee structure which would have reduced future financial performance across the portfolio, to a point where Sabra believed were not fair market value.
“From our perspective, as much as we like the portfolio, we’re better off moving forward,” Matros said.
TPG will lead the search for a buyer, and is expected to launch the search after Labor Day. Sabra will tag along throughout the process
Exiting the Enlivant JV will arguably place Sabra in a better financial position. Excluding the portfolio, Sabra’s credit profile as of June 30 was 4.75x net debt to EBITDA, well below the REIT’s target of 5.5x. A sale would enhance that position, and would be earmarked toward future acquisitions and managing its balance sheet.
“If we receive proceeds equal to our new carrying value of $114 million, our net debt to adjusted EBITDA would decline on a pro forma basis,” Matros said.
Sabra also reported operational improvement in its independent living assets managed by Holiday Retirement, which account for 5.4% of the REIT’s total NOI. Lead generation is tracking 10% higher than 2019 numbers, and move-ins are tracking 20% higher, Chief Investment Officer Talya Nevo-Hacohen said. The lead-to-lease conversion ratio, meanwhile, is exceeding 2019 numbers.
Sabra stock ended trading Thursday down nearly 2.6%, closing at $17.30 per share.
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