Sabra Health Care REIT, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Sabra is a healthcare-focused REIT that owns and finances skilled nursing, senior housing, specialty hospital and other healthcare properties in the U.S. and Canada. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are with the same periods in 2018. The portfolio included 434 properties at quarter-end, including 44 senior housing communities operated under management agreements.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $149.8 million | $151.8 million | $506.0 million | $484.2 million |
| Net income attributable to common stockholders | $23.3 million | $35.2 million | $29.3 million | $288.7 million |
| Diluted EPS | $0.12 | $0.20 | $0.16 | $1.62 |
| FFO per diluted share | $0.45 | $0.50 | $1.64 | $1.72 |
| AFFO per diluted share | $0.46 | $0.54 | $1.63 | $1.68 |
- Revenue mix and operating costs: Q3 rental and related revenue fell to $110.1 million from $130.5 million, while resident fees and services rose to $36.4 million from $17.4 million, mainly reflecting the conversion of 21 Holiday communities to managed operations. For the first nine months, rental revenue decreased 19% to $339.3 million; resident fees increased 71% to $89.5 million.
- Profit comparability: Nine-month 2018 results included $142.4 million of real estate sale gains. 2019 included $119.1 million of real estate impairment charges and $66.9 million of Holiday lease-termination income. These unusual items materially affect comparisons; 2019 nine-month GAAP net income was also reduced by $10.8 million of debt-extinguishment costs.
- Cash flow: Nine-month operating cash flow was $277.0 million versus $283.0 million. Investing activities provided $298.5 million, primarily from $321.7 million of property-sale proceeds; financing activities used $595.7 million. Cash, cash equivalents and restricted cash totaled $39.7 million at period-end, including $29.4 million unrestricted cash.
- Debt and liquidity: Debt carrying amount, net, was $2.603 billion at September 30, versus $3.232 billion at December 31, 2018. The company reported $200 million drawn and $800 million available on its revolving credit facility, and total liquidity of approximately $829.4 million including unrestricted cash. Sabra reported compliance with applicable debt covenants.
- Equity and distributions: Sabra issued 15.3 million shares through its at-the-market program during the first nine months, generating $308.5 million gross proceeds. It paid $247.2 million of common dividends; the declared quarterly dividend was $0.45 per share, including a subsequent declaration for payment November 29, 2019.
Material changes and management outlook
- Sabra sold 38 facilities during the first nine months for $315.0 million net consideration and a $1.2 million net gain. It acquired two specialty hospital/other facilities for $15.0 million.
- The Holiday master lease was terminated and 21 communities converted to managed operations on April 1, 2019. The company recorded $57.2 million cash termination consideration and a further $9.7 million gain from assumed fixed assets net of liabilities.
- Senior Care Centers-related actions included the sale of 28 facilities for $282.5 million gross proceeds, transition of eight facilities to another portfolio operator, and an estimated $95.2 million impairment charge across related and additional facilities. The impairment includes $10.2 million for estimated contractual indemnification obligations to a buyer. Sabra expected to sell two remaining facilities.
- The company amended and restated its credit agreement in September. Subsequent to quarter-end, it issued $350 million of 3.90% notes due 2029 and redeemed $200 million of 5.375% notes due 2023 on October 27; the latter generated $5.6 million of redemption costs and write-offs after quarter-end.
- Management stated that cash, operating cash flows and available revolver borrowings were expected to cover operations, scheduled debt service and dividends for the next 12 months. It anticipated capital expenditures of up to $57 million over the next 12 months, including $43 million expected to generate incremental rental income. No full-year earnings or revenue guidance is provided in the filing text.
- Management expects to pursue healthcare property investments and selective dispositions. It noted rental revenue may become more variable following adoption of lease accounting Topic 842; adoption reduced equity by $32.5 million, and future rental write-offs or recoveries may affect rental revenue.
Risks, contingencies and unusual items
- Tenant operating performance and ability to pay rent are central risks. Skilled nursing/transitional care facilities generated 56.5% of revenue for the first nine months, excluding the one-time Holiday lease-termination income. Medicare’s Patient-Driven Payment Model became effective October 1, 2019; reimbursement, regulation and tenant financial health may affect results.
- Variable-rate exposure includes $1.4 billion of company variable-rate debt and Sabra’s $376 million share of unconsolidated joint-venture debt. After hedges, a 100-basis-point rate increase was estimated to reduce income by $7.8 million over the following 12 months. The filing also identifies Canadian currency exposure and LIBOR transition risk.
- Sabra’s 49% Enlivant joint-venture investment had a $324.3 million carrying value and generated a $5.6 million loss for the nine months. Sabra has an option to acquire the remaining interest by January 2, 2021, but the filing cautions that the acquisition may not occur.
- Management reported no material legal proceedings or reasonably possible material legal loss contingencies known to it, and no expected material adverse environmental liability. It identified no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether managed-community operating performance, particularly the Holiday portfolio, supports revenue and margins as it replaces triple-net rental income.
- The status and potential cash impact of the Senior Care Centers indemnification obligations, remaining facility sales and impairment assumptions.
- Tenant rent coverage and collection trends, especially among skilled nursing operators, and the effects of Topic 842 and the new Medicare payment model.
- Debt refinancing outcomes, variable-rate exposure, covenant headroom and the sustainability of the $0.45 quarterly dividend relative to recurring cash generation and AFFO.
- The assumptions behind management’s liquidity and capital expenditure outlook, and the timing and terms of any Enlivant joint-venture transaction.