Sabra Healthcare REIT (Nasdaq: SBRA) has had several quarters in a row of continuing occupancy and rent coverage improvement in all of its primary asset classes, including skilled nursing, distancing themselves from the pandemic, leaders said.

Meanwhile, its investment pipeline is seeing more activity in the past months, with primarily deals of one or two assets – certainly much smaller compared to the $500 million deal involving CareTrust REIT (NYSE: CTRE) and a JV partner a couple days ago.

Sabra CEO Rick Matros said during the third quarter earnings call on Friday that his team is starting to see more market opportunities and is focused on doing high quality investments with good yields, and with trusted operators. The team is being highly selective moving ahead and understanding the risk attached to many skilled nursing assets on the market.

“We’re not interested, nor do we need to do larger portfolio deals. Usually at least some portion, if not most, of the facilities in those larger portfolios do require a lot of work, and we just don’t need that noise around us right now,” said Matros. “We need to be focused on doing the kinds of deals that give us durable and sustained earnings growth, and are high quality.”

It’s a big playing field, but REITs value skilled nursing assets the same way, he said. This means that the capitalization rate is typically between 9% and 10%, and even if one REIT’s cost of capital is better, they’re not going to come in with an 8% capitalization rate to beat Sabra on a deal.

Quality investments and cost of capital, debt

Sabra is starting to see an uptick in skilled nursing opportunities specifically, but not dramatically so, he said. But, there’s a connection between Sabra’s performance and improved cost of capital, making it that much easier for Sabra to compete for deals in the future, Matros said.

Talya Nevo-Hacohen, chief investment officer for Sabra, said opportunities for investment across multiple asset classes remains robust while cost of debt remains relatively high, compared to what it had once been.

Cost of debt pulls the leveraged buyers out of the market or forces them to bid at prices they’ve seen in Sabra’s initial yield, she said. Sabra has been bidding on higher quality skilled nursing assets.

“With our cost of capital we can be quite competitive. And you’ve seen our peers be quite competitive as well. We’re being selective,” said Nevo-Hacohen. “The private equity funds, I’m sure they’re salivating and wanting to execute, but the pricing is still tough. We’re seeing there will still be sellers in the market so we’ll see what happens. It’s all about the cost of debt.”

In terms of lenders, Nevo-Hacohen touched briefly on bridge-to-HUD lending. Those operating in this space have been non-bank lenders for some time, she said, but their risk appetite has shifted down somewhat.

Steady occupancy increase

Occupancy for Sabra’s skilled nursing portfolio is up 130 basis points, said Matros, while skilled mix continues to increase 110 basis points sequentially and is higher now than it has been in quite some time, he noted.

“Labor has gotten better, so that’s allowed occupancy to continue to tick up, and it’s improved over the last year a little bit more than we would have thought, given labor issues. We expect it to keep ticking up,” said Matros.

Coupled with improved labor are Medicaid and Medicare rate increases, which are expected to be “outsized” for at least one more year compared to years past. Even when rate increases stabilize, the Sabra’s operating leverage is so significant that both senior housing and skilled nursing will continue to see margin growth and rent coverage, Matros said.

Both skilled nursing and senior housing assets are projected to be fully occupied in the next few years, he said, considering dynamics with demographics and declining supply on the skilled side.

“About 800 to 900 buildings closed over the last four-plus years, and only 15 new facilities were built last year; it’s just going to continue that way,” said Matros. “I think that’s a real possibility that we’re still not going to see the normal seasonality that we historically see.”

Skilled nursing EBITARM rent coverage is 1.94 times, Matros said, much higher than pre-pandemic levels. The outlier here is Avamere, he said, with a sequential coverage decline due to the percentage of rents Sabra had been receiving.

“The fact that we’ve been getting percentage rents for a number of months now, and yet they still have rent coverage as high as it is, shows that this particular lease restructure worked out as anticipated, and our faith in the operator certainly has been rewarded,” said Matros.

Sabra reported net income of 13 cents per share for 3Q, and funds from operations at 34 cents per share, an improvement compared to a loss of 7 cents per share and 33 cents per share respectively, during 3Q 2023.

Results were in line with analyst expectations, according to a note from BMO Capital Markets.

Sabra shares closed at $18.64 down 76 cents, or 3.92%, according to Yahoo Finance.

In terms of investments and divestitures, Sabra sold four of its skilled nursing facilities in 3Q for $34.9 million, with a trailing 12-month cash yield of 4%.

Sabra also closed on a $75.8 million deal involving two managed senior housing communities operated by the Leo Brown Group. Meanwhile, another senior housing community acquisition from the Leo Group closed subsequent to quarter end, the REIT said.

The Sabra team touched briefly on growth with its behavioral health assets, saying the initiative began as a vehicle to reuse existing assets that were no longer viable as skilled nursing or senior housing.

Since these properties have been converted to behavioral, Sabra hasn’t seen that many opportunities of institutional quality these days, Tevo-Hacohen said.