All we can say is that Sabra Health Care REIT is fortunate to have gotten out of its joint venture with TPG and the former Enlivant portfolio. TPG bought those assets at a very low per-unit price, and Sabra bought its 49% interest from them at a very high per-unit price, more than double TPG’s price. While we understood the need to diversify Sabra’s portfolio into more private pay seniors housing, these were not the right assets. But they were available at the time, and if it worked out Sabra had an option for the remaining 51%. Even without the pandemic, we do not believe the value would have climbed to merit buying the other 51%. The buildings were small, on the old side and were designed with a 30% Medicaid census in mind. Oh well, water under the bridge.
In the meantime, Sabra still had 11 communities managed by Enlivant that have now been transitioned to Inspirit Senior Living, an existing Sabra operator. Management has high expectations for Inspirit, and even though it is a small group of properties, it will help the overall performance of the seniors housing portfolio.
Speaking of the same-community seniors housing performance, progress has been made, but just like most everyone else, it has been slower than desired. The sequential occupancy declined by 70 basis points in the second quarter to 79.9%. This was the result of a 130-basis point drop in the smaller independent living portion, while assisted living increased by 120 basis points to 81.9%. We have been hearing a lot about weakness in the IL market, where post-pandemic growth has been slower than for assisted living.
It may be a combination of the growth of alternative active adult communities, as well as the fact that IL communities are not need-driven, so people are more willing to stay in their homes. But people forget that they performed much better than assisted living during the pandemic. Cash NOI for the portfolio increased by 20% year over year, and the operating margin increased by 320 basis points to 27.3% year over year. While that sounds good, it also represented a 170-basis point drop from the fourth quarter 2022.
We focus on the seniors housing portfolio because that is where the industry interest is, but Sabra is still dominated by its skilled nursing and transitional care assets. They own 253 of them, and occupancy has been growing steadily during the past four quarters. Second quarter 2023 occupancy reached 74.4%, up 160 basis points from a year ago. The EBITDARM coverage has slipped a little, from 1.80x to 1.65x, but still healthy enough to not cause any worries. With a 4% Medicare increase coming up, and management’s expectations for an average 5% Medicaid rate increase across the states, and very little new development, they are feeling a lot more comfortable than two years ago.
Because the cost of capital is high right now, and valuations are all over the board, growth by acquisitions may have to be put off until 2024, other than an opportunistic deal here and there. The good news is that the majority of Sabra’s debt (73.6% of the total) is fixed rate at an average of 4.02%, and very little debt matures between now and 2026. If the financial performance of the existing portfolio continues to improve, they should be in good shape to refinance in 2026, assuming interest rates have declined.
