Sabra Health Care REIT, Inc. Q3 FY2025 earnings call

• SHOP portfolio growth: Exceeded expectations, now at 26% and target revised to 40% from 30%. Investment target of $400M to $500M exceeded, with over $550M closed plus awarded in 2025.
• Managed senior housing: $237M invested in Q3, including $20M for acquisition of 4 leased senior housing properties. Cash NOI and margin up 18.6% and 90 basis points sequentially. Occupancy increased 60 basis points to 86.8%, RevPAR rose 4.3%.
• Same-store performance: Revenue grew 5.4% YOY, occupancy up 110 basis points to 86%, cash NOI grew 13.3% YOY. Canadian communities saw cash NOI increase 20.2% YOY.
• Financials: Normalized FFO and AFFO per share reported, balance sheet strong with net debt to adjusted EBITDA at 4.96x, credit rating upgraded to Baa3. Quarterly cash dividend of $0.30 per share declared.

The SHOP portfolio has grown to approximately 26% of the total portfolio, exceeding initial expectations. Cash NOI growth for the managed portfolio was a solid 15.9% excluding 16 ex-Holiday properties, with same-store cash NOI growing 13.3% year-over-year. The triple-net portfolio saw a decrease in cash rental income due to transitions, sales, and percentage rents, but was offset by growth in the managed senior housing portfolio. In absolute terms, normalized FFO per share was $0.36 and normalized AFFO per share was $0.38 for the third quarter of 2025, with year-to-date normalized FFO per share at $1.09 and normalized AFFO per share at $1.12.

• Normalized FFO and normalized AFFO midpoint unchanged at $1.46 and $1.50 per share, respectively. Full year average same-store cash NOI growth for managed senior housing expected in mid-teens. Commitment to strong balance sheet, utilization of $750M ATM equity offering program for investments.

• Competition for assets in the senior housing market. Concerns about cap rates relative to cost of capital. Potential impact of new supply on the SHOP segment's growth trajectory.

Q: Good day, everyone. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sabra Health Care REIT Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Lukas Hartwich, EVP Finance.

A: Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements...

Q: And first, I want to congratulate Talya. Thank you for everything you've done. And looking forward, I'm sure, to not having to be on these earnings calls again. But my first question is really around the guidance. So as you were saying, we saw strong core performance, especially in your SHOP portfolio as well as we've seen these increased acquisitions. And I'm just curious how the guidance was maintained, while we're also seeing these increasing core metrics?

A: Yes. I think the easiest answer to that, Farrell, is the fact that the vast majority of these investments that we're closing on this year are in the latter half of the year, so they're really going to have a pretty muted impact on 2025 performance, but we look forward to their contribution to 2026.

Q: Knowing that the same-store pool is a significant chunk of the overall SHOP portfolio, but can you just share what total portfolio occupancy is? And then also how that compares to where occupancy stands on the recent SHOP acquisitions?

A: Yes. So we don't disclose that, Austin. I would say the majority of the assets that are not in the same-store aren't in same store because they haven't been around long enough to be in same store. That's a good chunk of that. And the occupancy in those non-same-store assets is going to be largely in line with our same-store pool is probably the easiest way to describe it.

Q: Knowing that the same-store pool is a significant chunk of the overall SHOP portfolio, but can you just share what total portfolio occupancy is? And then also how that compares to where occupancy stands on the recent SHOP acquisitions?

A: Yes. So we don't disclose that, Austin. I would say the majority of the assets that are not in the same-store aren't in same store because they haven't been around long enough to be in same store. That's a good chunk of that. And the occupancy in those non-same-store assets is going to be largely in line with our same-store pool is probably the easiest way to describe it.

Q: My first one is on, Rick, you made some opening remarks about Holiday starting to improve this quarter. And I just wanted to hear more about the glide path of those assets and what are those operators accomplished so far? I think you noted that occupancy is a little bit lower there. Is there a possibility that they're additive to the overall growth of that portfolio?

A: Yes, they will be additive. I think the primary accomplishment to date with all 3 operators because they all assessed their piece of the Holiday portfolio the same way. And that is that they've rightsized and stabilized labor in the buildings because even in IL, there's been some acuity creep and the lack of stability in labor or the lack of appropriate staffing of labor prior to the transition did contribute to the -- just sort of meandering of occupancy and contributed to greater move-outs and move-ins because they simply couldn't take care of certain residents. So job one basically has been accomplished, which is stabilize all that, now remarketing themselves to the referral sources so they can demonstrate that they can, in fact, take residents who are a little bit higher acuity, which should result in not just a wider number of residents that can be admitted but better length of stay, which obviously contributes to occupancy as well. So there's always going to be some lag time between stabilizing your infrastructure and having the benefits of that stability result in a stronger top line, but that's fully our expectation.

Q: I guess my first one is just kind of on the pipeline. As you kind of increased your target for the SHOP exposure, how do you see kind of the mix of the pipeline of opportunities you're looking at skew between SHOP and skilled?

A: So this is Darrin again. So our current pipeline as it has been for the past several quarters, typically, we see 90% to 95% of that volume or opportunity set is within SHOP and only maybe 5% to 10% on SNF. So I would expect us to be heavily weighted towards SHOP moving forward.

Q: Just hoping you could talk a little bit, Rick, about your appetite or lack thereof around pursuing skilled nursing or RIDEA or opco investments as everybody looks for external growth opportunities in the space?

A: No appetite.

Q: Just hoping you could give us a little bit more color on the U.S. versus Canada split for SHOP. What's the current split on an NOI basis today? Is Canada market you'd like to grow in? And is there any kind of limitations or governors on RevPOR growth in Canada? I know some markets, Quebec may or may have some pricing restrictions or rent controls. So just curious on that.

A: I'll take the part about appetite. So we would like to grow in Canada. We've had good success with the portfolio investments we've made there. I think the biggest -- and Canada faces even a longer time frame for getting new supply added to their existing inventory and they have the same demographic issues we do, but without the labor -- same labor pressures. So there's a really good setup there. The challenge for us is pricing, and that is assets trade for, call it, 6 handle cap rates, and that's just not -- doesn't work for us right now. We continue to stay close to that market and obviously have enough exposure to see what's going on. I'll let Darrin respond to the rate and as such.

Q: So I have a question about the fact that everybody is sort of doing the same thing, which is expanding into SHOP. And it reminds me of, I don't know, 2015-2016 time frame when operators were all pushing the REITs to move from a net lease model to a SHOP model. I remember thinking what do they know that we don't. And then next thing you know, we're oversupplied and the REITs are underwater, it's not underwater, but struggling with SHOP. So I mean when you use that history of sort of everyone moved to SHOP, now everyone is buying SHOP and everyone is going in SHOP, do you have any concerns about this sort of mass wave of movement that everyone is doing it and maybe we should be thinking about this a little bit more closely because it does feel a little herd like to me. And I wonder if that enters any concern in your mind about pursuing this like everybody else is doing.

A: Yes. So I totally get your point. I think the dynamics are dramatically different right now. I mean you've got the demographics that everybody has been waiting for, for 3 decades are really kicking in. We've got several years, if not longer runway before new supply has any impact whatsoever. When you look at the breadth of opportunities out there, for those of us who have been on the SNF side of the REIT business as well, it's almost like it was before the pandemic where there were just so many different SNF opportunities out there. They were enough for all of us to get sort of our fair share. And I think that's the case now. And then the other thing, obviously, is a complete change in interest rates in the debt market from when the PEs got high on crack because of really 0 interest for so long and just leverage everything up. And of course, that all imploded on them once the pandemic hit. And even with interest rates coming down, it's not going back to what it was. And as PEs start to circle around and get more interested in maybe getting back into the space, they still need a spread and they're not going to be able to impact cap rates the way they did back then. So that's my answer, Rich.

Q: My second question is what's the shelf life of this growth spurt? Like what -- do we have 5 years ahead of us? As soon we have a SNF of new supply coming at us, obviously, maybe that changes that dynamic. But assuming that holds off for the time being, is this a 5-year sort of story, 2 years? What do you think knowing what's out there today?

A: Yes, this is Darrin. I think at the very least, it's going to be 2 years. I think there's -- I've seen numbers around $20 billion of senior housing mortgage debt that's coming due over the next 2 years, which should provide a lot of opportunity there. I think it's at least 2 years.

Q: So first, may you speak about the managed seniors pipeline/deal flows, specifically what you were seeing between IL and AL?

A: Yes, sure. So we see a combination of both, but it's definitely much more weighted towards AL memory care than IL.

Q: And second one for me is, are there any new observations with private capital entering or exiting either the skilled nursing or the SHOP acquisition market? And do you think Sabra and its public REIT peers are taking market share currently?

A: On the SNF side, I think you're still seeing very active private capital involved using HUD debt for leverage and REITs having to be clever in how they deploy capital into the SNF world. On senior housing, we are starting to see private equity come in. They are not disrupting pricing, at least not yet because of the factors that Rick outlined, but we are seeing names come in, they're not coming in with doing huge deals, but they -- or take privates yet or other methods that they use to go in and make a big splash in the past. We're seeing them at the asset level, onesie-twosies start. I think they're tiptoeing coming back in. I think there's some institutional memory, although it's usually brief.

Q: So you've now had 3 consecutive quarters of, call it, 1% to low 2% SHOP expense growth. Do you see this as a sustainable pace in the near term?

A: This is Darrin. Yes, we don't see anything that should disrupt that trend from continuing.

Q: Right. Okay. Is any of that low expense growth due to maybe weakness in occupancy within the Holiday portfolio or maybe that's actually been a headwind given some of your comments on labor rightsizing, just curious how the Holiday portfolio is impacting that?

A: Yes, it was more a headwind than anything. And we've talked about this now for several quarters now, Talya's always pointed this out. On an exPOR basis, we've actually seen flat to declining exPOR on our portfolio because of the operating leverage. Given where the occupancy is on this total portfolio, there's not a lot of incremental expense you need in order to increase occupancy.

Q: Talya, end of the road, we'll definitely miss you and all your advice, and I wish you all the very best. Congrats on the credit upgrade guys. Just kind of curious as you kind of think about the cost of debt the implications of the upgrade, does it kind of -- you're going to issue debt -- of unsecured debt going forward? Do you think you're kind of 25% -- or 25 bps in? Or does it have any impact on your pricing grid?

A: Yes, it's a good question, Tayo. I think the short answer is it doesn't have a material impact on our pricing today by having all 3 credit rating agencies rate us investment grade, probably a couple of basis points to be very honest with you. It doesn't impact our pricing grid on our credit facility anything like that. I think what it does for us more than anything. One, it validates our story, which is huge and something我们've been pounding the table, with Moody's on for 15 years and finally, that worked. But then importantly, is now that we have all 3 of those rating agencies onboard, we're not exposed to perhaps one of them going rogue one day and changing their rating methodology hypothetically, right, and that would impact our credit rating. If we only had 2 at that level and then one did that, then we'd be in a different situation from a pricing perspective. So now it just gives我们 more breathing room, more comfort over being able to continue being an investment-grade issuer going forward.

Q: Perfectly. And then could you just talk a little bit about the behavioral portfolio at this point and kind of long-term plans around that?

A: Sure. So you'll see that continue to shrink as a percent of our portfolio. When we first started investing in it, it was really still during the pandemic, and it was just another pathway to growth. And it was before both the senior housing and skilled spaces really started recovering way more quickly than anticipated from the pandemic, and it became clear that the best use of our capital allocation was in senior housing and skilled nursing to the extent that we could find opportunities. And we noted all along from the beginning of those investments that we thought it was an interesting space. It had some different dynamics and unit economics from both skilled and senior housing that we liked, particularly the fact that the breakeven point on profitability was sort of in the 50% to 60% range. We like that. We see it as a growing space. But all that said, we also noted that it was very young. There were -- the operators that have been proven were few and far between. And so the opportunities were always going to be incremental. And so that's kind of how we sort of got into it and why the growth is really was so slow initially, and we just haven't grown in that. But again, since, call it, the latter part of '23, when it became so apparent what the runway was going to be for senior housing and skilled, that really is the best use of our capital. So it will shrink naturally, as I said, as a percent of our exposure. If we have opportunities to divest some of those assets, we'll explore that. And that's kind of it. Does that answer your question, Tayo?

Q: Perfectly.