Why Stifel Likes This 6% Yielding Small-Cap Healthcare REIT

Last week, Stifel analysts Chad Vanacore and Daniel Bernstein published a research note titled, "Sabra Makes for a Compelling Value Play."

Prior to the report, Sabra Health Care REIT Inc (NASDAQ: SBRA) just completed a 5.9 million share secondary offering at $25.25 per share, raising ~$149 million to fund recent acquisitions and pay down revolving debt.

Sabra owns 169 properties, including 103 skilled nursing facilities, 64 senior housing facilities and two acute care hospitals. The properties contain a total of 17,593 beds/units and are located in 34 states.

This makes $1.5 billion cap Sabra one of the smaller healthcare (HC) REITs, along with peers:

• National Health Investors Inc (NYSE: NHI): $2.4 billion cap, 5.5 percent yield
• LTC Properties Inc (NYSE: LTC): $1.5 billion cap, 4.9 percent yield
• Omega Healthcare Investors Inc (NYSE: OHI): $6.3 billion cap, 6.3 percent yield

Tale Of The Tape: 2015 Front Half

HC REIT shares are generally sensitive to rising interest rates, in large part due to the long-term nature of the leases with the operators of the facilities.

Stifel noted that Sabra was trading at ~11x 2015E FAD (funds available for distribution), a measure of REIT cash flow often referred to as AFFO.

This compared favorably to a 2015E peer average of 15x, with National Health Investors, LTC and Omega Healthcare Investors trading at about 15x, 16.8x and 12.5x, respectively.

Stifel–SBRA: Buy Rated, PT Reduced From $33 To $30

The new Stifel $30 target price represents a potential ~16.5 percent share price upside based on Tuesday's close of $25.74 per share.

The Sabra $30 PT was based upon a 13x Price/FAD multiple, (still lower than peer average); which also values the shares "at an implied cap rate of 6.75 percent on forward NOI."

Stifel believes based on Sabra's "current leverage and portfolio mix, SBRA should at a discount to peers;" however, the current 4x discount is excessive and represents a value opportunity for investors.

Stifel–SBRA Rationale

Acquisition Pipeline: Stifel noted that Sabra management "over-delivers on investments," having already announced ~$400 million in new acquisitions vs. $160 million prior guidance.

Secondary Stock Offering: The issuance of the 5.9 million additional shares removed the potential "equity overhang" from weighing on the share price.

Increasing FAD Estimates: Stifel raised its "2015 FAD forecast, from $2.15 to $2.16 and 2016 FAD from $2.34 to $2.36, representing close to 10 percent FAD growth."

Forest Park Issues: Stifel believes that management will resolve the contract and payment issues with this tenant, and that this is already priced into the Sabra stock price.

Portfolio Mix: "[W]ith skilled nursing mix around 50 percent of NOI, management feels it can selectively add SNF [skilled nursing facility] portfolios without impacting credit quality.

• Stifel believes this is a positive for growing NOI, "as SNF investments typically yield 250–350bps higher than seniors housing."

Stifel–SBRA Risk Factors

Key risks included:

• 1. "Sabra's significant concentration of its assets in skilled nursing and its reliance on one operator, Genesis HealthCare, for approximately 30 percent of net operating income."
• 2. Stifel assumes "that Sabra is able to execute on accretive acquisitions to help build FFO and FAD."
• 3. The likelihood "of future equity share issuance to fund Sabra's investment activity."

Stifel–SBRA Bottom Line

Vanacore and Bernstein believe that Sabra Health Care REIT represents "a compelling value play."

The current 6 percent dividend yield, combined with the 16.5 percent target price appreciation, represents a potential total 12 month investor return of 22.5 percent.

Image Credit: Public Domain