Sabra Health Care REIT, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013 unless stated otherwise. Dollar amounts below are in millions except per-share data.
Business context
Sabra is a healthcare-focused REIT that owns and finances properties leased to third-party operators, generally under triple-net leases. Its portfolio comprised 119 properties across 27 states (96 skilled nursing/post-acute, 22 senior housing and one acute care hospital), three mortgage loans and two preferred equity investments. The portfolio had 12,382 beds or units; leases had a weighted-average remaining term of 11 years.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $32.0 | $23.7 | +35% |
| Rental income | $31.5 | $23.7 | +33% |
| Net income | $9.6 | $4.4 | +117% |
| Net income attributable to common stockholders | $9.3 | $4.4 | — |
| Diluted earnings per common share | $0.25 | $0.12 | — |
| Interest expense | $10.0 | $7.7 | +30% |
| Operating cash flow | $21.6 | $16.5 | +31% |
| FFO / diluted share | $0.46 | $0.32 | — |
| AFFO / diluted share | $0.43 | $0.38 | — |
Revenue growth reflected acquisitions and originations since January 2012, along with higher rental income, including straight-line rent adjustments. GAAP net income included $0.5 million of other income from a fair-value adjustment to contingent consideration. Management presents FFO and AFFO as supplemental, non-GAAP measures; they are not substitutes for GAAP earnings or operating cash flow.
Total assets were $964.6 million and stockholders’ equity was $440.1 million. Cash and cash equivalents were $53.6 million, with a further $194.0 million available under the revolving facility; reported liquidity was $247.6 million. Debt carrying value was $481.8 million: $330.5 million of senior notes and $151.3 million of mortgages. The notes have $325.0 million principal outstanding, bear 8.125% interest and mature in 2018. Mortgage debt includes $57.6 million of variable-rate borrowings. The revolver had no balance outstanding; Sabra reported compliance with applicable debt covenants.
Cash increased by $36.5 million during the quarter. Investing activities used $15.3 million, principally for a $12.9 million mortgage loan and $4.6 million of preferred equity investments, partly offset by $2.2 million of property-sale proceeds. Financing activities provided $30.2 million, including preferred-stock proceeds, offset principally by the $92.5 million revolver repayment and $12.7 million of common dividends.
Material changes and transactions
- Rental income rose $7.8 million year over year; $5.3 million was attributed to properties acquired on or after January 1, 2012, with the remainder primarily related to rent adjustments on Genesis properties.
- Interest expense increased $2.3 million, primarily from the 2012 senior-note issuance and revolver-related costs, partly offset by lower mortgage costs.
- On March 21, Sabra issued 5.75 million shares of 7.125% Series A preferred stock at $25 per share, receiving $138.4 million net. It used part of the proceeds to repay the $92.5 million revolver balance. The preferred shares rank ahead of common stock for dividends and liquidation.
- Sabra established a common-stock at-the-market program for up to $100 million; no shares had been sold under it by quarter-end.
- Sabra originated a $12.8 million, five-year mortgage loan at 9% on a memory-care facility. It also committed up to $7.2 million to preferred equity investments for two Texas facilities; the investments provide a 15% preferred return, with payment deferred under stated terms.
Outlook, risks and contingencies
Management said cash, operating cash flow and available revolver capacity were expected to fund operations, debt service and dividend requirements for the next 12 months. It plans to pursue healthcare property acquisitions, loan originations and development opportunities, subject to suitable investments and financing availability. Expected capital expenditures for the next 12 months were not to exceed $3.0 million. No formal earnings guidance was provided.
Tenant concentration is a key risk: 83 of 119 properties were leased to Genesis subsidiaries, which accounted for 64% of Sabra’s Q1 revenue. Genesis is not an SEC registrant; its financial information was supplied by Genesis, is unaudited and was not independently verified by Sabra. Genesis reported a Q1 net loss of $48.1 million and liquidity of $107.6 million at March 31, 2013. Sabra also cited tenant dependence on government reimbursement, leverage and refinancing constraints, interest-rate exposure, and the need to maintain REIT status. A 100-basis-point increase in rates on existing variable-rate debt was estimated to increase interest expense by $0.1 million over the following 12 months, assuming debt balances remained unchanged.
Sabra reported no material legal proceedings or known environmental liability expected to materially affect results, while noting that future environmental liabilities cannot be ruled out. It reported no material change to its previously disclosed risk factors. Subsequent to quarter-end, Sabra repaid a $7.3 million mortgage, expecting approximately $0.7 million in annual interest savings. On May 1, it declared a $0.34 per-share common dividend and an initial preferred dividend of $0.346354 per share, payable May 31.
Important facts for investors to verify
- Genesis’s financial condition, rent coverage and ability to meet lease obligations, given its large share of Sabra’s properties and revenue and the unaudited, unverified nature of the supplied figures.
- Debt maturities, covenant headroom and refinancing options, particularly the 2015 mortgage maturities and the 2018 senior notes.
- Whether reported AFFO and operating cash flow adequately support common and preferred dividends after debt service and future investment needs.
- Performance, repayment terms and purchase-option conditions for the new mortgage and preferred equity investments.
- Progress on portfolio diversification and any issuance under the $100 million ATM program.