If your worries over inflation and how it will impact your investments are keeping you up at night, buying shares of companies that own and rent out healthcare facilities could be a ticket to sweeter dreams. Sabra Health Care REIT (SBRA -0.29%) is one such company, and its stock price gain of more than 8.6% year to date makes it look especially appealing, particularly in comparison to the S&P 500, which is down by more than 12% in 2022.
But real estate investment trusts (REITs) vary widely in quality, and picking stocks based on a few months of outperforming the market is hardly a recipe for long-term wealth-building success. So let's examine Sabra's value proposition and see if it's an income stock that's portfolio-worthy.
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Why Sabra might be up your alley
The strongest reason to invest in Sabra Health Care is that it's well-positioned to capture long-term growth from the ever-expanding senior care market. Sabra owns more than 440 properties that are leased by skilled nursing facilities, behavioral health clinics, and senior housing facilities. When its tenants pay rent, the REIT collects it, and over the last five years, its revenue has increased by 131.1% to $580.2 million in the most recent quarter.
The company then leverages its assets and income to borrow more cash, buy more properties, invest in bringing the new purchases up to spec, and finally, rent them out.
Skilled nursing facilities amount to 61.7% of its assets, so they're by far its most important segment. According to a report by Precedence Research, the global skilled nursing facility market is forecast to grow from nearly $315.5 billion in 2021 to around $592.1 billion in 2030, so Sabra won't need to change much about its core business to keep growing for the foreseeable future.
In the meantime, the weighted average remaining lease term of its tenants is around seven years, and its skilled nursing facilities are at roughly 76.5% occupancy. That occupancy level suggests there's demand for its tenants' services, but not so much that expanding into new properties is imperative for them right now, even if it might be necessary later on.
Therefore, Sabra is expanding its senior housing holdings. Its most recent deal on that front came in late May, when it inked a $236.5 million deal for properties in Canada, financed by a combination of cash and debt. Soon enough, that investment will start to deliver growth, and investors will get their cut via the REIT's dividend, which at today's share prices offers a sizable forward yield of about 8.6%.
Don't get too attached to that dividend
The trouble with Sabra Health Care REIT is its debt load. At more than $2.3 billion, it's a significant concern. Though it won't have any trouble paying off the $118.3 million in short-term liabilities that are due before the end of this year, it has $562 million in term loans due in 2024.
While its trailing 12-month cash from operations (CFO) totals nearly $351 million, the past three years have only seen CFO growth of 0.9%. And in that same period, the company switched from reducing its debt load to borrowing more than it was repaying.
Management's position is that the pandemic is having a negative impact on demand for skilled nursing facilities, so it's possible that its pace of growth could soon improve.
Nonetheless, the REIT was forced to slash its quarterly dividend from $0.45 per share in late 2019 to $0.30 per share now, and its payout isn't expected to improve anytime soon. In fact, it's reasonable to expect that it'll get cut again, and perhaps quite soon. After all, the company's $40.6 million in net income from Q1 was significantly less than the $69.2 million in dividends it paid out in the quarter.
To make matters worse, there are no major catalysts or economic events on the horizon that are likely to dramatically change the math here for Sabra. Buying more properties to grow revenues would weaken its balance sheet even more if the returns it can get via rents are lower than its cost of borrowing. So the income that investors receive from their shares for today may not be good for the same flow of money down the line.
Overall, those issues make this stock an ill-advised purchase right now.
