Sabra Health Care REIT, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Sabra is a healthcare-focused REIT that owns and leases skilled nursing, senior housing, behavioral health and other healthcare properties, and also operates senior housing communities through third-party managers.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $163.1 million | $152.4 million | Up 7% |
| Net income | $40.6 million | $33.4 million | Up 21% |
| Diluted EPS | $0.18 | $0.16 | Up $0.02 |
| FFO per diluted share | $0.39 | $0.39 | Unchanged |
| AFFO per diluted share | $0.39 | $0.39 | Unchanged |
| Operating cash flow | $63.1 million | $68.5 million | Down $5.4 million |
Revenue growth reflected higher interest and other income, including income from the Recovery Centers of America mortgage loan and a $2.3 million lease termination payment, plus higher resident fees. Rental and related revenues declined 3% to $109.9 million. Net income and FFO/AFFO are not interchangeable: FFO and AFFO are non-GAAP supplemental measures, and management cautions they are not cash flow or a measure of cash available for future needs.
Balance sheet, debt and liquidity
- At March 31, 2022, total assets were $5.885 billion, total liabilities $2.523 billion and equity $3.362 billion.
- Debt totaled $2.378 billion at principal value, or $2.358 billion net of discounts and financing costs. This included $1.750 billion of senior notes, $560.0 million of term loans, $51.6 million of secured debt and $16.8 million drawn on the revolving facility.
- Cash and cash equivalents were $24.8 million. Sabra reported approximately $1.0 billion of liquidity, including $983.2 million available on its revolving credit facility. The company reported compliance with applicable debt covenants.
- Quarterly dividends were $0.30 per share; $69.3 million was paid during the quarter. The board declared another $0.30-per-share dividend for payment May 31, 2022.
Material changes and notable items
- Interest and other income rose to $11.0 million from $2.9 million, largely due to the $290 million Recovery Centers of America mortgage loan funded in October 2021 and the lease termination payment.
- Resident fees and services rose 17% to $42.2 million, reflecting acquisitions, improved occupancy as the pandemic’s effects eased, and higher rates. Managed senior housing operating expenses increased 14% to $33.1 million, including higher labor costs.
- Rental income decreased $3.5 million. Sabra cited leases no longer accounted for on an accrual basis, dispositions and fully amortized lease intangibles. Avamere’s annual base rent was amended down from $44.1 million to $30.7 million effective February 1, 2022; its 27 facilities had been affected by census declines, labor costs and cash constraints.
- Sabra acquired one managed senior housing community for $26.2 million, converting a previously held preferred equity investment. It completed no property dispositions during the quarter; one community classified as held for sale after quarter-end was sold for $2.6 million gross.
- The loss from the unconsolidated joint venture narrowed to $2.8 million from $5.0 million. Sabra’s 49% Enlivant joint venture investment had a $93.9 million book value; the filing warns that further impairment may be possible and realized proceeds may differ materially from estimated fair value. Sabra recorded a $164.1 million impairment on this investment in Q2 2021.
Outlook, risks and contingencies
Sabra provided no specific earnings or FFO guidance in the supplied filing text. Management said available cash, operating cash flows and revolving-credit availability were expected to fund requirements for the next 12 months. Planned capital expenditure commitments were approximately $127 million, with no more than $96 million expected over the next 12 months; $57 million of that amount was expected to generate incremental rental income. Additional investment funding commitments were up to $58.9 million.
COVID-19 continued to pressure tenant and borrower occupancy, operating costs and payment capacity, and to weigh on Sabra’s managed senior housing operations. From the pandemic’s start through March 31, 2022, Sabra agreed to $3.2 million of temporary rent deferrals for six tenants; $0.5 million had been repaid. The company identified possible rent restructurings, defaults and asset impairments as risks, particularly if government assistance is reduced. Skilled nursing/transitional care facilities generated 51.4% of Q1 revenue, excluding lease termination income. CMS had proposed a 0.7% net decrease in FY2023 skilled nursing Medicare rates; the proposal was not final. Sabra reported no material legal proceedings or material changes to its previously disclosed risk factors.
Investor verification priorities
- Assess whether tenant rent collections, occupancy and labor costs are improving, especially at Avamere and in the managed senior housing portfolio.
- Check the sustainability of the $0.30 quarterly dividend against recurring cash generation, capital needs and debt obligations.
- Track the Enlivant joint venture’s operating performance, sale prospects and potential for further impairment.
- Review refinancing and interest-rate exposure, including the 2023 revolving-credit maturity and 2024 term-loan maturity, alongside available liquidity and covenant headroom.
- Separate recurring performance from the $2.3 million lease termination payment and other non-recurring or non-cash items when evaluating revenue, net income and FFO/AFFO.