Business context and reporting period
Sabra Health Care REIT, Inc. is a healthcare-property owner and investor operating as a REIT. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods. At quarter-end, Sabra held 182 real estate properties, 11 loan investments and 11 preferred-equity investments. Property types included skilled nursing/transitional care, senior housing and one acute-care hospital.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $61.9 million | $59.9 million | $198.7 million | $172.1 million |
| Net income | $25.3 million | $18.0 million | $47.0 million | $54.3 million |
| Net income attributable to common stockholders | $22.8 million; $0.35/share | $15.5 million; $0.24/share | $39.4 million; $0.60/share | $46.7 million; $0.76/share |
| FFO per diluted share | $0.59 | $0.55 | $1.89 | $1.52 |
| AFFO per diluted share | $0.58 | $0.53 | $1.86 | $1.55 |
For the first nine months, operating cash flow was $133.8 million, versus $79.1 million a year earlier. Investing activities provided $173.6 million, mainly from loan repayments and property-sale proceeds; financing activities used $295.9 million, including dividends and net revolver repayments. Ending cash and cash equivalents were $19.7 million.
At September 30, total assets were $2.24 billion and total equity was $1.01 billion. Gross debt principal was approximately $1.21 billion: $700 million of senior notes, $340.1 million of term loans and $165.0 million of mortgage debt. There were no revolver borrowings and $500 million was available. Management reported $519.6 million of liquidity, including available revolver capacity, and said liquidity and operating cash flows were expected to cover operations, scheduled debt service and dividends for the next 12 months. Sabra was in compliance with applicable debt covenants.
Common dividends paid in the nine-month period totaled $82.2 million; preferred dividends totaled $7.7 million. A $0.42-per-share common dividend and $0.4453125-per-share Series A preferred dividend were declared for payment November 30, 2016.
Material changes versus the prior comparable period
- Q3 revenue rose 3.3%; common-stockholder income rose to $22.8 million from $15.5 million. Nine-month revenue rose 15.5%, while common-stockholder income declined to $39.4 million from $46.7 million.
- Rental income increased, primarily from properties acquired after the comparable periods. Interest and other income fell in Q3 as the loan and preferred-equity portfolio contracted following repayments; nine-month interest income was higher, partly due to default-rate interest and fees on two repaid Forest Park loans.
- Nine-month results included a $29.8 million real estate impairment related to an acute-care hospital sale, contributing to a $3.2 million net loss on real estate sales. There was no comparable impairment in 2015.
- FFO and AFFO per diluted share increased year over year for both the quarter and nine months. These are non-GAAP supplemental measures and are not substitutes for GAAP earnings or cash flow.
- Sabra acquired four facilities for $109.6 million and sold two skilled nursing facilities and one acute-care hospital for $85.4 million net of selling expenses during the first nine months. It also received $214.9 million in loan repayments.
Outlook, commentary, risks and unusual items
Management’s stated strategy is to grow and diversify the portfolio, with emphasis on assisted living, independent living and memory-care properties, while also pursuing selected skilled-nursing assets, financing investments and development opportunities. Sabra expects to continue investing when suitable opportunities and financing are available; it provided no specific earnings or revenue guidance in the supplied filing text. Expected capital expenditures for the next 12 months were not to exceed $4.0 million.
Sabra and Genesis had agreed to jointly market 35 skilled nursing facilities for sale and amend leases and guarantees for the remaining 43 Genesis facilities. Marketing was ongoing and expected to continue over the next several quarters. Genesis, Holiday and NMS Healthcare represented 32.6%, 16.3% and 12.4% of annualized revenue, respectively. Skilled nursing/transitional care exposure represented 58.4% of annualized revenue.
Other notable items included $5.0 million of nine-month lease-termination income related to five Genesis facilities, $9.6 million of default interest income from loan investments, and $3.3 million of nine-month doubtful-account and loan-loss provisions. Three loans with $18.4 million of principal were on nonaccrual status at quarter-end. The filing identifies tenant creditworthiness, tenant concentration, healthcare reimbursement and regulation, interest rates, foreign currency exposure, refinancing and REIT qualification as risks. Sabra said it used derivatives to hedge interest-rate and Canadian-dollar exposures and did not use them for speculation.
Management reported effective disclosure controls, no material changes in internal control over financial reporting, no material legal proceedings, and no material change in the risk factors disclosed in its 2015 Form 10-K.
Important facts for investors to verify
- Progress and terms of the planned Genesis facility sales and lease/guarantee amendments, and the resulting change in tenant and skilled-nursing concentration.
- Genesis, Holiday and NMS tenant operating performance and rent coverage, including the credit implications of the nonaccrual loans and loan-loss reserves.
- How recurring cash generation compares with dividends after excluding default interest and lease-termination income; FFO and AFFO are adjusted non-GAAP measures.
- The valuation and sale outcome for the impaired acute-care hospital, and whether future dispositions or impairments arise.
- Debt maturity, covenant and interest-rate exposure, including hedge coverage, refinancing needs and continued access to the $500 million revolver.