Sabra Health Care REIT, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Sabra is a healthcare real estate investment trust with leased and managed properties, loans, preferred equity and joint venture investments. At quarter-end, it held 407 real estate properties for investment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $140.8 million | $128.6 million | $459.8 million | $433.9 million |
| Net income (loss) | $(50.1) million | $10.2 million | $7.3 million | $(88.9) million |
| Diluted EPS | $(0.22) | $0.05 | $0.03 | $(0.41) |
| FFO per diluted share | $0.28 | $0.27 | $1.03 | $1.05 |
| AFFO per diluted share | $0.34 | $0.38 | $1.09 | $1.15 |
Q3 revenue growth reflected higher interest and other income and resident fees, partly offset by lower rental revenue. Q3 net loss principally included $60.9 million of real estate impairment; nine-month impairment was $72.6 million. The prior-year nine-month loss included a $164.1 million impairment of the Enlivant joint venture investment. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $248.1 million, versus $258.5 million in 2021. Investing activities used $185.1 million; financing activities used $148.2 million. Cash, cash equivalents and restricted cash ended at $31.1 million.
- Debt and liquidity: Debt principal totaled $2.47 billion (net carrying amount $2.45 billion). Unrestricted cash was $26.3 million and available revolver capacity was $861.4 million, for reported liquidity of $887.7 million. The revolver matures in September 2023, with two six-month extension options; term loans mature in 2024. Sabra reported covenant compliance at September 30.
- Dividends: The company paid $0.30 per share quarterly during the first nine months and declared another $0.30 dividend payable November 30, 2022.
- Margins: The filing does not provide a single company-wide operating margin measure. Managed-portfolio operating expenses increased with labor rates, staffing, utilities and occupancy-related costs.
Material changes and transactions
- Rental and related revenue declined 1% in Q3 and 4% for the first nine months year over year. Avamere’s annual base rent was reduced from $44.1 million to $30.7 million effective February 1, 2022.
- During Q3, Sabra stopped accrual accounting for its North American Health Care leases, wrote off $15.6 million of straight-line rent receivables, and terminated the leases. North American remained in possession of the buildings at quarter-end; the lease termination was accounted for as a modification pending transfer approvals.
- Sabra acquired three managed senior housing communities for $98.3 million during the first nine months, formed the Sienna joint venture (with a $128.0 million cash investment), and sold 11 facilities for net proceeds of $62.8 million, recognizing a $4.6 million aggregate loss on sale.
- Revenue from interest and other income rose substantially, primarily reflecting the Recovery Centers of America mortgage loan funded in 2021. Managed-community resident fees also increased, supported by occupancy and rate growth.
Outlook, risks and contingencies
- Management said available cash, operating cash flow and revolver capacity were expected to cover requirements for the next 12 months. The filing gives no formal earnings or FFO guidance.
- COVID-19 continues to pressure tenant and managed-community occupancy and operating costs; occupancy remained below pre-pandemic levels. Pandemic-related rent deferrals to seven tenants totaled $5.0 million, of which $1.0 million had been repaid. Federal Provider Relief Fund distributions had effectively ended.
- Inflation and labor-market challenges are raising operator expenses. The company is exposed to tenant payment and reimbursement risks, healthcare regulation, interest rates, refinancing and debt-service needs, and potential further real estate or joint-venture impairments.
- Sabra expects approximately $63 million of triple-net property capital commitments and $27 million of managed-community capital expenditures over the next 12 months; it also had up to $72.3 million of committed future funding for loans and preferred equity investments.
- The Enlivant investment’s realized value may differ materially from its carrying value; additional impairment may be required. Management reported no material legal proceedings or expected material environmental liability. Disclosure controls were deemed effective, with no material change in internal control reported.
Key facts for investors to verify
- Whether the large real estate impairments and planned asset sales are complete, and what proceeds Sabra ultimately realizes.
- North American lease transfers and rent collection, and the ongoing effect of the Avamere rent reduction on cash rental income.
- Tenant occupancy, labor and other operating-cost trends, government reimbursement support, and managed-portfolio performance.
- Liquidity and refinancing plans ahead of the 2023 revolver and 2024 term-loan maturities, including the cost of variable-rate borrowings.
- Enlivant joint venture performance and valuation, as well as the company’s capacity to fund capital commitments and sustain dividends.