Sabra 3rd Quarter 2026 Earnings Call - SABRA HEALTH CARE REIT INC

Financial Performance:

• Reported normalized FFO per share of $0.39 and normalized AFFO per share of $0.41 for Q3 2026, both an 8% year-over-year increase; guidance midpoint increased by $0.005.
• Same-store shop portfolio revenue grew 9.3% YoY, with cash NOI up 14.6% YoY driven by 160 basis points occupancy gain to 89.2% and 7.3% REV4 growth.
• Total senior housing operating portfolio revenue grew 10.3% sequentially and NOI 8.5% sequentially; same-store domestic occupancy rose 211 bps to 86.9%.
• Cash rental income totaled $93.5 million for the quarter, excluding $10.2 million in deferred rent repayments; normalized G&A was $10.6 million.
• Wrote off $6.2 million in straight-line rent receivables and lease intangibles related to the Avermeer portfolio transition, normalized in results.
• Net debt to adjusted EBITDA ratio declined to 4.54x as of September 30, 2026, from 4.61x; liquidity stood at approximately $1.2 billion.
• Issued 6.5 million shares via ATM program for $116.2 million net proceeds to fund acquisitions.

Guidance and Future Outlook:

• Raised 2026 per-share normalized FFO and AFFO guidance midpoint, projecting 7% and 8% YoY growth respectively.
• Anticipates 7%–8% year-over-year earnings growth for the year, with skilled nursing portfolio contributing significantly via lease expirations and rent resets.
• Targeting 50% shop exposure by year-end 2027, shifting from a 40% shop portfolio; skilled nursing exposure will drop to ~40% as senior housing outweighs it.
• Expect to see rent increases in lease expirations between 2027 and 2031 as coverage ratios reset to fair market values.
• Pipeline includes $425 million in awarded investments (nearly all shop) and $260 million in active pursuit, bringing total closed and awarded investments to over $1.17 billion.
• Management expects full impact of the Avermeer rent reset ($5M+ YoY NOI increase) to be reflected in 2027 numbers, with Q4 run-rate including the transition.

Business Segments and Product Lines:

• Shop segment added seven communities ($222.8 million) in Q3 and four subsequent communities ($140.7 million) with an estimated 8% yield; 18 shop assets added YoY.
• Skilled nursing and senior housing triple net rent coverage ratios continue to improve; senior housing portfolio now outweighs skilled nursing exposure.
• Behavioral health portfolio (Signature Left) reduced to 5 psych hospitals (10% of portfolio); remaining substance abuse business largely exited.
• Value-add strategy involves acquiring stabilized assets (approx. 80% occupancy) with upside potential, noting no material CapEx issues on assets under 10 years old ($1,200–$1,500 per unit annual CapEx).
• Avamir transition effective October 1 increased annualized rents from $48M to $53M; full impact realized in 2027.
• Legacy Elite Senior Housing portfolio (7% of NOI) contains stable triple-net operators; no active optimization expected beyond minor incremental gains.

Market and Competitive Landscape:

• Strong deal flow with no signs of slowing; capitalizing on off-market opportunities (30% of pipeline vs. near zero last year) and existing operator relationships (65% retention of operators).
• Senior housing market experiencing cap rate pressure that has moderated amidst rising interest rates; deal economics remain stable with unlevered IRRs in low double-digit to mid-teens.
• Industry occupancy trends remain robust; Sabra maintaining occupancy targets of 92–93.5% for stabilized assets and seeing rate growth in facilities at 80%+ occupancy due to increased acuity.
• Strategic focus on optimizing skilled nursing rents via lease expirations; operators negotiating extensions with rent increases due to high existing coverage ratios.
• Management views the skilled nursing sector as having a strong runway, with outsize NOI contributions expected through 2031 lease expirations.

Risks and Challenges:

• Political uncertainty regarding Medicaid and staffing mandates noted as potential "noise" but not an immediate operational risk, given most states already meet federal staffing recommendations.
• Potential dilution concerns if behavioral health assets (Signature Left) require sale; management refuses to accept dilution to earnings for transactions.
• Long-term CapEx requirements may increase as newer assets in the portfolio age over time.
• Risk of future rent cuts in specific segments (1.0x–1.5x coverage bucket) was addressed by management stating no concerns exist for current assets in those buckets.
• Forward-looking statements regarding tenant performance, acquisition plans, and earnings are subject to risks detailed in Form 10-K.

Management Commentary and Tone:

• Management tone is highly confident, describing shop performance as "stellar" and same-store NOI margins as "best-in-class" (34.9%).
• CEO Rick Matros and CFO Michael Costa emphasized a balanced approach, avoiding rigid asset class caps in favor of capitalizing on earnings growth opportunities in both shop and skilled nursing.
• Emphasis on discipline regarding capital deployment; willing to utilize value-add strategies without taking excessive risk, provided operators are strong.
• Clear stance against forcing exits of legacy operators in the Elite portfolio, preferring to let them naturally shrink as a percentage of the portfolio.

Analyst Questions and Answers:

• Skilled Nursing Optimization: Confirmed two specific opportunities for rent increases via extensions/expirations; timing expected for full 2027 impact.
• Cap Rate Trends: Skilled nursing cap rates remain stable; senior housing cap rate pressure has moderated; value-add deals lower immediate yield but offer significant upside.
• Yield Metrics: Updated yield reporting now reflects "year-one yield" rather than initial cash yield, except for select value-add deals using stabilized yield; go-in yield remains in the low 7% range.
• Rent Growth Drivers: REV4 growth (7.3%) attributed primarily to increased resident acuity allowing higher billing rates rather than pure pricing power above market rates.
• Deferred Rent: $10.2M deferred rent repayment resulted from a specific operator transition and improved financial health, not a broad market trend.
• FAD Calculation: Management declined to disclose Funds Available for Distribution per share due to SEC restrictions but provides all recurring/non-recurring CapEx data for external calculation.
• Political Outlook: Anticipates potential healthcare policy noise if Democrats control Congress but expects no immediate material business impact due to existing state-level staffing compliance.

Other Key Points:

• Declared quarterly cash dividend of $0.30 per share, representing a 73% payout of Q3 normalized AFFO per share.
• $6.2M write-off regarding the Avermeer portfolio was normalized out of quarterly results to reflect ongoing performance.
• Off-market deal volume increased significantly from near zero last year to 30% of current pipeline; operator retention rate is 65%.
• Total capital available (cash, credit facility, ATM) is sufficient to fund acquisitions through early Q2 2027.
• Value-add investments are currently performing ahead of underwriting projections regarding both occupancy and NOI.