Sabra Health Care REIT, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Sabra began operating as a separate company on November 15, 2010, so comparisons with 2010 are against unaudited pro forma results, not reported operating results for a predecessor Sabra.
Business context
Sabra owns healthcare real estate leased to third-party operators, primarily under triple-net leases. At June 30, 2011, its portfolio comprised 88 properties with 9,793 beds or units across 20 states, plus a mortgage note. Eighty-six properties were leased to subsidiaries of Sun Healthcare Group (“New Sun”); the leases had a weighted-average remaining term of 12 years.
Financial snapshot
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Total revenue | $18.8 million | $36.4 million |
| Net income | $2.1 million | $3.3 million |
| Net income per diluted share | $0.08 | $0.13 |
| Net income margin | 11.1% | 9.2% |
| FFO / diluted share | $8.4 million / $0.33 | $15.7 million / $0.62 |
| AFFO / diluted share | $10.3 million / $0.40 | $19.4 million / $0.76 |
FFO and AFFO are non-GAAP supplemental measures and are not substitutes for GAAP income or operating cash flow. Six-month operating cash flow was $17.9 million; investing cash outflow was $79.4 million; financing cash outflow was $9.3 million. Cash and cash equivalents fell by $70.8 million to $3.5 million, largely reflecting property acquisitions and the mortgage-note purchase.
At June 30, total assets were $595.8 million, total liabilities $420.0 million, and stockholders’ equity $175.8 million. Debt comprised $225.0 million of 8.125% senior notes due 2018 and $159.4 million of mortgage principal, for approximately $384.4 million of principal debt. Mortgage debt included $59.7 million at variable rates. The $100 million secured revolving facility had no borrowings and approximately $87.6 million available, subject to borrowing-base limits. Sabra reported compliance with applicable debt covenants.
Changes versus comparable periods
- Against Q2 2010 pro forma results, Q2 2011 revenue increased about 7% and net income increased about 51% ($2.1 million versus $1.4 million). Rental income rose 6%; G&A increased 18%, partly reflecting stock compensation and acquisition costs.
- Against first-half 2010 pro forma results, first-half 2011 revenue increased about 4% and net income increased about 14% ($3.3 million versus $2.9 million). Rental income rose 3%; G&A increased 16%.
- Real estate investments, net, increased to $542.6 million from $482.3 million at year-end 2010. Cash declined from $74.2 million to $3.5 million as Sabra funded investment activity.
Transactions, outlook, and risks
- During the quarter Sabra acquired a 70-bed Texas hospital for $62.7 million and a 120-bed Texas skilled nursing facility for $11.3 million. It also acquired a mortgage note for $5.3 million in March. Management expects to pursue further healthcare-property acquisitions, subject to suitable opportunities and financing.
- After quarter-end, Sabra acquired four Delaware skilled nursing facilities for $97.5 million under a 15-year triple-net lease. On August 1, it issued 11.7 million shares at $14.75, generating $163.9 million in net proceeds before expenses. A quarterly dividend of $0.32 per share was declared August 2.
- Medicare’s final FY2012 rule, effective October 1, 2011, was expected to reduce skilled nursing facility reimbursement rates by a net 11.1%. Sabra estimated that, on a pro forma portfolio basis, facility EBITDAR coverage would fall from approximately 1.64x to 1.28x, before tenant mitigation. Weaker tenant finances could impair rent payments.
- Tenant concentration is substantial: New Sun leases generated 94% of Q2 rental revenue and 97% of first-half rental revenue. Sabra identified New Sun’s capacity to meet lease obligations as a material exposure.
- Sabra intends to qualify as a REIT beginning with tax year 2011. Failure to qualify, or leases not being treated as true leases for tax purposes, could trigger corporate-level tax and reduce distributions. The filing also cites interest-rate, refinancing, covenant, acquisition, and general market risks.
- Management stated that available cash, operating cash flow, revolver availability, and the subsequent equity offering were expected to support operations, debt service, dividends, and planned investment. There was no formal earnings guidance. The company reported no material legal proceedings known to management and no off-balance-sheet arrangements.
Important facts for investors to verify
- New Sun’s operating performance, liquidity, and ability to pay rent, given the high share of Sabra revenue tied to that tenant.
- The actual effect of the Medicare reimbursement reduction on tenant coverage and rent collection versus Sabra’s modeled 1.28x coverage.
- Post-quarter share issuance, acquisition funding, and resulting per-share dilution and leverage.
- Availability under the secured revolver and compliance with its borrowing-base tests and financial covenants.
- Sabra’s ongoing REIT qualification and the tax treatment of its leases.