Sabra Health Care REIT, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Sabra is a healthcare real estate REIT with properties leased to third-party operators, managed senior housing communities, loan and preferred-equity investments, and a 49% interest in the Enlivant Joint Venture. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $143.3 million | $149.8 million | $446.5 million | $506.0 million |
| Net income attributable to common stockholders | $36.5 million | $23.3 million | $101.3 million | $29.3 million |
| Diluted GAAP EPS | $0.18 | $0.12 | $0.49 | $0.16 |
| FFO per diluted share | $0.41 | $0.45 | $1.25 | $1.64 |
| AFFO per diluted share | $0.46 | $0.46 | $1.32 | $1.63 |
Q3 rental and related revenue was $100.6 million, down 9% year over year; resident fees and services were $39.3 million, up 8%. Nine-month interest and other income was $8.8 million versus $77.1 million in 2019, largely because the prior-year period included $66.9 million related to transitioning 21 Holiday communities to managed operations, including a lease termination payment and a gain on assumed assets.
For the nine months, net cash from operating activities was $265.5 million (versus $277.0 million); cash used in investing was $130.5 million, and cash used in financing was $142.0 million. Ending cash, cash equivalents and restricted cash totaled $41.8 million. Sabra paid $215.7 million in common dividends during the period.
At September 30, total assets were $6.0 billion and equity was $3.36 billion. Debt principal was $2.435 billion, with a net carrying amount of $2.423 billion; this included $1.25 billion in senior notes, $1.049 billion in term loans, $80.1 million secured debt and $56.0 million drawn on the revolver. The company reported $944.0 million available under its $1.0 billion revolving facility and approximately $979.0 million of total liquidity, including cash. It was in compliance with applicable debt covenants.
Reported interest expense was $24.9 million for Q3 and $75.9 million for nine months, down from $29.3 million and $99.2 million, respectively, in 2019. The filing does not provide a headline operating margin. Management reported $1.1 billion of variable-rate debt; after hedging, a 100-basis-point rate increase was estimated to reduce net income by $5.4 million over the following 12 months.
Material changes versus prior periods
- GAAP net income rose year over year, while nine-month FFO and AFFO per share declined. Comparisons reflect nonrecurring items, portfolio changes and COVID-19 effects.
- Genesis Healthcare and Signature Healthcare leases were placed on non-accrual after their auditors expressed substantial doubt about going concern. Sabra wrote off $14.3 million of non-cash rent receivables and lease intangibles; rental revenue also reflects the loss of further non-cash accruals.
- Q3 managed-portfolio operating expenses increased 16%, primarily due to acquired/transitioned communities and pandemic-related supplies and labor. Nine-month joint-venture results included lower occupancy and increased operating and insurance costs.
- Real estate impairment was $3.2 million for the first nine months, versus $119.1 million in 2019. The prior-year charge included significant impairments associated with Senior Care Centers and other properties.
- Sabra reduced its quarterly dividend from $0.45 to $0.30 per share in May 2020. The board declared another $0.30 dividend on November 5, payable November 30.
- Sabra acquired four senior housing communities for $113.7 million during the first nine months and sold seven skilled nursing/transitional care facilities, recognizing a $2.8 million net gain.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and revolver capacity should fund operations, scheduled debt service and dividends for the next 12 months. It expects to limit material property investment while disrupted capital markets raise financing costs and complicate valuation; investment activity may resume if conditions improve.
- Management said the board would re-evaluate the dividend after the COVID-19 pandemic has passed. No earnings or FFO guidance was provided in the supplied filing text.
- COVID-19 reduced occupancy and increased costs for tenants, borrowers, managed communities and the Enlivant joint venture. As of September 30, tenants and borrowers continued to make expected cash rent and debt-service payments, but prolonged disruption could lead to defaults, rent restructurings and impairments. CARES Act grants recognized were $4.2 million in Q3 and in the nine-month period, including amounts recorded through the managed portfolio and joint venture.
- During Q3, Sabra recorded a $3.6 million increase to joint-venture income and net income as an out-of-period correction of historical basis-difference depreciation and asset-sale accounting errors. Management concluded the errors were not material to the affected prior periods.
- Expected capital expenditures for the next 12 months were not to exceed $64 million, of which $31 million was expected to generate incremental rental income. Major risks include operator financial health, healthcare reimbursement and regulation, interest rates and refinancing, and ongoing pandemic effects.
Important facts for investors to verify
- Tenant-level rent coverage, collections and recovery prospects for Genesis and Signature, and whether additional leases move to non-accrual.
- Occupancy, operating costs and government support trends across managed senior housing and the Enlivant Joint Venture.
- Whether cash flow and available credit continue to cover debt service, capital spending and the $0.30 quarterly dividend.
- Debt maturities, covenant headroom, variable-rate exposure and hedge performance, including the transition away from LIBOR.
- Underlying drivers of FFO and AFFO, including recurring versus nonrecurring items and the impact of the Q3 joint-venture adjustment.