Sabra Health Care REIT, Inc.

Sabra Health Care REIT, Inc. Annual Report: Navigating the Healthcare Real Estate Landscape

Business Overview

Sabra Health Care REIT is a leading real estate owner in the healthcare sector, specializing in properties such as skilled nursing facilities, senior housing, behavioral health centers, and specialty hospitals. The company's portfolio is diversified across various care settings, providing a broad footprint in the industry.

Financial Performance

For the fiscal year ended December 31, 2025, Sabra reported total revenues of $650 million, a modest decrease from $670 million in 2024. Property sales primarily drove this dip, though rent escalations and new investments provided some offset.

Net income attributable to common stockholders fell to $75 million in 2025, down from $90 million the previous year. Higher interest costs on debt and increased depreciation primarily caused this decline.

For real estate investment trusts (REITs), Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) are key performance indicators. FFO per share decreased to $1.40 in 2025 from $1.55 per share in 2024. AFFO per share, a key measure of a REIT's dividend-paying capacity, also declined to $1.20 in 2025 from $1.35 the prior year. These figures reflect a challenging operating environment and rising cost pressures.

Sabra's total real estate portfolio value (excluding corporate assets) slightly decreased, moving from $5.068 billion at year-end 2024 to $4.975 billion at year-end 2025. Strategic asset sales and ongoing depreciation across its property types primarily drove this $93 million reduction.

The company's total equity attributable to Sabra's parent company consistently decreased, falling from $2.743 billion at year-end 2023 to $2.697 billion at year-end 2024, and further to $2.651 billion by year-end 2025. This $45-50 million annual decline largely stems from dividend distributions exceeding net income.

Risk Factors

Investors should consider several key risks:

• Interest Rate Fluctuations: Rising interest rates could increase Sabra's borrowing costs and depress property values.
• Tenant Credit Risk: The financial health of Sabra's healthcare operators is crucial. Tenant bankruptcies or defaults could impact rent collection and property values.
• Healthcare Regulatory Changes: Shifts in Medicare/Medicaid reimbursement policies or other healthcare regulations could significantly affect tenant profitability and, consequently, Sabra's rental income.
• Labor Shortages and Wage Inflation: These issues in the healthcare industry can strain tenant operations, potentially leading to financial difficulties for Sabra's operators.
• Economic Downturns: Broader economic challenges could reduce occupancy rates or tenants' ability to pay rent.
• Dividend Payout Sustainability: The ongoing trend of dividend distributions exceeding net income, leading to declining equity, poses a long-term concern if not addressed through improved profitability or adjusted payout policies.

Management Discussion (MD&A highlights)

Management's discussion highlights the company's strategic responses to a challenging operating environment. Strategic asset sales and ongoing depreciation primarily caused the slight decrease in total real estate portfolio value, reflecting a continuous effort to optimize the portfolio. Property sales largely influenced the dip in total revenues, though rent increases and new investments provided some offset. Higher interest expenses on debt and increased depreciation primarily drove the decline in net income.

A key challenge noted is the consistent decline in parent equity, stemming from dividend distributions exceeding net income and the impact of higher interest rates on profitability. The healthcare sector continues to grapple with labor shortages and inflationary pressures, which affect tenant operators.

Despite these challenges, Sabra continued its strategic portfolio optimization, divesting $10 million worth of non-core assets in 2025. This demonstrates an active management strategy to refine the portfolio and generate capital. The company also maintained strong liquidity and effectively managed its debt profile. Sabra continues to strategically focus on portfolio optimization, divesting non-core or underperforming assets, and selectively investing in properties that align with long-term demographic trends and healthcare demand. They also commit to maintaining a strong balance sheet and effectively managing debt to navigate the current economic environment.

The aging U.S. population remains a powerful demographic tailwind for healthcare real estate, driving demand for senior housing and skilled nursing services. Post-pandemic, certain segments, such as skilled nursing, are seeing a gradual recovery in occupancy. However, the regulatory landscape, particularly Medicare and Medicaid reimbursement rates, remains critical, as significant changes could directly impact the financial viability of Sabra's tenants. The broader economic environment, including inflation and interest rate policies, will also continue to influence property valuations and capital costs.

Financial Health

Sabra concluded 2025 with $100 million in cash and cash equivalents, establishing a solid liquidity buffer. Total debt remained stable at approximately $2.351 billion from 2024 to 2025, consisting of secured debt and senior notes.

The company maintains significant borrowing capacity, with a $1 billion revolving credit facility and $600 million in term loans, providing flexibility for future investments and operational needs. Importantly, Sabra reported no non-performing loans at year-end 2025, indicating strong credit quality within its small $1 million mortgage loan portfolio.

Sabra actively manages financial risks using hedging instruments like interest rate swaps and cross-currency swaps. These tools help protect the company from significant fluctuations in interest rates, which can impact borrowing costs, and currency exchange rates, ensuring more predictable financial outcomes. They also committed $10 million for future investments, signaling ongoing growth and improvement initiatives.

Future Outlook

Management anticipates continued near-term challenges from higher interest rates and labor costs. However, they remain optimistic about the long-term demand drivers for healthcare real estate, particularly the aging population. Sabra expects to continue its disciplined approach to capital allocation, focusing on investments that enhance portfolio quality and deliver attractive risk-adjusted returns. They project FFO per share for the upcoming year to range from $1.35 to $1.45, reflecting ongoing efforts to stabilize performance. No significant executive leadership changes were announced during the year.

Competitive Position

Sabra stands as a significant player in the healthcare REIT sector, recognized for its diversified portfolio across various healthcare sub-sectors. Its strategy focuses on maintaining strong relationships with experienced operators and optimizing its asset base. While the market is competitive, Sabra leverages its scale and expertise to identify strategic investment opportunities and manage its existing portfolio. Its focus on a mix of asset types, including the more stable behavioral health and specialty hospital segments, helps differentiate it.