Reimbursement trends among nursing homes remain positive while investment opportunities are rising, said leaders at Sabra Health Care REIT Inc. (Nasdaq: SBRA), who also noted that the company’s occupancy recovery looks promising.

During the second quarter, Sabra reported net income of 10 cents per diluted common share, a slight decrease compared to 9 cents in Q2 2023. Funds from operations (FFO) was 35 cents per diluted common share for Q2, beating Wall Street estimates by a penny, but lower compared to 33 cents in Q2 2023.

Sabra increased its annual earnings guidance to 48 cents to 51 cents for net income, and $1.33 to $1.36 for FFO, and both are attributable to common stockholders, per diluted common share.

The update follows portfolio momentum as the year has progressed, Sabra CEO Rick Matros said during the company’s Q2 earnings call on Thursday.

“Skilled nursing margins and rent coverage are higher than pre-pandemic levels, with the potential for further gains as occupancy continues to recover,” said Matros, adding that Sabra has approximately $906 million in liquidity.

Skilled nursing and seniors housing occupancy increased, Matros said, but on the SNF side is still about 200 basis points lower than pre-pandemic occupancy.

Earnings before interest, taxes, depreciation, amortization, rent, and management fees (EBITARM) margins, on the other hand, are now higher than pre-pandemic margins.

“The opportunity to reap the benefit of operating leverage is even greater, given the potential of occupancy growth,” Sabra Chief Investment Officer Talia Nevo-Hacohen said of the REIT’s domestic assets.

As for contract labor among Sabra assets, it has been at its lowest since March 2021, and agency use is down 50% compared to this time last year, executives said.

Meanwhile, Medicaid rate increases were positive and estimated to be roughly 7% across Sabra’s operating states – that’s 200 basis points higher than last year’s increases, Matros said. About 71% of states in which Sabra tenants operate have new effective Medicaid rates on July 1 of every year, and another six states spread their Medicaid updates throughout the year, he explained.

The Medicaid rate increase for Sabra’s top five SNF tenants was closer to 10.6%, Matros said.

“I’m guessing we may have hit a high point this year. Next year, we’ll still be capturing inflation so we’ll still have outsized Medicaid rates,” said Matros. “But certainly over the next few years, assuming inflation moderates, these rates will moderate as well.”

Sabra shares closed Thursday at $16.46, down 20 cents, or 1.20%.

Long-awaited SNF opportunities

Matros said the team is finally seeing skilled nursing opportunities for the investment pipeline, and expects these opportunities to increase in the coming months.

Sabra announced approximately $60.1 million in new investments during the quarter. Subsequent to the quarter’s end, Sabra closed on a $75.8 million acquisition involving two seniors housing communities.

Sabra also closed on the disposition of four facilities for $6.7 million and a trailing 12-month cash yield of 5%. Another four-property disposition occurred subsequent to Q2 for $34.9 million with a trailing 12-month cash yield of 4%.

Matros also anticipates an uptick in behavioral health asset opportunities, with capitalization rates being more attractive relative to cost of capital influencing investment activity in this segment, he said.

Of Sabra’s 374 real estate properties 236 are skilled nursing and transitional care facilities. The remaining 39 are leased seniors housing communities, 66 are seniors housing communities operated by third parties, 18 are behavioral health facilities and 15 are specialty hospitals and other properties.

There are also 14 investments in loans receivable, one asset held for sale, five preferred equity investments and two investments in unconsolidated joint ventures.

Margins, coverage are strong, but occupancy lags

Margins and coverage are fully expected to see improvement as occupancy rises. Coverage is currently higher than when Sabra hit its occupancy high in 2019, which bodes well for the future, Matros said. EBITARM coverage was 1.85 times for the quarter among skilled nursing and transitional care assets.

Matros discussed Sabra’s growing behavioral health segment, which saw decreased rent coverage in Q2, and he also reflected on how that segment compares to skilled nursing and seniors housing.

“You have to think about it a little bit differently than skilled nursing and senior housing, which are actually very predictable businesses, pandemics notwithstanding,” he said. “The behavioral business is very dynamic, a much shorter length of stay, but also has a break-even point at much lower occupancy and the coverage is still quite strong at 3.69; there’s a lot of breathing room there.”

Nine out of Sabra’s top 10 operators improved rent coverage, with the McGuire Group being the outlier.