Sabra Health Care REIT, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Dollar amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Sabra is a healthcare real estate investment trust that primarily owns properties leased to third-party operators, and also makes loans and preferred equity investments. At quarter-end, its portfolio included 154 properties, 14 loan investments and four preferred equity investments. Its 154 properties spanned 34 states; 81 properties were leased to Genesis subsidiaries.
Sabra acquired six skilled nursing/transitional care facilities and 27 senior housing facilities during the first nine months. Its September acquisition of the 21-property Holiday independent-living portfolio for $550 million was a major expansion and diversification step, though the portfolio remained concentrated among a small number of tenants.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $44.0 million | $32.9 million | $127.8 million | $97.2 million |
| Net income | $17.2 million | $11.8 million | $24.7 million | $20.7 million |
| Net income attributable to common stockholders | $14.6 million | $9.2 million | $17.0 million | $15.3 million |
| Basic and diluted EPS | $0.31 | $0.25 basic; $0.24 diluted | $0.39 | $0.41 |
| Operating cash flow | Not presented by quarter | $71.2 million | $49.2 million |
- Quarterly revenue increased 34%, with rental income up 20% and interest and other income up 374%, primarily reflecting acquisitions and growth in loan investments. Quarterly common-stockholder income rose 58%.
- Nine-month revenue increased 32%, but common-stockholder income rose 11% and EPS declined from $0.41 to $0.39. The period included a $22.5 million loss on extinguishment of debt, chiefly from retiring the 8.125% notes due 2018. Excluding this item, reported net income and EPS are not directly comparable to the prior period.
- Calculated net margin was approximately 39% for Q3 2014 versus 36% for Q3 2013, and approximately 19% for the first nine months of 2014 versus 21% in 2013. These are net income divided by total revenue; the filing does not present a standardized operating-margin measure.
- Sabra reported NAREIT FFO of $24.4 million ($0.51 per diluted share) and AFFO of $24.6 million ($0.51 per diluted share) for Q3. For the first nine months, FFO was $45.9 million ($1.05 per diluted share) and AFFO was $48.5 million ($1.10 per diluted share). These are non-GAAP measures, not substitutes for cash flow or GAAP earnings.
- At September 30, total assets were $2.02 billion, total liabilities $1.35 billion and equity $663.7 million. Debt was $1.289 billion: $614 million drawn on the revolver, $550 million in senior notes and $124.7 million in mortgages.
- Cash and cash equivalents were $25.5 million, plus $6.5 million of restricted cash. Reported quarter-end liquidity was approximately $61.3 million, including $36 million available on the revolver. After October financing, repayments and subsequent investments, management reported pro forma liquidity of approximately $312.9 million.
- For the first nine months, operating cash flow was $71.2 million; investing used $793.3 million, principally for acquisitions; and financing provided $743.2 million. Cash increased by $21.2 million to $25.5 million.
Material changes, outlook and risks
- The Holiday master lease has a 15-year initial term, two five-year renewal options and first-year base rent of approximately $30.3 million; the filing estimates $39.3 million in annual GAAP lease revenue. Holiday and Genesis represented 18.2% and 37.1%, respectively, of annualized revenue at quarter-end.
- In October, Sabra issued another $150 million of 5.5% notes due 2021 and 6.9 million common shares for net proceeds of approximately $145.8 million and $160.6 million, respectively. Proceeds were used to repay revolver borrowings. The company also converted $200 million of revolver debt to a term loan and entered into a five-year interest-rate cap at 2% LIBOR.
- The September 30 revolver borrowing rate was 2.46%; the facility matures in September 2018 and has a one-year extension option. A 100-basis-point increase in rates was estimated to raise annual interest expense by $6.1 million at September 30, or $3.4 million on the stated pro forma basis after subsequent financing actions.
- Management said available cash, operating cash flows and revolver capacity were expected to fund operations, scheduled debt service and dividends for the next 12 months. It planned to pursue additional healthcare investments as opportunities and financing allow. Expected capital expenditures for the next 12 months were not to exceed $3.5 million. The board declared a common dividend of $0.39 per share and a preferred dividend of $0.4453125 per share, payable November 26, 2014.
- CMS finalized a 2.0% net increase in fiscal 2015 Medicare skilled-nursing-facility rates. Tenant reimbursement dependence remains a risk. Sabra also cited exposure to interest rates, debt and covenant restrictions, tenant operating performance, and its ability to diversify.
- The filing specifically warns that Holiday may not meet lease obligations: the portfolio had previously been owner-operated and therefore lacked a comparable lease expense. Sabra held approximately $15.1 million of tenant security and had a parent guaranty, but noted no assurance the guarantor could cover a shortfall. Management reported the guarantor’s net worth at approximately $429.4 million at September 30.
- Sabra reported compliance with applicable debt covenants, effective disclosure controls, no material legal proceedings or off-balance-sheet arrangements, and no material expected environmental liability. Management cautioned that actual results may differ from forward-looking statements.
Important facts for investors to verify
- Holiday and Genesis tenant credit, lease coverage, guaranty capacity and the extent to which Sabra’s revenue concentration changes as the portfolio grows.
- Post-quarter debt balances, revolver availability and liquidity after October share and note offerings, repayments, term-loan conversion and subsequent investments.
- Whether acquisition-driven rental and investment income translates into sustainable AFFO and dividend coverage, considering elevated acquisition, corporate and interest costs.
- Debt maturity and refinancing exposure, variable-rate sensitivity, interest-rate-cap terms, and covenant headroom.
- Reconciliation and assumptions underlying FFO/AFFO, including the treatment of debt-redemption costs, straight-line rent adjustments and acquisition pursuit costs.