Sabra Health Care REIT, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Sabra is a healthcare-focused REIT that owns and finances senior housing, skilled nursing, behavioral health and related properties in the U.S. and Canada. Unless noted, figures are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $156.0 million | $152.9 million | $319.1 million | $305.3 million |
| Net income (loss) | $16.8 million | ($132.6 million) | $57.4 million | ($99.1 million) |
| Diluted EPS | $0.07 | ($0.61) | $0.25 | ($0.46) |
| FFO per diluted share | $0.36 | $0.39 | $0.75 | $0.78 |
| AFFO per diluted share | $0.36 | $0.39 | $0.75 | $0.77 |
Q2 revenue rose about 2% year over year, while FFO and AFFO per share declined. Net income turned positive largely because the prior-year comparison included a $164.1 million impairment of the Enlivant joint venture; the 2022 quarter also included $11.7 million of real estate impairment and a $4.5 million loss on property sales.
- Q2 rental and related revenue fell 7% to $103.2 million, primarily reflecting lower rent from leases no longer accounted for on an accrual basis, including the amended Avamere lease.
- Interest and other income increased to $8.7 million from $3.0 million, mainly due to the Recovery Centers of America mortgage loan. Resident fees and services rose to $44.1 million from $39.1 million, reflecting occupancy and rate improvement and acquired communities.
- Managed senior housing operating expenses increased 18% to $34.0 million in Q2, including higher labor, utilities and maintenance costs. Management cited staffing and labor-rate pressures.
- Six-month operating cash flow was $139.7 million, versus $152.3 million in 2021. Investing cash outflow was $128.1 million, including $128.0 million invested in an unconsolidated joint venture; financing cash outflow was $56.6 million.
Balance sheet, debt and liquidity
- At June 30, 2022, total assets were $5.96 billion, total liabilities $2.64 billion and equity $3.32 billion. Cash and cash equivalents were $67.2 million.
- Total debt was $2.50 billion principal, or $2.48 billion net carrying value. Senior unsecured notes totaled $1.75 billion principal; the revolving facility had $142.3 million outstanding and $857.7 million available. Weighted-average effective interest on the notes was 4.01%; the revolver rate was 3.33% at quarter-end.
- Management reported total liquidity of approximately $924.8 million, including cash and available revolver capacity, and said it expects available cash, operating cash flow and revolver capacity to cover requirements for the next 12 months. Sabra was in compliance with applicable debt covenants at quarter-end.
- Common dividends paid in the first half totaled $138.6 million. The board declared a $0.30-per-share quarterly dividend on August 3, 2022, payable August 31.
Material developments, outlook and risks
- Sabra formed a joint venture with Sienna Senior Living, which acquired 12 Canadian senior housing communities. The venture’s gross investment was CAD $379.0 million and it assumed CAD $53.4 million of debt.
- During the first half, Sabra sold eight facilities for net proceeds of $40.0 million, recognizing a $4.5 million net loss. Three additional skilled nursing facilities with a $22.9 million aggregate carrying value were classified as held for sale; one was sold after quarter-end for a gross price of $6.5 million.
- Avamere leases 27 facilities and faced census declines, labor cost increases and cash constraints. Its annual base rent was reduced from $44.1 million to $30.7 million effective February 1, 2022. The lease was not accounted for on an accrual basis; rent collection and future recoverability remain important risks.
- COVID-related occupancy and operating-cost pressures continued to affect tenants and managed communities, with occupancy still below pre-pandemic levels. Pandemic-related rent deferrals agreed with seven tenants totaled $4.1 million, of which $0.7 million had been repaid by June 30, 2022.
- Management identified possible further property impairments as it evaluates asset sales. Other key exposures include tenant ability to pay, healthcare reimbursement and regulation, labor inflation, interest-rate changes, debt refinancing and the performance or sale prospects of the Enlivant joint venture. The filing provides no company-wide earnings guidance.
- CMS’s final FY2023 skilled nursing Medicare rule, issued July 29, 2022, projected a net rate increase of 2.7%, effective October 1, 2022; the filing notes that this excludes estimated value-based purchasing reductions.
Important facts for investors to verify
- Whether rent collections and tenant coverage recover, particularly for Avamere, and how non-accrual lease treatment affects reported revenue.
- Whether managed-community occupancy improves enough to offset labor, staffing and other operating-cost pressures.
- Cash generation and dividend coverage: first-half operating cash flow was $139.7 million versus $138.6 million of dividends paid.
- Progress and realized proceeds from held-for-sale assets, and whether further impairments or disposal losses arise.
- Enlivant joint-venture valuation and exit prospects, alongside debt maturities, borrowing costs and compliance with covenants.