Sabra Health Care REIT, Inc. — Q1 2015 Form 10-Q
Business context and period: Quarterly results for the three months ended March 31, 2015. Sabra is a healthcare REIT that owns and finances healthcare real estate, principally leased to third-party operators. At quarter-end, its portfolio included 160 properties, 14 loan investments and six preferred-equity investments.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $55.6 million | $40.9 million |
| Net income (loss) | $19.4 million | $(7.3) million |
| Net income (loss) attributable to common stockholders | $16.9 million; $0.29 basic and $0.28 diluted per share | $(9.9) million; $(0.25) per share |
| Net cash provided by operating activities | $24.7 million | $1.2 million |
| Net cash used in investing activities | $6.2 million | $128.1 million |
| Net cash used in financing activities | $76.1 million | Net cash provided: $126.9 million |
- Rental income was $49.5 million, up $13.4 million (37%); interest and other income was $6.1 million, up $1.3 million.
- Total expenses rose to $36.0 million from $26.3 million. Depreciation and amortization increased to $14.2 million from $9.4 million; interest expense rose to $13.9 million from $11.1 million; and general and administrative expense increased to $8.0 million from $5.9 million.
- FFO was $31.0 million ($0.52 per diluted share) and AFFO was $30.5 million ($0.51 per diluted share). These are non-GAAP supplemental measures, not substitutes for cash flow or GAAP earnings.
- Cash and cash equivalents were $4.2 million at March 31, down from $61.8 million at December 31, 2014. Restricted cash was $6.9 million. Management reported approximately $428.1 million of liquidity, including $424.0 million available on the revolving facility.
- Total debt carrying value was approximately $1.049 billion: $699.3 million senior notes, $200.0 million term loan, $26.0 million revolver borrowings and $123.3 million mortgage debt. Variable-rate debt was $226.0 million. The revolver and term loan mature in 2018, subject to a one-year extension option; the senior notes mature in 2021 and 2023.
- Total assets were $2.004 billion and total equity was $932.2 million. The common dividend paid during the quarter was $0.39 per share; the Series A preferred dividend was $2.6 million.
Changes versus the prior comparable period
- Revenue growth primarily reflected properties acquired after January 1, 2014. Management attributed $14.6 million of the rental-income increase to acquired properties, partly offset by dispositions and lease changes.
- Results turned profitable compared with a prior-year loss. The comparison is materially affected by the $22.1 million debt-extinguishment loss recorded in Q1 2014 when the remaining 2018 notes were redeemed; no such loss occurred in Q1 2015.
- Interest expense increased, primarily due to the 2021 notes and term loan. General and administrative expense increased, including a $1.1 million higher allowance for doubtful accounts and costs related to transitioning two facilities to new operators.
- Operating cash flow increased to $24.7 million, while investing outflows were much lower because Q1 2015 had no real estate acquisitions; Q1 2014 included $108.7 million of acquisitions.
- During Q1 2015, Sabra repaid $42.0 million on its revolver and modified six HUD-insured mortgage notes totaling $59.2 million, reducing their weighted-average rate from 4.39% to 3.98% without changing original maturities.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and borrowing capacity should cover operations, scheduled debt service and dividends for the next 12 months. The company plans to pursue additional healthcare real estate investments, funded through cash flow, borrowing and potential securities issuance.
- Management estimated capital expenditures for the next 12 months would not exceed $4.0 million. No formal earnings or revenue guidance was provided.
- Tenant concentration is significant: Genesis and Holiday represented 36.1% and 17.7% of annualized revenue, respectively; 81 of 160 properties were leased to Genesis subsidiaries. Skilled nursing/transitional care accounted for 53.4% of annualized revenue.
- CMS’s projected FY2016 Medicare rate increase for skilled nursing facilities was 1.4%, versus the 2.0% FY2015 increase described in the filing. Tenant performance is exposed to healthcare reimbursement, regulation and operating conditions.
- A 100-basis-point rise in rates on variable-rate debt would increase annual interest expense by an estimated $2.3 million, assuming debt balances remained unchanged. A $200.0 million interest-rate cap limits LIBOR to 2.0% for the hedged borrowings.
- Sabra had $90.8 million of remaining funding commitments for loan and preferred-equity investments, of which $72.9 million had been funded. A $4.0 million contingent-consideration liability was recorded, with payout dependent on facility performance.
- The filing reported no material legal proceedings or material change in previously disclosed risk factors. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Genesis and Holiday tenant credit, lease coverage and their ability to meet rent obligations, given their combined 53.8% share of annualized revenue.
- Liquidity and dividend coverage: cash was $4.2 million, while the reported liquidity figure relies substantially on unused revolver capacity; assess debt covenants and refinancing needs.
- Debt maturity, interest-rate exposure and the extent to which the interest-rate cap protects against rising rates.
- Whether acquired-property contributions and loan/preferred-equity income are sustainable, and how the allowance for doubtful accounts and contingent consideration may develop.
- Confirm the continued declaration and payment of common and preferred dividends; the board declared another $0.39 common dividend and $0.4453125 preferred dividend for May 2015.