Sabra Health Care REIT, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Sabra began operating as a separate company on November 15, 2010, so its reported 2010 results cover only a short post-separation period. Where relevant, management compares 2011 with unaudited 2010 pro forma results; these are not directly equivalent to reported 2010 results.
Business context
Sabra is a healthcare real estate investment trust that leases properties to healthcare operators, generally under long-term triple-net leases. At year-end, it owned 97 properties with 10,877 licensed beds or units across 23 states. The portfolio was predominantly skilled nursing facilities. Sun Healthcare Group subsidiaries leased 86 properties and generated 84% of Sabra’s 2011 revenue.
Key financial metrics
| Metric | 2011 | Comparable period / year-end context |
|---|---|---|
| Total revenue | $84.2 million | $70.3 million unaudited pro forma for 2010; up 15% |
| Rental income | $80.7 million | $70.2 million unaudited pro forma for 2010; increase primarily reflected 2011 acquisitions |
| Net income / diluted EPS | $12.8 million / $0.43 | $5.9 million pro forma net income for 2010; reported 2010 net income was $7,000 for the post-separation period |
| FFO / diluted FFO per share | $39.4 million / $1.31 | Non-GAAP measures; filing does not provide a directly comparable pro forma 2010 FFO figure |
| AFFO / diluted AFFO per share | $47.2 million / $1.55 | Non-GAAP measures; filing does not provide a directly comparable pro forma 2010 AFFO figure |
| Cash from operating activities | $44.7 million | $6.6 million for the shorter post-separation 2010 period |
| Cash from investing activities | $(204.6) million | Primarily acquisitions |
| Cash from financing activities | $127.9 million | Included $163.2 million of common stock proceeds and $31.6 million of dividends paid |
| Cash and cash equivalents | $42.3 million | $74.2 million at December 31, 2010 |
| Debt | $383.4 million carrying amount | $225.0 million of 8.125% senior notes and $158.4 million of mortgage notes payable |
| Liquidity | Approximately $142.3 million | $42.3 million cash plus $100 million available revolver capacity at year-end; revolver capacity increased to $200 million in February 2012 |
| Dividends | $0.96 per share declared and paid | Quarterly dividend raised to $0.33 per share in February 2012 |
Operating margin is not presented as a standard measure in the filing. The triple-net lease structure places most property-level operating costs with tenants. Total occupancy was 87.5% in 2011, down from 88.2% in 2010. Real estate investments, net, were $658.4 million; total assets were $749.7 million and stockholders’ equity was $326.6 million at year-end.
Material changes and unusual items
- Sabra completed 11 property business combinations in 2011, investing approximately $206.3 million in acquired real estate. Acquisitions helped lift rental income; acquired properties generated $10.3 million of 2011 revenue.
- An August 2011 equity offering issued 11.7 million shares at $14.75 per share and raised approximately $163.9 million before expenses. Shares outstanding rose to 36.9 million at year-end from 25.1 million a year earlier.
- Sabra purchased the defaulted Hillside Terrace mortgage note for $5.3 million and collected $8.3 million in December, recording $3.0 million of interest income. It also incurred a $1.4 million third-party fee related to the transaction.
- General and administrative expense increased 50% versus 2010 pro forma, to $14.5 million, including $3.2 million in acquisition pursuit costs and $4.6 million in stock-based compensation.
- Net income and FFO are not interchangeable: FFO adds real estate depreciation and amortization to net income; AFFO also adjusts for specified non-cash items and acquisition pursuit costs. Both are non-GAAP measures and do not represent cash available for distribution.
Outlook, risks and contingencies
- Management stated that available cash, operating cash flow and revolver capacity were expected to fund operations, scheduled debt service and dividend requirements for the next 12 months. Sabra planned to pursue acquisitions opportunistically, without a fixed acquisition target or schedule.
- Management anticipated 2012 capital expenditures below $250,000, principally for corporate office needs. The filing provides no Sabra earnings or FFO guidance.
- CMS’s 2012 skilled nursing Medicare payment rule, effective October 1, 2011, reduced rates by a net 11.1%. Sun projected a $40–$45 million 2012 impact after mitigation and estimated consolidated EBITDAR rent coverage of 1.50x–1.54x. This is Sun’s outlook, not Sabra guidance; Sabra cautioned that unsuccessful mitigation could impair tenants’ ability to pay rent.
- Tenant concentration is a central risk: Sun subsidiaries accounted for 84% of 2011 revenue. A deterioration in Sun’s financial condition, reimbursement pressure, or nonpayment could harm Sabra’s revenue, debt service capacity and distributions.
- Debt risks include $225 million of 8.125% senior notes due 2018, mortgage debt, restrictive covenants and refinancing exposure. Approximately $59.2 million of mortgage debt was variable-rate; a 100-basis-point rate increase was estimated to raise annual interest expense by about $0.2 million, assuming debt balances were unchanged.
- Sabra disclosed approximately $145.8 million of built-in-gains tax exposure, assuming a 40% tax rate, on certain pre-REIT assets if disposed of in taxable transactions within the applicable 10-year period.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- Sun’s current rent coverage, liquidity, debt position and ability to absorb the Medicare reimbursement reduction; also track Sabra’s tenant diversification.
- Acquisition-level tenant credit quality and whether acquired properties produce the expected cash rent and returns.
- Debt covenant headroom, mortgage maturities and refinancing plans, including the terms and borrowing-base limits of the amended revolver.
- Cash available for dividends after debt service and capital needs; compare dividend payments with operating cash flow and AFFO while recognizing AFFO’s adjustments.
- Actual outcomes of tenant mitigation plans and any effects on rent collections, occupancy or property values.