What A Ride!
What a wild ride to finish out 2017! My last post was minutes before I had to leave to the airport since I booked a last minute trip to Hong Kong the night before. I didn’t plan anything. I just bought a plane ticket and hoped for the best. What I didn’t know is that my trip would eventually take me to Macau and Thailand as well. I definitely drank way more than I should have, but who’s counting?
I also mentioned in my last post that Sabra Healthcare REIT (NASDAQ: SBRA) was undervalued. The stock hasn’t done too much since my purchase on 12/12/17 and has been hovering around the $19 level. However, I’m a long-term investor so I’m not concerned about the stock not shooting up to my fair value estimate overnight.
An Attractive Investment
Since I was in a time crunch during my last post I wasn’t able to post a full article outlining my investment thesis. I’ll post my current analysis here, but please note that there was a big acquisition in Q3 so using the latest numbers from the Q3 ’17 report will have some accounting noise. To keep it simple I did my analysis using FY 2016 data, which led me to believe the stock was valued at around $26 per share. I will post a more detailed deep dive on SBRA once FY 2017 numbers come out, but my initial analysis on the post-acquisition numbers seem to indicate the intrinsic value of SBRA can materially higher.
Side note: I always recommend using full year data for your stock analysis. There can be a lot of noise by using quarterly data. SBRA in particular is currently on-boarding the assets acquired in the acquisition while also unloading some other unrelated assets. This may take a few quarters to smooth out this transition. The data in the annual report, which should be released sometime in February, will be much better for analyzing the value of SBRA post acquisition. I will write a second more detailed article when FY 2017 data becomes available.
Below is a simple NAV model I use to value equity REITs. I pulled all information from the SBRA 2016 annual report. My research has led me to believe that the current cap rate applicable to SBRA’s assets is 8.2%. However, I used an extremely conservative 9.0% just to be safe.
As you can see, the Net Asset Value per share is $26.29, which offers a discount of almost 28%. The Price/FFO metric is also indicating a cheap price by having a multiple of only 7.6x. Based off of asset values alone I like the risk/return here. I also like the dividend yield, which is hovering around 10%. There are not many other investment opportunities offering comparable return metrics.
The main concern revolves around SBRA’s skilled nursing facilities. However, I think the fears around reimbursement trends and healthcare providers trying to limit the use of these types of facilities is overstated. Demographic trends overwhelmingly support continued demand well into the next couple of decades.
The Year Ahead
Everyone has their New Year’s resolutions so I guess I had to make some myself. I’m not going to lie, I was getting pretty lazy and feeling very unmotivated towards the end of 2017. I was sidetracked with a job search and I was focused on starting up this blog. Now that I have a new job doing credit analysis for business loans, I need to get off my ass and get back at it! Working in corporate finance and doing M&A work just drained every ounce of energy I had. It’s like Kylo Ren (finally saw it a week ago!) working on the death star. The dark side just pulls you in and there’s no escape.
My goals for 2018 are pretty simple: Get better at surfing, read more and continually improve my investing IQ. I love setting those bars low. My immediate goal that I want to get started on is to read a book called The Outsiders. As you may already know, I’m a big cheerleader when it comes to preaching capital allocation. I found out this book was highly recommended by Warren Buffet (my hero). The book covers how top CEO’s think about allocating capital across their businesses and with the Oracle of Omaha recommending it, I naturally have to read it. Other than that what I look forward to in the New Year is to just stay above ground and enjoy life. If I can do that while also building a nice net worth to break free from the corporate chains then that’ll be cool too. By the way, I actually reached my 2017 goal of hitting a net worth of 160K!
For all of you that have been following Ninja Capitalist – Thank you!