Sabra Health Care REIT, Inc. — FY 2013 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2013, filed February 28, 2014. Sabra is a healthcare real estate investment trust (REIT) that leases properties to third-party operators and makes healthcare-related loans and preferred equity investments. At year-end, its portfolio included 121 properties across 27 states, 10 debt investments and two preferred equity investments. Property types comprised 96 skilled nursing/post-acute facilities, 23 senior housing facilities and two acute care hospitals; the properties had 12,468 licensed beds or units and were leased under triple-net leases.
Financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $134.8 million | $103.2 million |
| Net income | $33.7 million | $19.5 million |
| Net income attributable to common stockholders | $25.7 million; $0.69 basic and $0.68 diluted per share | $19.5 million; $0.53 basic and $0.52 diluted per share |
| FFO (non-GAAP) | $59.0 million; $1.55 per diluted share | $52.3 million; $1.40 per diluted share |
| AFFO (non-GAAP) | $57.9 million; $1.51 per diluted share | $60.3 million; $1.59 per diluted share |
| Cash flow from operations | $62.1 million | $56.3 million |
| Cash used in investing activities | $297.5 million | $218.7 million |
| Cash provided by financing activities | $222.6 million | $137.2 million |
| Interest expense | $40.5 million | $34.3 million |
| Common dividends declared and paid per share | $1.36 | $1.32 |
At December 31, 2013, total assets were $1.20 billion, total liabilities $737.7 million and stockholders’ equity $460.2 million. Cash and cash equivalents were $4.3 million; the company reported $139.4 million of liquidity, including $135.1 million available under its revolving credit facility. Debt on the balance sheet included $141.3 million of mortgage notes, $135.5 million outstanding on the secured revolver and $414.4 million of senior unsecured notes (carrying value). Mortgage debt’s weighted-average rate was 4.08%; the revolver rate was 3.17%. The revolver matures in July 2016, with a one-year extension option. Management said available cash, operating cash flow and revolver capacity were expected to cover operations, scheduled debt service and dividends for the next 12 months.
Weighted-average occupancy was 88.2%, versus 88.7% in 2012; skilled nursing/post-acute occupancy was 88.3% and senior housing occupancy was 87.4%. Skilled mix declined to 36.6% from 38.1%. These facility metrics were supplied by operators, not independently verified, and reported one quarter in arrears.
Material changes versus the prior comparable period
- Revenue increased 31%, primarily from acquisitions and higher straight-line rent recognized on Genesis leases after their escalators were fixed at 2.5% annually.
- Common-stockholder net income rose 32%. Operating cash flow increased about 10%, while FFO per diluted share increased about 11%.
- AFFO per diluted share declined about 5%, to $1.51 from $1.59, reflecting adjustments including substantially higher straight-line rental income excluded from AFFO.
- Interest expense rose $6.1 million, chiefly reflecting the 2023 Notes issuance and increased revolver activity. A $10.1 million debt-extinguishment loss was recognized in 2013, versus $2.7 million in 2012.
- Investments expanded materially: loans receivable and other investments increased to $185.3 million from $12.0 million. Cash declined to $4.3 million from $17.1 million, while total liabilities rose to $737.7 million from $611.4 million.
- Quarterly 2013 revenue was highest in Q4 at $37.6 million. Q2 reported a $3.2 million loss attributable to common stockholders, primarily reflecting debt-extinguishment costs; Q4 reported $10.4 million of common-stockholder net income.
Outlook, commentary, risks and unusual items
- Strategy: Management expects to grow chiefly through senior housing and memory care acquisitions, with a secondary focus on skilled nursing, and to pursue loans, preferred equity, joint ventures and development opportunities. It aims to diversify tenants, property types and geographies while maintaining liquidity. No formal earnings or FFO guidance is provided in the supplied filing text.
- Concentration: Genesis subsidiaries leased 81 of 121 properties and generated 60% of 2013 revenue; Genesis guarantees those leases. Genesis reported a 2013 net loss of $178.0 million, although Sabra also cited Genesis adjusted normalized EBITDAR of $591.6 million. Sabra cautions that Genesis information was unaudited, provided by Genesis and not independently verified.
- Post-year-end financing and acquisition: In January 2014, Sabra issued $350 million of 5.5% notes due 2021, then tendered and redeemed all remaining 8.125% notes due 2018. The refinancing is expected to produce approximately $21.6 million in tender, redemption and write-off costs in Q1 2014. In February 2014, Sabra acquired the Nye Portfolio for $90 million, with expected annual GAAP lease revenue of $8.0 million. It also refinanced $44.8 million of variable-rate mortgages with HUD-guaranteed debt at 4.25%.
- Principal risks: Dependence on Genesis and tenant operating performance; changes in Medicare, Medicaid and other reimbursement; substantial debt, variable interest rates and restrictive covenants; refinancing and capital-market access; healthcare regulation and enforcement; property liquidity, environmental exposure, litigation and REIT qualification/distribution requirements.
- Other items: Sabra recorded no real estate impairment in 2013 (a $2.5 million impairment was recorded in 2012). No material legal proceedings or off-balance-sheet arrangements were reported. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Genesis’s current financial condition, lease coverage, liquidity and ability to meet lease obligations, given its significance to Sabra’s revenue.
- Debt balances and covenants after the 2014 note refinancing, including the revolver’s 2016 maturity, variable-rate exposure and remaining borrowing availability.
- Whether operating cash flow and recurring AFFO support common and preferred dividends, and how the REIT distribution requirement interacts with debt restrictions.
- Quality and performance of the enlarged loan and preferred-equity portfolio, including collateral, borrower repayment capacity and the terms of purchase options and contingent consideration.
- Occupancy and skilled-mix trends, noting that operator-provided performance data are unaudited by Sabra and reported with a lag.
- Actual Q1 2014 refinancing costs and the Nye Portfolio’s realized rent, operating performance and any earn-out obligations.