Earnings Call Transcript - SBRA Q3 2025

Operator, Operator

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. I would now like to turn the call over to Lukas Hartwich, EVP Finance. Please go ahead, Mr. Hartwich.

Lukas Hartwich, EVP Finance

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 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.

Rick Matros, CEO, President and Chair

Thanks, Lukas, and thanks, everybody, for joining us. I'll start by making some comments on our SHOP portfolio. So the growth of our SHOP portfolio has exceeded our expectations, and now stands at approximately 26% of our portfolio. As a result of that, we had publicly set a target of increasing our SHOP from 20% to 30%, we're now setting a new target of setting our SHOP from where it is now at 26% to 40%. And as we get closer to that, we'll reach that target again. Cash NOI growth was a solid 15.9%, excluding the 16 ex-Holiday properties included in same store, and with those in same-store was still a solid 13.3%. We believe the performance of the 21 facilities in transition had bottomed out in July. We saw a really nice improvement in August and even stronger improvement in September. So we look forward to that portfolio continuing to stabilize and to contribute to earnings growth going forward. We will exceed the high end of our investment targets. Originally, our investment target was $400 million to $500 million. We will exceed the $500 million. In addition to that, the pipeline continues to be robust, and we'll be working on deals diligently, obviously, through the end of the year, which will allow us to get 2026 off to a much stronger start and should bode well for volume next year. Our EBITDAR rent coverage in all asset classes increased as they have been in the past 2 quarters. SNF occupancy and skilled mix continues to increase. Our top 10 had its best showing yet. Our skilled exposure dropped below 50% for the first time. We're really focused on having a very well-balanced portfolio between skilled nursing and senior housing, with senior housing, obviously, being SHOP specifically, being a much stronger driver of earnings growth than the triple-net portfolio. The regulatory environment for skilled nursing remains stable. Leverage came in below 5x. And Talya and Darrin will both provide details on our SHOP performance. Talya?

Talya Nevo-Hacohen, Executive

Thank you, Rick. First, I want to say something, and that is this is my last earnings call at Sabra. So before I begin my remarks, I want to thank everyone for following and supporting Sabra for the past 15 years. As of the third quarter, Sabra's managed senior housing portfolio contributed nearly 26% of our total annualized cash NOI as recent acquisitions contributed to Sabra's expanded exposure to manage senior housing and reduce Sabra skilled nursing exposure below 50%. During the quarter, Sabra invested $237 million in managed senior housing, including $20 million for the acquisition of the operations of 4 leased senior housing properties. In addition, during the third quarter, Sabra was awarded an additional $124 million in managed senior housing investments, which closed after quarter end. Subsequent to quarter end, Sabra's pipeline of acquisitions remained strong, with an additional $121 million of awarded deals not including the acquisition of the operations of a leased senior housing community for an additional $14.5 million, all of which are expected to close later this year or in early 2026. Closed plus awarded deals in 2025 totaled more than $550 million. We continue to see high-quality properties coming to market, and while competition for assets is real, pricing has remained reasonable, allowing Sabra to continue to be competitive. The full impact of acquisitions from the first half of the year and the partial impact of third quarter closings resulted in continuing positive momentum in the portfolio. Cash NOI and cash NOI margin were up 18.6% and 90 basis points, respectively, on a sequential basis for the total managed portfolio, including non-stabilized communities and joint venture assets at share. Further, occupancy increased 60 basis points to 86.8% and RevPAR rose 4.3%, both sequentially in the total managed portfolio, excluding non-stabilized communities and those held for share, underscoring the quality of the properties in which Sabra has been investing. Development of new senior housing remains in a lull suggesting that the current supply-demand equation will continue for some time. Now I will turn over the call to my colleague, Darrin Smith, to discuss Sabra's same-store portfolio operating results.

Darrin Smith, Executive

Thank you, Talya. Sabra's same-store managed senior housing portfolio, including joint venture assets at share and excluding non-stabilized assets, continued its strong performance in the third quarter. The key numbers are: Revenue for the quarter grew 5.4% year-over-year with our Canadian communities growing 10.2% in the same period. Third quarter occupancy in our same-store portfolio was up 110 basis points to 86%. Notably, our domestic portfolio occupancy increased 90 basis points to 82.6%, while our Canadian portfolio was up 150 basis points to 93.1% over the same period and marking the sixth consecutive quarter where occupancy has been above 90%. RevPAR in the third quarter of 2025 increased 3.4% year-over-year, while in our Canadian portfolio, RevPAR grew 5.8% over the same period. While RevPAR and occupancy continue to grow, exPOR remained relatively flat, only increasing 30 basis points across the same-store portfolio. Cash NOI for the quarter grew 13.3% year-over-year in the same-store portfolio. Excluding the 16 properties in the same-store portfolio formally operated by Holiday, same-store cash NOI grew 15.9%. While in our Canadian communities, cash NOI for the quarter increased 20.2% on a year-over-year basis, demonstrating the impact of operating leverage that higher occupancy brings. Industry tailwinds remain strong, senior housing communities continue to gain occupancy while operators balance rate and occupancy to maximize revenue. With cost structure stable and revenue increasing, cash NOI and margin continue to grow. Our net leased stabilized senior housing portfolio continues to do well, with sequentially improving rent coverage, a reflection of continued strong operating results. And with that, I will turn the call over to Michael Costa, Sabra's Chief Financial Officer.

Michael Costa, CFO

Thanks, Darrin. For the third quarter of 2025, we recognized normalized FFO per share of $0.36 and normalized AFFO per share of $0.38. Year-to-date through September 30, normalized FFO per share was $1.09 and normalized AFFO per share was $1.12, representing an increase of 5% and 4%, respectively, over the same period in 2024. In absolute dollars, normalized FFO and normalized AFFO totaled $88.6 million and $92.2 million this quarter, respectively. Cash rental income from our triple-net portfolio decreased $3.5 million from the second quarter, while cash NOI from our managed senior housing portfolio increased $4.7 million for a net sequential increase of $1.3 million. The decrease in cash rental income was primarily due to a $1.4 million decrease from transitioning 4 previously triple-net leased senior housing facilities to our managed senior housing portfolio during the quarter, a $1.2 million decrease related to facilities sold late in the second quarter and during the third quarter, and a $600,000 decrease in percentage rents. As we noted in last quarter's call, percentage rents were elevated during the second quarter while the third quarter was closer to the historical trend. These decreases were partially offset by annual rent escalators on leases accounted for on a straight-line basis which improved normalized AFFO, but do not have an impact on normalized FFO. Cash NOI from our managed senior housing portfolio totaled $30.1 million for the quarter compared to $25.3 million last quarter. This $4.7 million increase was primarily the result of investment activity completed during the quarter, including $1.9 million from the aforementioned transition of 4 previously triple-net leased senior housing facilities. This transition also resulted in the write-off of $9.2 million of straight-line rent receivables and $1.2 million of lease termination expense, both of which have been backed out of normalized FFO and normalized AFFO. Interest and other income was $12.7 million for the quarter compared to $10.3 million last quarter. This increase was primarily due to a $2.8 million lease termination income recognized as a result of terminating the Genesis leases and has been backed out of normalized FFO and normalized AFFO. Cash interest expense was $26.7 million compared to $25.8 million last quarter. This increase is due to higher borrowings under our revolving credit facility to fund recent investment activity. Additionally, noncash interest expense increased by $500,000 from the previous quarter, primarily related to the repayment of our 2026 bonds and entering into our new 5-year term loan this quarter. Recurring cash G&A was $9.1 million this quarter compared to $9.4 million last quarter. As noted in our earnings release, we have updated our 2025 earnings guidance ranges. However, the implied midpoint for both normalized FFO and normalized AFFO remain unchanged at $1.46 and $1.50 per share, respectively. Consistent with previous quarters, our guidance only includes completed investment, disposition, and capital market activities. We are also reaffirming the following assumptions included in our previously issued guidance. General and administrative expense is expected to be approximately $50 million, which includes $11 million of stock-based compensation expense. Ignoring the impact of acquisitions and dispositions, cash NOI growth for our triple-net portfolio is expected to be low single digit, in line with contractual escalators. Additionally, our guidance assumes no additional tenants are placed on cash basis or moved to accrual basis for revenue recognition. Our updated guidance assumes that full year average same-store cash NOI growth for our managed senior housing portfolio is expected to be in the mid-teens. For context, this quarter, cash NOI for our same-store managed senior housing portfolio increased 13.3% year-over-year, and on a year-to-date basis, is approximately 16%. Our updated guidance also assumes that cash interest expense is expected to be approximately $104 million. Lastly, our updated guidance assumes a weighted average share count of approximately 244.7 million and 245.7 million for normalized FFO and normalized AFFO, respectively, which is in line with this quarter's weighted average share count after adjusting for the timing of ATM issuances during the quarter. Now briefly turning to the balance sheet. Our net debt to adjusted EBITDA ratio was 4.96x as of September 30, 2025, a decrease of 0.04x from June 30, 2025, and a decrease of 0.34x from September 30, 2024. As of September 30, 2025, the cost of our permanent debt was 3.94% and the weighted average remaining term on our debt was 4.4 years, with the next material maturity being in 2028. All metrics that were meaningfully improved through the opportunistic refinancing of our 2026 bonds with a 5-year term loan during the quarter. Additionally, we have no floating rate debt exposure in our permanent capital stack, with the only floating rate debt being borrowings under our revolving credit facility. We remain committed to maintaining a strong balance sheet, and this commitment, together with the anticipated future earnings growth of our portfolio, were significant factors in Moody's upgrading our credit rating to Baa3 during the quarter. This quarter, we entered into a new $750 million ATM equity offering program, which gives us added capacity to thoughtfully and efficiently finance the numerous investment opportunities we are evaluating. During the quarter, we issued $58.5 million on a forward basis at an average price of $18.45 per share after commissions. And in total, we currently have $157.3 million outstanding under forward contracts at an average price of $18.14 per share after commissions. We also settled $165 million of outstanding forward contracts to fund this quarter's investment activity. We expect to use the proceeds from the outstanding forward contracts to close on the investments we have been awarded and do so on a leverage-neutral basis. As of September 30, 2025, we were in compliance with all of our debt covenants and have ample liquidity of approximately $1.1 billion, consisting of unrestricted cash and cash equivalents of $200.6 million, available borrowings under our revolving credit facility of $717.8 million and the $157.3 million outstanding under forward sales agreements under our ATM program. As of September 30, 2025, we also had $690.9 million available under our ATM program. Finally, on November 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 November 28, 2025, to common stockholders of record as of the close of business on November 17, 2025. The dividend is adequately covered and represents a payout of 79% of our third quarter normalized AFFO per share. And with that, we'll open up the lines for Q&A.

Operator, Operator

Our first question comes from Farrell Granath with Bank of America.

Farrell Granath, Analyst

And first, I want to congratulate Talya. Thank you for everything you've done. 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?

Michael Costa, CFO

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.

Farrell Granath, Analyst

Okay. And I was wondering if you could also just give a little bit more color on the core SHOP portfolio and pretty much the metrics, excluding Holiday, specifically on the occupancy. If you can give any color on those transitioned assets and maybe the impacts that are causing the difference between the same-store NOI.

Darrin Smith, Executive

Yes, this is Darrin. So the same-store NOI is largely being driven down, as we had mentioned before, through Holiday. The Holiday same-store NOI is at 5.1%. All the other metrics are very positive.

Rick Matros, CEO, President and Chair

Yes, it was a challenging comparison to last year. However, we updated our guidance to reflect mid-teens growth instead of low to mid-teens because we are more confident in the stability and contribution of SHOP, although the comparison to last year significantly influenced this decision.

Michael Costa, CFO

The occupancy rate for our same-store pool was 86% for the quarter. The occupancy for the Holiday assets included in that pool is likely around 80%. You can analyze the performance of the non-Holiday assets based on those numbers.

Operator, Operator

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

Austin Wurschmidt, Analyst

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?

Michael Costa, CFO

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.

Austin Wurschmidt, Analyst

Got it. And I guess, as you continue to lease up the senior housing managed assets, what type of pricing power do you think is achievable for the markets that you're targeting as this becomes a growing part of the overall company?

Talya Nevo-Hacohen, Executive

I think that's a really interesting question. The statistics Darrin provided about our Canadian assets reveal a lot about pricing power. Those assets have maintained over 90% occupancy, and the rate growth there, which Darrin mentioned, exceeded 5% on a quarter-over-quarter basis. This suggests that over time, if there aren't significant developments in this country, our domestic portfolio will likely reach that occupancy level where pricing power becomes significant and has a strong impact, along with operational leverage.

Austin Wurschmidt, Analyst

Can you share any sense what annual rent increases in the SHOP segment could look like heading into '26?

Talya Nevo-Hacohen, Executive

I think we're looking at mid...

Darrin Smith, Executive

Yes, mid-single digits.

Operator, Operator

Your next question comes from the line of John Kilichowski with Wolf Fargo.

William John Kilichowski, Analyst

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?

Rick Matros, CEO, President and Chair

Yes, they will be beneficial. The main achievement so far with all three operators is that they have aligned their approach to the Holiday portfolio. They have effectively adjusted and stabilized the labor force in the buildings. Even in Illinois, there has been an increase in care needs, and the instability or insufficient staffing before the transition contributed to fluctuations in occupancy and resulted in higher move-outs and move-ins because they were unable to care for certain residents. The primary goal has been achieved, which is stabilizing the situation, and now they are working on remarketing themselves to referral sources to show they can accommodate residents with higher care needs. This should not only increase the number of residents that can be admitted but also enhance the length of stay, which will positively impact occupancy. There will always be some delay between stabilizing the infrastructure and seeing the benefits reflected in the revenue, but that is our full expectation.

William John Kilichowski, Analyst

Okay. And then my second one is just on underwriting. Obviously, there's a bit of concern about cap rates are getting a little bit tight relative to where your spot cost of capital is. But maybe if we think longer term about that unlevered IRR that you're achieving today on these, I don't know if you can give color there. And then also talking about what that implies as far as like a stabilized occupancy or a stabilized margin.

Darrin Smith, Executive

Sure. This is Darrin. The investments we have closed on and are evaluating are yielding between 7% and 8% and are expected to deliver a mid-single-digit annual earnings growth. Therefore, we estimate that the IRRs for our investments are in the low double-digit range. Regarding occupancy, it varies by individual micro market, but we generally expect stabilized occupancy to be in the lower to mid-90% range at most.

Operator, Operator

Your next question comes from the line of Seth Bergey with Citi.

Seth Bergey, Analyst

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?

Darrin Smith, Executive

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.

Rick Matros, CEO, President and Chair

We have a couple of smaller off-market SNF deals that we are working on that are more likely to be in early 2026 events. And we do have some hope that we'll start seeing more SNF volume next year. We're not shying away from it. I mean we have our own standards relative to the quality we're looking for, but we are looking forward to being able to get more SNF deals done next year.

Operator, Operator

Your next question comes from the line of Michael Stroyeck with Green Street.

Michael Stroyeck, Analyst

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?

Darrin Smith, Executive

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

Rick Matros, CEO, President and Chair

And the operating leverage as occupancy continues to grow just contributes to that.

Michael Stroyeck, Analyst

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?

Michael Costa, CFO

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.

Operator, Operator

Your next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya, Analyst

Talya, we'll definitely miss you and all your advice, and I wish you all the best. Congrats on the credit upgrade. I'm curious about the implications of the upgrade for the cost of debt. Are you planning to issue unsecured debt going forward? Will you see any change in pricing, like 25 basis points?

Michael Costa, CFO

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 or anything like that. I think what it does for us more than anything, one, it validates our story, which is huge and something we'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 us more breathing room, more comfort over being able to continue being an investment-grade issuer going forward.

Omotayo Okusanya, Analyst

Got you. That's helpful. And then could you just talk a little bit about the behavioral portfolio at this point and kind of long-term plans around that?

Rick Matros, CEO, President and Chair

Sure. You'll notice that it will continue to decrease as a percentage of our portfolio. When we began investing in it, it was still during the pandemic, serving as another growth avenue. At that time, both the senior housing and skilled spaces were recovering faster than expected from the pandemic. It became evident that the best use of our capital allocation was in senior housing and skilled nursing where we could identify opportunities. From the outset of these investments, we believed it was an interesting area with different dynamics and unit economics compared to skilled and senior housing, especially since the breakeven point for profitability was around the 50% to 60% range, which we found appealing. We view it as a growing field. However, we also noted that it was very nascent, with limited proven operators. Therefore, the opportunities were expected to be incremental. This is how we approached it, and the initial growth was slow. Since the latter part of 2023, it became clear what the potential was for senior housing and skilled nursing, which turned out to be the best use of our capital. Consequently, it will naturally shrink as a percentage of our exposure. If we find opportunities to divest some of those assets, we will consider that. Does that address your question, Tayo?

Omotayo Okusanya, Analyst

Perfectly.

Operator, Operator

At this time, we have no further questions. I will now turn the call over to Rick Matros for closing remarks.

Rick Matros, CEO, President and Chair

Thank you all for joining us today. We appreciate the support. As always, we're available for follow-up and look forward to talking with all of you again. And for those of you that we don't talk to before year-end, hope you all have great holidays and be safe. Thank you.

Operator, Operator

This concludes today's conference call. We thank you for your participation. You may now disconnect. Have a pleasant day, everyone.