Sabra Health Care REIT, Inc. quarterly report, Q3 FY2017

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Sabra Health Care REIT, Inc. — Q3 2017 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2017. Sabra owns and invests in healthcare real estate, principally leased to third-party operators. On August 17, 2017, Sabra completed its merger with Care Capital Properties (CCP), substantially expanding its portfolio. Because CCP’s results are included only from the merger date, comparisons with 2016 are not directly comparable.

Financial performance and position

  • Q3 revenue: $111.8 million, up from $61.9 million in Q3 2016. Rental income was $100.1 million; resident fees and services were $7.6 million.
  • Q3 earnings: Net income was $15.1 million versus $25.3 million; net income attributable to common stockholders was $12.5 million versus $22.8 million. Diluted EPS was $0.11 versus $0.35.
  • Nine-month results: Revenue was $239.2 million versus $198.7 million; net income was $54.4 million versus $47.0 million; common-stockholder net income was $46.8 million versus $39.4 million. Diluted EPS was $0.57 versus $0.60.
  • FFO and AFFO: Q3 diluted FFO per share was $0.34 versus $0.59, and AFFO per share was $0.56 versus $0.58. Nine-month diluted FFO per share was $1.28 versus $1.89, and AFFO per share was $1.66 versus $1.86. These are non-GAAP measures; AFFO adjusts for items including merger costs and certain noncash items.
  • Cash flow: Nine-month operating cash flow was $49.8 million, down from $133.8 million. Investing used $303.1 million, principally reflecting $393.1 million of real estate acquisitions; financing provided $257.8 million. Cash and cash equivalents were $30.9 million at quarter-end.
  • Debt and liquidity: Debt, net of deferred financing costs and premiums, totaled approximately $3.01 billion. Sabra reported $779.6 million of liquidity, including $749.0 million available on its revolving facility. It was in compliance with applicable debt covenants.
  • Dividends: Common dividends declared were $0.36 per share for Q3, reflecting a prorated payment, and $1.21 per share for the nine months. A subsequent declaration set the next common dividend at $0.5201087 per share, including a catch-up amount; the stated full-quarter dividend component was $0.45.
  • Margins: The filing does not provide a clear headline operating-margin measure. Management cautions that acquisition activity makes period comparisons difficult.

Material changes versus the prior comparable period

  • CCP added 330 properties, a direct-financing-lease investment, 18 loan investments and a specialty valuation firm. At September 30, the portfolio included 530 real estate properties, compared with 183 at year-end 2016.
  • Q3 revenue growth primarily reflected CCP. Q3 rental income rose $43.3 million year over year, with $43.1 million attributed to properties acquired in the merger. Revenue growth was partly offset by higher depreciation, interest, operating costs, and $23.3 million of merger and acquisition costs.
  • Q3 common-stockholder earnings and per-share results declined despite higher revenue, reflecting merger-related costs, increased interest expense, loan and receivable reserves, and the substantially larger share count.
  • Nine-month interest and other income fell to $8.1 million from $25.5 million, mainly because prior-year income included default interest and late fees on loans that were repaid in 2016. Nine-month 2016 also included a $29.8 million real-estate impairment, absent in 2017.
  • Debt increased substantially following the merger. Sabra assumed $1.75 billion of CCP debt and issued or assumed additional debt; common shares also increased significantly through merger consideration and an equity offering.

Outlook, commentary, and risks

  • Management expects to continue investing in healthcare properties and pursuing portfolio diversification. It said available cash, operating cash flow and revolving-facility availability should fund operations, scheduled debt service and dividends for the next 12 months.
  • Management estimated capital expenditure requirements would not exceed $67 million over the next 12 months, principally for facility improvements.
  • Sabra announced a CCP portfolio repositioning strategy that may include lease changes, working-capital advances, tenant transitions, and sales or closures; potential rent reductions could reach $33.5 million.
  • Genesis was a material tenant: 76 investments represented 18.1% of Q3 total revenue and 25.3% of nine-month total revenue. Sabra had arrangements to market 35 Genesis facilities and was also marketing up to all 43 other remaining Genesis-leased facilities. Completion timing and terms were not assured.
  • Six loan investments totaling $35.2 million in principal were on nonaccrual status; loan-loss reserves were $6.2 million. Q3 provision for doubtful accounts and loan losses was $5.1 million.
  • Sabra had agreed to acquire a 49% interest in Enlivant joint ventures for $371 million, subject to customary conditions, regulatory approvals and lender consents; closing was expected by December 31, 2017. The agreement includes an option to acquire the remaining interest during the first three years after closing.
  • Interest-rate exposure is meaningful: variable-rate debt was approximately $1.5 billion. After hedging, a 100-basis-point rate change was estimated to affect annual interest expense by $6.0 million. Other risks include tenant operating performance, healthcare reimbursement and regulation, merger integration, refinancing, and the ability to complete planned asset sales.
  • The CCP merger-related shareholder lawsuits were dismissed without prejudice; management expected any related attorneys’ fees payable by Sabra not to have a material adverse effect. Management reported effective disclosure controls and no material change in risk-factor assessment.

Important facts for investors to verify

  • Progress, pricing and timing of Genesis facility sales, and the ultimate effect of any lease repositioning or rent reductions.
  • CCP merger integration, realized synergies, ongoing transaction and transition costs, and completion of purchase-price valuations.
  • Collection performance and reserve adequacy for nonaccrual loans, tenant receivables and straight-line rent.
  • Debt maturities, variable-rate exposure, covenant headroom and the use of equity-offering proceeds to repay revolving borrowings.
  • Whether the Enlivant investment closes on expected terms and how it affects leverage, liquidity and future distributions.
  • Dividend coverage using recurring cash generation; reported GAAP earnings, FFO and AFFO differ and the non-GAAP measures are not cash-flow substitutes.