Sabra Health Care REIT pays good dividend (NASDAQ:SBRA)

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Sabra Healthcare REIT (NASDAQ:NASDAQ: SBRA) is a real estate investment trust that owns buildings used by the healthcare sector. Its nominal dividend yield is close to 8%. The majority of the stocks I own are biotech pharmaceutical companies. While I have done very well, overall, with them I’ve aged to want a portfolio that pays dividends. I like to invest where I have knowledge or analytical skills that give me an edge. I confess that I am not particularly well informed about the REIT space. By watching Sabra, I hope to gain knowledge about a REIT in a commercial space that I understand better than retail or residential. In this article, I will examine whether Sabra is a good investment for its dividend, but I will not compare it to other REITs. I already know that it currently pays a higher dividend than any of the pharmaceutical companies or healthcare companies I own. I also note that there are other Healthcare REIT stocks to choose.

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SBRA given by Y-Charts

Sabra Health Care Basics

Sabra Health Care REIT invests in or owns 441 properties and has 75 clients for these properties [SBRA August 2022 presentation, Slide 15]. Most properties are skilled nursing or transitional care facilities [Slide 16]. Other significant types of properties owned are behavioral health centers and senior residences. By using its equity and leveraging some debt, Sabra can lease facilities to operators at relatively attractive rates. It prides itself on supporting the expansion of its operator customers while prudently financing its facilities. It emphasizes a growing behavioral health portfolio, including the conversion of buildings into addiction treatment centers. For example, in late 2021, he purchased a 132-bed hotel in South Carolina to convert into an addiction treatment facility. In June 2022, it completed the conversion of a 48-unit memory care facility into an addiction treatment center.

In May 2022, Sabra completed the the acquisition of a Canadian senior housing portfolio in a 50/50 joint venture with Sienna Senior Living (TSX: SIA). The acquisition includes 11 seniors’ communities with 1,048 units. Sienna will operate the facilities. The total cost was $243 million. In the second quarter, $40 million was raised from the sale of eight facilities, two more were sold after the end of the quarter and six more were in the process of being sold.

Sabra Q2 2022 results

On August 3, 2022, Sabra has published its results for the second quarter of 2022. Revenue was $156 million, up 2% from $153 million a year earlier. About $103 million of second-quarter revenue came from rent, $49 million from interest or other, and $44 million from residence fees and services. Total expenses jumped year-over-year to nearly $130 million, mostly due to a $12 million impairment charge. Other expenses amounted to $7 million. GAAP earnings before loss from unconsolidated joint ventures were $19.6 million, down 48% from $37.7 million a year earlier. But losses from unconsolidated joint ventures declined significantly, from $170 million in Q2 2021 to less than $3 million in Q2 2022. All of this resulted in GAAP net income of $16.8 million, compared to a loss of $132.6 million the previous year. GAAP EPS was $0.07. Diluted common shares outstanding increased 6% year-over-year to 231.7 million.

Sabra ended the quarter with $67 million in cash. Real estate assets were valued at just over $5 billion. Debt consisted primarily of $1.7 billion in senior unsecured notes, $554 million in term loans and $142 million in revolving credit.

The company gives very detailed information on AFFO, or adjusted operating funds. In the second quarter, it was $88 million or $0.36 per share, down 8% from $0.39 per share in the second quarter of 2021. The press release shows details of how this has been calculated. Note that this is a non-GAAP figure.

Growth prospects

Revenue growth for the last quarter was only 2% year-over-year, which is not exceptional. Since most cash flow is diverted to dividends and there is significant debt, any growth would likely require new debt, at rates currently higher than they have been in years. With the exception of the Canadian acquisition described above, I would classify Sabra as low growth until proven otherwise.

Dividend and reliability

Sabra declared a dividend of $0.30 on August 8, for shareholders of record as of August 17. It was paid on August 31, so we have to wait for the next payment. The $0.30 per quarter level started in May 2020; before that it was $0.45, at least since the start of 2018. Cash use for dividends would have been less than $70 million in the quarter. See also Sabra annual dividend the story.

Assuming stability, at $1.20 per year and the closing price of $15.13 on September 13, 2022, the the yield is 7.9%. Q2 dividend payout accounted for 79% of AFFO. But it was $0.23 per share over Q2 GAAP EPS, which is a caveat. In April Fitch gave Sabra a BBB- credit rating, indicating that it has adequate capacity to meet all of its financial commitments.

Given the aging of the population in the United States and Canada, I see no reason why the demand for care for the elderly will decrease. There is uncertainty about costs, including the current high rate of inflation, relative to Medicaid payment trends for nursing providers. The second quarter press release included a chart of Medicaid FMAP (Federal Medical Assistance Percentages) supplemental status in key states. Given the shortage of niches for drug addicts, expanding the space of addiction centers seems like a good strategy. Overall, I consider revenues to be reasonably stable and able to cover the dividend under normal conditions. A truly detailed analysis would take into account the ability of the healthcare companies that lease the facilities to maintain payments.

Conclusion

My opinion is that Sabra Health Care REIT is a dividend with a low growth game. Since most of my portfolio is growth oriented with little to no dividend, I have no problem with that, as long as the dividend is around 8%. If the stock price goes up and the dividend goes down, I would find that much less attractive, and vice versa. Whether Sabra is a buy for other investors largely depends on the portfolio strategy pursued.

On a higher level, before buying SBRA, I should research other healthcare REITs. Real estate markets are generally in flux right now due to unknowns such as future inflation rates and other macroeconomic trends. All companies in the REIT category can be affected by a trend, but by being mindful of price and quality, the downside can be minimized.

If you’re a regular REIT investor, feel free to comment below on how you think Sabra compares to other healthcare REITs. How healthcare REITs compare to other types of REITs is also a valid topic here.

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