Sabra Health Care REIT, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone quarterly report; fourth-quarter results are also summarized below. Financial statements are audited and prepared under U.S. GAAP.
Business context
Sabra is a healthcare real estate investment trust that primarily leases properties to third-party operators, generally under triple-net leases. At year-end, its portfolio included 183 properties with 18,878 beds or units, 10 loan investments and 12 preferred equity investments, across the United States and Canada. Nearly all leased properties were subject to long-term leases, with a weighted-average remaining term of more than nine years.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $260.5 million | $238.9 million |
| Net income | $70.2 million | $79.4 million |
| Net income attributable to common stockholders | $60.0 million; $0.92 per diluted share | $69.2 million; $1.11 per diluted share |
| Operating cash flow | $176.7 million | $121.1 million |
| FFO attributable to common stockholders (non-GAAP) | $164.4 million; $2.51 per diluted share | $132.4 million; $2.12 per diluted share |
| AFFO attributable to common stockholders (non-GAAP) | $161.5 million; $2.45 per diluted share | $133.9 million; $2.14 per diluted share |
| Common dividends declared per share | $1.67 | $1.60 |
Revenue rose about 9%, largely reflecting acquired properties. Common-stockholder net income declined about 13%, while FFO increased about 24% and AFFO about 21%. FFO and AFFO are supplemental non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Fourth quarter 2016: Revenue was $61.8 million, net income attributable to common stockholders was $20.6 million ($0.32 basic and $0.31 diluted per share), operating cash flow was $42.9 million, FFO was $40.7 million ($0.62 per diluted share), and AFFO was $38.8 million ($0.59 per diluted share). The first quarter’s common-stockholder loss of $18.3 million reflected a $29.8 million real estate impairment.
Balance sheet and liquidity: Total assets were $2.27 billion and total liabilities $1.25 billion at year-end. Gross debt principal was approximately $1.23 billion: $700 million of senior notes, $338 million of term loans, $163.6 million of mortgage debt and $26 million drawn on the revolving facility. Unrestricted cash was $25.5 million, and available revolving-credit capacity was $474 million, for reported liquidity of approximately $499.5 million. Sabra reported compliance with applicable debt covenants.
Portfolio and operations: Stabilized occupancy was 88.2% for skilled nursing/transitional care, up from 87.0%, and 89.4% for senior housing, down from 90.3%. Annualized revenue concentration was 32.3% Genesis, 16.2% Holiday and 12.4% NMS. Skilled nursing/transitional care represented 56.6% of annualized revenue.
Material changes and unusual items
- Sabra invested $165.7 million during 2016, including $153.6 million for one skilled nursing facility and six senior housing facilities. It sold four skilled nursing facilities, one acute care hospital and land for $98.0 million net of selling expenses.
- A $29.8 million impairment on the Forest Park–Frisco hospital contributed to an aggregate $6.1 million net loss on 2016 real estate sales.
- Loan and other investment book value fell to $96.0 million from $300.2 million, principally following $216.0 million of loan repayments, including repayment of the Forest Park–Dallas mortgage and Forest Park–Fort Worth construction loan.
- Four loan investments totaling $31.2 million were on nonaccrual status at year-end; three loans with $17.4 million principal were considered impaired. Sabra recorded a $5.5 million provision for doubtful accounts and loan losses for the year.
- Other income of $10.7 million included lease termination payments, contingent-consideration adjustments and a hedge ineffectiveness gain. Operating cash flow also included $9.6 million of default interest and a $10.0 million lease termination payment.
- Debt financing shifted materially: revolving-credit borrowings declined by a net $229 million, while term loans increased. Interest expense rose to $64.9 million from $59.2 million.
Outlook, risks and contingencies
- Management stated that cash, operating cash flow and available revolver capacity were expected to cover operations, scheduled debt service and dividend requirements for the next 12 months. It anticipated capital expenditures of no more than $8 million over that period. No specific earnings or FFO guidance is provided in the supplied filing text.
- Sabra and Genesis signed memoranda of understanding to market 35 skilled nursing facilities for sale and amend leases and guarantees for the remaining 43 Genesis-leased facilities. Sales were still being marketed; completion, timing and terms were not assured.
- Tenant concentration is a significant risk: Genesis alone generated 32.3% of annualized revenue. Sabra also depends on tenant operating performance, occupancy, reimbursement rates and continued access to government and third-party payors.
- Debt is substantial, and variable-rate borrowings, refinancing needs, restrictive covenants and limits on distributions could constrain flexibility. A 100-basis-point rate increase was estimated to raise annual interest expense by $0.3 million after hedging.
- Other material risks include healthcare regulation and reimbursement reductions, tenant insolvency or bankruptcy, difficulty replacing tenants or selling properties, Canadian-dollar exposure, environmental liabilities and maintaining REIT qualification.
- No material legal proceeding or material environmental liability was identified in the filing. Sabra reported effective disclosure controls and internal control over financial reporting; the independent auditor also opined that internal control was effective.
Important facts for investors to verify
- Progress, completed sale terms and expected rent or guarantee effects of the Genesis facility sale and lease-amendment plan.
- Current financial condition, rent coverage and payment status of Genesis, Holiday and NMS, including any subsequent developments after the reporting date.
- Recoverability and collection status of impaired and nonaccrual loans, and whether further reserves or write-offs are required.
- Debt maturities, covenant headroom, refinancing plans and available liquidity, including the distinction between cash and undrawn credit capacity.
- Recurring operating cash flow and dividend coverage after excluding default interest, lease termination receipts and other unusual items; assess FFO/AFFO alongside GAAP results.