Rising Occupancy In Skilled Nursing And Senior Housing Will Strengthen Future Prospects

Key Takeaways

• Strategic investment in newer assets and improving occupancy rates boost Sabra's revenue potential and earnings stability.
  
• Improved financial strength, operational leverage, and strong tenant performance enhance Sabra's earnings growth and cash flow sustainability.
  
• Dependence on skilled nursing and Medicare/Medicaid reimbursement risks impacting growth due to limited opportunities, competition, and regulatory uncertainties.

Catalysts

As of September 30, 2023, Sabra’s investment portfolio included 377 real estate properties held for investment (consisting of (i) 240 Skilled Nursing/Transitional Care facilities, (ii) 43 senior housing communities (“Senior Housing - Leased”), (iii) 61 senior housing communities operated by third-party property managers pursuant to property management agreements (“Senior Housing - Managed”), (iv) 18 Behavioral Health facilities and (v) 15 Specialty Hospitals and Other facilities), 12 investments in loans receivable (consisting of two mortgage loans and 10 other loans), five preferred equity investments and two investments in unconsolidated joint ventures.

• Sabra Health Care REIT has shown sequential quarters of improving occupancy rates in its SNF portfolio and its SHOP portfolio, leading to increased revenue generation potential in these core areas.
  
• The company has been making strategic, high-quality investments in newer vintage assets, supporting future revenue growth and ensuring stronger earnings stability.
  
• Sabra's management reported that operating leverage is contributing significantly to cash NOI growth, resulting in improved margins and enhanced earnings prospects.
  
• A credit rating upgrade from Moody's demonstrates improved financial strength, which could lead to better borrowing terms and support earnings growth.
  
• Sabra is leveraging strong tenant performance in senior housing and skilled nursing, which is expected to drive sustainable earnings and maintain high rental coverage ratios, contributing to robust future cash flows.

Sabra Health Care REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sabra Health Care REIT's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $192.6 million (and earnings per share of $0.93) by about December 2027, up from $97.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $168.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2027 earnings, down from 43.0x today. This future PE is lower than the current PE for the US Health Care REITs industry at 43.0x.
• Analysts expect the number of shares outstanding to decline by 4.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Sabra Health Care REIT Future Earnings Per Share Growth

Risks

• The reliance on skilled nursing facilities (SNF) and the potential for limited skilled nursing opportunities in the market could hinder growth and impact revenue.
  
• High dependency on Medicare and Medicaid reimbursements, which may see less favorable adjustments in the future, potentially affecting net margins.
  
• Avamere's percentage rents are a significant contribution, but there's a risk if their performance falters, which could negatively impact earnings.
  
• Increased competition and changes in lending conditions could impact availability and cost of new acquisitions, affecting revenue growth.
  
• Ongoing regulatory uncertainties, such as minimum staffing mandates, could increase operational costs and pressure earnings.

Valuation

• The analysts have a consensus price target of $20.0 for Sabra Health Care REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $837.1 million, earnings will come to $192.6 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of $17.65, the analyst's price target of $20.0 is 11.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.