Sabra Health Care REIT, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 4, 2015. Sabra is a healthcare real estate investment trust that owns and leases properties and also makes healthcare-related loans and preferred equity investments. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $56.6 million | $43.0 million | $112.2 million | $83.8 million |
| Net income attributable to common stockholders | $14.3 million | $12.2 million | $31.2 million | $2.4 million |
| Diluted EPS | $0.24 | $0.28 | $0.52 | $0.06 |
| FFO per diluted share | $0.45 | $0.50 | $0.98 | $0.51 |
| AFFO per diluted share | $0.51 | $0.53 | $1.02 | $0.57 |
- Q2 rental income was $49.9 million, up 33% year over year, primarily reflecting acquisitions. Interest and other income was $6.7 million. Q2 interest expense was $14.1 million, compared with $11.0 million a year earlier; depreciation and amortization was $14.5 million.
- For the six months, net cash from operating activities was $51.3 million, versus $28.9 million. Investing activities used $320.7 million and financing activities provided $213.8 million. Cash and cash equivalents ended June at $6.0 million, down from $61.8 million at year-end 2014.
- At June 30, total assets were $2.34 billion and total equity was $1.07 billion. Debt carrying amounts totaled approximately $1.24 billion: $142.3 million mortgage notes, $122.0 million revolving borrowings, $272.8 million term loans, and $699.3 million senior notes. The filing reports $394.8 million of variable-rate debt.
- Liquidity was approximately $334 million, consisting of $6 million unrestricted cash and $328 million available under the revolving facility. The company was in compliance with applicable debt covenants. Net interest paid during the six months was $25.4 million.
- Common dividends paid in the first half were $0.78 per share in total; preferred dividends were $5.1 million. The board subsequently declared a $0.41 common dividend and a $0.4453125 per-share Series A preferred dividend, payable August 31, 2015.
Material changes versus the prior comparable period
- Revenue rose 32% in Q2 and 34% for the six-month period, chiefly due to portfolio growth. Real estate investments, net, increased to $1.93 billion from $1.65 billion at December 31, 2014.
- GAAP common-stockholder income increased in Q2, while diluted EPS fell to $0.24 from $0.28 as the weighted-average share count rose. Common shares outstanding increased to 65.1 million from 59.0 million at year-end, including a June offering of 5.9 million shares that generated $147.9 million net proceeds before expenses.
- Six-month GAAP income was substantially higher than in 2014, when results included a $22.3 million loss on extinguishment of debt related mainly to retiring the 2018 notes. FFO and AFFO are supplemental non-GAAP measures; despite higher six-month per-share results, both Q2 measures were lower year over year.
- During the first half, Sabra acquired 13 properties—three skilled nursing/transitional care facilities and 10 senior housing facilities—and made $349.3 million of real estate, loan, and preferred-equity investments. The portfolio comprised 172 properties at June 30, versus 160 at year-end 2014.
- Debt increased from approximately $1.09 billion at December 31, 2014, reflecting acquisition financing and the Canadian term loan. Sabra also modified six HUD-insured mortgages totaling $59.2 million, reducing their weighted-average rate from 4.39% to 3.98%.
Outlook, risks, and unusual items
- Management said available cash, operating cash flow, and revolving-facility capacity were expected to cover operations, scheduled debt service, and dividends for the next 12 months. No full-year earnings or FFO guidance was provided. Management estimated capital expenditures for the next 12 months would not exceed $8 million and anticipated continued investment as suitable opportunities and financing became available.
- Forest Park–Frisco: The tenant could not pay rent beginning in January 2015. At June 30, rent owed was $4.5 million and accumulated straight-line rent receivable was $4.7 million; Sabra reserved $4.6 million and recorded a $3.0 million Q2 doubtful-account provision. A proposed lease restructuring depended on additional financing that had not closed as of August 4. The amended terms reduce and defer rent, and Sabra warned that financing timing and adequacy remained uncertain; a sale of the investment was among the alternatives under consideration.
- Other Forest Park exposures: Sabra reported a $110 million Dallas mortgage investment, with $1.9 million deferred interest at June 30; it recorded no reserve, citing contractual rents, borrower compliance, and collateral value. The Fort Worth construction loan was current, with $59.8 million funded against a $66.8 million commitment.
- Tenant concentration remains significant: Genesis and Holiday represented 32.1% and 15.8% of annualized revenue, respectively; 80 of 172 properties were leased to Genesis subsidiaries. Skilled nursing/transitional care accounted for 54.9% of annualized revenue. Healthcare reimbursement, tenant operating performance, regulation, and tenant insolvency are key risks.
- Sabra added Canadian properties and is exposed to foreign-exchange movements. It uses Canadian-dollar debt and derivatives to hedge some exposure, but stated that hedging cannot eliminate the risk. A 100-basis-point increase in variable rates was estimated to increase interest expense by $3.2 million over the following 12 months, after hedges.
- Unusual or notable items included $5.1 million of Q2 acquisition pursuit costs, a $1.7 million gain on sale of a skilled nursing facility, and a $4.1 million contingent-consideration liability. Management reported no material legal proceedings or known environmental liability, and said disclosure controls were effective.
Most important facts for investors to verify
- Whether the financing needed for the Frisco lease restructuring closed, and whether the tenant can meet revised rent obligations; assess potential for additional reserves or asset sale.
- Genesis and Holiday rent coverage, tenant concentration, and the continuing ability of operators to meet lease and loan obligations.
- Acquisition returns and integration, including the Canadian portfolio and the Maryland NMS properties; verify the status of the planned fourth NMS facility purchase for $58.8 million.
- Debt maturities, variable-rate exposure, covenant headroom, and the adequacy of liquidity after acquisitions, dividends, and further investment.
- The effect of share issuance and acquisition-related costs on per-share performance; compare GAAP earnings with FFO/AFFO and review the company’s non-GAAP definitions.