Senior Housing And Skilled Nursing's Resilient Growth Amidst Challenges Signals Bright Future

Key Takeaways

• Strong recovery trajectory suggested by occupancy increases in Skilled Nursing and Senior Housing, hinting at enhanced revenue and net income.
  
• Strategic portfolio expansion through new acquisitions and operational improvements in both Skilled Nursing and Senior Housing indicate potential for future revenue and earnings growth.
  
• Increased competition, dependency on government reimbursements, rising labor costs, strategic risks in Senior Housing Managed properties, and potential regulatory changes may impact revenue stability and growth prospects.

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.

• Skilled Nursing and Senior Housing occupancy increases signal a strong recovery trajectory, which might enhance revenue and net income through higher occupancy rates.
  
• Notable Medicaid rate increases estimated at around 7%—higher than previous increases—suggest potential for revenue growth specifically within the Skilled Nursing Facility (SNF) sector.
  
• SHOP (Senior Housing Operating Portfolio) cash NOI growth of 17.7% points to robust operational improvements, indicating potential for increased revenues and margins in senior housing operations.
  
• Investment in new acquisitions ($136 million announced) reflects strategic portfolio expansion, likely to contribute positively to future revenue and earnings growth.
  
• Improvements in Skilled Nursing EBITDARM margins, exceeding pre-pandemic levels despite lower occupancy, hint at enhanced operational efficiency and cost management, likely improving net margins.

Assumptions

• Analysts are assuming Sabra Health Care REIT's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 23.1% in 3 years time.
• Analysts expect earnings to reach $186.9 million (and earnings per share of $0.72) by about October 2027, up from $52.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.9x on those 2027 earnings, down from 83.7x today. This future PE is lower than the current PE for the US Health Care REITs industry at 55.0x.
• Analysts expect the number of shares outstanding to grow by 3.66% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

• Increasing competition in the behavioral health space could reduce tenant performance and impact rent coverage ratios, affecting net operating income (NOI) and funds from operations (FFO).
  
• Dependency on government reimbursement rates, such as Medicaid and Medicare, which are subject to political changes and budget constraints, could affect the company's revenue stability and growth prospects.
  
• Rising labor costs or challenges in managing labor expenses, despite current improvements, may negatively impact operating margins and NOI in the skilled nursing and senior housing sectors.
  
• The company's strategic focus on Senior Housing Managed properties (SHOP) involves inherent operational risks, including occupancy volatility and expense management, which can affect cash NOI and margins.
  
• Potential regulatory changes affecting the senior housing and skilled nursing sectors could introduce compliance costs or operational restrictions, impacting earnings and the ability to grow revenue sustainably.

Valuation

• The analysts have a consensus price target of $19.05 for Sabra Health Care REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $807.3 million, earnings will come to $186.9 million, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of $18.67, the analyst's price target of $19.05 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.