Sabra Health Care REIT Inc. (Nasdaq: SBRA) is experiencing promising changes in nursing home reimbursements, opening up more investment opportunities for the company. During the second quarter of 2024, Sabra reported a net income of 10 cents per diluted common share, slightly higher than 9 cents in Q2 2023. The company also beat Wall Street estimates with funds from operations (FFO) at 35 cents per share, compared to 33 cents in the same quarter last year.
Improved Margins and Rent Coverage for Nursing Homes
Sabra CEO Rick Matros highlighted the positive trends in skilled nursing margins and rent coverage, which are now better than pre-pandemic levels. "Skilled nursing margins and rent coverage are higher than pre-pandemic levels, with the potential for further gains as occupancy continues to recover," said Matros. Despite occupancy being about 200 basis points lower than pre-pandemic levels, the company sees significant potential as more facilities reach higher occupancy.
Medicaid Rate Increases Benefit Sabra
One of the key drivers behind Sabra's improved financial performance is the increase in Medicaid rates across the states where it operates. The average Medicaid rate increase is about 7%, 200 basis points higher than the previous year. Matros pointed out that the Medicaid rate increase for Sabra's top five skilled nursing tenants was closer to 10.6%. He added, "We may have hit a high point this year. Next year, we'll still be capturing inflation, so we'll still have outsized Medicaid rates. But certainly, over the next few years, assuming inflation moderates, these rates will moderate as well."
Sabra's Investment Opportunities on the Rise
Sabra is capitalizing on the positive market trends by increasing its investments. The company announced approximately $60.1 million in new assets during the quarter. In addition, after the quarter ended, Sabra closed on a $75.8 million acquisition involving two senior housing communities. The company also completed the sale of four facilities for $6.7 million and another four-property disposition for $34.9 million.
Matros said, "The opportunity to reap the benefit of operating leverage is even greater, given the potential of occupancy growth." He also noted an anticipated uptick in behavioral health asset opportunities, which could become essential to Sabra's investment strategy.
Focus on Behavioral Health and Nursing Home Properties
Sabra's diverse portfolio has 236 skilled nursing and transitional care facilities, 39 leased senior housing communities, and other healthcare-related properties. The company also focuses on expanding its behavioral health segment, which saw decreased rent coverage in Q2 (2023). Matros explained, "The behavioral business is very dynamic, a much shorter length of stay, but also has a break-even point at much lower occupancy, and the coverage is still quite strong at 3.69; there's a lot of breathing room there."
Occupancy Recovery and Future Prospects
While Sabra's occupancy rates are still recovering, the company remains optimistic. Coverage is currently higher than when Sabra hit its occupancy high in 2019, which bodes well for the future. "Margins and coverage are expected to improve as occupancy rises," said Matros. Nine out of Sabra's top 10 operators improved rent coverage, with the McGuire Group being the only exception.
Conclusion
Sabra Health Care REIT Inc. is on a positive trajectory with improving nursing home reimbursements, strategic investments, and a focus on expanding its healthcare portfolio. As the company recovers from the pandemic's challenges, it is well-positioned for future growth and success in the healthcare real estate market.
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