Better Senior Housing REIT: Sabra Health Care or Welltower?

Senior housing real estate investment trusts (REITs) took a beating during the pandemic, with lower occupancy rates and rising labor costs cutting into margins. REITS such as Sabra Health Care (NASDAQ: SBRA) and Welltower (NYSE: WELL) are bouncing back now.

Demographic tailwinds, mainly the aging baby boomer population, are driving record demand for senior care beds. By 2050, the global population aged 65 and above is projected to nearly double, from 703 million in 2023 to 1.5 billion.

Because new construction has remained highly limited over the last few years, Sabra and Welltower are benefiting from an environment in which demand heavily outstrips supply, pushing rent coverage levels to new highs.

Let's compare each of these REITs to see which is the better long-term buy.

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Rising occupancy rates, improved pricing power

Sabra's portfolio includes 361 properties across the U.S. and Canada, of which 208 are skilled nursing and transitional care facilities. It also owns senior housing communities, specialty hospitals, and behavioral health facilities. In its latest quarterly earnings, Sabra's same-store managed senior housing operating portfolio experienced a 14.4% year-over-year surge in cash net operating income (NOI).

Its average occupancy ranges from 76% for its specialty hospitals and behavioral health facilities to 84% for its skilled nursing and transitional care facilities, 85% for managed senior housing, and 89% for its leased senior housing.

In the first quarter, the company reported revenue of $221.7 million, up 20.8% year over year, while normalized funds from operations (NFFO) per share were $0.38, up 8.5% over the same period last year.

Welltower owns more than 2,500 senior housing communities in the U.S., the United Kingdom, and Canada. Its portfolio's occupancy rates in the first quarter were robust, led by outpatient medical (96.9%), seniors housing operating (88.8%), seniors housing triple-net (87.4%), and long-term and post-acute care (85.3%). Overall, its occupancy rates grew by an average of 370 basis points.

NOI climbed 16.4% year over year, led by a 22.1% increase in NOI for its senior housing operating portfolio.

Its revenue was $2.78 billion, up 49.1% year over year, and NFFO per share rose 22.5% from the same quarter a year ago to $1.47.

Sabra has a more rewarding dividend with more risk

For income investors, Sabra offers an attractive risk-reward profile backed by a reliable balance sheet. The company has kept its quarterly dividend at $0.30 since 2023, and at Sabra's current share price, the yield is about 6.14%. The NFFO payout ratio is 78.9%, which is high but sustainable as long as it continues to increase funds from operations.

Welltower raised its dividend by 10.45% last year to $0.74, but the yield is a more pedestrian 1.29% at its current share price. There's plenty of room for growth, though, as its NFFO payout ratio is only 50%.

One thing that could trip up Sabra's dividend is its greater debt compared to Welltower. Sabra's debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at the end of the first quarter was 5.04 times, while Welltower's was only 2.7 times. That means it would take Sabra five years, nearly twice as long as Welltower, to pay down its debt at its current rate of core operating earnings.

The choice is pretty clear

Income-oriented investors may choose Sabra for its higher dividend yield, but that's misleading, as total return matters more for many investors. So far this year, Welltower has a total return of more than 24% while Sabra's total return is only slightly above 6%. Taking a longer view, over the past five years, Welltower's total return is more than 200%, while Sabra's is just over 57%.

Welltower is in a stronger position because of its size, its lower debt profile, and its structure. Instead of just acting as a traditional landlord collecting fixed rent, Welltower uses structures in which it hires third-party managers to run the senior living communities. This means Welltower directly captures the operational upside. When occupancy rises and pricing power increases, that profit flows directly to Welltower's bottom line.

Historically, Sabra has leaned much more heavily on traditional triple-net (NNN) leases and skilled nursing. In a triple-net model, the rent is fixed. If a facility performs incredibly well, the operator keeps the extra profit, not Sabra. While Sabra has been actively trying to pivot more toward its own seniors housing operating portfolio (SHOP) assets, it lacks Welltower's massive, mature scale in this category.

Sabra is trading at a much lower valuation based on forward earnings, but that's because Welltower is clearly doing better, and investors have noticed. Welltower has stronger financials, less debt, more diversity, and is in a better position to increase its dividend going forward.

James Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.