Sabra Health Care REIT, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
Sabra is a healthcare REIT that owns and finances skilled nursing/post-acute, senior housing and acute care properties, as well as making debt and preferred equity investments. At June 30, 2014, its portfolio included 130 properties, 12 loan investments and five preferred equity investments. The company acquired six skilled nursing facilities and three senior housing facilities during the first half of 2014.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $43.0 | $32.3 | $83.8 | $64.3 |
| Net income (loss) | $14.8 | $(0.7) | $7.5 | $8.9 |
| Net income (loss) attributable to common stockholders | $12.2 | $(3.2) | $2.4 | $6.1 |
| Basic and diluted EPS | $0.28 | $(0.09) | $0.06 | $0.16 |
| FFO per diluted share | $0.50 | $0.13 | $0.51 | $0.60 |
| AFFO per diluted share | $0.53 | $0.15 | $0.57 | $0.58 |
Rental income rose 19% in Q2 and 17% in the first half, primarily from acquisitions. Interest and other income increased substantially as loan and preferred equity investments expanded. First-half common-stockholder income declined year over year despite revenue growth, reflecting a $22.3 million debt-extinguishment loss, higher general and administrative expense and higher interest expense. Q2 earnings also benefited from the comparison with the prior-year quarter’s $9.8 million debt-extinguishment loss.
- Cash flow: First-half operating cash flow was $28.9 million, versus $23.0 million. Investing cash outflow was $164.0 million, versus $34.6 million, mainly reflecting acquisitions and investment originations. Financing cash inflow was $145.9 million, versus $87.3 million. Cash and cash equivalents ended the period at $15.1 million.
- Liquidity: Management reported approximately $304.5 million of liquidity, comprising $15.0 million of unrestricted cash and $289.5 million available under the revolving credit facility. Restricted cash was an additional $6.1 million.
- Debt: Debt outstanding was $675.4 million: $550.0 million of senior unsecured notes and $125.4 million of mortgage debt. No debt outstanding at quarter-end bore a variable rate. The company reported compliance with applicable debt covenants and no significant scheduled debt maturities until 2021, excluding mortgage amortization.
- Balance sheet: Total assets were $1.377 billion, total liabilities $720.7 million and total equity $655.8 million. Net real estate investments were $1.036 billion; loans and other investments were $225.8 million.
- Dividends and equity: The company paid $37.1 million in common and preferred dividends during the first half. A May common-stock offering raised approximately $219.1 million before expenses; shares outstanding increased to 47.3 million from 38.8 million at year-end 2013. The common dividend declared after quarter-end was $0.38 per share.
FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP income or operating cash flow. AFFO excludes certain non-cash items and acquisition costs; the filing cautions that these measures may not be comparable with other REITs.
Material changes versus the prior comparable period
- Revenue growth reflected portfolio expansion: rental income rose by $6.0 million in Q2 and $10.6 million in the first half; interest and other income also increased with growth in loan and preferred equity investments.
- General and administrative expense rose 132% in Q2 and 69% in the first half. The increase included a roughly $2.9 million Q2 straight-line rental income write-off associated primarily with a tenant ownership and lease modification, as well as facility costs and stock-based compensation.
- In January 2014, Sabra issued $350 million of 5.5% notes due 2021 and retired its remaining 8.125% notes due 2018. The refinancing generated a $22.3 million first-half extinguishment loss, largely from early-redemption costs.
- The May equity offering funded repayment of $192 million outstanding on the secured revolver; no revolver borrowings remained at June 30.
- Genesis subsidiaries leased 81 of Sabra’s 130 properties. Genesis-related leases generated 48% of Sabra’s first-half revenue, down from 63% in the first half of 2013.
Outlook, risks, contingencies and unusual items
- Management stated that available cash, operating cash flow and revolver availability were expected to be sufficient for operations, debt service and dividend requirements for the next 12 months. The filing provides no specific earnings or FFO guidance.
- Management intends to pursue further healthcare property acquisitions and loan originations, subject to suitable opportunities and financing. It expects capital expenditures for the next 12 months not to exceed $2.0 million.
- After quarter-end, Sabra reported non-binding lender commitments for a proposed $500 million unsecured revolving facility, with a possible additional $250 million accordion and improved pricing. Final terms were still under negotiation; completion was not assured.
- Concentration in Genesis remains a central risk. Genesis information was supplied by Genesis, was unaudited and was not independently verified by Sabra. Sabra also depends on tenants’ operating performance and government and other third-party reimbursement.
- Sabra reported $4.5 million of contingent consideration liabilities and up to $95.9 million of committed funding for debt and preferred equity investments, of which $61.8 million had been funded by June 30. The filing also describes customary environmental, tax-indemnity and legal contingencies; management identified no material legal proceeding or known environmental liability.
- Other risks cited include leverage and debt covenants, interest-rate and refinancing risk, access to capital, tenant credit quality, real estate illiquidity and maintaining REIT status. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Genesis lease coverage, financial condition and ability to meet lease obligations, including the source and limitations of Genesis-reported data.
- Whether the proposed unsecured revolving credit facility closed on the anticipated terms and how its capacity and pricing compare with the existing secured facility.
- Recurring earnings and dividend coverage after separating acquisition-driven growth from debt-redemption costs, the rental-income write-off and other unusual items; compare AFFO with operating cash flow.
- Execution and returns from recent acquisitions and investments, and the timing and amount of unfunded investment commitments and contingent earn-outs.
- Effects of common-share issuance, preferred dividends, debt levels and covenants on per-share performance and future financial flexibility.