Business context and reporting period
Sabra Health Care REIT, Inc. is a healthcare-property REIT that primarily leases properties to third-party operators, with additional managed senior housing, lending, preferred-equity and joint-venture investments. This unaudited 10-Q covers the three months ended March 31, 2018; financial comparisons are substantially affected by the August 2017 Care Capital Properties (CCP) merger, which was not reflected in first-quarter 2017 results.
At quarter-end, Sabra held 515 real estate properties and had a 49% interest in the Enlivant joint venture, which owns 172 senior housing communities. Its property portfolio is concentrated in skilled nursing/transitional care, which generated 64.3% of first-quarter revenue directly or indirectly.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $166.1 million | $62.7 million |
| Net income | $62.5 million | $18.8 million |
| Net income attributable to common stockholders | $59.9 million; $0.34 per diluted share | $16.3 million; $0.25 per diluted share |
| FFO per diluted share | $0.64 | $0.54 |
| AFFO per diluted share | $0.59 | $0.55 |
| Operating cash flow | $101.6 million | $31.6 million |
| Cash, cash equivalents and restricted cash | $58.2 million | $587.4 million at December 31, 2017 |
| Total assets / total equity | $7.0 billion / $3.4 billion | $7.0 billion / $3.4 billion at December 31, 2017 |
| Debt, net of financing costs and premiums | $3.36 billion | $3.39 billion at December 31, 2017 |
| Common dividend declared per share | $0.45 | $0.42 |
Revenue included $144.3 million of rental income, $17.5 million of resident fees and services, and $4.3 million of interest and other income. Depreciation and amortization was $48.0 million and interest expense was $35.8 million. The filing does not provide a directly comparable conventional operating-margin measure.
Net cash used in investing was $516.4 million, principally for the $354.5 million Enlivant joint-venture investment and $172.0 million of property acquisitions. Financing used $114.4 million, including $82.8 million of dividends paid and $30.0 million of net revolving-credit repayments. The reported liquidity measure was approximately $435.1 million: $46.1 million of unrestricted cash (excluding joint-venture cash) plus $389.0 million of available revolver capacity.
Material changes versus the prior comparable period
- Revenue rose about 165% year over year, primarily because the CCP portfolio was included for a full quarter in 2018 but was acquired only in August 2017. Management attributes most of the increases in rental revenue, depreciation and interest expense to the merger and subsequent investments; therefore, reported growth is not a like-for-like comparison.
- First-quarter 2018 acquisitions added 14 properties for $172.0 million. Sabra also invested $352.7 million, before closing costs, for its 49% Enlivant joint-venture interest. The JV had $791.3 million of debt at closing; Sabra’s reported share of JV debt at March 31 was $384.2 million.
- Interest expense increased $20.0 million year over year, primarily reflecting debt assumed or added in connection with the CCP merger. Common shares outstanding were approximately 178.3 million at quarter-end, versus 65.4 million weighted-average shares in Q1 2017, also reflecting the merger and subsequent equity issuance.
- Cash and restricted cash fell by $529.1 million during the quarter, largely reflecting the JV investment, acquisitions and dividends. Net debt was modestly lower than at year-end, while debt balances and portfolio scale remained substantially larger than in Q1 2017.
- Genesis lease restructuring reduced annual base rent by $19.0 million effective January 1, 2018. The filing attributes a $4.8 million year-over-year quarterly rental-income decrease to this reduction.
Outlook, commentary, risks and unusual items
- Management expects to continue investing in healthcare properties and related lending, preferred equity and joint ventures as opportunities and financing permit. It estimates capital expenditures over the next 12 months will not exceed $62.0 million and says available liquidity, operating cash flow and revolver capacity should fund operations, scheduled debt service and dividends for the next 12 months.
- Sabra expected to sell 41 of its remaining 49 Genesis facilities during the remainder of 2018 and retain eight, but cautioned that timing and completion were not assured. Five Genesis facilities were sold after quarter-end. Separately, five facilities classified as held for sale at quarter-end were sold April 2 for $17.0 million gross.
- The board declared a $0.45-per-share common dividend payable May 31, 2018. Sabra announced redemption of all 5.75 million Series A preferred shares on June 1, 2018, at $25 per share plus accrued dividends.
- Notable items included a $2.0 million contingency fee from a legacy CCP investment, a $0.5 million real-estate impairment, a $0.5 million net loss on property sales, and $0.3 million of merger and acquisition costs. These items, together with acquisition effects, affect period comparisons.
- Interest-rate exposure is material: Sabra reported $2.3 billion of variable-rate debt, including its share of joint-venture debt. After hedges, a 100-basis-point rate move was estimated to change income by $13.5 million over the following 12 months. Risks also include tenant/operator financial performance, healthcare reimbursement and regulation, Genesis dispositions, integration and expected benefits of the CCP merger, refinancing and REIT qualification. CMS had proposed a new skilled-nursing payment model for October 2019; the proposal was not final.
- Management reported compliance with debt covenants and effective disclosure controls. It reported no material legal loss contingency or known environmental liability as of the filing, while noting these matters can change.
Most important facts for investors to verify
- Separate underlying operating trends from merger, acquisition, managed-property and share-count effects when assessing revenue, earnings, FFO and AFFO growth.
- Track Genesis lease performance, rent reductions, facility-sale proceeds and the timing and terms of planned dispositions.
- Review tenant/operator coverage and credit quality, particularly given the 64.3% revenue exposure to skilled nursing/transitional care and reimbursement-policy changes.
- Assess debt maturities, variable-rate exposure, hedge effectiveness, covenant headroom and the funding impact of the preferred-stock redemption and ongoing dividends.
- Monitor the Enlivant joint venture’s operating results, debt and interest-rate protection, as well as Sabra’s option to acquire the remaining interest by January 2, 2021.
- Evaluate the sustainability of AFFO and dividends, including non-cash adjustments and unusual income items; the filing provides no formal earnings or FFO guidance.