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Summary

  • The aging of US baby boomers will continue to create increasing demand for healthcare facilities.
  • Healthcare is the leading sector over the past year and year-to-date, but there are very few dividends paying over 6%.
  • Sabra Healthcare offers income investors a well-covered 7%-plus preferred dividend yield.

Let's face it, the US populace, which is 26% baby boomers, is getting a bit gray around the temples. How gray? AARP has this to say, "In 2011, the first of the baby boom generation reached what used to be known as retirement age. And for the next 18 years, boomers will be turning 65 at a rate of about 8,000 a day. As this unique cohort grows older, it will likely transform the institutions of aging." (Source: AARP website)

So, Healthcare facilities will become increasingly important, or, at least the market thinks so, having made the Healthcare sector the leading sector over the past year, and year-to-date in 2014.

The bummer for income investors is that there aren't a huge amount of high dividend stocks in this sector. Among common stocks, there are less than 5 paying a 5%-plus dividend. Among Healthcare REITs, there are 11 paying above 5%, but none above 7%.

A 7% Preferred Dividend: Sabra Healthcare REIT, (NASDAQ:SBRA), offers a preferred dividend which is yielding over 7%. These shares trade on the NASDAQ, and are listed on Yahoo and Google Finance under the ticker symbol SBRAP. We're tracking both the preferred and the common shares in our High Dividend Stocks By Sector Tables, (in the Healthcare section).

As we noted in last week's article about some other high-yielding preferred stocks, preferred shares are much better-covered than common dividends. Why? Because net income is usually declared after subtracting preferred distribution payments. Here's how SBRAP was covered over the past 4 quarters. Even with negative income in Q1 2014, SBRA averaged 3.15 preferred dividend coverage over the past 4 quarters:

In last week's article, we also noted that, in general, you should try to buy preferred shares under their liquidation value. However, if that's not possible, then determine if you'll receive enough dividends prior to the call date, to justify paying above the liquidation value.

For SBRAP, the liquidation value is $25, and it's not callable until 3/21/18, so you'd be eligible to receive $6.234 in dividends before the call date. If you pay $25.22, just deduct the $.22 premium you paid above $25, from the $6.23 in dividends, which gives you a $6.01 net profit, and an annualized yield of 6.66%.

Another more short term way to play SBRAP is to watch for price gains. Preferred shares, although usually less volatile than common shares, also rise and fall. SBRAP has a 52-week high of $27.12, and a low of $23.01. Many preferred shares decreased back in December 2013, when the market thought that the Fed would raise rates sooner than later. This presented a golden opportunity to buy many preferreds on the cheap, and achieve attractive price gains in 2014.

Preferreds may fall again, when rates finally rise, but, most likely, the issuing companies will call them back in, on or after the call date, and they're obligated to pay you the liquidation price, which in SBRAP's case, is $25. Until they call the shares back in, they'll have to keep paying you that quarterly dividend. Since these shares are cumulative, if Sabra misses paying any of the quarterly dividends on these shares, they must pay them to you upon calling them back in.

We've also noticed that market arbitrage plays a factor with maturing preferreds - as they get closer to their call date, they should be priced at their liquidation price, or even above, since it would be a potential gift to arbitrageurs if a preferred share, due to expire soon, was priced below its liquidation price.

Since Sabra is a REIT, its dividends don't qualify for the 15 to 20% dividend tax rate. The preferred shares rank senior to the common shares.

Common Dividend: SBRA also pays a quarterly dividend, which it has grown from $.32 in 2011, to the current $.38:

Options: Although SBRA does have options available, we haven't added it to our Covered Calls Table or our Cash Secured Puts Table yet, as its options-selling yields aren't currently very attractive.

Quarterly Growth: SBRA has shown strong revenue and normalized Funds from Operations growth, (up over 26%), over the past 4 quarters, and over the past 3 years. It has grown its Revenues from $84 million in 2011, up to $135 million in 2013.

(Source: Sabra website)

SBRA's Q2 2014 looked very good, as did its 2013 full year:

Valuations: As with last week's preferred pick, SBRA's story isn't about being undervalued, but rather, being able to grow and support its dividends.

Financials: SBRA's management effectiveness ratios, excepting ROI, are roughly in line with its peers, but it has more debt, and a lower operating margin. However, all of SBRA's debt is long term, maturing in 2019 and beyond, and it has improved its debt profile over the past 12 months - As of 6/30/14, Sabra had 100% fixed rate debt, at a rate of 5.17%, whereas as of 6/30/13, 32% of its debt was variable rate, and its fixed rate debt had a rate of 6.14%.

Sabra has also diversified its customer base over the past 3-plus years, having made several acquisitions, which now contribute over 53% of its revenues:

(click to enlarge)

Sabra's occupancy rates have been pretty steady over the past few years:

(Source: Sabra website)

Since 12/31/10, SBRA has greatly decreased its reliance on Government reimbursement, decreasing Non-Private Pay to 58.4%, from 76.3%.

Company Profile: Sabra Health Care REIT operates as a real estate investment trust that holds investments in healthcare facilities, principally long-term care facilities. Co. invests primarily in the U.S. nursing home industry and other senior housing segments. Co. operates through an umbrella partnership structure in which substantially all of its properties and assets are held by Sabra Health Care Group, Inc.

As of June 30, 2014, Sabra's investment portfolio included 130 real estate properties held for investment and leased to operators/tenants under triple-net lease agreements (consisting of (i) 102 skilled nursing/post-acute facilities, (ii) 26 senior housing facilities, and (iii) two acute care hospitals), 12 debt investments (consisting of four mortgage loans, (iii) three construction loans, one mezzanine loan, and (iv) four pre-development loans) and five preferred equity investments.

Included in the 130 real estate properties held for investment is one 100% owned, senior housing facility leased to a 50%/50% RIDEA-compliant joint venture tenant. As of June 30, 2014, Sabra's real estate properties were located in 28 states and included 13,550 licensed beds/units.

(Source: Sabra website)

Sabra expects to continue to grow its portfolio primarily through the acquisition of senior housing and memory care facilities with a secondary focus on acquiring skilled nursing facilities.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only.

Source: A Healthcare High Dividend Stock With 25%+ FFO Growth; Yielding Over 7%