SABRA HEALTH CARE REIT, INC.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

SABRA Health Care REIT, Inc. is a real estate investment trust that primarily invests in healthcare properties, focusing on skilled nursing and assisted living facilities and also generates revenue through the management of these properties.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

SABRA Health Care REIT (SBRA) operates as a real estate investment trust (REIT) that focuses on healthcare properties and their operation. This dual approach is both an opportunity and a challenge for the company.

Business Overview:

SABRA primarily generates revenue through two main avenues:

  1. Rental Revenue: A majority of their income comes from leasing their properties to healthcare operators. These are typically long-term net leases where the tenant is responsible for most operating costs, including maintenance, insurance, and taxes.
  2. Managed Assets: SABRA also generates income from managing the properties they own. This model is less hands-off and provides an operational component for the company.

In essence, SABRA is not just a real estate owner but also an operator of healthcare properties in many situations.

Trends in the Industry:

The healthcare real estate industry is currently facing multiple challenges, including:

  • Rising Labor Costs: Staffing shortages and increased labor costs impact the profitability of facility operators, which, in turn, affects SABRA’s rental revenues.
  • Changing Payment Models: Government and private payer reimbursements for healthcare services can significantly change, leading to volatility in operator revenues, thus affecting their ability to pay rent.
  • Evolving Demand: While demand for senior living facilities is generally expected to increase with aging populations, the specific needs and preferences of new generations may require facilities to adapt quickly.
  • Inflation: While their revenue is inflation linked, cost inflation from building materials, etc. can put a strain on their finances.

Margins:

SABRA’s margins are directly related to their properties’ performance and their tenants ability to pay rent.

  • Stable Revenue, Variable Costs: Their revenue streams are more stable than operating cost due to long-term leases. Expenses like maintenance, insurance, taxes vary over time. As a result, their profitability is subject to fluctuations due to increasing costs, primarily wages.
  • Reinvestment: It is also important to see how well a company reinvests in its own assets for the future, in order to provide a stable operating environment.

Competitive Landscape:

The healthcare REIT sector is relatively fragmented with many different players. Some of the larger competitors are Welltower, Ventas, Omega, and Healthpeak. Here’s how SABRA distinguishes itself:

  • Specialized Portfolio: While SABRA operates in the healthcare sector, most of their investments are in skilled nursing and assisted living facilities. Some competitors operate in other health sectors.
  • Operating Capabilities: Unlike many REITs, SABRA has a direct involvement in the management of some of its portfolio of assets. It is not a passive investor.
  • Active Investment Manager: Management is continuously looking to add value via new acquisitions and divestitures of properties that are not performing well.

Financials:

Let’s delve into SABRA’s financials:

Income Statement In their Q3 2023 results, they had a decrease in total revenue from the previous quarter, mainly due to a dip in tenant services revenues and a small dip in rental income. However, their total expenses fell significantly, primarily from a huge one-time write down in Q3 2022. The combination of decrease in revenue and decrease in expenses led to a positive net income.

Balance Sheet They have been actively paying down their debt, but leverage continues to be substantial. They had total liabilities over $4.5 billion while total assets around $7.3 billion in Q3 2023. A large proportion of their liabilities is secured or unsecured debt. Their equity remains weak at $2.7 billion, but this is still a major improvement over past few years.

Cash Flows SABRA has very strong positive operating cash flows. This comes from steady rental revenue and efficient management of expenses. In recent quarters, they have been using that cash flow to aggressively pay down debt.

Moat Rating: 2/5 SABRA’s moat is very limited, thus earning a 2/5 rating. Their value comes from management expertise, geographical location, and long term contracts, but these are not strong enough to protect their revenue from competitors. They face fierce competitive pressures from the numerous other skilled nursing home companies as well as other real estate management companies. They benefit from some level of:

  • Switching Costs: Switching healthcare facilities and partners would be quite complex and costly.
  • Location: Facilities are often located in places that are good for business.
  • Regulatory Approvals: Operating in this industry has quite a few barriers in the form of complex regulations.

All of these points provide SABRA some advantage, but they don’t result in an impenetrable moat.

Legitimate Risks That Could Harm the Moat and Business Resilience

  1. Operator Financial Health: If SABRA’s tenants fall into financial difficulties, they might be unable to meet their rent obligations, leading to reduced revenue or even occupancy drops for SABRA.
  2. Interest Rate Risk: Being a debt heavy company in a high interest rate environment can be problematic. Their WACC might go higher and therefore make the entire business less attractive.
  3. Regulation Changes: Changes in healthcare regulations, especially reimbursement, could significantly impact operators’ profitability, which will affect SABRA as well.
  4. Competition: Fierce competition from smaller healthcare REITs might erode some profitability.
  5. Changing Consumer Preferences: Changing demand from the younger generation might force some of their facilities to become obsolete.

Business Resilience:

SABRA has shown resilience in some key areas:

  1. Diversified Portfolio: They have a well-diversified portfolio of properties in terms of property-type and locations which minimizes risks.
  2. Long-Term Leases: Long-term leases with their operators provide predictability to their cash flows
  3. Experienced Management Team: SABRA’s management team has decades of experience in healthcare real estate, which helps in navigating through challenges.

Understandability Rating: 3/5 SABRA gets a 3/5 in understandability. The business model is reasonably simple to grasp: a REIT that owns and manages healthcare properties. Understanding REIT accounting and their specific sector complexities is essential to fully understand the business model. This makes the business somewhat less intuitive.

Balance Sheet Health: 3 / 5 Their balance sheet health gets a 3/5 rating. This was a high-debt company with low equity, but they have been making efforts to reduce their debt burden and increase equity. They still have long term debt at 4.5 Billion and a low equity base of only 2.7 Billion which limits its growth potential and may put the company in peril in the future.

In recent earnings calls, the management has noted that they are planning to continue paying down debt, and make the company have a balance sheet that can withstand future market volatility. They have mentioned an intention to further reduce its debt, while also continuing a disciplined approach towards acquisitions of healthcare facilities. They have also emphasized they will be focusing on optimizing their existing portfolio, mainly focusing on generating revenue growth through organic growth as well as acquisitions. Their focus will remain on strong and stable operator relationships which they think will result in higher returns in the future.