Sabra Health Care REIT (SBRA -0.36%) is slated to grow by quite a bit, for a real estate business at least. The average of the estimates made by Wall Street analysts suggests that Sabra's stock price will climb by around 20% over the year from its current level of around $11.27 to reach roughly $13.58.
But that doesn't mean you should buy the stock. In fact, there are a few compelling reasons why you should avoid it or dump your shares if you're a holder. Here's why.
The top and bottom lines are shrinking, and there might be worse to come
As its name implies, Sabra is a real estate investment trust (REIT) that buys and rents out healthcare properties like behavioral health clinics, skilled nursing facilities, and even senior housing using sale-leaseback transactions, among other types of deals. 58% of its portfolio is concentrated in the skilled nursing care niche, and all of its 264 leases in the segment are triple-net, which means that tenants are responsible for all of the costs associated with operating and maintaining their facilities.
It's clear that demand for Sabra's properties won't be declining very much anytime soon, and given its low-cost leases, one might assume that its financial performance is strong -- but it isn't. Over the last five years, its annual revenue was essentially flat, climbing by 0.2% to hit close to $625 million, while its annual cash from operations fell by 12.4% to reach $315.7 million. Management blames labor supply issues for the trouble, but that doesn't really make sense, as top-line growth has been weak for years now, and the company's full-year results for 2021 claimed that labor shortages were easing starting from January of 2022.
Furthermore, the top line could shrink more, and soon. In the fourth quarter, it sold off seven of its skilled nursing facilities for gross proceeds of nearly $26 million. That means it won't be making rent from those properties. And in terms of its ability to deploy capital to buy more rent-bearing facilities, it only has a bit over $49 million in unrestricted cash and equivalents. Considering that one of its most recent purchases of senior housing cost it roughly $41 million, that's hardly a war chest that's going to power significant future growth.
Macroeconomic factors don't help, and they aren't about to improve
The other piece of the puzzle with Sabra is that, as a REIT, it's largely dependent on taking out new debt in order to have enough capital to purchase new properties. At the moment, its $2.5 billion in debt means it has a debt-to-equity ratio of around 0.82, which isn't too bad (relative to the 1.5 D/E average among S&P 500 companies). And management has prudently stated that it's a strategic priority to lower its leverage while refraining from excessive borrowing or new stock issuance to raise capital.
Unfortunately, if it needs to take out debt anyway in the next few years, it'll likely be forced to do so at an unfavorable rate. As the Federal Reserve hikes the federal funds rate, which ultimately controls the interest rate at which companies can borrow money, it'll need to pay more than it did in the past, potentially a large amount more if it continues to be unprofitable. Of course, the detrimental impact of the additional interest that's owed won't be felt by shareholders immediately but rather during the years of repayment which follow. So even if the federal funds rate comes back down within a couple of years after inflation is tamed, Sabra will be paying for it for quite a while, and that'll leave less money to make investments and pass to shareholders.
So does Wall Street have this stock wrong? Not necessarily. Shareholders could still get a decent return thanks to its dividend, which currently yields 10.4%, even if the dividend falls slightly -- except that it might fall by a lot like it did when the company slashed its payout aggressively in 2020. But with so many headwinds and so few ways of reacting without harming future returns, it's probably best to close your position and invest in something safer if you're looking for consistent passive income, regardless of whether Wall Street is right or not.
