## Executive Summary / Key Takeaways<br><br>*
Disciplined Growth & Portfolio Rebalancing: Sabra Health Care REIT is executing a focused strategy to enhance its portfolio quality and earnings durability, prioritizing high-quality, newer vintage Senior Housing - Managed (SHOP) assets and selective skilled nursing (SNF) investments. This includes a strategic goal to increase SHOP exposure from 20% to 30% of its portfolio by 2026, requiring approximately $1 billion in investments.<br>*
Strong Operational Momentum: The company is demonstrating robust operational recovery, with its same-store SHOP portfolio achieving 17.1% year-over-year cash NOI growth in Q2 2025, driven by 86% occupancy and a 3.9% RevPOR increase. Triple-net rent coverage is at new highs, and SNF contract labor is at pre-pandemic levels, signaling significant operating leverage.<br>*
Solid Financial Health & Capital Management: SBRA's net debt to adjusted EBITDA has improved to 5.0x as of Q2 2025, meeting its long-term target without additional equity market deleveraging. Recent debt refinancing, including a new $500 million term loan at a fixed rate of 4.64%, has lowered its weighted average interest rate to 4.04% and extended debt maturity, enhancing financial flexibility.<br>*
Positive Outlook & Strategic Execution: Management's updated 2025 guidance projects normalized FFO per share growth of approximately 5% and normalized AFFO per share growth of 4% over 2024, underpinned by low to mid-teens cash NOI growth in same-store SHOP and low single-digit growth in triple-net. The successful Holiday portfolio transition is expected to further boost SHOP performance.<br>*
Technology as an Operational Moat: SBRA leverages its platform capabilities and data-driven insights, including digital marketing for operator recruiting and developing AI capabilities, to enhance asset management, operator support, and portfolio quality. This operational technology contributes to its competitive moat by optimizing existing assets and informing selective new investments, driving durable earnings growth.<br><br>## Setting the Scene: A Focused Approach to Healthcare Real Estate<br><br>Sabra Health Care REIT, Inc. (SBRA) operates as a self-administered, self-managed real estate investment trust, specializing in acquiring, financing, and owning properties across the healthcare sector in the U.S. and Canada. Its diverse portfolio includes skilled nursing/transitional care facilities, senior housing communities (both leased and managed), behavioral health facilities, and specialty hospitals. This strategic mix positions Sabra to capitalize on the robust demographic tailwinds of an aging population, which continues to drive demand for senior care services.<br>\<br><br>The broader healthcare real estate market is characterized by constrained new supply, particularly in senior housing, due to high capital, material, and labor costs. Concurrently, the skilled nursing segment is experiencing a declining supply, with hundreds of facilities closing over the past four years while only a handful of new ones have been built. These dynamics create a favorable supply-demand imbalance, setting the stage for sustained occupancy and rate growth across the industry.<br><br>In this competitive landscape, Sabra distinguishes itself through a disciplined growth strategy that prioritizes high-quality, newer vintage assets and strong operator relationships. While larger peers like Welltower (TICKER:WELL) and Ventas (TICKER:VTR) pursue aggressive diversification into broader healthcare and life sciences, Sabra maintains a more specialized focus on its core segments. This approach allows Sabra to develop deeper expertise and more tailored offerings, particularly in skilled nursing and behavioral health, and leverage its geographic presence in both the U.S. and Canada. Compared to Omega Healthcare Investors (TICKER:OHI), which shares a similar skilled nursing focus, Sabra's broader asset diversification, including behavioral health, offers a degree of risk mitigation. However, Sabra's smaller scale compared to WELL and VTR means it must be more selective in its acquisitions, relying on operational excellence and strategic partnerships to drive growth rather than sheer volume.<br><br>Sabra's competitive edge is further sharpened by its operational technology and data-driven approach. While not a developer of proprietary medical devices or building materials, the company is actively "building artificial intelligence capabilities into our systems" to enhance asset management and operator support. This includes leveraging "digital marketing for recruiting" as an operator strategy, which has proven "really helpful getting just more people into the door to be considered." These technological advancements provide tangible benefits by optimizing existing assets, improving efficiency, and offering better visibility into portfolio performance. For investors, this translates into a stronger competitive moat through enhanced operator relationships, improved portfolio quality, and a more predictable pathway to "durable and sustained earnings growth." This focus on operational technology underpins Sabra's strategy to maximize value from its existing assets and inform highly selective new investments, ensuring it remains competitive in a market where scale and innovation are increasingly critical.<br><br>## Strategic Evolution and Portfolio Enhancement<br><br>Sabra's journey began in 2010, spinning off from Sun Healthcare Group and quickly establishing itself as a REIT focused on healthcare properties. A pivotal moment was the 2017 merger with Care Capital Properties, which significantly expanded its portfolio. In the years that followed, particularly during and after the COVID-19 pandemic, Sabra embarked on a strategic transformation. The company proactively converted approximately one-third of its triple-net senior housing assets to a managed (SHOP) model, recognizing the greater growth potential and operating leverage in this segment. This strategic shift also involved a significant capital recycling initiative, including the disposition of most of its Genesis assets in 2024, retaining only eight facilities under a sublease structure with a trusted operator.<br><br>Post-pandemic, Sabra committed to a disciplined growth strategy, explicitly avoiding large, complex portfolio deals or extensive loan books, which management described as creating "noise." This commitment underscores a focus on stability and predictable earnings. A recent example of this strategy in action is the transition of its Holiday portfolio, a relationship dating back to 2015. This move, completed on April 1, 2025, was driven by the Holiday portfolio's underperformance relative to Sabra's other SHOP assets post-pandemic. By breaking the portfolio into smaller pieces and transitioning it to new operators—Discovery, In Spirits, and Sunshine—Sabra aims to improve performance and diversify operator exposure. This strategic re-alignment is a testament to Sabra's proactive management and its dedication to optimizing its asset base for long-term value creation.<br><br>## Operational Excellence and Segment Performance<br><br>Sabra's operational performance across its key segments reflects the success of its strategic initiatives and the favorable industry backdrop.<br><br>### Managed Senior Housing (SHOP) Portfolio: A Growth Engine<br><br>The SHOP portfolio is a significant and growing contributor to Sabra's earnings, representing nearly 21% of its total annualized cash NOI. This segment is a primary focus for future growth, with a stated goal to increase its exposure from 20% to 30% of the total portfolio by 2026, a target that requires approximately $1 billion in investments.<br><br>The SHOP segment delivered strong results in Q2 2025, with same-store revenue growing 5.6% year-over-year. Occupancy in the same-store portfolio reached 86%, up from 84.6% in Q2 2024, with the domestic portfolio gaining 190 basis points to 83.5%. Revenue per occupied room (RevPOR) increased 3.9% year-over-year, while expenses per occupied room (exPOR) declined 70 basis points, demonstrating significant operating leverage. This led to a robust 17.1% year-over-year cash net operating income (NOI) growth for the same-store portfolio. Management noted that the Holiday transition assets, while initially causing some sequential noise (16 of 21 remained in same-store sales), are showing positive momentum with tours and move-ins increasing and move-outs declining, signaling anticipated performance improvement. The outlook for same-store SHOP cash NOI growth remains strong, projected in the low to mid-teens, driven by continued occupancy gains and RevPOR increases.<br><br>### Triple-Net Portfolio: Stability and Strategic Optimization<br><br>Sabra's triple-net portfolio, encompassing skilled nursing, leased senior housing, behavioral health, and specialty hospitals, provides a stable revenue base. In Q2 2025, rental and related revenues increased 0.73% year-over-year to $99.82 million. This growth was primarily driven by a $1.8 million increase in non-cash rent from improved collectability estimates and a $1.0 million increase from lease amendments and contractual escalators. Triple-net rent coverage reached new highs across all asset classes, including skilled nursing and senior housing.<br><br>The skilled nursing segment is particularly strong, with occupancy and skill mix continuing to increase, and contract labor and employment levels returning to pre-pandemic norms. This operational improvement is supported by favorable reimbursement trends: Medicaid rate increases are expected to average 3.5% (with top skilled nursing tenants seeing over 5%), and the Medicare market basket for fiscal year 2026 was finalized upward to a net increase of 3.2%. While the transaction market for skilled nursing is robust, Sabra maintains a selective approach, focusing on quality assets and avoiding the "frothy" pricing driven by strategic buyers.<br><br>The behavioral health portfolio, while exhibiting high coverage (3.77x), is a dynamic business not currently targeted for new acquisitions. Sabra prefers models with private equity backing for these assets, which are "very few and far between." The company has also largely completed its conversions of triple-net senior housing to managed, with the remaining leased assets performing well with high rent coverage (1.37x).<br><br>## Financial Health and Capital Allocation<br><br>Sabra's financial performance reflects its strategic focus on operational improvement and prudent capital management. For Q2 2025, the company reported normalized FFO per diluted share of $0.37 and normalized AFFO per diluted share of $0.38, representing a 6% improvement over Q2 2024. This growth was fueled by increased NOI from both its triple-net and managed senior housing portfolios. Annual revenue for the trailing twelve months (TTM) stands at $703.24 million, with a robust gross profit margin of 68.71% and an EBITDA margin of 64.85%, underscoring efficient operations.<br>
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\<br><br>Liquidity remains strong, with approximately $1.2 billion available as of June 30, 2025, comprising unrestricted cash, available revolving credit, and proceeds from forward sale agreements under its at-the-market (ATM) program. The ATM program has been actively utilized, with $266.5 million outstanding under forward contracts as of Q2 2025, providing an accretive cost of capital for future investments.<br>
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\<br><br>A key achievement in capital management is the significant deleveraging. Sabra's net debt to adjusted EBITDA ratio improved to 5.0x as of June 30, 2025, a notable decrease from 5.19x in Q1 2025 and 5.45x in Q2 2024. This achievement aligns with its long-term leverage target, primarily driven by the growth in its managed senior housing portfolio, reducing the need for equity market deleveraging. This balance sheet strength was recognized by Moody's, which recently upgraded Sabra's outlook from stable to positive.<br>
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\<br><br>Further enhancing its financial flexibility, Sabra executed a strategic debt refinancing in July 2025. The company redeemed its $500 million 5.125% senior unsecured notes due 2026 and simultaneously entered into a new 5-year, $500 million term loan. Through forward starting interest rate swaps, the SOFR portion of this new loan was fixed at 3.44%, resulting in an effective interest rate of 4.64%. This move not only addressed an upcoming maturity but also decreased the weighted average interest rate on its debt by 10 basis points to 4.04% and extended the weighted average maturity from 4 to nearly 5 years.<br><br>## Outlook and Investment Thesis<br><br>Sabra's management has provided updated 2025 earnings guidance, reflecting confidence in its strategic direction and operational momentum. Normalized FFO per diluted share is projected to be between $1.45 and $1.47, and normalized AFFO per diluted share between $1.49 and $1.51. At the midpoint, this represents approximately 5% and 4% year-over-year growth, respectively, over 2024. This guidance is based on key assumptions, including low single-digit cash NOI growth for the triple-net portfolio and low to mid-teens cash NOI growth for the same-store managed senior housing portfolio. General and administrative expenses are expected to be around $50 million, with cash interest expense at approximately $102 million.<br><br>The company aims for $500 million in investments in 2025, with a significant portion dedicated to its SHOP expansion goal. Management's conservative approach to guidance, often hoping to "beat" stated figures, suggests potential for upside. The long-term outlook remains positive, with expectations for continued occupancy growth, sustained operating leverage, and outsized reimbursement increases for at least another year. RevPOR is projected to trend in the mid-single digits (4-6%).<br><br>## Key Risks and Challenges<br><br>Despite the positive outlook, investors should consider several risks. Macroeconomic factors such as sustained inflation, elevated interest rates, and labor shortages could impact tenant profitability and Sabra's cost of capital. While the minimum staffing standards for skilled nursing facilities have seen a 10-year enforcement moratorium, the underlying Assessment Requirements remain, potentially exacerbating staffing challenges. The ongoing threat of Medicaid cuts, though currently unspecified and facing bipartisan opposition, could still introduce uncertainty. Furthermore, foreign currency fluctuations pose a risk due to Sabra's Canadian investments. The inherent illiquidity of real estate investments also limits rapid portfolio adjustments.<br><br>## Conclusion<br><br>Sabra Health Care REIT is executing a well-defined strategy to drive durable and sustained earnings growth, leveraging a disciplined approach to portfolio management and a strong operational foundation. Its commitment to increasing exposure to high-quality, managed senior housing assets, coupled with the strategic optimization of its triple-net portfolio, positions the company to benefit from favorable demographic trends and a constrained supply environment. The company's robust financial health, marked by improved leverage and strategic debt refinancing, provides a solid platform for continued investment.<br><br>The core investment thesis for Sabra hinges on its ability to capitalize on the powerful operating leverage within its SHOP portfolio, maintain stability and generate consistent cash flow from its triple-net assets, and strategically deploy capital into accretive, high-quality investments. Its operational technology, including AI capabilities and digital tools for operator support, serves as a critical differentiator, enhancing efficiency and strengthening its competitive standing. While macroeconomic and regulatory risks persist, Sabra's proactive management, strong operator relationships, and disciplined capital allocation suggest a compelling path for long-term shareholder value creation, making it a noteworthy consideration for discerning healthcare REIT investors.