Introduction
I hold small positions in Sabra Health Care (SBRA) and Omega Healthcare (OHI). Both are REITs leasing to the healthcare industry with a focus on skilled nursing facilities. In fact, both companies share several common operator-tenants.
Both OHI and SBRA share prices declined heavily since the quarter ended September 30, 2017. Readers may be aware that Sabra issued 16 million common shares on September 28, 2017 at $21 per share (source: NASDAQ Globe Newswire). As of November 16, 2017, SBRA shares closed at $19.05. Omega shares have shared a similar trend.
In this article, I wanted to review the two healthcare REITs side-by-side to evaluate whether one is particularly stronger investment candidate relative to the other. Among others, I independently computed several operating metrics and liquidity measures. Read on for the calculations and my conclusion.
Show Me The Dividend
Without further ado, let me start bombarding you with the metrics. First of all, I recognize that there’s a good chance you, the reader, is a dividend investor. Me, too! So, here is how the two companies stack up side-by-side.
Dividend Yield
Basically, both companies yield a relatively high 9%+, with a slight edge going to Omega Healthcare (which mainly is following the recent sell-off). Also, worth noting is that Omega had the stronger absolute dividend growth over prior year in the high single-digit %.
(As an aside, Sabra shares jumped so much since 2016 year-end, because of the merger with Care Capital Properties.)
Winner: Omega. But, not by much.
Reference Financial Info
The following reference financial info was mostly keyed in using 2017 Q3 10-Q (for the quarter ended 9/30/2017). These base figures will set the stage for the computations to follow and I wanted to share these with you for reference.
Source: Author’s data entry. [Original worksheet: sbra_vs_ohi_side-by-side.xlsx]
I need to make a quick explanation about the column labeled “Omega w/out imp.” That refers to what Omega’s financials would look like if I exclude the non-cash impairment charge for direct financing lease of $198 million.
In this article, I won’t debate the merits of whether or not the figure should be deemed reflective of on-going operations. Rather, I want to present the metrics both with and without that particular impairment charge. Okay, back to metrics.
Operating Metrics
Based on the financial table shared above, one can re-compute the following metrics.
Recognize that these are neither GAAP measures nor conventionally disclosed REIT measures. However, these made sense to me as operating metrics I’d like to know if I were running the business.
For instance, Both Omega and Sabra derive over 80% of their total revenues from renting. That helps me understand that both are mostly in the business of being a landlord. Clearly, Omega is more involved in “other” activities.
OpEx ratio is simply total operating expense (including interest expense) divided by total revenues. You can see how these were computed in the source spreadsheet. Here, I find that Sabra is the more frugal spender. That’s important for me to know as an investor.
With respect to distributions made relative to FFO, both come out in the low 80%-range if you exclude the impact of the aforesaid $198 million impairment charge. On a NAREIT FFO basis, Omega’s distributions exceeded its FFO for the 9-months ended September 30, 2017.
Rent income yield was computed as annualized rental income divided by gross real estate assets. It was a way of seeing for a given amount of asset, how much income is that asset producing in rent? In that measure, Omega was the winner. But, then unlike Sabra, Omega was recognizing quite a bit of impairment activity. That means both you and I need to dig a little deeper into the quality of Omega’s assets and drivers of the impairment charges. Sadly, that deep dive is out of scope here and will have to be done in a separate analysis.
Winner: Sabra. But Maybe.
Liquidity/Credit Quality
Both companies issue investment grade debt as measured by your rating agencies (I excluded Fitch rating for simplicity). Ba1 is one grade lower than Baa3, so Omega’s unsecured debt is rated slightly higher.
Also, note that a greater portion of Omega’s debt is unsecured. That gives some strength to Omega’s case relative to Sabra.
(For those unfamiliar with debt, unsecured is better in this case. Secured debt basically means that the Bank has secured a specific lien on some hard asset of the business, most likely a real estate property. An unsecured debt would be made based on the creditworthiness and enterprise value of the overall business.)
That said, I find that Sabra has the lower overall debt burden relative to equity, but higher debt burden relative to its annualized FFO (for Omega, using the FFO excluding impairment).
In terms of servicing current interest expenses, I find both companies similar. (Here, note that this coverage calculation is my proforma, as it is simply FFO over interest expense from the income statement.)
As for upcoming maturities, I actually like Sabra’s maturity schedule much more. It will have very little payments until 2019, but the maturing payments should be manageable through 2020. Omega has one big balloon maturity in 2021. That’s good for the next few years, but it means management will be busy restructuring or refinancing the debt in a few years’ time.
Winner: Mixed. It’s a tie.
Tenants/Other
We can’t end an article like this without looking at tenants; these are landlords, after all!
I was surprised to see that Sabra has a better occupancy ratio in the upper 80%-range. I was surprised because I’ve read many articles asserting how Omega was best in class in the skilled nursing category.
It also struck me how much lower the occupancy rate is for these two REITs relative to high performing retail REITs like Realty Income (O) and Tanger Factory Outlets (SKT), whose occupancy rates will be in the high 90%-range. For example, see my post on Tanger and Retail REITs for those occupancy rates.
Digging little more, we find that Omega has little less concentration from top 5 tenant-operators. But, both share some operators that many readers will recognize as distressed. Note below the EBITDAR coverage as shared by Sabra Health Care in its 2017 Q3 supplemental presentation.
Omega and Sabra both share top tenants Genesis and Signature, and neither have a very strong income coverage of debt obligations.
In fact, in its November 8, 2017 8-K filing, Genesis Healthcare announced plans to restructure its obligations with counterparties Welltower Master Lease and Sabra Master Leases, among others.
I feel like this last comparison is like seeing who has the stinkier feet. There are no winners in that game. This last aspect of the business model is a little bit disappointing. The conservative investor should require a healthy margin of safety. If you step back and consider a business model lending to or leasing to those with limited (or shaky) ability to payback your money, then you have a business model with little margin of safety. It is my hope – and I’m sure the management’s hope as well – that the parties can work out a payment plan that works, and that the operating health of these tenants will improve over time. As for Sabra, its management already has announced plans to dispose of Genesis-related assets.
Loser: Both. Though a slight edge to Sabra.
Here again, the source file: sbra_vs_ohi_side-by-side.xlsx
Conclusion
I compared Sabra Health Care and Omega Healthcare because I have small positions in both companies. Further, both have a material skilled nursing facility exposure and share top common tenants.
Specifically, I independently computed several operating metrics and liquidity measures. My conclusion is that on the whole, Sabra appears to be the better operator with the stronger overall business mix (e.g. higher occupancy, higher interest coverage).
That said, it is clear that both REITs are operating under some market distress. So, I likely will not be adding to my positions in spite of the appealing dividends.
Disclosure: I am/we are long OHI, SBRA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial advisor. The research was done for myself, and I am sharing it with the readers.
Article source: https://seekingalpha.com/article/4126049-sabra-health-care-vs-omega-healthcare-side-side