Sabra Health Care REIT, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 2, 2017. Sabra is a healthcare-focused REIT that primarily owns properties leased to third-party operators, with additional managed properties, loans and preferred equity investments. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $64.7 | $74.2 | $127.4 | $136.8 |
| Net income | $20.5 | $37.5 | $39.3 | $21.7 |
| Net income attributable to common stockholders | $18.0 | $34.9 | $34.2 | $16.6 |
| Diluted earnings per share | $0.27 | $0.53 | $0.52 | $0.25 |
| FFO per diluted share | $0.47 | $0.78 | $1.01 | $1.30 |
| AFFO per diluted share | $0.55 | $0.75 | $1.10 | $1.28 |
Margins: GAAP net income as a share of revenue was approximately 31.7% in Q2 2017 versus 50.5% in Q2 2016, and 30.9% for the first half versus 15.9% in the prior-year period. Comparisons are affected by significant prior-year and current-period items.
- Q2 rental income rose 1% to $55.9; interest and other income fell 88% to $2.0. The decline mainly reflects repayment in 2016 of two Forest Park loans that had generated default-rate interest and late fees.
- Q2 general and administrative expense increased to $11.1 from $4.6, including $5.9 of merger-related acquisition pursuit costs. Managed-property operating expenses also increased.
- First-half operating cash flow was $53.9 versus $94.5. Investing used $6.3; financing used $60.1, including $60.7 of dividends paid. Cash and cash equivalents ended at $13.2, down from $25.7 at year-end 2016.
- At June 30, total debt was $1,220.1 net carrying value ($1,235.5 principal), versus total assets of $2,254.0. Debt included $700.0 of senior notes, $341.3 of term loans, $162.2 of mortgages and $32.0 drawn on the revolving facility. Interest expense was $15.9 in Q2 and $31.7 in the first half.
- Liquidity was reported at approximately $481.0: $13.0 unrestricted cash, excluding joint-venture cash, plus $468.0 available on the revolving facility. Sabra said available cash, operating cash flow and facility availability should fund operations, scheduled debt service and dividends for the next 12 months. It was in compliance with applicable debt covenants.
- Common dividends declared in the first half totaled $0.85 per share. The filing reports a subsequent prorated common dividend of $0.3598913 per share, assuming the merger closed August 17, 2017, and a preferred dividend of $0.4453125 per share.
Material changes, outlook and risks
- Q2 net income fell year over year, principally alongside the sharp decline in interest and other income; a $4.0 gain on real estate sale partly offset the decline. First-half net income rose versus 2016, when Sabra recorded a $29.8 real-estate impairment and a $4.7 net loss on sales; 2017 included a $4.0 sale gain and no real-estate impairment.
- During the first half Sabra acquired one senior housing facility for $14.5 and sold one skilled nursing facility for $6.1, recognizing a $4.0 gain. Nine senior housing properties in Canada shifted from leases to managed-property operations, increasing resident-fee revenue and operating expenses.
- Tenant concentration: Genesis represented 31.3% of Q2 total revenue; Holiday 15.2% and NMS Healthcare 11.6%. Genesis leased 77 investments. Sabra had agreements to market 35 Genesis facilities for sale; one had been sold by June 30 and another afterward. Marketing of the remaining 33 was ongoing, with completion expected in the second half of 2017, but timing and successful sales were not assured.
- Merger: Sabra agreed to acquire Care Capital Properties (CCP), with each CCP share to convert into 1.123 Sabra common shares, subject to approvals and other conditions. The merger was expected in Q3 2017, but could be delayed or not close. Sabra reported related shareholder lawsuits challenging proxy disclosures; the cases were preliminary and Sabra considered them without merit.
- Concurrent with merger closing, a proposed amended credit agreement was expected to provide a $1.0 billion revolver, $1.1 billion in U.S.-dollar term loans and a CAD $125 million term loan; effectiveness depended on the merger closing.
- Management anticipated capital expenditures of no more than $7.0 over the next 12 months. It cited tenant operating performance, reliance on Genesis and Holiday, healthcare reimbursement and regulation, debt servicing and refinancing, interest-rate and currency movements, merger conditions and REIT qualification among key risks. CMS’s final FY2018 skilled-nursing Medicare rates, announced July 31, were estimated to increase payments 1.0% from FY2017.
- Three loan investments totaling $35.2 were on nonaccrual at June 30; the filing also identified three impaired loans. Sabra recorded $1.8 of loan-loss provision in the first half.
Investor verification priorities
- Track whether the CCP merger received all required approvals, closed on the expected timetable, and delivered the anticipated financing and strategic benefits.
- Verify completion and pricing of the remaining Genesis facility sales, and monitor Genesis, Holiday and NMS rent coverage and payment capacity.
- Assess the quality and sustainability of cash flows and dividends, including the effect of managed-property operations, merger costs and loan nonaccruals.
- Review debt maturities, variable-rate exposure, available liquidity and covenant headroom; the filing reported $373.3 of variable-rate debt and estimated a 100-basis-point rate move would change annual interest expense by $0.3 after hedges.
- Distinguish GAAP results from non-GAAP FFO and AFFO, and evaluate the effect of one-time sale gains, prior-year impairment and merger-related costs on period comparisons.