Sabra Health Care REIT, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
Sabra is a healthcare-focused REIT that owns and finances properties leased to third-party operators. At quarter-end, its portfolio comprised 120 properties (96 skilled nursing/post-acute, 23 senior housing and one acute care hospital), six loan investments and two preferred-equity investments. Properties were located in 27 states and leased under triple-net leases.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $32.9 million | $26.0 million | $97.2 million | $74.9 million |
| Net income | $11.8 million | $5.2 million | $20.7 million | $15.6 million |
| Net income attributable to common stockholders | $9.2 million | $5.2 million | $15.3 million | $15.6 million |
| Diluted EPS attributable to common stockholders | $0.24 | $0.14 | $0.41 | $0.42 |
| FFO per diluted common share | $0.46 | $0.34 | $1.06 | $1.02 |
| AFFO per diluted common share | $0.43 | $0.39 | $1.01 | $1.18 |
- Q3 revenue increased 26% year over year, while common-stockholder net income rose about 77%. For the nine-month period, revenue increased 28%, but common-stockholder net income was slightly lower year over year.
- Q3 rental income was $31.7 million; nine-month rental income was $94.7 million. Management attributed growth to acquired properties and higher straight-line rent adjustments, including fixed 2.5% escalators on Genesis leases effective December 2012.
- Cash provided by operating activities was $49.2 million for the nine months, versus $47.9 million in 2012. Investing activities used $37.4 million; financing activities provided $67.7 million. Cash and cash equivalents ended at $96.6 million.
- At September 30, liquidity was approximately $383.1 million: $96.6 million of unrestricted cash plus $286.5 million available under the revolving facility. No revolver borrowings were outstanding at quarter-end.
- Debt comprised $411.3 million principal of senior notes and $142.2 million of mortgage debt, or $553.5 million in total. Mortgage debt included $57.0 million at variable rates. The $375 million revolving facility matures in July 2016, with a one-year extension option. Sabra reported compliance with applicable debt covenants.
- Total assets were $1.027 billion and stockholders’ equity was $423.2 million at quarter-end. The company declared a $0.34 quarterly common dividend; it also issued 7.125% Series A preferred stock and paid preferred dividends.
Material changes and unusual items
- Sabra issued $200 million of 5.375% senior notes due 2023 and redeemed $113.8 million of 8.125% notes due 2018. The redemption generated a $10.1 million nine-month debt-extinguishment loss, including a $9.3 million cash premium.
- In March, Sabra raised $138.3 million net from its preferred-stock offering. No shares were sold under its $100 million at-the-market common-stock program through September 30.
- Q3 AFFO increased year over year, but nine-month AFFO fell to $38.5 million from $44.5 million. The company’s reconciliation reflects, among other items, higher straight-line rental income adjustments and the debt-redemption premium. AFFO is a non-GAAP measure and is not cash flow available for dividends.
- Sabra’s largest tenant concentration remains Genesis: 81 of 120 properties were leased to Genesis subsidiaries, which generated 63% of nine-month revenue. Genesis is not an SEC registrant; tenant financial information in this filing was provided by Genesis and was not independently verified by Sabra.
Outlook, risks and contingencies
- Management stated that cash, operating cash flow and available revolver borrowings were expected to fund operations, scheduled debt service and dividends for the next 12 months. It anticipated capital expenditures of no more than $3 million over that period.
- Management expects portfolio growth through acquisitions and financing investments, subject to opportunities and available financing. A non-binding Meridian term sheet contemplated up to ten facilities at an estimated aggregate cost of $100 million through 2015; final terms remained under negotiation.
- Sabra had committed to provide up to $66.8 million of construction financing for a Fort Worth hospital; only $0.5 million had been funded by September 30. Construction was expected to finish by mid-2014.
- After quarter-end, Sabra acquired a Frisco hospital for $119.8 million and made a $110 million mortgage loan secured by a Dallas hospital. The filing says these transactions were funded with cash and revolver borrowings; Sabra subsequently borrowed $131 million under the facility.
- Key risks include dependence on tenant performance and government reimbursement, particularly Genesis concentration; leverage and refinancing access; interest-rate exposure; real-estate and tenant credit risks; and maintaining REIT qualification. CMS’s final FY2014 skilled-nursing Medicare rates represented a net 1.3% increase over FY2013.
- The filing reported no material legal proceedings, no known environmental liability expected to materially affect results, and no material change in previously disclosed risk factors. It identified no off-balance-sheet arrangements.
Important facts for investors to verify
- Genesis’s ability to meet lease obligations and the impact of its concentration on Sabra’s rental income; Genesis data in the filing are unaudited and not independently verified.
- Post-quarter liquidity and leverage after the Frisco acquisition, Dallas mortgage loan and $131 million revolver borrowing.
- Whether recurring cash generation and AFFO support common and preferred dividends, given nine-month AFFO per diluted share of $1.01 versus declared common dividends of $1.02 per share.
- Execution, funding and credit risks for the Fort Worth construction loan, the Meridian pipeline proposal and other planned investments.
- Debt maturity, covenant and variable-rate exposure, including the effect of higher rates and future refinancing conditions.