Sabra Health Care REIT (Nasdaq: SBRA) is currently less focused on acquiring skilled nursing assets and is satisfied with its existing asset mix, which includes senior housing. The company is also steering clear of large portfolio deals, CEO Rick Matros said Tuesday.

“[We’ve been] able to have a better balance in our portfolio between senior housing and skilled [nursing] than we’ve ever had. It drives our growth better. We still want to do skilled deals. We love the space, and obviously it will increase our average weighted yield, but we want to have that balance in the portfolio,” Matros said during the company’s conference call to discuss first quarter earnings results.

This move stems from the desire to have a portfolio component that drives stronger earnings compared to the typical 2.25% to 2.5% bumps from triple net leases, Matros said. And so, Sabra is selectively acquiring assets, focusing on deals under $100 million that can help maintain the balance.

During the quarter, Matros pointed to several positives for Sabra: The use of contract labor improved, dropping to its lowest level in more than four years. And while labor challenges remain, they are easing faster than expected. Meanwhile, skilled occupancy rose 80 bps to 81.7%, skilled mix by 10 bps, and triple-net senior housing occupancy by 50 bps, he noted.

Sabra will likely see continued improvement in coverage, Matros said. Growing occupancy, moderating labor costs, and mid-year Medicaid rate hikes for 70% of its properties by June or July, should assure this outcome, Matros said.

“We still should see improved coverage for a while,” he said, barring impact from potential provider tax changes – although even that should be minimal.

Matros allayed concerns that recent improvements in coverage might be tapering off due to lower inflation and uncertain Medicaid funding, in the midst of smaller Medicare reimbursement rate increase planned for 2026 compared to 2025 rate increase.

“Formulaically, they’re encompassing periods of time where inflation started coming down so and the 2.8% is still about a full point or so higher than what we saw historically every year,” he said.

And while Matros is expecting Medicaid not to be at the “seven plus percent we saw last year,” we still think it’s going to be outsized.

During the first quarter, Sabra reported funds from operations (FFO) of $0.36 per share, in line with Wall Street expectations. It posted quarterly revenue of $183.54 million, beatin analyst estimates by $3.31 million.

Sabra shares closed on Tuesday at $17.89, up 61 cents, or 3.53%.

‘Less attractive’ SNF deals

An increasingly active deal environment, particularly within the senior housing sector, was a hallmark of the first quarter, building upon the abundance of deals in the previous quarter, said executives for the San Juan Capistrano, Calif.-based REIT.

Overall, the current deal flow is characterized by an abundance of small, high-quality senior housing opportunities driven by capital recycling needs, with relatively stable pricing and moderate competition.

Talya Nevo-Hacohen, Sabra’s chief investment officer, treasurer and executive vice president, described the current pipeline as “very robust,” with most opportunities focused on senior housing, particularly senior housing operating portfolio (SHOP) assets.

“The best opportunities for us for multiple reasons [are] in these onesie-twosie situations,” she said, referring to small-scale transactions involving single properties or small bundles.

While large portfolios are appearing on the market, they are currently less attractive to Sabra due to quality or pricing concerns, and often consist of assets the company has previously evaluated, Nevo-Hacohen said.

Also, unattractive for acquisitions are SNFs that are losing a lot of money.

“[That] 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,” Nevo-Hacohen. “And we’re not doing managed assets in the SNF space.”

Regarding a $50 million skilled nursing facility (SNF) sale pending from last quarter, Matros said it was still expected to close, the delayed timing not changing the pricing for its sale.

“It’s just in a state where there’s a lot more regulatory hoops to come through, and there won’t be any change on the proceeds that we’re expecting,” said Matros. “So it’s going to just be one of those – it’ll happen when it happens.”

Private equity activity

The most compelling deals are those coming from private equity firms that are reaching the end of their fund life. These sellers are motivated to exit because they need to return capital to their limited partners and prepare for new fundraising cycles, Sabra executives said. Many of these assets have now recovered enough from COVID-era challenges to be sold at reasonable multiples without requiring the seller to inject additional capital to cover debt obligations, Nevo-Hacohen explained.

Meanwhile, some properties are re-entering the market after unsuccessful past attempts to sell, now benefiting from improved operating performance and timing conditions, Nevo-Hacohen said.

As for competition, private equity buyers are largely inactive as buyers, though a few remain engaged. Sabra is seeing increased participation from public REITs, occasionally overlapping with groups they haven’t historically competed with. Despite this uptick in interest, Nevo-Hacohen said that “pricing has remained pretty tight from our perspective” on deals Sabra has bid on.

Genesis impact: ‘Keep it simple’

Sabra is planning to be disciplined with its approach to adding SNF assets.

“We don’t need any big swings. When we repositioned the company with the merger and really exiting Genesis, we didn’t need to do it again. And we still don’t need to do it,” said Matros. “We’ve got a really strong portfolio. We had less SNF operator issues than pretty much everybody during the pandemic. And so we just want to be predictable and keep it simple.”

Sabra was spun out of Sun Health in 2010. Two years later, Genesis acquired Sun Health. Sabra eventually reduced its exposure to Genesis, although Genesis continues to operate some of these facilities under long-term lease agreements with Sabra.

As far as past portfolio readjustments with Genesis exerting negative impact on Sabra’s net operating margin (NOI), Matros said it was largely baked in.

Sabra executives noted during call that the remaining eight Genesis facilities were subleased last year to a “trusted operator.” And while the rent is slightly lower under the operator, Genesis covers the difference under its guarantee. 

“That’s been going really well for us. No missed payments. They will be our operator going forward, after the lease expires,” he said. “The operations have improved materially since they started, but with really that many facilities, it’s pretty negligible impact on our NOI.”