Sabra Health Care REIT (Nasdaq: SBRA) continued its shift away from skilled nursing facilities (SNFs) toward managed senior housing operations during the third quarter, but executives pushed back on the notion that the move reflects “herd” behavior, citing favorable demographics and market conditions.

While Sabra’s focus on SNFs this year has been less, it won’t remain so next year.

“We do have some hope that we’ll start seeing more SNF volume next year. We’re not shying away from it,” said CEO Rick Matros during the company’s third quarter conference call. “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.”

The company’s senior housing operating portfolio (SHOP) now represents about 26% of total assets – up from 20% earlier in the year – and Sabra is increasing its target to 40%, Matros said. 

Skilled nursing now accounts for less than 50% of the portfolio for the first time, he said, reflecting a multi-year strategy to diversify revenue sources and reduce exposure to reimbursement-sensitive assets. 

Skilled nursing remains a core business for Sabra, with occupancy, skilled mix, and rent coverage all improving during the quarter, Matros added. However, the long-term growth outlook is stronger in senior housing.

In the past two quarters, SNF occupancy and skilled mix continued to increase, Matros said, noting that the regulatory environment for skilled nursing remains stable.

Sabra expects to exceed the high end of its $400 million to $500 million investment target for 2025, supported by a robust pipeline heading into 2026, Matros said.

“[T]he pipeline continues to be robust, and we’ll be working on deals diligently through the end of the year, which will allow us to get 2026 off to a much stronger start, and it should go well for the next year,” Matros said. “We’re really focused on having a very well balanced portfolio between skilled nursing and senior housing.”

Chief Investment Officer Talya Nevo-Hacohen said Sabra invested $237 million in managed senior housing during Q3 and was awarded an additional $124 million of projects that closed after quarter-end. Including pending transactions, 2025 acquisitions totaled more than $550 million, the majority in senior housing, accelerating the portfolio shift away from SNFs. 

Portfolio occupancy rose to 86.8%, and revenue per occupied room increased 4.3% sequentially.

Sabra reported 13.3% year-over-year cash NOI growth in the same-store managed portfolio, supported by steady occupancy gains in both U.S. and Canadian communities.

During the quarter, Sabra posted normalized FFO of $0.36 per share. The results fell short of Wall Street estimates of $0.37 per share. 

The earnings results included termination of the Genesis HealthCare leases, which produced $2.8 million in lease-termination income and marked a continued reduction in Sabra’s skilled nursing exposure, noted CFO Michael Costa. The termination also facilitated the transition of certain properties to new operators under stronger financial structures.

On Thursday, Sabra shares closed at $18.85, up $0.65, or 3.57%.

‘Herd’ buying 

Analysts have questioned whether the industry-wide rush by health care REITs into SHOP investments echoed the expansion cycle a decade ago, when oversupply hurt performance, with one analyst asking if Sabra was concerned about “herd behavior.”

Nevo-Hacohen said Sabra wasn’t simply following a trend given that it has operated in SHOP for nearly a decade. And, Sabra’s disciplined approach to buying considers only selective acquisitions while focusing on newer, well-located assets built by private equity firms before the pandemic, rather than older, perpetual “value-add” properties.

Sector conditions ‘everybody’s been waiting for’

The current demand and investment conditions are also fundamentally different, Matros said, and the strong demographic demand is finally materializing with the new supply being limited. 

“The dynamics are dramatically different right now. The demographic that everybody’s been waiting for for three decades are really kicking in there,” he said. “When you look at the breadth of opportunities out there, for those of us who have been on the SNF side of the REIT business, it’s almost like it was before the pandemic, where there’s so many different SNF opportunities out there, there were enough for all of us to get our fair share.”

Moreover, Matros cited a sharp shift in interest rates and debt markets since the era of near-zero rates that once fueled aggressive private equity (PE) leverage – an approach that ultimately collapsed when the pandemic hit.

“As PEs start to circle around and get more interested in maybe getting back into the space, they still need to spread and they’re not going to be able to impact cap rates the way they did back then,” he said.