Sabra Health Care REIT, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts are in millions unless noted. Sabra owns and finances healthcare real estate, primarily leased to third-party operators in the U.S. and Canada.
Financial results and position
- Q3 revenue: $59.9, up 36% from $44.0 a year earlier. Rental income was $53.2, up 39%; growth primarily reflected acquired properties.
- Q3 earnings: Net income was $18.0 versus $17.2; net income attributable to common stockholders was $15.5 versus $14.6. Diluted EPS declined to $0.24 from $0.31, alongside a substantially higher weighted-average share count (65.4 million versus 47.9 million).
- Nine-month results: Revenue was $172.1 versus $127.8; net income was $54.3 versus $24.7; common-stockholder income was $46.7 versus $17.0; diluted EPS was $0.76 versus $0.39. The prior-year period included a $22.5 debt-extinguishment loss.
- REIT supplemental measures: Q3 diluted FFO per share was $0.55 versus $0.51 and AFFO was $0.53 versus $0.51. Nine-month FFO was $1.52 per diluted share versus $1.05; AFFO was $1.55 versus $1.10. These are non-GAAP measures, not substitutes for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $79.1 versus $71.2. Investing used $402.7, mainly for acquisitions and investments; financing provided $293.5. Cash and cash equivalents ended at $31.5, down from $61.8 at year-end 2014.
- Debt and liquidity: Debt book value totaled approximately $1,339.7: $168.6 mortgage notes, $204.0 revolver, $267.1 term loans and $699.3 senior notes. Sabra reported $246.0 of revolver availability and approximately $277.4 of total liquidity, including cash. It was in compliance with applicable debt covenants. Scheduled 2018 maturities include $204.0 revolver and $200.0 U.S. term loan balances.
- Dividends: Common dividends declared during the first nine months totaled $1.19 per share. The company subsequently declared $0.41 per common share and $0.4453125 per Series A preferred share, payable November 30, 2015.
Material changes and business activity
- Sabra invested $443.0 during the first nine months, including $406.2 in real estate acquisitions. Its portfolio grew to 178 properties, 15 loan investments and 10 preferred-equity investments.
- Major acquisitions included nine Canadian senior-housing facilities for U.S. $138.8 and three Maryland skilled-nursing facilities for $175.2. A fourth Maryland facility purchase for $58.8 was pending, subject to customary closing conditions.
- Common shares outstanding increased to 65.1 million from 59.0 million at year-end 2014. A June offering of 5.9 million shares generated $147.9 in proceeds before expenses, used primarily to repay revolver borrowings.
- Q3 expenses included a $2.5 provision for doubtful accounts and a $3.8 loss on sale of real estate. Nine-month doubtful-account provisions were $6.6, primarily related to Forest Park-Frisco.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and revolver capacity should fund operations, scheduled debt service and dividends for the next 12 months. It intends to pursue further healthcare-property investments, subject to suitable opportunities and financing.
- Forest Park-Frisco: The tenant filed for Chapter 11 after a proposed lease restructuring failed. Sabra agreed to provide up to $18.5 of debtor-in-possession financing and had funded $3.3 by quarter-end. The filing reports $2.3 of unpaid cash rent net of reserves; collection of rent and the loan depends on the bankruptcy outcome. Sabra expects to seek a new operator or sell the property, subject to bankruptcy-court approval.
- Forest Park-Dallas and Fort Worth: Both borrowers missed interest payments due October 1, 2015 and received default and foreclosure notices; foreclosure sales were scheduled for December 1, subject to possible court action. Management said third-party appraisals indicated collateral values sufficient to cover loan balances and unpaid interest; no impairment reserves were recorded.
- Genesis and Holiday represented 32.8% and 16.2% of annualized revenue, respectively. Skilled-nursing/transitional-care facilities contributed 55.1% of annualized revenue, exposing Sabra indirectly to tenant operating and reimbursement risks. CMS’s FY2016 skilled-nursing payment rates increased a net 1.2%.
- A 100-basis-point rise in variable borrowing rates was estimated to increase annual interest expense by $4.0 after hedging. Management identified tenant credit, healthcare regulation and reimbursement, interest rates, refinancing, foreign exchange and REIT qualification among key risks. No material change to previously reported risk factors was cited.
Important facts for investors to verify
- Developments in the Frisco bankruptcy, DIP-loan recovery, unpaid rent and property resolution.
- Outcomes of the Dallas and Fort Worth defaults and foreclosures, including realized collateral values and any impairment recognition.
- Genesis and Holiday tenant financial condition, lease coverage and concentration as portfolio revenue changes.
- Funding and refinancing plans for the 2018 debt maturities, revolver availability, covenant headroom and dividend coverage.
- Acquisition economics and the effect of share issuance, interest expense, doubtful-account provisions and property dispositions on recurring FFO and AFFO.