Sabra Health Care REIT, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Sabra is a healthcare real estate REIT with leased and managed senior housing, skilled nursing, behavioral health and other properties, plus loans, preferred equity and joint-venture investments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $161.2 million | $156.0 million | $322.5 million | $319.1 million |
| Net income | $21.2 million | $16.8 million | $11.7 million | $57.4 million |
| Diluted EPS | $0.09 | $0.07 | $0.05 | $0.25 |
| FFO per diluted share | $0.32 | $0.36 | $0.64 | $0.75 |
| AFFO per diluted share | $0.33 | $0.36 | $0.66 | $0.75 |
Q2 revenue rose about 3%, and net income rose about 26% year over year. Six-month revenue was up about 1%, but net income fell sharply, principally reflecting substantially higher losses on real estate sales and lower rental revenue. FFO and AFFO declined in both comparison periods. FFO and AFFO are non-GAAP supplemental measures, not substitutes for cash flow or GAAP income.
Q2 rental and related revenue decreased 9% to $94.3 million, while resident fees and services increased 32% to $58.4 million, reflecting managed-community acquisitions, transitions and improved occupancy and rates. For the first half, rental revenue declined 11% to $190.1 million and resident fees increased 33% to $115.1 million. The filing does not provide a clear consolidated operating-margin measure.
Cash flow, balance sheet and liquidity
- First-half cash from operations was $138.6 million, versus $139.7 million a year earlier. Investing activities provided $105.0 million, including real estate sale proceeds; financing activities used $264.5 million, including $138.7 million of dividends and $98.9 million of net revolver repayments.
- At June 30, cash and cash equivalents were $27.2 million; total debt was $2.44 billion principal, or $2.42 billion net of discounts and financing costs. Total assets were $5.52 billion and equity was $2.94 billion.
- Reported liquidity was approximately $926.7 million: cash of $27.2 million plus $899.5 million available under the revolving facility. Management said available cash, operating cash flow and borrowing capacity should cover requirements for the next 12 months.
- Floating-rate credit-facility borrowings carried rates of 6.34% on the revolver, 6.44% on the U.S. term loan and 6.52% on the Canadian term loan at quarter-end. Interest expense rose 11% in Q2 and 13% for the first half, primarily due to higher rates and borrowings. Interest-rate derivatives hedge portions of term-loan exposure.
- The company reported compliance with applicable debt covenants. It had up to $500 million available under its ATM equity program and had made no sales under the program through June 30.
Material changes and notable items
- Sabra sold 12 facilities in the first half and recorded a $29.3 million net loss on real estate sales; it also recognized $7.1 million of real estate impairment related to a facility that sold. Sale proceeds supported capital recycling and debt reduction.
- Sabra acquired two senior housing communities for aggregate consideration of $51.5 million and paid $17.9 million of contingent consideration after two managed communities met performance targets.
- The managed portfolio expanded through acquisitions and transitions, increasing both resident-fee revenue and operating expenses. Management reported some occupancy and labor improvement, but occupancy remained below pre-pandemic levels and labor availability and costs remained worse than pre-pandemic levels.
- First-half dividends were $0.60 per share. The board declared a further $0.30-per-share dividend payable August 31, 2023.
- Capital requirements included approximately $56 million of future commitments for triple-net leased properties, with about $43 million expected to be spent in the next 12 months, and approximately $49 million of anticipated managed-community capital expenditures, with about $35 million expected over the next 12 months.
Outlook, risks and contingencies
No quantified full-year earnings or FFO guidance is provided in the filing. Management cited inflation, higher interest rates, labor shortages and costs, supply-chain disruption and lingering pandemic effects as pressures on tenants, borrowers and managed communities. These conditions may weaken occupancy and operating results, impair rent or debt-service collections, or require rent restructuring and asset impairments. Further asset sales could also result in additional losses or impairment charges.
Skilled nursing/transitional care facilities generated 42.4% of first-half revenue directly or indirectly, creating exposure to operator performance and government reimbursement. CMS finalized an estimated 4.0% increase in FY2024 Medicare skilled-nursing payment rates, effective October 1, 2023; this estimate excludes potential value-based purchasing reductions. The company’s filing identifies no material legal proceeding or known environmental liability expected to materially affect results. It reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether managed-community occupancy, labor availability and costs continue to improve, and how these trends affect operating results and rent coverage.
- Whether tenants and borrowers maintain timely rent and debt-service payments, particularly given the lower rental revenue and leases not accounted for on an accrual basis.
- Debt refinancing and interest-rate exposure, including variable-rate borrowings, hedge coverage, covenant headroom and scheduled maturities.
- Cash generation relative to dividends, debt service, and the stated near-term capital spending commitments; assess AFFO alongside cash flow and capital needs.
- Proceeds, realized losses and any further impairments from portfolio dispositions, as well as returns from recent acquisitions and investments.
- Whether the anticipated CMS reimbursement increase translates into improved operator performance; the filing’s stated rate change is an estimate and excludes certain reductions.