Sabra Health Care REIT, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Sabra is a healthcare real estate REIT, with properties leased to third-party operators and a portfolio of senior housing communities it manages. Unless otherwise noted, amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $153.9 million | $219.4 million | $303.3 million | $356.1 million |
| Net income attributable to common stockholders | $29.6 million | $83.7 million | $64.8 million | $6.0 million |
| Diluted EPS | $0.14 | $0.46 | $0.31 | $0.03 |
| FFO per diluted share | $0.43 | $0.76 | $0.85 | $1.20 |
| AFFO per diluted share | $0.42 | $0.72 | $0.87 | $1.19 |
- Q2 rental and related revenue was $112.7 million, essentially unchanged year over year; resident fees and services rose to $38.6 million from $36.1 million. Q2 interest and other income fell to $2.6 million from $70.5 million.
- Q2 interest expense decreased to $25.3 million from $33.6 million. Senior housing managed portfolio operating expenses increased to $28.0 million from $24.2 million, with management citing COVID-related supply and labor costs as one contributor.
- Six-month operating cash flow was $168.6 million, versus $191.9 million in 2019. Investing activities used $99.0 million and financing activities used $81.6 million. Cash, cash equivalents and restricted cash totaled $36.8 million at period end.
- At June 30, total debt was approximately $2.468 billion principal ($2.455 billion net carrying amount). Unrestricted cash was $28.3 million, with $927.0 million available on the revolving facility; management reported total liquidity of approximately $955.3 million. Sabra was in compliance with applicable debt covenants.
- Total assets were $6.024 billion and total equity was $3.361 billion. The filing does not provide a single operating-margin measure in the presented financial statements.
Material changes and notable items
- The year-over-year Q2 revenue and earnings comparisons are materially affected by a $66.9 million item recognized in Q2 2019 when 21 Holiday communities transitioned to managed operations: a $57.2 million lease termination payment and a $9.7 million gain related to assumed fixed assets net of liabilities. This also explains much of the six-month interest and other income comparison.
- Six-month GAAP net income rose from $6.0 million to $64.8 million, in part because the 2019 period included $105.1 million of real estate impairment charges. No real estate impairment was recorded in the first half of 2020.
- The 49%-owned Enlivant joint venture generated a $12.1 million Q2 loss and a $15.8 million six-month loss. The six-month result included a $10.8 million loss on sales of 11 communities; COVID-related operating costs and occupancy declines also weighed on performance.
- Sabra acquired four senior housing communities for $113.7 million in the first half and sold six skilled nursing/transitional care facilities for $24.3 million net of closing costs, recording a $0.1 million gain.
- The quarterly dividend was reduced from $0.45 to $0.30 per share in May. The board declared another $0.30-per-share dividend on August 5, payable August 31, 2020. Management said the board would reassess the dividend after the pandemic has passed.
Outlook, risks and contingencies
- Management said tenants and borrowers continued to pay expected cash rent and debt service through June 30, 2020. However, reduced occupancy and higher operating costs could weaken operator finances, lead to rent or debt-service defaults, require lease restructurings, and cause impairment or credit losses. Management noted skilled nursing operators had received some government support, while few such programs were available to senior housing operators.
- Management believed available cash, operating cash flows and revolver capacity were sufficient for operations, scheduled debt service and dividends for the next 12 months. Given disrupted capital markets and a higher cost of capital, Sabra did not expect material property investment while those conditions persisted.
- Anticipated capital expenditures for the next 12 months were not expected to exceed $74 million, including $44 million expected to generate incremental rental income. No formal earnings guidance is stated in the provided filing text.
- Key exposures include dependence on operator performance, COVID-19 effects, healthcare reimbursement and regulation, leverage and refinancing, interest-rate and LIBOR transition risks, real estate valuation, and potential impairment of the managed portfolio and joint-venture investment. The filing reports no material legal proceedings or known environmental liability expected to materially affect results.
- At June 30, $11.8 million of accumulated cash-flow-hedge losses was expected to be reclassified into earnings over the next 12 months. A breach of specified derivative-related default provisions could have required settlement at a termination value of $36.7 million; no collateral had been posted at period end.
Important facts for investors to verify
- Separate recurring rental and operating performance from the unusual 2019 Holiday transition income and the 2019 impairment charges when assessing year-over-year trends.
- Track tenant rent coverage, occupancy, rent collections, and COVID-related costs, particularly in managed senior housing and the Enlivant joint venture.
- Monitor the joint venture’s operating performance, dispositions, debt and any further impairment indicators.
- Review the reduced dividend against AFFO, cash flows, capital expenditures and future liquidity needs; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow.
- Assess debt maturities, variable-rate exposure, hedge positions and covenant headroom. The filing’s contractual-obligations schedule includes principal and interest and should not be confused with principal debt balances.