Sabra Health Care REIT, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Sabra is a healthcare real estate investment trust that owns and leases properties, primarily skilled nursing/transitional care facilities and senior housing. The prior-year comparison is not directly comparable: the August 2017 Care Capital Properties merger substantially expanded the portfolio.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $166.3 million | $64.7 million | $332.4 million | $127.4 million |
| Net income attributable to common stockholders | $193.6 million | $18.0 million | $253.5 million | $34.2 million |
| Diluted GAAP EPS | $1.08 | $0.27 | $1.42 | $0.52 |
| Diluted FFO per share | $0.58 | $0.47 | $1.22 | $1.01 |
| Diluted AFFO per share | $0.55 | $0.55 | $1.14 | $1.10 |
- Revenue growth was largely portfolio-related following the CCP merger and subsequent acquisitions. Q2 rental income rose $88.3 million year over year; resident fees and services rose $10.7 million.
- GAAP earnings included a $142.9 million Q2 net gain on real estate sales ($142.4 million for the first half). Sabra sold 33 skilled nursing facilities and four senior housing communities during the half. The gain substantially boosts reported net income and EPS; AFFO per share was flat year over year in Q2.
- Six-month operating cash flow was $211.6 million, versus $54.3 million in 2017. Investing used $296.9 million, including the Enlivant investment; financing used $276.2 million, including dividends and preferred stock redemption. Cash, cash equivalents and restricted cash ended at $225.7 million.
- At June 30, total assets were $7.03 billion and total equity was $3.41 billion. Debt principal was approximately $3.43 billion: $256.3 million secured debt, $676.0 million revolver, $1.20 billion term loans and $1.30 billion senior notes. The balance-sheet carrying amount of total debt was $3.42 billion.
- Management reported $362.6 million of liquidity: $38.6 million unrestricted cash (excluding joint-venture cash) and $324.0 million available on the revolving facility. Restricted cash included $174.4 million held by exchange accommodation titleholders for possible acquisitions.
- Common dividends declared were $0.45 per share for each of the first two quarters. The board subsequently declared another $0.45 quarterly dividend, payable August 31, 2018. Sabra redeemed all Series A preferred shares on June 1 for $143.8 million, including accrued dividends.
Changes, outlook and risks
- The 2017 CCP merger and 2018 investment activity materially increased Sabra’s scale and changed the mix of properties and financing. At June 30, the portfolio comprised 487 real estate properties, plus a joint-venture investment, loans and preferred equity investments.
- Sabra invested $352.7 million before closing costs for a 49% interest in the Enlivant joint venture, which owns 172 senior housing communities. Sabra recorded a $2.3 million Q2 loss from the venture and has an option to acquire the remaining interest by January 2, 2021.
- Genesis lease restructuring reduced annual base rent by $19.0 million effective January 1, 2018. Sabra completed sales of 27 Genesis facilities in the first half and expected to sell 19 of the remaining 27 during the rest of 2018, retaining eight; completion and timing were not assured.
- Management expects operating cash flow to increase as the CCP merger and other investments contribute for full periods. It stated available cash, operating cash flow and revolver capacity should cover operations, scheduled debt service and dividends for the next 12 months. No specific earnings or FFO guidance was provided. Expected capital expenditures for the next 12 months were not to exceed $59 million.
- Debt and interest-rate exposure are significant. Sabra reported $2.0 billion of variable-rate indebtedness and estimated that a 100-basis-point rate increase would reduce income by $13.4 million over the following 12 months after hedges, including its share of joint-venture debt. The company was in compliance with applicable debt covenants at quarter-end.
- Skilled nursing/transitional care generated 63.9% of first-half revenue, exposing results indirectly to healthcare reimbursement and operator performance. CMS finalized a new skilled-nursing payment model effective October 1, 2019; CMS estimated a fiscal 2019 aggregate Medicare payment increase of $820 million for skilled nursing facilities.
- Other disclosed risks include tenant financial distress, difficulty replacing tenants or completing property sales, healthcare regulation, refinancing and market rates, real estate illiquidity, and maintaining REIT status. Management reported no material legal proceedings or known environmental liability expected to materially affect results.
Important facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus the $142.4 million first-half disposal gain; compare GAAP results with FFO and AFFO.
- Whether Genesis facility sales proceed on the expected timetable and how the rent reduction and remaining retained facilities affect rental income and tenant risk.
- Enlivant joint-venture performance, its debt and interest-rate exposure, and the financial terms and feasibility of Sabra’s option to acquire the remaining interest.
- Debt maturities, variable-rate exposure, available revolver capacity, covenant headroom and the sustainability of dividends relative to recurring cash generation.
- Operator coverage and reimbursement sensitivity, particularly given the portfolio’s skilled-nursing revenue concentration and upcoming Medicare payment-model changes.