Sabra Health Care REIT, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context
Sabra owns and finances healthcare real estate, primarily leased to operators under triple-net leases. At quarter-end its portfolio included 120 properties across 27 states (96 skilled nursing/post-acute, 23 senior housing and one acute-care hospital), plus four loan investments and two preferred-equity investments. Lease terms had a weighted-average remaining term of 11 years.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $32.3 | $25.1 | $64.3 | $48.8 |
| Net income (loss) | ($0.7) | $5.9 | $8.9 | $10.3 |
| Net income (loss) attributable to common stockholders | ($3.2) | $5.9 | $6.1 | $10.3 |
| Basic and diluted EPS | ($0.09) | $0.16 | $0.16 | $0.28 |
| FFO per diluted share | $0.13 | $0.36 | $0.60 | $0.68 |
| AFFO per diluted share | $0.15 | $0.42 | $0.58 | $0.79 |
Q2 rental income grew 27% to $31.5 million; six-month rental income rose 30% to $63.0 million. Management attributed much of the increase to acquisitions and, additionally, straight-line rent recognition following fixed 2.5% escalators on Genesis leases. Interest expense rose to $10.1 million in Q2 and $20.1 million for six months. The filing does not provide a clearly defined operating-margin measure.
Q2 results included a $9.8 million debt-extinguishment loss and $1.4 million fair-value expense for contingent consideration. These unusual charges contributed to the quarterly common-stockholder loss. Six-month net income declined despite higher revenue; the company also recorded $2.8 million of preferred dividends.
Six-month operating cash flow was $23.0 million, versus $24.1 million a year earlier. Investing cash use was $34.6 million, while financing provided $87.3 million. Cash and cash equivalents were $92.8 million at June 30, versus $17.1 million at year-end 2012. Total assets were $1.02 billion and stockholders’ equity was $425.6 million.
At June 30, debt carrying amounts comprised $414.7 million of senior unsecured notes and $143.1 million of mortgage debt; there were no revolver borrowings. The company reported $194.0 million of availability under its then-existing $230.0 million revolver, giving stated quarter-end liquidity of approximately $286.8 million. On July 29, it entered a new $375 million revolver, with $286.5 million available as of that date. The filing reports compliance with applicable debt covenants.
Material changes versus prior comparable period
- Q2 revenue increased 28% and six-month revenue increased 32%, mainly reflecting portfolio growth and rent adjustments.
- Interest expense increased 28% in Q2 and 29% for the first half, reflecting financing activity; the six-month comparison also included prior revolver borrowings.
- Sabra issued $200 million of 5.375% notes due 2023, then redeemed $113.8 million of 8.125% notes due 2018 at a premium. The redemption generated $9.8 million in reported losses and write-offs.
- In March, Sabra issued 5.75 million Series A preferred shares at $25 each, raising approximately $138.3 million net and carrying a 7.125% stated dividend rate.
- FFO and AFFO per diluted share fell year over year in both periods, notwithstanding revenue growth.
Outlook, commentary, and risks
- Management said cash, operating cash flows and revolver availability were expected to cover operations, scheduled debt service and dividends for the next 12 months. It planned continued investment in healthcare properties, with emphasis on senior housing and memory care; no formal earnings guidance was provided.
- A July 29 non-binding Meridian term sheet contemplated up to ten developments with estimated aggregate cost of $100 million through 2015. Final terms remained to be negotiated. A separate Meridian preferred-equity investment provides a 15% preferred return.
- Genesis subsidiaries leased 81 of 120 properties and generated 63% of Sabra’s revenue in the first half of 2013, down from 72% in the comparable 2012 period. Genesis is not an SEC registrant; its supplied financial information was unaudited and not independently verified by Sabra. Genesis reported a $78.8 million first-half net loss.
- Tenant performance depends in part on government and other third-party reimbursement. CMS’s final FY2014 skilled-nursing Medicare rates represented a net 1.3% increase over FY2013.
- Key risks include tenant concentration and tenant ability to pay rent, leverage and refinancing access, interest-rate exposure, reimbursement changes, real-estate illiquidity, and maintaining REIT status. A 100-basis-point increase on variable-rate debt was estimated to increase annual interest expense by $0.1 million, assuming debt balances remained unchanged.
- Sabra reported no material change in risk factors, no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls. It said known environmental matters were not expected to have a material adverse effect.
- The board declared a $0.34 quarterly common dividend and a $0.4453125 quarterly preferred dividend, payable August 30, 2013.
Most important facts for investors to verify
- Genesis lease coverage, guaranty strength and rent-paying capacity, including the significance of its reported losses and debt.
- Whether acquisitions, loan originations and proposed development investments can sustain recurring cash flow and support dividends.
- The impact of the debt refinancing on ongoing interest costs, leverage, covenant capacity and future maturities.
- The quality and cash convertibility of reported FFO/AFFO, particularly given straight-line rent adjustments and excluded items.
- Final terms, funding obligations and execution risks for the Meridian pipeline, and the expected payment and rent effects of the Stoney River contingent consideration.