It pays to shop in beaten sectors that offer high dividend yields. There are currently plenty of high-yield opportunities with office REITs such as City Office REIT (CIO) and SL Green (SLG). I recently highlighted Here And Here, Beyond offices, many healthcare REITs are still undervalued, providing high-yield opportunities for investors.
This brings me to Sabra Health Care REIT (Nasdaq: SBRA), at the current price of $12.53, is trading well below its 52-week high of $16.60 and trending low of $11.44, giving it a dividend yield of 9.6%. This article highlights why SBRA presents an attractive value proposition for current income investors, so let’s get started.
Sabra Health Care is a self-managed REIT focused on owning and leasing SNFs (skilled nursing facilities), senior housing communities, and specialty hospitals across America. With a long-weighted average remaining lease term of 8 years.
SBRA’s diverse mix of skilled nursing, senior housing, and other health care properties gives it diversification in both public and private pay models. As shown below, 60% of SBRA’s annual cash NOI stems from skilled nursing, with much of the rest coming from senior housing (leased and managed), behavioral health and specialty hospitals.
It is not new news that SBRA and the rest of the healthcare REIT segment have faced challenges over the past 2 years, first with the COVID lockdown and later with wage inflation and labor shortages as the labor market returned. This has resulted in some tenants coming under pressure to cover rental payments.
However, SBRA is led by an experienced management team, including longtime CEO Rick Matros, and is working through addressing tenant coverage issues. This includes the recent announcement of a 24 property portfolio transition from North American Health Care to two veteran operators, Ensign and Avamere, for a combined initial annual rent of $34.5 million.
As a result, both Ensign and Avamere will become SBRA’s two largest relationships, each representing 8% of SBRA’s annual cash NOI. I consider this a good move for the long-term viability of the properties, especially considering that Ensign leased properties come with corporate guarantees and that Ensign is a large operator with a $5 billion market cap.
Specifically, this transaction will strengthen the portfolio EBITDARM to rent aggregators of 1.83x (1.6x excluding provider relief funds). In addition, SBRA maintains plenty of balance sheet flexibility with a net debt to EBITDA ratio of 5.5x, and management expects to reduce leverage to 5.0x by the end of year-end distribution activities. Importantly for dividend investors, the $0.30 quarterly dividend was covered by $0.34 in AFFO per share generated during the third quarter.
Looking ahead, I see labor constraints likely to ease, as inflation has shown signs of easing in recent months. In addition, management is looking at normalization of labor which, as noted during the recent conference call, is aided by encouraging occupancy gains:
Moving to the operating environment, labor continues to improve. It’s still tough, but occupancies are improving now and labor is improving as well. I’ll just note and remind everyone that our triple net occupancy is one quarter outstanding. And while occupancy was flat in the second quarter, as noted in the release, on the skills side, from June to October, our occupancy increased 180 basis points, which we see as a direct function of labor being better. . And similarly for our AL portfolio which was up 190 basis points during that same time frame, so June through October. Our senior housing lease portfolio also continues to improve, and we’ve seen good traction in rent coverage there.
In conclusion, I think SBRA is cheap at its current price of $12.53 with a forward P/FFO of 8.4, which is well below its typical P/FFO of 11.2. Analysts have a consensus Buy rating on SBRA with an average price target of $15, which translates to a potential 29% total upside including dividends.
In summary, I view Sabra Health Care REIT as an attractive healthcare REIT with a well-diversified portfolio, experienced management team, and strong balance sheet flexibility. With the transition to Ensign and Avamere, SBRA should be able to head off remaining labor headwinds, especially given recent occupancy gains across the portfolio. In conclusion, I find SBRA to be attractively priced and a good dividend income opportunity. Investors with an appetite for high-yielding stocks should consider the SBRA at current levels.