Sabra Health Care REIT, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2011. Sabra is a healthcare real estate investment trust that owns properties leased to third-party operators, generally under long-term triple-net leases. At quarter-end, its portfolio comprised 94 properties across 22 states, with 10,578 beds or units, plus a mortgage note. Eighty-six properties were leased to subsidiaries of Sun Healthcare Group (New Sun).
Sabra began operations on November 15, 2010. Accordingly, 2011 results are compared with unaudited pro forma 2010 results, not a full-period operating history; comparisons have limitations.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total revenue | $21.5 million | $57.9 million |
| Net income | $2.3 million | $5.7 million |
| Diluted net income per share | $0.07 | $0.20 |
| FFO per diluted share | $0.28 | $0.89 |
| AFFO per diluted share | $0.38 | $1.13 |
| Net cash from operating activities | Not separately reported for quarter | $34.5 million |
Quarterly and nine-month net income margins were approximately 10.9% and 9.8%, respectively. The company paid $19.9 million of dividends during the nine-month period; dividends declared were $0.32 per share for each of the second and third quarters. A further $0.32 quarterly dividend was declared after quarter-end.
At September 30, total assets were $758.0 million, cash and cash equivalents $56.4 million, and restricted cash $6.3 million. Debt comprised $225.0 million of 8.125% senior notes due 2018 and $158.7 million of mortgage principal; no borrowings were outstanding on the $100 million secured revolver, which was fully available. The company reported compliance with applicable debt covenants.
Material changes versus the comparable period
- Against unaudited pro forma 2010, quarterly rental income increased 21% to $21.3 million and nine-month rental income rose 9% to $57.5 million, primarily reflecting 2011 acquisitions. Net income was $2.3 million versus pro forma $1.4 million for the quarter, and $5.7 million versus pro forma $4.7 million for nine months.
- General and administrative expense rose 87% for the quarter and 48% for nine months versus pro forma 2010, reflecting acquisition pursuit costs, stock compensation and related adjustments. Acquisition pursuit costs were $2.6 million in Q3 and $3.0 million year to date.
- In August, Sabra issued 11.7 million shares at $14.75, generating approximately $163.9 million in net proceeds before expenses. Shares outstanding increased from 25.1 million at year-end 2010 to 36.9 million at September 30, 2011.
- Real estate investments, net, grew to $649.3 million from $482.3 million at year-end 2010. Eight property acquisitions were completed during the nine months; real estate acquisition cash outflows were $187.7 million.
Outlook, risks, contingencies and unusual items
- Management said cash, operating cash flows and available revolver capacity should fund operations, scheduled debt service and dividends for the next 12 months. The company intends to pursue additional healthcare property acquisitions when suitable opportunities and financing are available. No earnings guidance was provided.
- CMS’s FY2012 skilled-nursing payment rule took effect October 1, 2011. Sabra estimated the net reimbursement-rate reduction at 11.1%; modeled property EBITDAR coverage declined from about 1.59x to 1.24x. Including expected New Sun cost mitigation and its lease guarantees, estimated combined tenant coverage was 1.51x–1.54x.
- Tenant concentration is material: New Sun subsidiaries leased 86 of 94 properties and contributed 82% of Q3 revenue and 92% of nine-month revenue. Sabra’s rent collection and financial performance therefore depend significantly on New Sun’s ability to meet lease obligations.
- Subsequent to quarter-end, Sabra acquired two Texas skilled nursing facilities for $14.2 million, funded with cash, under a 15-year triple-net lease. A $500 million shelf registration statement was also filed after quarter-end.
- Interest-rate exposure includes $59.5 million of variable-rate mortgage debt. A 100-basis-point increase was estimated to add approximately $0.1 million to interest expense over the following 12 months. Management disclosed no material legal proceedings, no off-balance-sheet arrangements, and no material environmental liabilities known to it.
Important facts for investors to verify
- New Sun’s current financial condition, lease coverage, guarantees and capacity to satisfy rent obligations, given Sabra’s revenue concentration.
- Actual tenant and property performance after the Medicare reimbursement reduction, compared with Sabra’s modeled coverage estimates.
- Acquisition rent economics, tenant credit quality and final purchase-price allocations; some 2011 acquisition valuations were preliminary.
- Cash available after acquisitions, dividend payments and the deferred $1.8 million Aurora purchase-price payment due by October 1, 2012; assess funding needs and debt maturities.
- Comparability of results and per-share metrics, considering Sabra’s short operating history, pro forma comparisons and substantial share issuance.