Sabra Health Care REIT, Inc. Q3 FY2026 earnings call

• Portfolio Strategy Shift: Management is actively shifting exposure from Skilled Nursing (~40%) to Senior Housing (Shop, ~50%) by year-end 2027. This is driven by the desire to have senior housing outweigh skilled nursing for the first time, while maintaining diversity.
• Investment Activity: Closed $750 million in investments YTD (mostly Shop, except $100 million Skilled Nursing). An additional $425 million is awarded (mostly Shop), with another $260 million actively pursued. Total pipeline exceeds $1.17 billion.
• Same-Store Growth Drivers: Strong performance is attributed to occupancy gains (up 160 bps YoY) and rate growth (REV4 up 7.3%). Expense growth (EXPOR) increased only 4.7%, driven by repairs, marketing, and management fees, while labor costs remained flat (<3%).
• Value-Add Opportunities: Management is pursuing value-add deals targeting 80% occupancy, which provides upside potential despite slightly lower initial yields. These assets are performing ahead of underwriting projections.
• Leverage Reduction: Net debt to adjusted EBITDA ratio improved to 4.54x from 4.61x. The strategy is to naturally lower leverage without sacrificing earnings growth, supported by strong liquidity ($1.2 billion).
• Dividend Coverage: The quarterly dividend of $0.30 per share is well-covered, representing a 73% payout ratio of Q3 normalized AFFO per share ($0.41).

The company operates primarily in two segments: Senior Housing (Shop) and Skilled Nursing/Senior Housing Triple Net.

1. Senior Housing (Shop) Operating Portfolio:

   • Financial Performance: Sequential revenue growth of 10.3% and NOI growth of 8.5%. Year-over-year, same-store revenue grew 9.3%, with Canadian communities growing 7%. Same-store occupancy increased 160 basis points to 89.2% (Domestic: 86.9%; Canada: 93.9%). REV4 rose 7.3% year-over-year (Canada: 6.2%). Cash NOI grew 14.6% year-over-year. Investments added seven Shop communities in Q3 ($222.8 million), bringing YTD investments to $747 million.
   • Revenue Contribution %: Not explicitly stated as a percentage of total consolidated revenue, but the segment is described as having 'best in class' margins (34.9% same-store cash NOI margin) and driving the majority of earnings growth.

2. Skilled Nursing & Senior Housing Triple Net Portfolio:

   • Financial Performance: Cash rental income was $93.5 million for the quarter (excluding $10.2 million deferred rent payment). Cash rental income increased $1.2 million on a normalized basis compared to Q2. The portfolio is transitioning towards higher coverage ratios, with skilled nursing coverage improving. A $6.2 million write-off of straight-line rent receivables/lease intangibles occurred due to the AveMir transition, which was normalized in results.
   • Revenue Contribution %: The legacy triple-net senior housing portion has shrunk to approximately 7% of total NOI. The skilled nursing portfolio contributes significantly to near-term earnings via lease expirations and rent resets.

• FFO/AFFO Midpoint Increase: Updated 2026 guidance increases the midpoint of normalized FFO and normalized AFFO per share by half a penny (0.5 cents).
• Growth Rates: At the new midpoint, this represents 7% year-over-year growth for normalized FFO and 8% for normalized AFFO.
• Same-Store NOI Outlook: Fourth-quarter same-store Shop NOI guidance was moved up to the mid-teens growth range, supported by stronger occupancy and rate trends plus better visibility into the latter part of the year.
• Yield Expectations: New investments are expected to yield in the low double digits to mid-teens unlevered IRRs. The going-in year-one yield for the total closed and awarded pipeline is in the low seven percent range, competitive with the cost of capital.

• Regulatory and Political Risk: Potential changes in healthcare policy, staffing mandates, and Medicaid reimbursement depending on election outcomes. However, management notes that current federal staffing mandates are already met by most operators and views political noise as less impactful than historical precedent.
• Tenant Credit Risk: While coverage ratios are generally strong, some assets fall into the 1.0x to 1.5x coverage bucket. Management states no rent cuts are needed, but these areas require monitoring.
• Operational Execution: Transitioning from triple-net to operating portfolios involves execution risks regarding stabilization timelines (1-2 years) and managing operational expenses like labor and maintenance.
• Interest Rate Environment: Rising interest rates have caused cap rate pressure, though management believes this pressure has moderated recently. Underwriting assumes current market cap rates for exit valuations.

Q: Analyst asked about skilled nursing optimization opportunities, specifically if they involve rent increases upon expiration or asset sales to accelerate Shop NOI growth. / A: CEO clarified that optimization relies on rent increases at lease expirations (2027-2031) where coverage ratios allow for resets to fair market rates (typically ~1.5x). No immediate asset sales were planned; the focus is on negotiating extensions with higher rents based on current high coverage ratios.

Q: Analyst inquired about fourth-quarter deal economics, pending transactions, and how cap rates have trended for the $425M awarded pipeline. / A: EVP Investments noted that pipeline economics match completed 2026 deals, with unlevered IRRs in the low double digits to mid-teens. Cap rate pressure on senior housing has moderated despite rising interest rates. Deals include a mix of stable and value-add assets.

Q: Analyst asked for details on the Avamir transition's impact on run-rate rents and incremental NOI contribution not yet reflected in the current run rate. / A: CFO explained the transition effective Oct 1 raised annualized rents from $48M to $53M. The full impact hits 2027, but Q4 run rate includes the increase. Year-over-year NOI growth from this lease will be ~$5M+ due to earlier rent resets.

Q: Analyst questioned the change in yield metrics (from initial cash yield to estimated yield) and why Q1 Shop deal yields appeared to jump from 7.9% to 9.2%. / A: CFO clarified the new metric is 'year-one yield' (or stabilized yield for value-add deals). The apparent jump reflects the use of stabilized yields for specific value-add acquisitions rather than a general market shift. The overall going-in year-one yield remains in the low seven percent range.

Q: Analyst asked about behavioral health coverage, future outlook, and if any rent cuts are needed for assets in the 1.0x-1.5x coverage bucket. / A: CEO stated behavioral health (Signature Left) is now ~10% of the portfolio with strong coverage (~3-4x). It is a distinct, dynamic business. CFO confirmed no rent cuts are needed for the lower coverage bucket, which consists of a mix of skilled nursing and senior housing assets.