Sabra Health: Strong & Steady Income Plagued By Uncertainty (NASDAQ:SBRA)

Sabra Health Care REIT, Inc. (SBRA) is a small cap healthcare real estate investment trust (REIT) with a market capitalization of just over $3 billion. SBRA is highly focused on the Skilled Nursing and Senior Housing segment. As of September 30, 2020, SBRA’s investment portfolio included 425 real estate properties that included 287 Skilled Nursing/Transitional Care facilities, 111 Senior Housing communities and 27 Specialty Hospitals. The REIT has also invested in an unconsolidated joint venture that owns 158 Senior Housing communities. Overall, SBRAs investments included almost 50 thousand beds/units spread across the United States and Canada. The REIT is based in Irvine, CA, United States.

Sabra Health Care REIT, Inc. has been paying strong and steady quarterly dividends since 2011. It has recorded a dividend yield of 8.86 percent last year and a yield of more than 9 percent over the past 5 years. Considering the market price of $13.8, the stock is inexpensive, and the yield seems extremely attractive.

Source: Sabra Health Care REIT, Inc. Dividend Yield

However, a very interesting point to note here is that SBRA is not paying this dividend entirely out of its earnings. Since 2011, the dividend payment has mostly been significantly higher than the EPS earned in its previous quarter. This suggests that the REIT is paying dividends out of its capital, which certainly is not a positive growth factor. The market has not ignored that the earnings of the company have not grown over these years. As a result of that, SBRA’s stock had a negative growth rate over this period. Its stock price fell by 22 percent over the past year, 20 percent over the past three years, 47 percent over the past five years, and 13 percent over the past 10 years.

Source: Sabra Health Care REIT, Inc. Dividend History and

Sabra Healthcare REIT EPS – Earnings per Share 2010-2021 | SBRA

When compared to the S&P500, the stock has really performed poorly. S&P500 had a positive growth of 80 percent during the past five years. Being highly concentrated on the Skilled Nursing and senior housing segment has not worked well for this healthcare REIT. These two segments have been hugely impacted by the pandemic as well as the regulatory issues pertaining to the reimbursement system and service classification codes. Various provisions of the Affordable Care Act led to decline in profitability and rentals, and negatively impacted all the major operators in this segment. Introduction of the new Patient-Driven Payment Model (PDPM) has brought new classifications and thus, in the short term, providers had to adjust their service portfolios accordingly. These changes led to some disruption, and REITs focusing on skilled nursing facilities, specially the smaller ones, thus had to suffer in the short run.

Source: Sabra Health Care REIT, Inc. Momentum Performance

Investors also seem skeptical about some unforeseen pandemic-related issues such as shorter stays by patients due to cost constraints, lower reimbursements and increased awareness about managed care. The stock has 86 percent institutional holdings, out of which around 46 percent is held by five very reputed institutions, namely – Vanguard Group, Inc., Blackrock Inc. (NYSE:BLK), Principal Financial Group, Inc. (NASDAQ:PFG), State Street Corporation (NYSE:STT), and CenterSquare Investment Management LLC. Despite such big names, SBRA’s market performance has been really disappointing.

Source: Sabra Health Care REIT, Inc. Stock Major Holders – Yahoo Finance

SBRA’s price multiples are quite low compared to its peers. A price/book of 0.9 and price/cash flow of 8.51 suggests that the stock is available at a discount. But at the same time, it may also imply that investors are not very optimistic about the future growth potential of the stock. This uncertainty over its future growth makes it a riskier investment. The 60-month beta of SBRA is relatively higher at 1.36. The REIT however had a positive revenue growth of 8.31 percent over the past five years, which seems to be somewhere at par with its peers.

Source: Compiled from several pages of seeking alpha website

In my opinion, the company will bounce back on its senior housing/assisted living investments. However, this has to be backed by more investments in this sector. The stock so far has shown positive growth in 2022. However, it will take time to generate strong revenue and earnings from the skilled nursing and managed care facilities. These segments will still have to overcome some uncertainties, which makes this REIT even more risky. The short-term technical indicator doesn’t make me bullish either. All the long-term simple moving averages (NYSE:SMA) are placed above the short-term moving averages. There is an astonishing wide gap between 200 days SMA and 100 days SMA.

Source: Sabra Health Care REIT, Inc. Momentum Performance

All these factors have been instrumental in lowering the valuation of SBRA. I see the stock having upside potential in the long run, more so because it is trading near its 52-week low. However, to reach that stage, the stock will need to get across major ups and downs. I don’t expect a smooth bullish ride here. This may be a good stock for investors with above-average risk appetite who are betting on it to pay out a steady dividend. Since SBRA has been able to pay dividends even during its worst years, expecting a steady dividend in case the company generates good earnings is logical. But generating sufficient earnings again is surrounded by a lot of uncertainties.

But again, holding this stock for a longer term also makes sense as it is trading at a very low price and the expected dividends are strong. Investors holding SBRA may also consider hedging it with long-term calls and put options. Wide range of call and put options are available for July 15 (4 months forward), September 16 (6 months forward), and October 20 (7 months forward), with a strike price between $2.5 to $25. In order to safeguard my investments, I would prefer to spend another $0.3 to buy a July 15 or September 16 put option at a strike price of $10, so that my principal investment does not incur a loss beyond 30 percent.

Source: Sabra Health Care REIT, Inc. Options Chain – Yahoo Finance & Sabra Health Care REIT, Inc. Options Chain – Yahoo Finance