Sabra Health Care REIT, Inc. annual report, FY2014

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Sabra Health Care REIT, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.

Business context

Sabra is a healthcare-focused REIT that primarily owns properties leased to third-party operators under triple-net leases. At year-end, its portfolio included 160 properties with 16,718 beds or units across 34 states, plus 14 loan investments and six preferred equity investments. Leases had a weighted-average remaining term of 11 years.

Financial and operating performance

  • Annual revenue: $183.5 million, up 36% from $134.8 million in 2013. Rental income was $161.5 million; interest and other income was $22.0 million.
  • Annual earnings: Net income attributable to common stockholders was $36.7 million, or $0.78 per diluted share, compared with $25.7 million, or $0.68, in 2013. Net income before preferred dividends was $46.9 million.
  • REIT operating measures: FFO was $76.1 million, or $1.62 per diluted share; AFFO was $77.2 million, or $1.64 per diluted share. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
  • Fourth quarter: Revenue was $55.7 million; net income attributable to common stockholders was $19.7 million, or $0.36 per diluted share. FFO was $30.2 million, or $0.54 per diluted share, and AFFO was $28.8 million, or $0.51 per diluted share. Fourth-quarter 2013 revenue was $37.6 million and common-stockholder net income was $10.4 million.
  • Cash flow: Operating cash flow was $85.3 million for 2014, versus $62.1 million in 2013. Investing activities used $826.5 million and financing activities provided $798.6 million.
  • Liquidity and balance sheet: Year-end liquidity was approximately $443.7 million, comprising $61.7 million of unrestricted cash and $382.0 million available under the revolving facility. Total assets were $2.065 billion and total equity was $941.8 million.
  • Debt: Year-end debt book values included $699.3 million of senior notes, a $200.0 million term loan, $68.0 million outstanding on the revolving facility and $124.0 million of mortgage debt. The company reported $268.0 million of variable-rate debt and had a five-year interest-rate cap on $200.0 million, with LIBOR capped at 2.0%.
  • Occupancy: Skilled nursing/transitional care occupancy was 88.1%, compared with 88.2% in 2013; senior housing occupancy was 90.3%, compared with 87.9%.
  • Dividends: Common dividends declared and paid were $1.51 per share for 2014, versus $1.36 in 2013. The board subsequently declared a $0.39-per-share common dividend and a $0.4453125-per-share Series A preferred dividend, payable in February 2015.

Material changes versus 2013

  • Sabra invested $868.6 million during 2014, including the $550.0 million acquisition of 21 independent living facilities in the Holiday Portfolio. It acquired 42 properties in total and expanded its loan and preferred-equity investments.
  • Management said these investments reduced Genesis’ share of annualized revenue from 51.0% to 36.2% and skilled nursing/transitional care’s share from 69.5% to 53.5%. Revenue from non-governmental sources rose from 40.8% to 53.9%.
  • Sabra sold three skilled nursing facilities for $27.3 million and recorded a $3.9 million gain.
  • The company issued $500 million of 5.5% notes due 2021 and completed common-stock offerings and ATM sales. It redeemed the remaining 8.125% notes due 2018, recording a $22.5 million debt-extinguishment loss. The new notes and equity issuance funded growth and refinancing, while increasing the share count.
  • General and administrative expense rose 79% to $29.3 million, including higher stock compensation, acquisition costs, property-transition expenses and a $3.0 million straight-line rent write-off. Interest expense increased 16% to $47.0 million.

Outlook, risks and unusual items

  • Management expected cash, operating cash flow and available revolver capacity to be sufficient for operations, scheduled debt service and dividend requirements for the next 12 months. It anticipated capital expenditures of no more than $6.0 million over that period and intended to continue pursuing acquisitions and development opportunities. No formal earnings or FFO guidance is provided in the supplied filing text.
  • Tenant concentration remains material: Genesis generated 36.2% of annualized revenue and Holiday Tenant 17.8%. Sabra relies on tenants’ ability to operate successfully and pay rent; their results are exposed to occupancy, labor costs, Medicare and Medicaid reimbursement, regulation and litigation.
  • Other principal risks include substantial indebtedness, variable interest rates, debt covenants and refinancing needs, competition for investments, real-estate illiquidity, difficulty replacing tenants, environmental liabilities and maintaining REIT qualification.
  • Unusual 2014 items included the $22.5 million debt-extinguishment loss, the $3.9 million real-estate sale gain, a $3.0 million rent write-off and $1.7 million of nonrecurring expenses related to operator transitions. No real-estate impairment was recorded in 2014; all loans were reported performing and unimpaired.
  • The filing reports no material pending legal proceeding or material loss contingency known to management. It also identifies $90.8 million of committed funding for certain loan and preferred-equity investments, of which $69.8 million had been funded by year-end.

Important facts for investors to verify

  • Review Genesis’ and Holiday Tenant’s financial performance, lease coverage, guarantees and ability to meet rent obligations.
  • Reconcile the acquisition-driven revenue and FFO growth with the impact of new debt, equity issuance, dilution and the $22.5 million refinancing charge.
  • Check debt maturities, covenant headroom, revolver availability and exposure to higher interest rates; the revolving facility and term loan mature in 2018, subject to an extension option.
  • Assess dividend coverage using operating cash flow and AFFO, while accounting for capital needs, debt restrictions and the REIT distribution requirement.
  • Consider that tenant and property operating data were supplied by tenants or operators, were not independently verified, and were generally presented one quarter in arrears.