Sabra Health Care REIT, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Sabra is a healthcare real estate investment trust operating mainly through leases to third-party operators in the United States and Canada. Its portfolio included 182 investment properties, one property held for sale, 10 loan investments and 12 preferred equity investments.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable / December 31, 2016 |
|---|---|---|
| Total revenue | $62.7 million | $62.6 million, Q1 2016 |
| Net income (loss) | $18.8 million; $16.3 million attributable to common stockholders; $0.25 per diluted share | Net loss of $15.7 million; common-stockholder loss of $18.3 million; $(0.28) per diluted share, Q1 2016 |
| FFO / AFFO attributable to common stockholders | $35.4 million / $36.2 million; $0.54 / $0.55 per diluted share | $33.9 million / $34.8 million; $0.52 / $0.53 per diluted share, Q1 2016 |
| Cash from operating activities | $31.4 million | $24.7 million, Q1 2016 |
| Cash and cash equivalents | $12.8 million | $25.7 million |
| Total assets / equity | $2.24 billion / $1.00 billion | $2.27 billion / $1.02 billion |
| Debt | $1.219 billion principal; $1.202 billion net carrying amount | $1.220 billion principal at December 31, 2016 |
Revenue was nearly flat year over year. Rental income increased 3% to $57.2 million, while interest and other income fell 64% to $1.9 million, mainly because elevated default-rate interest and fees on a construction loan were absent after repayment in 2016. Resident fees and services rose to $3.5 million from $1.9 million as eight Canadian senior housing properties shifted to managed-property operations.
Net income improved substantially from the prior-year loss, which included $29.8 million of real estate impairment and a $4.6 million loss on sale. Q1 2017 included $2.1 million of other income, including $1.3 million of Genesis-related lease termination payments and an $0.8 million reduction in contingent consideration. These items affect comparisons. Interest expense declined 7% to $15.8 million; depreciation and amortization rose 8% to $19.1 million. General and administrative expense increased 46% to $6.9 million, including higher stock compensation, professional fees and merger-related pursuit costs.
Operating cash flow was $31.4 million; investing activities used $1.0 million and financing activities used $43.3 million, including $30.0 million of dividends and $9.0 million of net revolving-credit repayments. Sabra reported approximately $495.8 million of liquidity: $12.8 million of unrestricted cash and $483.0 million available under its revolving facility. Management said available cash, operating cash flow and facility capacity should fund operations, scheduled debt service and dividends for the next 12 months.
Debt comprised $700 million of senior notes, $338.8 million of term loans, $162.8 million of mortgage principal and $17.0 million drawn on the revolving facility. The filing reports $355.8 million of variable-rate debt, with interest-rate swaps hedging specified term-loan exposures. A 100-basis-point increase, after hedges, was estimated to raise interest expense by $0.2 million over the following 12 months. Sabra reported covenant compliance. The disclosed maturity schedule is concentrated in 2021, including $500 million of senior notes and term loans due that year.
Material changes, outlook and risks
- On March 1, eight senior housing properties in Canada moved from lease arrangements to managed-property operations. This increased resident-fee revenue and operating expenses and accelerated lease-intangible amortization.
- Sabra was marketing 35 Genesis skilled nursing facilities for sale under memoranda of understanding and amended arrangements for the remaining 43. One facility was sold on April 1, 2017; marketing of the remaining 34 was expected to continue into the second half of 2017. Completion, timing and terms were not assured.
- After quarter-end, Sabra entered into a merger agreement with Care Capital Properties (CCP), announced May 7, 2017. CCP shares would convert into 1.123 Sabra shares each, subject to approvals and other conditions. Closing was expected in Q3 2017 but was not assured. The filing estimated legacy Sabra holders would own approximately 41% of the combined company and legacy CCP holders approximately 59%.
- The board declared a Q2 common dividend of $0.43 per share and a Series A preferred dividend of $0.4453125 per share, payable May 31, 2017. The Q1 common dividend was $0.42 per share.
- Management anticipated capital expenditures not exceeding $8 million over the next 12 months. No formal earnings guidance is provided in the supplied filing text. CMS proposed a 1.0% aggregate increase in Medicare skilled-nursing-facility payments for federal fiscal 2018; this was a proposal, not a final payment outcome.
- Important exposures include tenant and operator credit, especially Genesis; healthcare reimbursement and regulatory changes; substantial indebtedness and interest-rate/refinancing risk; and the possibility that planned facility sales or the CCP merger may not close. Genesis accounted for 31.9% of Q1 total revenue; Holiday accounted for 15.7% and NMS Healthcare 12.0%.
- Five loan investments with $36.3 million of principal were impaired and on nonaccrual status at quarter-end. The loan-loss reserve was $4.1 million, up from $2.8 million at year-end. Management reported no material legal proceedings or expected material environmental compliance effects.
Key investor verification points
- Track Genesis tenant performance, rent coverage, facility sale progress and any effects on rent collections or lease guarantees.
- Verify merger approvals, financing and refinancing terms, closing timetable, transaction costs, dilution and realization of expected benefits.
- Review the nonaccrual loans, collateral values, reserve adequacy and subsequent credit developments.
- Assess whether operating cash flow and available facility capacity continue to support dividends and debt service, particularly given the 2021 maturities.
- Distinguish recurring operating performance from impairment and sale effects in the prior-year comparison and from Q1 2017 lease-termination and contingent-consideration income. FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.