EXPERT OPINION: A Conversation with Rick Matros

May 3, 2011

In this "Expert Opinion" interview, Rick Matros, CEO of Sabra Health Care REIT, discusses the dramatic increase in market activity in the health care REIT sector.

Rick MatrosWatch the video      Read the transcript

Richard K. Matros serves as Sabra's Chairman, President and Chief Executive Officer and was Old Sun's Chairman of the Board and Chief Executive Officer from 2001 until the Separation. Mr. Matros served as Chief Executive Officer and President of Bright Now! Dental from 1998 to 2000. From 1998 until its sale in May 2008, Mr. Matros was also the managing partner of CareMeridian, and continues to hold a partnership interest in a number of entities that own and lease real property to CareMeridian. Previously, from 1994-1997, he served Regency Health Services, Inc., a publicly held long-term care operator, holding positions as Chief Executive Officer, President, director and Chief Operating Officer. Prior to that time, from 1988 to 1994, he served Care Enterprises, Inc., holding positions as Chief Executive Officer, President, Chief Operating Officer, director and Executive Vice President—Operations. Mr. Matros currently serves on the advisory board for RFE Investment Partners. 
 

Contact Information:
Mr. Richard K. Matros
Chairman of the Board and CEO
Sabra Health Care REIT, Inc.
18500 Von Karman Avenue, Suite 550
Irvine, CA 92612
Phone #: (888) 393-8248
Fax #: (949) 679-8868


 
Watch the video of the interview: 


 

 

Read the interview transcript:

Steve Monroe:
There's been a lot of activity in the health care REIT sector, with the Nationwide Health Properties sale to Ventas and last year the split-off from Sun Healthcare of the REIT Sabra Health Care. I have with me Rick Matros, the CEO of Sabra Health Care REIT. Rick, the last time we sat down together, you were the CEO of Sun Healthcare, and now, you're the CEO of Sabra REIT, which basically now owns all the real estate of Sun. A lot has changed between then and now. How do you like the view for the industry from your new seat?

Rick Matros:
Well, I love being where we are, just given our size relative to the larger REITs. It's funny because our thesis had been that the REITs had gotten so big that we could appeal to the small- to mid-sized guys. And given our operating background, that would be appealing as well. And that was before all these big deals. So I think that makes our thesis even more compelling.

Steve Monroe:
And as Sun's landlord, you must be pretty ecstatic about what has happened with the RUGs-IV implementation and the increase in Medicare related to cash flow. Do you think this is having a dramatic impact on skilled nursing valuations in general, or just the big companies?

Rick Matros:
I think it's impacting a little. I think the bigger impact really has to do with the prices that have been paid for ManorCare and for Genesis. So there's a little bit I think from RUGs-IV, but as reality starts hitting relative to Medicaid rates, I think the primary effect of RUGs-IV will be to offset the negativity of Medicaid because RUGs-IV is so much better than everybody expected it to be.

Steve Monroe:
I mean, it's always been a debate in Washington, and some people don't like it to offset it. When they recalibrate it, do you think they will recalibrate it with the problems with Medicaid mind?

Rick Matros:
No, they won't because it's a bifurcated system and they look at it separately, and they look at everything in silos in Washington. And that was the problem that we had with RUGs-IV. RUGs-III with the nine categories back in '06 actually did save the system money, but there's a budget crisis and you look at everything in silos, and if any sector was spending more than they projected, they're going to make the adjustment. And that's what's going to happen with RUGs-IV at some point as well.

Steve Monroe:
And obviously Sabra wants to grow and you have enough cash in your balance sheet and lines of credit availability for immediate acquisitions. Are you seeing good product out there that you want to buy?

Rick Matros:
Yes, we are. On our earnings call last week, we noted that we have about $400 million in the pipeline, which at this early stage in our development is a pretty good pipeline. And it's a nice mix, about 68 percent SNFs and the rest primarily senior housing, some hospitals. So we're getting a nice mix of assets because we want to broaden our base beyond SNFs.

Steve Monroe:
I was going to ask you that. Do you want to go into the assisted living, senior housing area? Because that's not something that you personally have been in very much.

Rick Matros:
Yes. I've always I guess dabbled in it. I've always had some component of it in the companies that I've run. But I like the senior housing sector as well, and I always like to mitigate risk and spread things out a little bit, whether it was at the other companies with different product lines that we had and different businesses. Sort of the same thing here.

Steve Monroe:
And do you have a preference for small- to medium-sized portfolios when you're looking at deals? Or are you pursuing more the onesies, twosies?

Rick Matros:
Our preference would be portfolios of three to seven buildings, but we are looking at ones and twos. We're not going to discount those. Because given our starting point, anything is going to help our earnings growth, which is kind of an advantage we have. We don't have to do bigger deals. It takes as long to execute on the small ones as it does the mid-sized ones, but we'll take a look at everything, and that's what we're doing.

Steve Monroe:
Okay. And we all know that the large health care REITs are having absolutely no problem raising capital in the market. If Sabra was to find a particularly large acquisition, given that you're relatively new as a public company, would you be able to raise the capital to, let's say, almost double your size?

Rick Matros:
Yes. In fact, I don't think that we would even need to have a large acquisition to do it. I think as we go through our existing liquidity and we start running through, say, $120 to $150 million, we'll be able to go out and raise equity to replenish and evolve just on the strength of our pipeline and based on the deals that we've already executed. So I think the market would support that. If we happen to have a large deal in hand, then that would even probably be a little bit easier.

Steve Monroe:
And right now in the market, in my 25 years in the industry, I don't think I've seen this kind of investor interest in health care REITs, for the obvious reasons that they all did very well during the big recession that we are in theory out of. But one, do you see that continuing, and two, do you see either more consolidation among the health care REITs, or do you see more IPOs of people forming new health care REITs to take advantage of the investor interest right now?

Rick Matros:
One, I think that the interest will continue because it wasn't just about doing well through the recession, but if you go back to the early part of the decade, the REITs did real well through the SNF bankruptcies as well. So I think that's another piece of it. And then beyond that, my sense is that for the first time, some of the REITs that have never really focused on SNFs are getting more comfortable with the SNF business and so I think that will tend to keep things going as well.

In terms of additional consolidation or what other guys are going to do, I think there's going to continue to be a monetizing of real estate, but I don't see companies doing what we did. It looks like they're more along the lines of doing sale-leasebacks or, in the senior housing sectors, TRS structures. I'll be surprised if anybody in the skilled business does a TSR structure with nursing homes.

Steve Monroe:
Not because the nursing home guy wouldn't want it, but because the REIT wouldn't want that risk.

Rick Matros:
Yes. I just don't see why you would do that. I mean, the liability risk is huge. It changes the whole cost equation.

Steve Monroe:
Yes, that's definitely true. And we all know that the RUGs-IV impact, it went into effect October 1st last year. That's benefited—because we can see the results—the public companies. As an acquirer out there, are you seeing small companies or the individual owners, is there fallout from them that they just are fed up with all these changes in reimbursement, particularly Medicare, and they want out?

Rick Matros:
There's a little bit. And actually, not to do with RUGs-IV yet, although I think it will happen, we're seeing more distress in properties than we've seen in a while. But the challenge there from a REIT perspective is you want to do accretive deals, and you can take a look at that distressed property, and particularly with an operating background you can see it getting to be a good operation. But are you able to take the hit until it gets there? So that's a bit problematic.

But I think what's really going to create fallout is the combination of the complexity of RUGs-IV and what's happening with Medicaid rates. So many of the smaller providers are much more Medicaid dependent than the large guys, and you've had two years already, depending on the state you're in, of just flat rates. And now, it's going to be best-case flat in some cases. As you know, in a few states they're talking about some pretty Draconian cuts. So I just think you're going to see more guys throwing in the towel.

Steve Monroe:
And if you had to look forward in the next year or two, what's going to be the biggest obstacle for Sabra's growth in terms of maybe keeping you from growing to the size you want to grow to? What would prevent that?

Rick Matros:
You know, I don't mean to sound overly optimistic, but I don't really see any obstacles out there. I think there is a lot of product out there. There's enough product out there that we're seeing that we're able to be patient and selective, and I guess I just don't really see that changing over the next couple of years.

Steve Monroe:
Okay. How about for the senior care industry in general?

Rick Matros:
Well, I think the independent living sector maybe has it the toughest because so much of the independent living sector is tied to the housing industry. And so, I think one of the questions is by the time seniors actually can sell their homes, they're not even going to qualify for independent living anymore. There were already occupancy problems there, where they just go straight to assisted living. I think assisted living facilities have to be really careful as acuity in nursing homes has increased, the acuity in assisted living has increased. And they're trying to operate in a way that allows people to age in place, and so, they're contracting out for all these supplemental services, rehab, hospice, home health, to keep people in assisted living. And there's a fine line there. I just think they need to be really careful.

Steve Monroe:
Yes. By now, a lot of people are worried about that. Well, with your pipeline, I hope in the next 12 months or so, you're going to give me a lot to write about.

Rick Matros:
I hope so, too. Because everybody keeps calling us uninteresting right now.

Steve Monroe:
Thanks for sitting down with me.

Rick Matros:
All right. Thanks, Steve. Appreciate it.

 

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