Sabra Health Care REIT, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. Sabra is a healthcare real estate investment trust that primarily owns properties leased to third-party operators under triple-net leases.
Business context and portfolio
At quarter-end, Sabra owned 99 properties across 24 states: 89 skilled nursing/post-acute facilities, nine senior housing facilities and one acute care hospital, with 10,997 licensed beds or units. It also held a $10 million mezzanine loan with an option to purchase four Texas facilities. Portfolio size increased from 97 properties at December 31, 2011.
Sabra acquired two Pennsylvania skilled nursing facilities for $29.9 million in a sale-leaseback, entering a 15-year master lease with two five-year renewal options. It also originated the five-year, 11% fixed-rate mezzanine loan, secured by borrower equity and carrying a purchase option on the underlying facilities.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $23.7 million | $17.6 million |
| Net income | $4.4 million | $1.2 million |
| Basic and diluted earnings per share | $0.12 | $0.05 |
| Net cash from operating activities | $16.5 million | $12.5 million |
| FFO per diluted share | $0.32 | $0.29 |
| AFFO per diluted share | $0.38 | $0.35 |
Revenue rose 35%, primarily reflecting acquisitions completed since the prior-year period; rental income increased $6.1 million, including $5.7 million from acquired properties and $0.4 million from rent escalators on properties held in both periods. Net income increased to $4.4 million. General and administrative expense rose 62% to $4.3 million, including $0.5 million in acquisition pursuit costs and higher stock-based compensation. Interest expense was $7.7 million, up slightly from $7.6 million.
Operating cash flow was $16.5 million. Investing used $40.2 million, mainly for the Pennsylvania acquisition and mezzanine loan; financing used $15.8 million, including $12.2 million of dividends. Cash and cash equivalents fell from $42.3 million at year-end to $2.7 million at March 31. The filing states management believes cash, operating cash flow and available borrowing capacity are sufficient for operations, debt service and dividends over the next 12 months.
Balance sheet, debt and liquidity
Total assets were $746.5 million and stockholders’ equity was $320.6 million at March 31, 2012. Debt comprised $225.0 million of 8.125% senior notes due 2018 and $157.1 million of mortgage principal. Mortgage rates averaged 6.29% on fixed-rate debt and 5.50% on variable-rate debt; $58.9 million of mortgage debt was variable-rate. The company reported no revolver borrowings and $200 million available under its amended secured revolver, subject to borrowing-base terms. An accordion feature permits up to $150 million of additional capacity subject to conditions.
Sabra reported compliance with applicable financial covenants. A 100-basis-point increase in rates on variable-rate debt was estimated to increase interest expense by $0.1 million over the following 12 months, assuming debt balances remained unchanged. Scheduled mortgage principal maturities include $86.0 million in 2015; the senior notes mature in 2018.
Changes, outlook and principal risks
- Results are not directly comparable because the portfolio grew through acquisitions. On a pro forma basis, including specified acquisitions and the 2011 share offering as if completed at the start of 2011, Q1 2012 revenue was $24.8 million and net income was $5.7 million, versus $24.1 million and $6.1 million, respectively, in Q1 2011.
- Sabra paid a $0.33-per-share quarterly dividend and announced another $0.33 dividend on April 24, payable May 31, 2012. It did not provide specific company earnings guidance in the supplied filing text.
- Tenant concentration is material: 86 of 99 properties were leased to Sun Healthcare Group subsidiaries, generating 76% of Q1 revenue. Sabra cautioned that tenant operating performance and ability to pay rent depend in part on government reimbursement and other factors.
- CMS’s fiscal 2012 rule reduced skilled nursing facility Medicare reimbursement rates by a net 11.1%. Sun estimated a $40–$45 million impact after mitigation and reported Q1 EBITDAR coverage of 1.44x. CMS subsequently projected a 2.2% net increase for fiscal 2013. Any inability of tenants to offset reimbursement pressure could impair rent payments.
- Other risks include leverage and refinancing access, interest-rate exposure, dependence on tenant performance, and the ability to diversify beyond Sun. The company reported no material legal proceedings, no material change in its previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Sun’s current financial condition, lease coverage and capacity to meet rent obligations, given its contribution to 76% of Sabra’s Q1 revenue.
- How the skilled nursing reimbursement changes and mitigation efforts affect tenant coverage and rent collections.
- Cash needs and dividend coverage after the quarter-end cash decline, and whether operating cash flow and revolver availability remain sufficient.
- Mortgage maturity and refinancing exposure, particularly the $86.0 million scheduled for 2015, and compliance with debt covenants.
- Final purchase-price allocations for the 2012 property acquisitions and the performance and terms of the mezzanine loan and purchase option.