Sabra Health Care REIT, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Sabra is a healthcare real estate investment trust that primarily leases properties to third-party operators under triple-net leases.
Business context and portfolio
At year-end, the portfolio included 180 properties with 18,349 beds/units, 17 loan investments and 10 preferred equity investments across the United States and Canada. Properties comprised 103 skilled nursing/transitional care facilities, 75 senior housing facilities and two acute care hospitals. The weighted-average remaining lease term was 10 years.
Financial and operating metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $238.9 million | $183.5 million |
| Net income attributable to common stockholders | $69.2 million | $36.7 million |
| Diluted GAAP EPS | $1.11 | $0.78 |
| Operating cash flow | $121.1 million | $85.3 million |
| FFO per diluted common share | $2.12 | $1.62 |
| AFFO per diluted common share | $2.14 | $1.64 |
| Common dividends per share | $1.60 | $1.51 |
Revenue growth reflected acquisitions, including the Canadian senior housing portfolio and Maryland skilled nursing facilities. Rental income increased 30% to $209.9 million; interest and other income rose 32% to $25.5 million. Interest expense increased 26% to $59.2 million, while depreciation and amortization increased 46% to $63.1 million. The provision for doubtful accounts and loan losses rose to $12.8 million from $3.6 million. GAAP operating margin is not stated as a distinct metric in the filing.
Fourth quarter: Revenue was $66.8 million versus $55.7 million in Q4 2014; net income attributable to common stockholders was $22.5 million versus $19.7 million; diluted EPS was $0.34 versus $0.35. Operating cash flow was $42.0 million versus $14.1 million. Q4 2015 FFO and AFFO were $0.59 and $0.58 per diluted share, respectively.
Balance sheet and liquidity: Total assets were $2.49 billion and total liabilities $1.43 billion. Debt principal was approximately $1.40 billion: $700 million senior notes, $264.9 million term loans, $255 million revolving borrowings and $177.9 million mortgage debt. Cash and cash equivalents were $7.4 million; reported liquidity was $202.4 million, including $195 million available under the then-existing revolver. A January 14, 2016 credit facility increased revolver capacity to $500 million; pro forma year-end liquidity was stated as $313.4 million. Sabra reported compliance with applicable debt covenants at year-end.
Investing cash outflow was $489.2 million and financing cash inflow was $314.1 million. Sabra issued 5.9 million common shares in 2015, receiving $147.9 million net proceeds before expenses, primarily to repay revolver borrowings. The $0.41 quarterly common dividend was declared in February 2016, after the reporting period.
Material changes versus prior period
- Year-end properties increased from 160 in 2014 to 180 in 2015; real estate investments, net, increased from $1.65 billion to $2.04 billion.
- Skilled nursing/transitional care occupancy was 87.6%, down from 88.4%; senior housing occupancy rose to 90.8% from 88.9%.
- Common shares outstanding at year-end rose to 65.2 million from 59.0 million, following the equity offering. Weighted-average basic shares increased to 62.2 million from 46.4 million.
- Cash declined to $7.4 million from $61.8 million, while operating cash flow increased. Annual common dividends rose to $1.60 per share from $1.51.
- Two borrowers associated with Forest Park Dallas and Fort Worth filed for Chapter 11 in November 2015. Two loan investments totaling $123.5 million were on nonaccrual status at year-end; the Dallas mortgage loan was on nonaccrual, while the Fort Worth construction loan continued to accrue interest.
Outlook, risks and unusual items
- Management said available cash, operating cash flows and revolver capacity were expected to fund operations, scheduled debt service and dividends for the next 12 months. It expected annual operating cash flows to rise with completed and future investments. No specific earnings or FFO guidance was provided.
- Expected capital expenditures for the next 12 months were not to exceed $5 million. The company intended to pursue further senior housing acquisitions and other healthcare property, debt and preferred equity investments as suitable opportunities and financing allowed.
- Tenant concentration is substantial: Genesis accounted for 34.2% and Holiday for 16.8% of annualized revenue at year-end. Sabra depends on their ability to meet lease obligations; healthcare reimbursement, regulatory and operating pressures could affect tenant performance. Tenant/borrower operating data were provided by those parties and were not independently verified by Sabra.
- Forest Park-Frisco rental revenue was recognized on a cash basis during 2015, and Sabra recorded an $8.2 million reserve primarily related to that tenant. A February 2016 agreement to sell the hospital was approved by the bankruptcy court; Sabra expected net proceeds of $89.1–$94.1 million and a Q1 2016 loss of $30–$35 million on the hospital and debtor-in-possession loan, before considering approximately $21.3 million of owner guarantees. No impairment was recorded at December 31, 2015.
- Other material risks include significant indebtedness and variable-rate exposure, refinancing and covenant constraints, Canadian-dollar exposure, regulatory and reimbursement changes, tenant bankruptcy, and the risk of maintaining REIT status. A 100-basis-point increase in variable interest rates was estimated to add $4.4 million to interest expense over the following 12 months, pro forma for the new facility.
- There were no material legal proceedings reported, no real estate impairment losses in 2015, and no off-balance-sheet arrangements. The company disclosed a $12.8 million provision for doubtful accounts and loan losses and $7.0 million of acquisition pursuit costs.
Important facts for investors to verify
- Genesis and Holiday tenant credit, lease coverage, guarantees and current rent payment performance.
- Recovery prospects and collateral values for Forest Park loans, the Frisco sale proceeds and loss, and the Dallas/Fort Worth bankruptcy processes.
- Debt maturities, revolver availability, covenant headroom, variable-rate sensitivity and the terms and utilization of the January 2016 credit facility.
- Whether operating cash flow and AFFO support the dividend after acquisition spending, debt service and required REIT distributions; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow.
- Acquisition-related growth versus performance of the existing portfolio, occupancy trends, tenant concentration and exposure to government reimbursement and Canadian currency movements.