Sabra Health Care REIT, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing was signed February 21, 2018. This is an annual report, not a standalone quarterly filing. Sabra is a healthcare real estate investment trust (REIT), with revenue primarily from leasing healthcare properties and, to a lesser extent, managed senior housing, loans and preferred equity investments.
Business context and portfolio
- Sabra completed its merger with Care Capital Properties (CCP) on August 17, 2017. The merger added 330 properties, loans and other investments; at year-end Sabra reported 507 real estate properties with 53,558 beds or units.
- The portfolio was predominantly skilled nursing/transitional care: 384 properties, or 75.7% of properties. The substantial majority of properties, excluding managed senior housing, were leased on a triple-net basis; leases had a weighted-average remaining term of nine years.
- Genesis Healthcare represented 19.8% of 2017 revenue. Sabra reported that 66.2% of tenants’, borrowers’ and equity investees’ revenue came from government reimbursement programs, based on information supplied to Sabra and not independently verified.
Financial results and key metrics
| Metric | FY 2017 | FY 2016 | Change or context |
|---|---|---|---|
| Total revenue | $405.6 million | $260.5 million | Up 56%; largely reflects the CCP merger and other investment activity. |
| Net income attributable to common stockholders | $148.1 million; $1.40 per diluted share | $60.0 million; $0.92 per diluted share | Growth included a $52.0 million net gain on real estate sales. |
| FFO attributable to common stockholders | $211.3 million; $2.00 per diluted share | $164.4 million; $2.51 per diluted share | Total rose, but per-share FFO fell as the diluted share count increased substantially. |
| AFFO attributable to common stockholders | $242.3 million; $2.28 per diluted share | $161.5 million; $2.45 per diluted share | Total rose; per-share AFFO declined. FFO and AFFO are non-GAAP measures. |
| Cash provided by operations | $133.5 million | $176.7 million | Down 24% despite higher reported net income. |
| Cash used in investing activities | $240.1 million | Cash provided of $142.4 million | Included acquisition spending, partly offset by sale proceeds and loan repayments. |
| Cash provided by financing activities | $598.8 million | Cash used of $300.9 million | Included common-stock proceeds, term-loan proceeds and increased revolving borrowings. |
| Cash and cash equivalents at year-end | $518.6 million | $25.7 million | Year-end liquidity was approximately $877.4 million, including $359.0 million of revolver availability. |
| Total debt at year-end | $3.40 billion | — | Included $1.30 billion senior notes, $1.20 billion term loans, $641.0 million revolver borrowings and $259.2 million secured debt. |
| Common dividends declared and paid | $1.73 per share | $1.67 per share | Board declared a $0.45-per-share quarterly common dividend in February 2018. |
Fourth-quarter snapshot: Revenue was $166.5 million, net income attributable to common stockholders was $101.4 million ($0.57 per share), and diluted FFO and AFFO were each $0.60 per share. Operating cash flow was $83.7 million. The quarter’s common-stockholder income included a $47.4 million net gain on real estate sales; quarterly results also reflect the merger and share issuance, so comparisons with earlier quarters are not like-for-like.
Margins: The filing does not present a comparable operating-margin measure as a headline metric. GAAP common-stockholder income divided by revenue was approximately 36.5% in 2017 and 23.0% in 2016, but these figures are affected by real estate sale gains, depreciation, merger costs and the changing portfolio and should not be read as recurring operating margins.
Material changes versus the prior year
- CCP’s inclusion from August 17, 2017 drove a major increase in assets, revenue, debt and shares outstanding. Sabra issued approximately 94 million shares in the merger and issued a further 18.4 million shares in a public offering, raising $370.9 million before expenses; year-end common shares outstanding were 178.3 million versus 65.3 million a year earlier.
- Rental income rose $138.9 million, principally due to acquired properties. Interest and other income fell $12.4 million, largely because prior-year default-rate interest and late fees on two loans were not repeated.
- Expenses rose, including interest expense ($88.4 million versus $64.9 million), merger and acquisition costs ($30.3 million versus $1.2 million), and provision for doubtful accounts and loan losses ($17.1 million versus $5.5 million). The 2017 real estate impairment was $1.3 million, versus $29.8 million in 2016.
- Occupancy declined for skilled nursing/transitional care to 84.0% from 86.5% and for leased senior housing to 87.8% from 89.5%. Managed senior housing occupancy increased to 90.6% from 75.5%; specialty hospitals and other facilities reached 79.2% from 69.7%. These measures cover stabilized properties and are based on tenant/operator information not independently verified by Sabra.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and revolver availability were expected to fund operations, scheduled debt service and dividends for the next 12 months. This is a liquidity assessment, not formal earnings or FFO guidance. Planned capital expenditures for the next 12 months were not expected to exceed $66 million.
- Sabra expected to sell 46 of its remaining 54 Genesis facilities during 2018 and retain eight, but cautioned that timing and completion were not assured. A restructuring effective January 1, 2018 reduced annual Genesis base rent by $19 million. The company also described a broader CCP portfolio repositioning, including lease modifications and rent reductions of $28.2 million to $31.2 million, working-capital advances, operator transitions and dispositions.
- On January 2, 2018, Sabra completed a 49% investment in a joint venture owning 172 Enlivant-managed senior housing communities and acquired 11 additional managed communities. These and two other facility acquisitions used $515.8 million of cash and $18.0 million of revolver proceeds after year-end. The joint venture gives Sabra an option to acquire the remaining interest, expiring January 2, 2021; the partner has a transfer option beginning January 2, 2020, subject to Sabra’s right of first offer.
- Healthcare reimbursement, especially Medicare and Medicaid, is a material tenant-credit risk. A budget deal signed February 9, 2018, after year-end, included a 10-year $2 billion skilled-nursing Medicare reimbursement cut and a 2.4% freeze to reimbursement increases in 2019; final rates were not yet known when the filing was prepared.
- Other significant risks include Genesis concentration and operator performance, tenant insolvency or lease rejection in bankruptcy, regulatory and licensing hurdles when replacing operators, leverage and refinancing, interest-rate exposure, real estate illiquidity, environmental liabilities, and maintaining REIT qualification. At year-end, $1.9 billion of debt was variable-rate before considering hedges; management estimated a 100-basis-point rate move would change next-twelve-month interest expense by $9.9 million after swaps.
- Notable items include the $52.0 million real estate sale gain, $30.3 million of merger and acquisition costs, and increased receivable reserves. The filing reports no material legal loss contingency known to management and no off-balance-sheet arrangements. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Genesis lease coverage, payment performance, the effect of the $19 million rent reduction, and progress and proceeds from the planned facility sales.
- Whether merger-related growth translates into sustainable per-share FFO/AFFO and operating cash flow, given that annual FFO and AFFO per share declined despite higher totals.
- Debt maturities, covenant headroom, refinancing plans and the effect of rates after hedges; the filing’s maturity schedule shows substantial obligations in 2021 and 2022.
- Actual operating and occupancy trends across acquired properties, and the sensitivity of tenants to Medicare/Medicaid reimbursement changes.
- Post-year-end liquidity after the Enlivant and other acquisitions, and the terms, debt and governance rights associated with the Enlivant joint venture.
- The quality of straight-line rent and other receivables and the adequacy of reserves; tenant and borrower operating information is largely not independently verified by Sabra.