SABRA HEALTH CARE REIT, INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of
The Rating Outlook is Stable.
The affirmation and Stable Outlook reflect Fitch's view that SBRA's long-term credit profile remains sufficient to support the current capitalization despite the effects of the coronavirus pandemic on skilled nursing facilities (SNFs) and senior housing (SH), and that there is significant headroom in key metrics to withstand rental non-payments and lease amendments in the interim.
Further deteriorations in operating fundamentals due to new, or existing COVID-19 variants, and larger than anticipated reduction in rental revenues could cause SBRA's leverage to sustain above Fitch's negative sensitivities, which could lead to negative ratings momentum absent sufficient offsetting actions.
Key Rating Drivers
Adequate Leverage Headroom: SBRA maintains adequate headroom for leverage to sustain below 5.5x, the level which Fitch views as more consistent with a lower IDR. Fitch believes that the issuer will deploy additional levers to stabilize and reduce leverage if rent reliefs materially impact leverage metrics through a combination of jointly marketed dispositions of both the property and operations, and/or issuing additional equity. If rent relief causes leverage to sustain above Fitch's negative sensitivities without any offsetting steps by the issuer, Fitch may revise the ratings and/or Outlook. Fitch estimates SBRA's leverage at 4Q21 was 5.0x. SBRA's financial policy is leverage sustaining below 5.5x, with an average long-term target leverage of 5.0x.
Improved NOI Visibility Post-Avamere Rent Cut: Fitch assumes the recent resolution with troubled operator, Avamere, who deferred and/or did not pay rent on time through 2021, reduces but does not eliminate risks to rental income in 2022. Fitch notes that SBRA collected 100% of Avamere 2021 rent through 1Q22 after the application of letters of credit and some payments by Avamere. Effective
SBRA could recapture some of the lost rental income if Avamere's cash flow recovery exceeds a predetermined threshold during 2023, as well as ability to reset rents in 2025. Fitch estimates SBRA's leverage post-Avamere rent cut is 5.1x.
Uncertain Recovery Pace and Trajectory for SNFs: Fitch's Rating Case projections do not explicitly assume the effects of additional virus variants and any additional government relief beyond what has been committed to date, but instead assesses degree of leverage headroom for SBRA to withstand additional declines.
While the Omicron variant uncertainty has stalled the SNF occupancy recovery, vaccination rates and boosters are also rising across the country and hospitalizations are relatively modest relative to previous waves. SBRA occupancy rates at 4Q21 are 71%, down from 75% in 1Q21, and below pre-pandemic levels of 82% in 1Q20. Fitch assumes SNF occupancy levels to return to pre-coronavirus levels by mid-2023.
Fitch views the federal and state government's consistent support of the SNF sector through the pandemic positively. Fitch believes that the latest disbursement of
Without incremental funds, however, Fitch notes that additional rent deferral/abatement may be required for more tenants, once the federal and state level government funds are exhausted and when the Public Health Emergency (PHE) designation ends. Such actions would further pressure REIT cash flows since several measures and waivers to support operators during COVID-19 were tied to the PHE declaration.
Fitch expects the proposed Medicare payment rate cut of 0.7% to have a manageable impact on rental non-payments for SBRA specifically, as portfolio level operator lease coverage remains healthy (1.95x at 4Q21 pre-Avamere rent cut) and SNF occupancy improves through 2022. CMS proposed a 3.9% payment rate for SNFs in FY23 which is offset by a negative 4.6% recalibration of excess PDPM spending in FY20. Fitch notes that the proposed rule is not final and does not come into effect until
Labor issues add an additional risk to the stabilization in operator cashflows. Already elevated labor costs during the pandemic have not eased as bonuses paid at the start of the pandemic have been replaced by higher underlying wages and continued use of higher-cost sources of labor (e.g. agencies). Some SNF operators have noted ability to source labor has also been a constraint on occupancy growth due to staffing requirements. SNFs do not have short-run pricing power to pass through cost inflation due to the reliance on government payors.
Long-Run SNF Rental Income Risk Profile Intact: Fitch views the long-term rental income risk profile of SBRA's skilled nursing portfolio to be relatively unchanged by the COVID-19 pandemic. Fitch believes SNFs will continue to retain their place in the
Derivation Summary
SBRA's ratings reflects the issuer's ability to proactively manage its skilled nursing and SH portfolio through secular headwinds while maintaining leverage below 5.5x through the cycle. The ratings also reflect the issuer's strong liquidity due to no near-term debt maturities, portfolio quality and diversification, improving access to capital and average operator lease coverage. The ratings are constrained, however, by tenant concentration and by the issuer's focus on skilled nursing, SH facilities and hospitals.
Compared to its SNF-focused peer,
Fitch rates the IDRs of the parent REIT and subsidiary operating partnership on a consolidated basis using the weak parent/strong subsidiary approach and open access and control factors-based on the entities operating as a single enterprise with strong legal and operational ties.
Key Assumptions
Contractual annual rent escalators for the triple-net portfolio based on CPI through 2025;
Wholly-owned SHOP occupancy and NOI margins stabilize in 2022 and recover to pre-pandemic levels by 2023;
A rent cut of 30% for Avamere in 2022 with most of the rent reduction recaptured by 2025;
Annual net acquisitions of
Term loans maturing through 2024 are refinanced prior to maturity.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation that as a skilled nursing focused REIT, SBRA will operate with net debt to recurring operating EBITDA below 4.0x;
Fitch expectation that SBRA becomes a more diversified health care REIT, where SNFs comprise less than 20% of NOI;
Fitch's expectation of REIT fixed-charge coverage, defined as recurring operating EBITDA adjusted for straight line rents and maintenance capex relative to interest and preferred dividends, sustaining above 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
If the coronavirus pandemic recovery slows down, stalls or reverses such that Fitch expects net debt to recurring operating EBITDA sustains above 5.5x without a timely restoration;
Greater than expected pressure on operator fundamentals from reduced demand and profitability, possibly stemming from legislation revisions that result in lower coverages or other changes in regulatory framework;
Fitch's expectation of REIT fixed-charge coverage, defined as recurring operating EBITDA adjusted for straight line rents and maintenance capex relative to interest and preferred dividends, sustaining below 2.5x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity Profile, Limited Near-Term Debt Maturities: Fitch estimates SBRA's sources of liquidity (unrestricted cash, availability under the revolving credit facilities due 2024 after extension options and retained cash flow from operations) cover its uses (debt maturities, committed development expenditures and maintenance capex) through 2023.
The issuer maintained full capacity of its
Adequate Contingent Liquidity: Fitch estimates that SBRA's unencumbered assets would cover net unsecured debt (UA/UD) by 2.0x assuming a 9.5% stressed cap rate as of
The financeability of the underlying real estate is a core tenet of investment-grade REIT ratings. SNF and SH facilities generally benefit from strong access to contingent liquidity sources, including a multitude of durable government sponsored mortgage capital sources as well as more pro-cyclical bank mortgage and CMBS market.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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