Medicaid And $200M Deal Pipeline Will Boost Senior Housing

Key Takeaways

• Improved contract labor expenses and skilled occupancy rates suggest potential EBITDA and net margin growth amid moderating labor challenges.
  
• Expansion in the senior housing sector, Medicaid rate increases, and proactive capital recycling strategies position the company for future revenue and EPS growth.
  
• Reliance on Medicaid funding and unresolved regulatory challenges pose risks to revenue, margins, and liquidity, amid persistent labor cost issues.

Catalysts

As of September 30, 2024, Sabra’s investment portfolio included 373 real estate properties held for investment (consisting of (i) 233 skilled nursing/transitional care facilities, (ii) 39 senior housing communities (“senior housing - leased”), (iii) 68 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), 14 investments in loans receivable (consisting of three mortgage loans and 11 other loans), five preferred equity investments and two investments in unconsolidated joint ventures.

• Improvement in contract labor expenses and skilled occupancy rates suggest potential for increased net margins and EBITDA growth as labor challenges continue to moderate more quickly than anticipated.
  
• The expanding deal pipeline, with awarded deals totaling over $200 million, indicates robust future revenue growth opportunities through attractive acquisitions, primarily in the senior housing sector.
  
• Anticipated increases in Medicaid rates this summer are expected to contribute positively to revenue growth, particularly benefiting skilled nursing facilities.
  
• Strong performance in the senior housing segment, marked by significant year-over-year increases in revenue, occupancy, and cash NOI, hints at continued internal growth potential and enhanced net margins due to operating leverage.
  
• A proactive approach to capital recycling and using the forward feature under the ATM program to fund deal flow positions the company to pursue growth opportunities while maintaining a leverage-neutral stance, potentially boosting future earnings per share (EPS).

Sabra Health Care REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sabra Health Care REIT's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.5% today to 23.8% in 3 years time.
• Analysts expect earnings to reach $200.1 million (and earnings per share of $0.78) by about May 2028, up from $140.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.0x on those 2028 earnings, up from 30.2x today. This future PE is lower than the current PE for the US Health Care REITs industry at 31.9x.
• Analysts expect the number of shares outstanding to grow by 2.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Sabra Health Care REIT Future Earnings Per Share Growth

Risks

• Despite improvements in contract labor, labor costs remain a significant challenge, which could impact net margins if not carefully managed.
  
• The reliance on Medicaid rate increases presents a risk; any changes or reductions in Medicaid funding could adversely affect revenue and operating income.
  
• The potential influence of unresolved regulatory challenges and estate-related issues in planned dispositions could impact future liquidity and net margins.
  
• Any shifts or delays in awarded deals, especially in the context of high competition for SHOP assets, could pose risks to anticipated revenue and cash flows.
  
• The effect of Medicare and Medicaid federal budget negotiations introduces uncertainty, which could negatively affect future earnings if reimbursement rates are adjusted unfavorably.

Valuation

• The analysts have a consensus price target of $19.5 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 2028, revenues will be $842.3 million, earnings will come to $200.1 million, and it would be trading on a PE ratio of 31.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $17.89, the analyst price target of $19.5 is 8.3% 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.