Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Sabra Health Care REIT, Inc. (NASDAQ: SBRA) and Sabra Health Care Limited Partnership and the instrument ratings of their subsidiaries, including unsecured debt ratings, at 'BBB-'.

The Rating Outlook is Stable.

The affirmation and Stable Outlook reflect Fitch's view that SBRA's long-term credit profile remains sufficient to support the current capitalization.

Though leverage is slightly outside of Fitch's sensitivities as of March 31, 2024, Fitch believes that deleveraging within its sensitivities is likely within the near-term through organic growth driven primarily by continued recovery in the company's Senior Housing Operating Portfolio (SHOP) portfolio. The potential for equity issuance, as the company is trading at a premium to NAV, could accelerate this deleveraging. However, leveraging capital allocation or deterioration in operating fundamentals could cause SBRA's leverage to sustain above Fitch's negative sensitivities, which could lead to negative ratings momentum absent sufficient offsetting actions.

Key Rating Drivers

Compressed Leverage Headroom: SBRA's leverage has increased in the aftermath of the pandemic and the company ended 2023 with REIT leverage at 5.7x, which is above Fitch's negative sensitivity for Sabra at a 'BBB-' IDR. The company has exhibited flat to declining EBITDA and declining EBITDA margins over the past four years even as revenue has increased primarily as a result of increased operating expenses from its senior housing managed portfolio.

However, Fitch believes that SBRA can return leverage within its sensitivities through organic growth and improved operating leverage, though additional capital allocation could delay or expedite deleveraging. If rent relief or capital allocation causes leverage to sustain above Fitch's negative sensitivities without any offsetting steps by the issuer, Fitch may revise the ratings and/or Outlook. SBRA's financial policy is leverage sustaining below 5.5x, with an average long-term target leverage of 5.0x.

Stable Portfolio-Level Lease Coverage: SBRA's lease coverage (EBITDARM coverage), which Fitch views as a key indicator of lease defaults/renewal risk, has exhibited recovery from its weakest levels. As of the TTM period ended 12/31/2023, the company's Skilled Nursing Coverage was 1.79x (up from 1.63x a year prior); Leased Senior Housing at 1.33x (up from 1.14x); and Behavioral Health, Specialty Hospitals and Other at 3.77x (up from 3.60x).

Fitch believes that the probability of material rent deferrals for most of SBRA's additional tenants is low, particularly as Senior Housing coverage improves. TTM EBITDARM coverage for each of the company's top 10 relationships was >1.30x, a level which Fitch views as sustainable, as of Dec. 31, 2023.

Senior Housing Poised for Strong Recovery: Fitch assumes SHOP NOI margins will return towards pre-pandemic levels in the intermediate term, driven by a combination of improving occupancy rates and strong rent growth. Fitch also assumes occupancy rates will return to pre-pandemic levels due to a combination of healthy demographic trends and a favorable supply backdrop. The 80+ age cohort is expected to grow at a faster rate than the overall population over the next decade.

Senior housing new starts remain depressed and significantly lower than 2017 peak levels due to rising construction costs and stricter bank-lending standards. Senior housing rent growth, both asking and in-place, has accelerated, and improving occupancy rates should help rent growth outplace inflationary cost pressures.

Long-Run SNF Rental Income Risk Profile Generally Intact: Fitch views the long-term rental income risk profile of SBRA's skilled nursing portfolio to be relatively unchanged by the pandemic. Fitch believes skilled nursing facilities (SNFs) will continue to retain their place in the U.S. health care system since certain complex post-acute care and needs driven care will continue to be best delivered in a SNF setting. However, the somewhat tepid recovery in occupancies may indicate that the pandemic accelerated certain pre-pandemic trends of patients being cared for in lower cost settings including at home. This should be partially mitigated by long-term demographic tailwinds.

Derivation Summary

SBRA's ratings reflects the issuer's ability to proactively manage its skilled nursing and SH portfolio through secular headwinds while maintaining leverage below 5.5x through the cycle. Though leverage is currently above this level, Fitch expects the company to be able to delever in the near term. The ratings also reflect the issuer's strong liquidity due to no near-term debt maturities, portfolio quality and diversification, improving access to capital and average operator lease coverage. The ratings are constrained, however, by tenant concentration and by the issuer's focus on skilled nursing, SH facilities and hospitals.

Compared to its SNF-focused peer, Omega Healthcare Investors, Inc. (OHI; BBB-/Stable), SBRA benefits from greater portfolio diversification by segment. However, SBRA has historically maintained higher leverage and has a less established track record of accessing the capital markets.

CareTrust REIT, Inc. (CTRE; BB+/Stable) has a less diversified portfolio, weaker underwriting performance, above-average lease coverage ratios, and higher tenant concentration compared to SBRA and OHI. Recent capital allocation decisions by the company have reduced leverage to very low levels

(C) 2024 Electronic News Publishing, source ENP Newswire