Business context and reporting period
Sabra Health Care REIT, Inc. is a healthcare-property REIT that owns and leases properties in the United States and Canada and also makes loans and preferred-equity investments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Unless noted otherwise, amounts below are in millions of dollars.
At June 30, 2016, Sabra held 178 real estate properties, 14 loan investments and 11 preferred-equity investments. Its real estate portfolio included skilled nursing/transitional care, senior housing and one acute-care hospital.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $74.2 | $56.6 | $136.8 | $112.2 |
| Net income attributable to Sabra | $37.5 | $16.8 | $21.8 | $36.3 |
| Net income attributable to common stockholders | $34.9 | $14.3 | $16.6 | $31.2 |
| Diluted earnings per common share | $0.53 | $0.24 | $0.25 | $0.52 |
| FFO per diluted share | $0.78 | $0.45 | $1.30 | $0.98 |
| AFFO per diluted share | $0.75 | $0.51 | $1.28 | $1.02 |
Q2 revenue growth reflected higher rental income and interest and other income. Six-month rental income increased 11% to $110.6 million; interest and other income nearly doubled to $22.3 million, largely because of default-rate interest and fees on two Forest Park loans that were repaid during the period. Q2 general and administrative expense declined to $4.6 million from $9.4 million, mainly due to lower acquisition-pursuit costs. Interest expense rose 19% to $33.3 million for the six months.
Six-month operating cash flow was $94.5 million, compared with $51.3 million. Investing activities provided $256.0 million, principally from $193.9 million of loan repayments and $75.5 million of property-sale proceeds. Financing activities used $254.2 million, including $59.3 million of dividends and net repayment of $255.0 million on the revolving facility. Cash and cash equivalents ended at $103.9 million.
At June 30, total assets were $2.25 billion and total liabilities were $1.24 billion. Debt had a $1.218 billion principal balance ($1.200 billion net carrying value), comprising $700 million of senior notes, $341.5 million of term loans and $177.0 million of mortgage debt. No revolving-facility borrowings were outstanding; $500 million was available. Sabra reported $603.8 million of liquidity, including unrestricted cash and available revolver capacity, and stated it expected available cash, operating cash flow and revolver access to cover operating needs, scheduled debt service and dividends for the next 12 months. It was in compliance with applicable debt covenants.
The common dividend was $0.42 per share for the quarter, following $0.41 in February. After quarter-end, the board declared another $0.42 common dividend and a $0.4453125 Series A preferred dividend, payable August 31, 2016.
Material changes and unusual items
- Common-stockholder net income rose sharply in Q2 year over year, but the increase included $2.4 million of other income from a Genesis lease-termination payment and unusually high Forest Park loan interest and fees. FFO and AFFO also rose in Q2; those non-GAAP measures should be considered alongside GAAP results and their stated adjustments.
- For the six months, common-stockholder net income fell to $16.6 million from $31.2 million. Results included a $29.8 million impairment on an acute-care hospital and a $4.7 million aggregate loss on sale of one hospital and one skilled nursing facility. The impairment and dispositions contributed to real estate investments declining to $1.91 billion from $2.04 billion at year-end 2015.
- Four loan investments with $32.2 million of principal were impaired and on nonaccrual status at June 30. Sabra recorded a $2.7 million six-month provision for doubtful accounts and loan losses.
- Loan and preferred-equity investments totaled $120.3 million, down from $300.2 million at year-end, following major Forest Park loan repayments. Sabra received $196.1 million in final repayments on two Forest Park loans, including accrued interest and fees.
- Debt funding was restructured in January 2016 through an amended credit facility, including a $500 million revolver and increased U.S.- and Canadian-dollar term loans. Variable-rate debt was $341.5 million; management estimated a 100-basis-point rate increase would add $2.7 million to interest expense over the following 12 months, after hedges.
Outlook, risks and contingencies
Management provided no specific earnings or investment guidance. It said it intends to pursue healthcare-property investments and expects future investments to be funded through cash, operating flows, available or future borrowings, and possible securities issuances. It anticipated capital expenditures of no more than $4.0 million over the next 12 months.
On July 29, 2016, Sabra agreed with Genesis to market up to 29 currently leased facilities for sale. Rent from Genesis would decline by 7.5% of net sale proceeds, while lease maturities would be extended or laddered so that 30% of Genesis lease revenue, rather than 77%, would mature by the end of 2021. If the contemplated sales and previously announced sales are completed, Genesis-leased facilities would decline from 78 to 43. Sabra also amended agreements concerning other Genesis facilities, including scheduled payments totaling $20 million and rent reductions; completion, timing and resulting rent effects remain important uncertainties.
Concentration remains material: Genesis, Holiday and NMS Healthcare represented 33.6%, 16.6% and 10.4%, respectively, of annualized revenue. Skilled nursing/transitional care generated 58.8% of annualized revenue. Sabra highlighted tenant/operator credit, dependence on government reimbursement, leverage and interest rates, refinancing and capital-raising access, healthcare regulation, property illiquidity, and REIT qualification as risks. CMS finalized a 2.4% increase in skilled-nursing Medicare rates effective October 1, 2016; the filing also noted potential effects of the mandatory joint-replacement bundled-payment model on facility reimbursement.
Management reported no material legal proceedings or material changes to previously disclosed risk factors. It stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Genesis completes the proposed facility sales and related lease changes, and the net effect on rent, tenant concentration and lease maturities.
- Whether Genesis, Holiday and other major tenants sustain rent coverage and meet lease obligations; the filing identifies material tenant concentration.
- The performance and recoverability of the four impaired, nonaccrual loans, and any further changes in loan-loss reserves.
- How recurring operating performance compares with reported income, given the Forest Park loan interest and fees, Genesis termination payment, impairment and disposition losses. Review the company’s FFO/AFFO reconciliations and adjustments.
- Debt service, covenant headroom, variable-rate exposure and refinancing needs, especially as interest rates change.
- The actual cash available for dividends and investment after debt service, property dispositions and any reduction in Genesis rents; management’s liquidity statement is not a guarantee of future coverage.