During the third quarter of 2023, Sabra Health Care REIT (Nasdaq: SBRA) generated $80 million of gross proceeds from the disposition of 13 skilled nursing and two senior housing facilities. The bulk of dispositions now could be past, industry analysts noted.
“While the REIT is still selling some assets, we believe the bulk of the dispositions are in the past,” analysts at Stifel wrote in a note on the real estate investment trust’s Q3 2023 results.
The analysts added that if the REIT ends up selling fewer and buying more assets, there could be additional earnings growth beyond their previous expectations for 2024.
And Sabra CEO Rick Matros is bullish on the direction of the sector, despite ongoing headwinds related to staffing.
“We believe our business is moving further and further away from the pandemic-induced bottom,” Sabra CEO Rick Matros said. “While we expect labor issues to persist, we do see continued improvement. Despite this challenge, occupancy and rent coverage in our skilled and senior housing NNN portfolios remain on an upward trajectory.”
He said that the impact of the proposed federal staffing mandate may not be seen immediately, making it difficult to assess the viability of some investments.
Matros underscored the significant number of comments received by the Centers for Medicare & Medicaid Services (CMS) regarding the mandate. Over 40,000 comments have been submitted. Matros said that CMS is obliged to review all these comments, leading to expectations of a significant delay in the issuance of the final rule.
“It’s going to take quite some time, we believe, before there’s a final rule, and then the actual impact of the rule, if it should come to pass, is probably a couple of [years], three years down the line,” he said.
Acquisition outlook
Although much of the call was focused on assisted living and senior housing portfolios, Chief Investment Officer and EVP Talya Nevo-Hacohen said there continues to be a strong investor appetite for higher-yielding skilled nursing facilities. Sabra is continuing to receive “reverse inquiries” on various parts of the portfolio, she noted, with pricing considered more on a per-bed or per-unit basis rather than by cap rate. That’s because the majority of interested buyers are capital partners with affiliated operators, and so are positioned to capture 100% of net operating income versus simply a rental stream as Sabra would.
One analyst asked if the REIT would be willing to temporarily lever up to do skilled nursing acquisitions in the current environment.
“We [are] still as laser-focused as we’ve been at trying to keep our leverage low,” Matros said. “We don’t want to lever up, and we’re pleased to have come down a little bit … We’d like to see it under 5.5 times.”
He added that the REIT can have a balance between using stock and using the credit revolver to control leverage. However, Sabra leadership would like to see the company’s share price increase from its current levels.
“We would like to see our stock price be a little bit higher … comfortably above NAV [net asset value] before we start using that as a form of currency,” Matros said.
He said that there was a promising road ahead for the skilled nursing and senior housing sectors, highlighting demographics and declining supply – a trend that gained steam during the pandemic.
As a result, the occupancy rates for both types of properties are expected to rise in the near future. The SNF sector did notch occupancy gains in October.
“It’s an important point to make that even though we’ve been focused on diversifying and getting that skilled exposure down, which is the primary driver of diversification, we’re not going to bypass doing a good skilled deal,” Matros said. “So we’re not sort of digging our heels in and saying, ‘Oh, we don’t want to go up a point or two on exposure for [skilled nursing,] so we’re just not going to do this deal.’”
Yet Matros continued that the most important thing for the REIT is growing earnings again, and is not anticipating blockbuster transactions.
“We’re going to be focused on singles and doubles,” he said. “We don’t need to do anything large, anything transformative, anything noisy. Just singles and doubles and steady, predictable growth.”
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