Sabra Health Care REIT, Inc. Q1 FY2025 Earnings Call

Good day, everyone. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to the 2025 Sabra First Quarter Earnings Call. All lines have been muted to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Lukas Hartwich, EVP Finance. Please go ahead, Mr. Hartwich.

Thank you, and good morning. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding our future financial position and results of operations, including our earnings guidance for 2025 and our expectations regarding our tenants and operators and our expectations regarding our acquisition, disposition and investment plans. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K for the year ended December 31, 2024, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid. In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures as well as the explanation and reconciliation of these measures to the comparable GAAP results included on the Financials page of the Investors section of our website at sabrahealth.com. Our Form 10-Q, earnings release, and supplement can also be accessed in the Investors section of our website. And with that, let me turn the call over to Rick Matros, CEO, President and Chair of Sabra Health Care REIT.

Thanks, Lukas, and thanks, everybody, for joining us today. Our skilled nursing and triple-net senior housing EBITDA and rent coverage continued to set new highs at 2.19 and 1.41, respectively, with behavioral hitting its highest level since year-end 2023 at 3.77. On average, coverage for our top 10 relationships was up sequentially. And while not all of them were up, there were none that we have concerns about. Specifically, as it relates to McGuire, about a year ago, they had a pretty large one-time Medicaid pickup due to some underpayments from the Michigan Medicaid system. In the absence of that, their coverage would not show a drop in the current period. Our contract labor continues to improve. While not quite down to pre-pandemic levels, it is lower than it's been in 4.5 years. Labor still is difficult, but certainly moderating at a much quicker pace than we would have anticipated. Our skilled occupancy is up 80 basis points sequentially, with our skilled mix up 10 basis points. Our triple-net senior housing occupancy is up 50 basis points sequentially. Talya will discuss SHOP results in detail. Our deal pipeline continues to be busier than in a very long time, still primarily SHOP, but with enough opportunities that we're able to bid on newer vintage assets with attractive yields. We have a mix of deals with existing operators and are also entering into new relationships with proven operators we've been cultivating relationships with. While we don't usually comment on awarded deals, given our experience in closing awarded deals, we wanted to provide a sense of the volume we hope to close on this quarter by noting the more than $200 million which have been awarded to us. That's more than we did in all of 2024 with more coming as we speak. There's nothing new to note as it pertains to Medicaid, other than we're looking forward to this summer's Medicaid rate increases. And with that, I'll turn the call over to Talya.

Thank you, Rick. Sabra's managed senior housing portfolio held up well in the first quarter of 2025 despite an expectation that seasonality would be back and would drive a dip in operating results. Revenue, cash NOI, and margin were flat on a sequential basis for the total managed portfolio, including non-stabilized communities and joint ventures at share. The senior housing industry continues to gain ground post-pandemic with more units occupied than ever before, according to Rick, having absorbed significant inventory that came online starting just before and continuing during the pandemic. With little new supply expected to be delivered in the next few years, we see continued opportunities for internal as well as external growth in senior housing. Sabra's same-store managed senior housing portfolio, including joint ventures at share and excluding non-stabilized assets, continued its strong performance in the first quarter. The key numbers are: revenue for the quarter grew 6.3% year-over-year; first quarter occupancy in our same-store portfolio was 85.4% compared to 82.6% in the first quarter of 2024. Notably, our domestic portfolio occupancy was 83%, gaining 340 basis points of occupancy during that period, while our Canadian portfolio occupancy was 90.9%, adding 140 basis points of occupancy in the same period, having ramped up occupancy ahead of our U.S. portfolio. RevPOR in the first quarter of 2025 increased 2.8% year-over-year for the same period. In our Canadian portfolio, where occupancy has been in the low 90% for a few quarters, RevPOR grew 4.9% this quarter on a year-over-year basis, demonstrating the impact of scarcity value. Importantly, as RevPOR and occupancy continue to rise, export declined 1.1% across the same-store portfolio. Cash NOI for the quarter grew 16.9% year-over-year in the same-store portfolio. In our U.S. communities, cash NOI grew 14.4% on a year-over-year basis, while in our Canadian communities, cash NOI in the quarter increased 24.7% over the same period, demonstrating the power of operating leverage. The trends that we have been seeing for the past year continue. Senior housing operators are tactically deploying the levers of occupancy and rate to maximize revenue and expenses remain steady, causing NOI to grow and export to decline. Our net lease stabilized senior housing portfolio continues to do well with continued solid rent coverage, reflecting the underlying operational recovery. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Thanks, Talya. For the first quarter of 2025, we recognized normalized FFO per share of $0.35 and normalized AFFO per share of $0.37 compared to $0.34 and $0.35, respectively, for the first quarter of 2024. Normalized FFO and normalized AFFO totaled $85.2 million and $88.2 million this quarter, respectively, which represents a year-over-year increase of 7% and 9% for normalized FFO and normalized AFFO, respectively. I would like to highlight a few key components of this quarter's earnings. Cash rental income from our triple net portfolio totaled $90 million for the quarter, up from $89 million in the first quarter of 2024 despite disposing of $115 million of real estate from our triple net portfolio last year. Cash NOI from our managed senior housing portfolio totaled $24.1 million for the quarter compared to $19.1 million in the first quarter of 2024. This increase was driven primarily by strong occupancy, NOI, and margin gains in our same-store portfolio as well as the impact of our addition of eight properties to this portfolio in 2024 through acquisitions and transitions. Interest and other income was $10.1 million for the quarter compared to $8.9 million in the first quarter of 2024. Cash interest expense was $25.4 million, in line with the first quarter of 2024 and our 2025 guidance run rate. Recurring cash G&A was $10 million this quarter, which matches our 2025 guidance run rate. As noted in our earnings release, we have reaffirmed our previously issued 2025 earnings guidance, and the results for this quarter are in line with our assumptions underlying that guidance. Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 5.19x as of March 31, 2025, a decrease of 0.08x from December 31, 2024, and a decrease of 0.36x from March 31, 2024. This improvement in leverage is driven primarily by the continued NOI growth in our managed senior housing portfolio, accretive capital recycling and prudent use of our ATM to fund growth. We have been proactively using the forward feature under our ATM to raise equity when our share price presents an attractive opportunity to lock in an accretive cost of capital to fund the deal flow we see in our pipeline. During the quarter, we issued $84.3 million on a forward basis at an average price of $17.32 per share after commissions. And in total, we currently have $110.5 million outstanding under forward contracts at an average price of $17.32 per share after commissions. We expect to use the proceeds to close on the investments we have been awarded and to do so on a leverage-neutral basis. As of March 31, 2025, we are in compliance with all of our debt covenants and have ample liquidity of over $1 billion, consisting of unrestricted cash and cash equivalents of $22.7 million, available borrowings under our revolving credit facility of $917.3 million, and the $110.5 million outstanding under forward sales agreements under our ATM program. As of March 31, 2025, we also had $297.7 million available under our ATM program. Finally, on May 5, 2025, Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock. The dividend will be paid on May 30, 2025, to common stockholders of record as of the close of business on May 16, 2025. The dividend is adequately covered and represents a payout of 81% of our first quarter normalized AFFO per share. And with that, we'll open up the lines for Q&A.

Your first question comes from Nick Yulico with Scotiabank. Your line is open.

This is Elmer Chang on with Nick. Congrats, Talya, on the upcoming retirement. My first question is on how you're thinking about dispositions throughout the year? I think you expected a $50 million skilled nursing facility sale in the near term from last quarter's call. Is that still on the table? And if so, when would you expect that to close and maybe how has delayed timing put pressure on the pricing for that sale?

We still expect that to close. It's just an estate that there's a lot more regulatory hoops to jump through and there won't be any change on the proceeds that we're expecting. So, it's going to just be one of those. It will happen when it happens, but it's on course to happen. Beyond that, it's just ordinary course of business for us, like it used to be, which would be sort of $50 million to $100 million a year, but we don't have much in the way that's targeted right now.

Thank you. My second question is about SHOP. I'm curious about your outlook for RevPOR and expense growth over the year as the portfolio moves toward a high 80% occupancy level, especially since operators are seeing increased occupancy during the quarter. It appears that the U.S. business might have less pricing power. How do you see the trends for these two factors developing throughout the year?

What we're seeing is that labor, which is our largest expense, is stable. As occupancy increases, exports are decreasing. I believe that as occupancy continues to rise, which we expect to happen across all segments of senior housing in the U.S. and Canada, pricing will also increase because that will be the lever we can use. Higher occupancy allows us to demand higher prices once we reach a certain threshold. There are significant tailwinds regarding both occupancy and revenue per occupancy, and I think expenses will remain as they are, subject to uncertainties.

Your next question comes from the line of Farrell Granath with Bank of America. Your line is open.

My first question is regarding your guidance. I know you mentioned some details about the deals awarded, so I wanted to ask if any of that is being taken into account. Additionally, concerning the SHOP guidance, given the execution this quarter, which is typically seasonally softer, are you maintaining the low to mid-teens cash NOI growth for the year?

Yes. The acquisitions we announced that we are working on are not included in our guidance. We will include them in our guidance once they are closed. You can expect that during our second quarter call, after those deals and possibly others have closed, we will incorporate that into our guidance considerations. So the short answer is no, they are not currently included in the guidance. In response to your second question, we reaffirm guidance along with all the underlying assumptions. The same-store growth guidance of low to mid-teens still stands.

Look, we want to be moderate here. So, we just want to give ourselves a little bit more time. If we have a reason to revisit for the second quarter, we'll do that.

Okay. And also just generally, in what you're seeing in the transaction market, especially with your ability to enter into a $200 million portfolio deal, what are you seeing in terms of deal flow? Are you seeing that increase and also the sellers and buyers entering into this space?

Happy to take that. And by the way, the $200 million that we've been awarded are actually not a single portfolio, but there are multiple transactions in there.

Okay.

We are experiencing a strong flow of deals, primarily focused on senior housing, which we mainly consider at SHOP, with few exceptions. Most of the opportunities are single assets or small bundles of assets. We have started noticing some large portfolios, but they are outliers and generally less appealing to us at this time, as we find better opportunities in smaller transactions. A notable trend is that many sellers are private equity firms that invested in development or early-stage assets and are now looking to sell due to fund life constraints. These assets have recovered sufficiently from COVID, allowing them to exit at reasonable multiples while needing to return capital to their limited partners to launch new funds. This recycling of capital is a significant factor propelling many sales. Occasionally, we do see sellers who had previous unsuccessful attempts returning to the market, and currently, the situation is more about timing and executing reasonably well, sometimes just meeting the minimum execution needed for these sellers. Despite rising cap rates, assets in the senior housing sector have recovered enough for sellers to exit without needing to inject additional cash to settle debts.

And has that increased competition that you've seen as well?

The private equity buyers are mostly not active in the market. There are a few that are being cautious. We have noticed one that is more engaged. Public REITs are also active, as you may have observed. Occasionally, we find ourselves competing with groups we haven't typically engaged with before. However, pricing has remained quite consistent from our viewpoint on the deals we've bid on.

Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

On the $200 million of senior housing acquisitions, are these all deals in the U.S.? And can you just give us a sense of kind of the operating metrics where they sit today? And what sort of that may imply for kind of the future growth profile?

I will approach this cautiously when sharing specific figures because these are deals we've been awarded but haven't finalized yet. Firstly, all of them are in the U.S., primarily focused on the eastern region. Additionally, they all have growth potential, as they are reasonably occupied but still have room for improvement in terms of occupancy and revenue per occupied room.

They are more heavily focused on AL memory care than IL.

Did you want to add something, Talya?

No, I'm good.

Okay. And then just following up, Rick, you kind of referenced you haven't historically disclosed deals until they've closed. I guess, what led you to break that practice with this $200 million? And should we expect you'll continue to announce deals that have been awarded or under LOI?

We decided to share this information because we have a strong history of closing deals once they are awarded. Given the significant activity we are experiencing, we didn't want to let another quarter pass without keeping you informed about our expectations. Earlier this year, we stated that we anticipated achieving much more than last year, which was our goal. This was the primary reason for our disclosure. In the future, we may or may not continue this practice, depending on the number of closed deals we have to announce as things progress.

Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Talya, congratulations. The first question is about Genesis. I know you have been very proactive in reducing exposure over the years. Could you remind us how much NOI you are receiving from Genesis? I understand it’s not in your top 10 list. Can you also provide details on the structure in place and the credit backing that lease? Additionally, could you update us on the paid rents to date, up to May?

Yes. So, we sold all but eight of the original 86 last year because we wanted to have more security going forward. We decided to sublease those eight assets to a trusted operator. Their rent was slightly less than Genesis, but because of the Genesis guarantee, Genesis makes up the stub. It's not material. So that's been going really well for us. No mis-payments. They will be our operator going forward after the lease expires. The operations have improved materially since they started, but with really that many facilities, it's pretty negligible impact on our NOI. But yes, so we're good there.

Great. Good to hear. And secondly, just on SHOP could you just remind us kind of the deferred or kind of revenue-generating CapEx that we should be thinking about this year for the in-place portfolio? And if we should be thinking about incremental kind of CapEx spend on the pipeline over and above traditional maintenance CapEx?

Mike highlighted that the assets we acquired last year and are in the process of acquiring are relatively new, mostly between five to ten years old. As a result, the capital expenditures required for these acquisitions are not significant. When discussing competition, we have a substantial pipeline which allows us to be very selective about the assets we choose to purchase. Therefore, no matter the competitive landscape in the markets we are operating in, we possess attractive, modern assets to compete effectively.

Yes. In terms of the dollars, Juan, so in terms of like regular maintenance CapEx, we've been spending on an average somewhere between, call it, $1.5 million to $2 million a quarter on our consolidated portfolio. On larger projects, that's going to be very community specific. We spent a lot last year, as we've talked about in the past. There's some deferred projects that got delayed because of the pandemic. That number was over $30 million that we spend across our entire portfolio. But we expect that number to be quite a bit lower in 2025 because of the fact that we caught up last year as well as what Rick pointed out with the newer vintage assets that we've been adding to our portfolio just naturally require less CapEx.

Your next question comes from the line of Seth Bergey with Citi Group. Please go ahead.

Hi, Seth, thanks for taking my question. I guess just going back to the pipeline kind of as you have been improving outlooks for SHOP, it sounds like there may be a little bit more competition out there for deals. Has there been any change to your underwriting criteria in terms of the type of assets you're looking at, geographies, or kind of your return expectations?

I believe the competition has become a smaller group of buyers for most of the assets we are observing. As Rick mentioned, we are being very selective about what we pursue for various outlined reasons. When it comes to underwriting, our focus remains unchanged. We are concentrating on our cost of capital and ensuring that our underwriting leads us to acquire deals that are accretive. Another important factor in our transaction evaluations is the opportunity to purchase at possibly lower prices, particularly when we have established relationships with operators involved in the deals who can influence the sale. We're also considering working with operators who have a pipeline of assets expected to come to market and potentially future development opportunities, although we are not relying on development at this moment. The assets themselves are important, but strategic reasons, including relationships and future opportunities, also play a vital role in our investment decisions.

Great. That's helpful. And then I guess just for the second one, your coverage level is continuing to improve, but are there any changes to your watch with respect to operators?

No, none.

Your next question comes from the line of George Dugan with Mizuho Securities.

This is Georgie on for Vikram. Just in the press release, you mentioned that you're not seeing many attractive SNF opportunities. Can you just provide more color on what makes the SNF acquisition unattractive? Like is it a location, operator, anything else that you can share?

Losing a lot of money is a good starting point, and we see a fair amount of those. Because oftentimes, what we're seeing is a nonprofit divesting because they're bleeding cash on the asset. So that's tough because it's really tough to structure a lease around an asset that doesn't have the ability to pay rent because it's going to take time even if you get the most fantastic operator in there and the asset is fundamentally well situated. And all that is going to be a while before they're able to turn the facility around so that they can pay rent. So that's the challenge of the math around the lease. And we're not doing managed assets in the SNF space.

We're not noticing significant progress from others as well. Ideally, with more clarity on Medicaid, we anticipate that additional assets will enter the market. While it's possible for people to engage in deals without considering future changes, we prefer a cautious approach to underwriting a skilled nursing facility deal without knowing the future of their Medicaid revenue stream.

That's helpful. And just a second question on the SHOP portfolio, can you just provide more color on like what you expect in terms of occupancy cadence throughout the year? And what are the trends that are you seeing so far in the second quarter?

We're a month into the second quarter, so I'm hesitant to make broad predictions. The first quarter was relatively stable, which seems to be the new seasonal trend for this year. I do anticipate improvements. If we focus on our Canadian assets, it's important to note that people are generally less inclined to move during January, February, and March due to harsh winter conditions. For instance, when I visited Vancouver last week, the weather was beautiful, even better than Southern California, and Toronto is also improving. This positive environment is likely to boost mood and increase move-ins, particularly in our Canadian properties. Additionally, our assets in the northern U.S. face similar winter challenges, making it difficult to expect move-ins during the coldest months.

Your next question comes from the line of Richard Anderson with Wedbush. Your line is open.

Congrats, Talya. I guess we'll see you around for a few more quarters, though. So, on the topic of not interested in any large portfolios, Rick, is that because of the portfolios? Or is that because of your sort of commitment to all of us to sort of keep it simple and not get into a firehose drinking situation again? I'm just curious what's motivating the lack of interest in large portfolios as you see it today?

Yes, it's about our commitment. As you know, we've made various decisions over time that created some noise but ultimately set us up to be stronger moving forward. It takes time for people to adjust their perceptions and see us as a reliable organization with clearer expectations for the future. We expressed this intention coming out of the pandemic in 2023, and we’ve remained dedicated to it. There’s a lot happening that we can capitalize on without needing to take significant risks. When we repositioned the company through the merger and exited Genesis, we had no need to make major changes again, and that remains the case. Our portfolio is robust, and during the pandemic, we faced fewer issues with SNF operators compared to most others. Our goal is to be predictable and maintain simplicity. We can execute hundreds of millions in deals, focusing on transactions under $100 million. Currently, many deals in our pipeline are approaching $100 million. This reflects our commitment to you and ourselves, and we will remain highly focused on this strategy. While we may be open to larger opportunities in the future, we currently have a balanced portfolio between senior housing and skilled nursing that drives our growth effectively. We still aim to pursue skilled deals, which will improve our average yield, but balance is essential. We want our asset base to include strong earnings drivers that exceed the typical 2.25% to 2.5% increases from triple net leases. I may be over-explaining, but that’s the situation.

No. I enjoyed it. Good stuff. And so next question is we're hearing some of your peers are doing some SHOP conversions. Is that a part of your strategy at all within the portfolio? Or is it going to be mostly looking for stuff externally?

We've already completed a significant portion of that work during the pandemic. There’s not much left for us to address. The coverage is excellent, and we have some legacy assets performing very well, with the operators satisfied. While there may be a few minor adjustments needed, nothing substantial remains. We have reduced our triple-net senior housing portfolio by about a third in recent years, so there’s not much left in that area. As we continue to grow our seniors housing operating properties, the triple-net senior housing portfolio will decrease as a proportion of our overall exposure, and behavioral will decline as well, since we will be directing our capital towards the two segments that have positive market trends, namely senior housing and skilled nursing.

The Medicare suggestion of 2.8% for fiscal year '26 seems acceptable. It's a decline from last year, which is understandable considering the easing inflation. There are also unresolved questions regarding Medicaid that remain unanswered. It seems like coverage improvements may be leveling off. Are we moving towards a more stable situation since reimbursement sources are likely to slow year-over-year? Coverage has experienced significant growth, but it may now be in the past. What are your thoughts on this?

Yes, that's a good question. I don't expect us to remain stagnant for a while for a couple of reasons. First, we anticipate decreases in Medicare and Medicaid rate increases this year, which is due to the timeframes covering periods of declining inflation. The current 2.8 is still around a full point higher than we saw historically. While we don't expect Medicaid to match the over seven percent increase we experienced last year, we believe the increases will still be significant. Given the continued growth in occupancy, the moderation in labor costs, and the projected Medicaid rate increases this summer—which affect about 70% of our buildings in July and August—we should see improved coverage for some time. If there are any changes related to provider taxes, that may slightly impact us, but overall, I anticipate a minimal effect since there will be cost offsets if the ceiling decreases. Additionally, we will likely see growth again once the Medicaid rate increases are implemented. Overall, I believe we still have room for growth throughout this year.

Your next question comes from the line of Alec Feygin with Baird Equity Research. Your line is open.

So, kind of speaking for the $200 million set of deals. And Talya, you kind of talked about maybe the strategic relationship angle, but maybe any more details with are these operators that you would like to grow? Are they new operators into the portfolio? And kind of what do you expect that shadow pipeline to kind of be after these deals close?

So, the answer to question number one is, yes, yes, yes, yes. All of the above. The answer to number two is tougher to assess. And I think we'd rather close the deals and then be able to report further detail on the additional opportunities that we're looking at.

All right. Fair enough. And then secondly, can you provide some details in the maybe kind of steady decline in occupancy in the behavioral health and specialty hospitals and other segment? Kind of what are the prospects for re-leasing those spaces, if they do go dark at what rents?

It's a very distinct business compared to senior housing and skilled nursing. The breakeven point is relatively low, usually below 60% occupancy. The coverage has actually improved because revenue per patient day has increased. However, the behavioral health space is highly dynamic. In skilled and senior housing, occupancy tends to be more stable and predictable. This is not the case in the behavioral sector, where we experience very short lengths of stay. There are significant occupancy drops during the holidays, as few individuals seek rehab services during that period, and this trend often extends into early January. While there may be some recovery, the coverage remains strong at 3.77, so it's not a concern for us. It’s simply a different type of business, and we have learned to navigate the fluctuations.

Your next question comes from Omotayo Okusanya with Deutsche Bank.

This is Sam on behalf of Tayo. I would like to know your updated thoughts on how the current intention of the U.S. government to establish a new federal budget might affect Medicare reimbursement for skilled nursing.

What we're hearing is that there are no plans to alter Medicare, and the President has expressed similar views regarding Medicaid. Over the past few quarters, we've identified some potential risks associated with provider taxes. However, we haven't heard anything during the discussions happening on Capitol Hill concerning Medicare. I believe that if there were a significant issue, the proposed rule would have been different. The comment period following the issuance of the proposed rule is unfolding as expected, and we're not receiving any concerning signals from CMS either. We're in a rapidly changing environment, but we are closely monitoring developments related to Medicaid. Overall, we feel quite secure about Medicare.

There are no further questions at this time. I turn the call back over to Rick Matros.

Thanks, everybody, for joining us. We're available, as always, if you want to reach out and have additional discussions. And otherwise, we'll see a bunch of you folks at NAREIT. Look forward to it. Thanks, everyone.

This concludes today's conference call. You may now disconnect.