Sabra Health Care REIT, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020. Sabra is a healthcare-focused REIT that owns, leases, finances and manages healthcare real estate in the U.S. and Canada. At quarter-end, its portfolio included 426 real estate properties and a 49% interest in the Enlivant senior housing joint venture.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior period |
|---|---|---|
| Total revenue | $152.4 million | $149.3 million |
| Net income | $33.4 million; $0.16 per diluted share | $35.2 million; $0.17 per diluted share |
| FFO / diluted share | $82.4 million / $0.39 | $86.9 million / $0.42 |
| AFFO / diluted share | $82.8 million / $0.39 | $91.8 million / $0.44 |
| Net cash from operating activities | $68.5 million | $74.8 million |
| Cash, cash equivalents and restricted cash, quarter-end | $29.5 million | $62.4 million at March 31, 2020 |
Revenue increased about 2%, while net income declined about 5%. Net margin, calculated as net income divided by revenue, was approximately 21.9%, versus 23.6% a year earlier. Interest expense was $24.4 million, down from $25.7 million. The filing does not provide a comparable consolidated operating-margin measure.
At March 31, total debt principal was approximately $2.29 billion; debt net of premiums and deferred financing costs was $2.28 billion. Sabra had $24.9 million of unrestricted cash and $1.0 billion available on its undrawn revolving facility, which management described as more than $1.0 billion of liquidity. Total equity was $3.50 billion. The company paid $63.2 million in common dividends during the quarter.
Material changes versus the prior-year quarter
- Rental and related revenue rose $6.9 million, largely because Q1 2020 included $6.1 million of lease-related write-offs that did not recur. The company attributed $0.9 million of the increase to acquisitions, partly offset by dispositions.
- Resident fees and services fell $3.9 million, primarily due to lower occupancy in the Senior Housing – Managed portfolio amid COVID-19.
- Loss from the Enlivant joint venture increased to $5.0 million from $3.7 million, reflecting reduced occupancy and COVID-related operating pressures.
- The loan-loss and other-reserves provision increased to $2.0 million from $0.7 million; management cited one loan deemed uncollectible. Three loans with no book value were on nonaccrual at quarter-end.
- A $0.8 million debt-extinguishment loss followed a partial term-loan repayment. Sabra repaid $93.0 million of term-loan principal in the quarter.
- FFO and AFFO declined despite higher revenue. AFFO also reflects higher loan-loss provisions and lower non-cash rental adjustments than in the prior-year period.
- The quarterly common dividend was $0.30 per share, compared with $0.45 per share in Q1 2020. The board declared another $0.30 dividend for payment in May 2021.
Outlook, risks and notable items
- Management said cash, operating cash flows and available revolving-credit borrowings were expected to be sufficient for operations, scheduled debt service and dividends for the next 12 months. No earnings or FFO guidance was provided.
- Management anticipated approximately $75 million of capital expenditures over the next 12 months, including $35 million expected to produce incremental rental income.
- COVID-19 remained a key risk: lower occupancy and higher costs could weaken tenants’ ability to pay rent and affect managed communities and the Enlivant investment. Although tenants and borrowers were paying expected cash rents and debt service at March 31, defaults, lease restructurings or impairments could follow if conditions deteriorated.
- Skilled nursing/transitional care facilities generated 55.6% of Q1 revenue, exposing Sabra to operator performance, reimbursement policy and sector-specific risks. The filing discusses proposed FY2022 Medicare rate changes for skilled nursing facilities, including an estimated 1.3% net increase, subject to rulemaking.
- Sabra acquired one addiction treatment center and one managed senior housing community for $28.7 million and sold two skilled nursing facilities for $5.3 million net of closing costs. It also recognized a $1.0 million gain after reclassifying a lease as sales-type, before the tenant’s eventual purchase of the property.
- Variable-rate debt and joint-venture exposure create interest-rate risk; derivatives hedge part of that exposure. Management estimated that a 100-basis-point increase in the relevant index would reduce net income by $3.8 million over the following 12 months, after hedging effects. LIBOR transition and Canadian-dollar exchange rates are additional risks.
- Debt covenants were met at quarter-end. The filing reported no material change in risk factors, no material legal proceedings, and no material environmental liability known to the company.
Important facts for investors to verify
- Whether occupancy, operating costs and tenant rent coverage recover from COVID-related pressure, particularly in managed senior housing and the Enlivant joint venture.
- Whether the increased loan-loss allowance and nonaccrual loans lead to additional credit losses or impairments.
- Debt maturities, refinancing capacity and covenant headroom, alongside the company’s variable-rate exposure and hedging arrangements.
- The sustainability of the $0.30 quarterly dividend relative to AFFO, cash generation and planned capital spending.
- Whether planned capital expenditures generate the expected incremental rental income and whether acquisitions and asset sales improve portfolio performance.