Sabra Health Care REIT, Inc. — Q1 2019 Form 10-Q
Business and period: Sabra owns and finances healthcare real estate, primarily skilled nursing/transitional care facilities and senior housing in the U.S. and Canada. This filing covers the three months ended March 31, 2019; comparisons are with Q1 2018. Amounts below are in U.S. dollars.
Financial performance and condition
- Revenue: $136.8 million, down 17.7% from $166.1 million. Rental and related revenue fell to $116.4 million from $144.3 million.
- Profit: Net loss attributable to common stockholders was $77.7 million, or $0.44 per diluted share, versus income of $59.9 million, or $0.34 per diluted share. The loss included $103.1 million of real estate impairment charges.
- REIT supplemental measures: FFO was $77.2 million ($0.43 per diluted share), versus $113.4 million ($0.64); AFFO was $83.2 million ($0.46 per diluted share), versus $107.0 million ($0.60). These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
- Cash flow: Operating cash flow was $54.0 million, down from $101.6 million. Investing activities provided $6.3 million; financing used $87.5 million, including $80.3 million of dividends paid. Cash, cash equivalents and restricted cash declined $27.2 million to $32.6 million.
- Assets and equity: Total assets were $6.46 billion, compared with $6.67 billion at year-end 2018. Total equity was $3.05 billion, down from $3.25 billion.
- Debt and liquidity: Debt, net of financing costs and premiums, was approximately $3.23 billion. Cash and cash equivalents were $22.9 million, and $380 million remained available on the revolving facility. Sabra reported total liquidity of approximately $402.6 million and compliance with applicable debt covenants.
- Dividends: The company paid $0.45 per common share in the quarter and declared a further $0.45 quarterly dividend, payable May 31, 2019.
Material changes versus Q1 2018
- Revenue declined, reflecting property dispositions, lower Senior Care Centers rent, and the adoption of Topic 842, which changed revenue recognition for certain leases. Sabra attributed $11.8 million of the rental revenue decline to leases no longer accounted for on an accrual basis under the new standard.
- The $103.1 million impairment charge was substantially higher than the $0.5 million charge in Q1 2018. It included $92.2 million related to Senior Care Centers properties and estimated indemnification obligations, plus $10.9 million for four other skilled nursing facilities.
- Operating cash flow decreased, while interest expense rose modestly to $36.3 million from $35.8 million.
- The company had no real estate acquisitions in Q1 2019; it acquired properties and invested in the Enlivant joint venture in the prior-year period.
Outlook, commentary and risks
- Management said available cash, operating cash flow and revolving-credit availability should fund operations, scheduled debt service and dividends for the next 12 months. It plans to pursue healthcare property investments and may use ATM offering proceeds to reduce debt or fund investments; no shares had been sold under the $500 million ATM program by March 31.
- Sabra expected 2019 rental and related revenue to increase from the Q1 level as cash payments are received on certain leases, but cautioned that the timing and amount of collections are uncertain. The filing provides no specific earnings or revenue guidance for the full year.
- After quarter-end, Sabra sold 28 Senior Care Centers facilities for $282.5 million gross proceeds and received $5.0 million of settlement payments; a further $4.5 million was due by July 1. It also received $57.2 million to terminate the Holiday master lease as 21 communities converted to managed operations. The combined $338.7 million of proceeds was used to repay revolving-credit borrowings. The sale agreement includes indemnification obligations for certain historical operating liabilities.
- Management estimated capital expenditures for the next 12 months would not exceed $63 million. It also cited exposure to tenant/operator performance, healthcare reimbursement and regulation, interest rates, refinancing needs and the concentration in healthcare real estate. Skilled nursing/transitional care generated 57.6% of Q1 revenue; Medicare’s PDPM payment model was scheduled to take effect October 1, 2019.
- Topic 842 adoption reduced equity by $32.5 million at transition and may make reported rental revenue more variable, because certain rent is recognized only when received if collection of substantially all lease payments is not probable.
- A 100-basis-point increase in rates was estimated to reduce income by $10.3 million over the following 12 months, after hedges; a 100-basis-point decrease was estimated to increase income by $12.5 million. The company reported $1.8 billion of variable-rate debt exposure and $378.1 million of its share of variable-rate Enlivant joint-venture debt.
Most important facts for investors to verify
- Whether rents and receivables affected by Topic 842 are collected, and how the new accounting treatment changes subsequent reported revenue.
- Completion economics and remaining obligations for the Senior Care Centers sale, settlement payments and indemnification, as well as plans for the remaining facilities.
- Performance and cash distributions from the Enlivant joint venture, including its debt and Sabra’s option to acquire the remaining interest.
- Tenant coverage, skilled nursing reimbursement trends and operator performance, especially as PDPM takes effect.
- Debt maturities, variable-rate exposure, covenant headroom and the effect of using sale proceeds to repay the revolving facility.
- Whether AFFO and operating cash flow support the $0.45 quarterly dividend after capital expenditures and other cash needs.