Sabra Health Care REIT, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 13, 2013. The filing is an annual report, not a standalone quarterly filing, but includes fourth-quarter results. Amounts below are U.S. dollars.
Business context
Sabra is a healthcare-property REIT that generally leases properties to operators under triple-net leases. At year-end, its portfolio included 119 properties held for investment (96 skilled nursing/post-acute, 22 senior housing and one acute-care hospital), one property held for sale, and two mortgage loans. The investment properties covered 27 states and 12,382 licensed beds or units; leases had an average remaining term of 11 years.
Genesis HealthCare acquired Sun Healthcare Group on December 1, 2012. Sabra obtained a Genesis parent guaranty for the leases, and amended the leases to provide fixed 2.5% annual rent escalators and cross-default provisions with Genesis’s term loan.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $103.2 million | $84.2 million |
| Net income | $19.5 million | $12.8 million |
| Diluted EPS | $0.52 | $0.43 |
| Cash provided by operating activities | $56.3 million | $44.7 million |
| FFO / diluted share | $52.3 million / $1.40 | $39.4 million / $1.31 |
| AFFO / diluted share | $60.3 million / $1.59 | $47.1 million / $1.55 |
| Dividends declared per common share | $1.32 | $0.96 |
Revenue growth reflected acquisitions and rent escalators; rental income rose 26% to $101.7 million. Net income increased 52%, while diluted EPS rose 21%. FFO and AFFO are non-GAAP supplemental measures and should not be treated as cash flow or a substitute for GAAP earnings.
Fourth quarter: Revenue was $28.3 million, net income $4.0 million, and diluted EPS $0.11. FFO was $14.3 million ($0.38 per diluted share) and AFFO was $15.8 million ($0.42 per diluted share). The quarter included a $2.5 million impairment charge.
Year-end balance sheet and liquidity: Total assets were $916.9 million, cash and cash equivalents $17.1 million, and stockholders’ equity $305.5 million. Debt consisted of $325.0 million principal of 8.125% senior notes due 2018, $92.5 million drawn on the secured revolver, and $152.3 million of mortgage debt—approximately $569.8 million in aggregate principal. The revolver had $109.1 million available, giving reported liquidity of about $126.2 million including cash. Sabra reported compliance with applicable debt covenants.
Operating cash flow increased to $56.3 million. Investing activities used $218.7 million, principally for property acquisitions and loan originations; financing activities provided $137.2 million. The board declared a quarterly dividend of $0.34 per share in January 2013, paid February 28, 2013.
Material changes and unusual items
- The portfolio expanded from 97 investment properties at the end of 2011 to 119 at year-end 2012. Sabra acquired 23 properties for a total purchase price of approximately $206.9 million and originated three loans during 2012.
- Genesis-related leases generated 71% of 2012 revenue, down from 84% in 2011. Genesis subsidiaries leased 85 investment properties and the property held for sale.
- Interest expense increased to $37.0 million, mainly due to the additional senior notes, greater revolver capacity and borrowings, and mortgage refinancing costs. The 2012 mortgage refinancings reduced rates on several HUD loans.
- Sabra recorded $2.5 million of impairment on a property held for sale and $2.2 million of other income from a tenant consent fee related to closing that facility. The property was sold on February 1, 2013 for $2.2 million.
- Fourth-quarter interest expense included a $0.6 million out-of-period adjustment for previously underreported debt-extinguishment fees; management said the error and correction were not material.
- In 2012, Sabra issued an additional $100 million principal amount of 8.125% senior notes at 106% of par and expanded its secured revolving facility to $230 million capacity. Approximately $57.9 million of mortgage debt was variable-rate.
Outlook, commentary and risks
Sabra provided no specific earnings or FFO guidance. Management said cash, operating cash flow and revolver availability were expected to fund operations, scheduled debt service and dividend requirements for the next 12 months. It anticipated capital expenditures not exceeding $3.0 million over that period and planned continued growth, particularly in senior housing and memory care, alongside further tenant and geographic diversification.
Key risks include reliance on Genesis and tenant operating performance, government reimbursement pressure, substantial indebtedness and restrictive covenants, interest-rate and refinancing exposure, and REIT qualification and distribution requirements. Genesis’s unaudited reported 2012 results included a $171.3 million net loss and $407.8 million of long-term debt net of cash; the filing notes that Sabra did not independently verify Genesis’s information. The filing also cited an expected 2% Medicare payment reduction for skilled nursing facilities and long-term acute-care hospitals beginning April 1, 2013, subject to possible policy changes. Other risks include healthcare regulation, property illiquidity, litigation, environmental liabilities and uninsured losses.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2012. Sabra reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Genesis’s ability to meet lease obligations and the strength and enforceability of its parent guaranty, particularly given its reported 2012 net loss and increased debt.
- Tenant concentration and rent coverage, including whether the decline in Genesis’s share of Sabra revenue continues.
- Debt maturities, revolver borrowing-base availability, covenant headroom and exposure to variable interest rates.
- Whether operating cash flow supports dividends and growth spending; FFO and AFFO are non-GAAP measures and exclude items that may affect cash needs.
- Effects of Medicare and Medicaid reimbursement changes, including the expected 2013 Medicare reduction, on tenants’ ability to pay rent.
- Progress and realized returns from acquisitions, loan investments and development or joint-venture strategies.
- REIT qualification, distribution constraints under debt agreements, and potential built-in-gains tax exposure on certain property sales.