Sabra Health Care REIT, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing includes fourth-quarter results; year-over-year comparisons are affected by the 2017 CCP merger and significant portfolio activity.
Business context
Sabra is a healthcare real estate investment trust (REIT) that owns and finances properties leased to third-party operators, and operates some senior housing communities through managers. At year-end it held 470 properties, with 47,648 beds or units, plus loans, preferred equity investments and a 49% interest in the Enlivant joint venture. Skilled nursing and transitional care represented 71.3% of consolidated properties and 61.8% of FY 2018 revenue.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $623.4 million | $405.6 million |
| Net income attributable to common stockholders | $269.3 million | $148.1 million |
| Diluted EPS | $1.51 | $1.40 |
| Operating cash flow | $358.5 million | $135.8 million |
| FFO per diluted share (non-GAAP) | $1.99 | $2.00 |
| AFFO per diluted share (non-GAAP) | $2.11 | $2.28 |
| Common dividends declared per share | $1.80 | $1.73 |
Revenue growth mainly reflects the CCP merger and subsequent acquisitions; it is not a like-for-like growth comparison. FY 2018 included $128.2 million of net gains on real estate sales, compared with $52.0 million in 2017. FFO and AFFO are supplemental non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Fourth quarter: Revenue was $139.2 million, versus $166.5 million in Q4 2017. Net loss attributable to common stockholders was $19.4 million, versus income of $101.4 million; diluted loss per share was $0.11, versus earnings of $0.57. Q4 FFO and AFFO per diluted share were $0.27 and $0.43, respectively. The filing reports a $29.5 million Q4 provision for doubtful straight-line rent, loan losses and other reserves; quarterly earnings also reflected real estate sale gains and other items.
Year-end balance sheet and liquidity: Total assets were $6.67 billion, cash and cash equivalents were $50.2 million, and total debt was approximately $3.23 billion. Sabra reported approximately $426 million of liquidity: $50 million of unrestricted cash (excluding joint-venture cash) plus $376 million available on its revolving facility. Total liabilities were $3.41 billion and stockholders’ equity was $3.25 billion.
Debt comprised $1.30 billion of senior notes, $1.19 billion of term loans, $624 million drawn on the revolving facility and $117.5 million of secured debt. The company reported $1.8 billion of variable-rate debt, including its share of joint-venture debt; interest-rate swaps and caps mitigate some exposure. A 100-basis-point rate increase was estimated to reduce income by $10.3 million over the following 12 months, after hedging.
Material changes versus prior period
- Revenue increased 54% and common-stockholder net income increased 82%, principally reflecting the CCP merger and other portfolio changes; interest expense also rose to $147.1 million from $88.4 million.
- Operating cash flow increased to $358.5 million. Investing used $258.5 million and financing used $627.3 million, including $325.2 million of dividends and $143.8 million to redeem all Series A preferred stock.
- Sabra acquired 21 properties for aggregate consideration of $265.3 million and invested $352.7 million, before closing costs, for its 49% Enlivant joint-venture interest. It sold 58 facilities for net proceeds of $382.6 million, recording a $128.2 million net gain.
- Occupancy declined at skilled nursing/transitional care facilities (82.8% versus 84.0%) and Senior Housing–Leased communities (86.7% versus 87.8%). Specialty Hospitals and Other occupancy rose to 89.6% from 79.2%; Senior Housing–Managed occupancy rose to 91.5% from 90.6%.
Outlook, commentary and risks
- Management said cash, operating cash flow and available revolver borrowings were expected to fund operations, scheduled debt service and dividends for the next 12 months. It anticipated capital expenditures of no more than $66 million over that period. No formal earnings or FFO guidance is provided in the supplied filing text.
- Senior Care Centers stopped paying rent; Sabra terminated the master leases after default notices, and the operator filed for Chapter 11. A sale of 28 facilities for $282.5 million and transition of 10 retained facilities were expected in April 2019, subject to bankruptcy-court and other approvals. Sabra expected a first-quarter 2019 impairment of $60.1 million to $76.0 million and reported a $16.5 million rent shortfall through year-end. A settlement, including $5.7 million for post-petition rent, was subject to court approval.
- Sabra reserved $28.9 million of straight-line rent receivable related to Holiday. A proposed lease termination and shift to management agreements for 21 communities was based on a non-binding letter of intent, with stated consideration of $57.2 million; completion and terms were not assured.
- Key risks include tenant/operator financial distress and bankruptcy, reliance on Medicare and Medicaid reimbursement, healthcare regulation, occupancy and labor costs, the concentration in healthcare real estate, substantial debt and interest-rate exposure, refinancing and covenant risk, joint-venture risks, and delays in regulatory approvals for operator transfers. Sabra stated it was in compliance with debt covenants at year-end.
- The board declared a $0.45-per-share common dividend payable in February 2019. The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Completion, cash proceeds and final impairment from the Senior Care Centers sale, retained-property re-leasing and bankruptcy settlement.
- Whether the proposed Holiday lease conversion was completed, and the cash received and resulting operating exposure.
- Tenant rent coverage, collections and occupancy trends, particularly in skilled nursing and Senior Housing–Leased properties.
- Debt maturities and refinancing plans, revolving-facility availability, covenant headroom and sensitivity to interest rates.
- How recurring operating performance compares with reported GAAP earnings, given real estate sale gains, rent reserves and non-GAAP FFO/AFFO adjustments.