Sabra Health Care REIT, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Sabra is a healthcare real estate investment trust focused on skilled nursing and transitional care, senior housing, specialty hospitals, loans, preferred equity and managed senior housing. Comparisons with 2017 are affected by the August 2017 Care Capital Properties merger and subsequent acquisitions and dispositions.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $151.8 million | $111.8 million | $484.2 million | $239.2 million |
| Net income attributable to common stockholders | $35.2 million | $12.5 million | $288.7 million | $46.8 million |
| Diluted EPS | $0.20 | $0.11 | $1.62 | $0.57 |
| FFO per diluted share | $0.50 | $0.34 | $1.72 | $1.28 |
| AFFO per diluted share | $0.54 | $0.56 | $1.68 | $1.66 |
| Net cash from operating activities | — | $283.0 million | $53.3 million |
- Q3 rental income was $130.5 million, up $30.3 million year over year; resident fees and services were $17.4 million, up $9.8 million. Growth largely reflects the expanded portfolio.
- Nine-month net income included a $142.4 million net gain on real estate sales. The reported increase in earnings therefore should not be read as comparable recurring operating growth.
- Q3 total expenses were $115.5 million, including $37.3 million interest expense, $48.5 million depreciation and amortization, and an $8.9 million provision for doubtful accounts and loan losses. The filing does not provide a single comparable operating-margin measure.
- At September 30, total assets were $6.91 billion, total equity $3.37 billion and total liabilities $3.54 billion. Real estate investments, net, were $5.98 billion.
- Debt principal totaled approximately $3.37 billion: $255.5 million secured debt, $619.0 million drawn on the revolving facility, $1.20 billion term loans and $1.30 billion senior notes. The revolving facility had $381.0 million available; reported unrestricted cash was about $36.1 million. Management reported total liquidity of approximately $417.1 million. Restricted cash was $103.2 million, including $90.1 million held by exchange accommodation titleholders.
- Net cash used in investing activities was $316.3 million and net cash used in financing activities was $414.5 million for the first nine months. Financing cash use included $245.0 million of dividends and $143.8 million to redeem preferred stock.
Material changes and unusual items
- The CCP merger materially expanded the portfolio and debt base; Sabra cautions that operating results are not directly comparable because of acquisition and disposition activity.
- Sabra acquired a 49% interest in the Enlivant joint venture for $352.7 million before closing costs. The venture owns 172 senior housing communities; Sabra recorded a $3.6 million equity-method loss for the first nine months, including basis-difference amortization.
- Sabra sold 40 properties in the first nine months for net proceeds of $290.9 million, recording a $142.4 million gain. It also recorded $1.4 million of real estate impairment.
- Sabra redeemed all Series A preferred shares on June 1 for $143.8 million, including accrued dividends, and recorded a $5.5 million charge related to original issuance costs.
Outlook, risks and contingencies
- Senior Care Centers: Sabra issued default and lease-termination notices after nonpayment; the operator is running the facilities month to month. Cash rent shortfall was $1.9 million through September 30, deposits were exhausted, and Sabra had stopped recording straight-line rent after May. A non-binding letter of intent proposes selling 36 skilled nursing facilities and two senior housing communities for $405 million, including a possible $27.5 million earnout. The proposed sale is conditional and not assured; Sabra expected completion in early 2019 and said a sale could result in an impairment.
- Genesis: Annual base rent was reduced by $19 million effective January 1, 2018. Sabra sold 28 Genesis-leased facilities and expected to sell 18 of the remaining 26 by the end of Q1 2019, while retaining eight; timing and completion are not assured.
- Management stated that cash, operating cash flow and revolver availability should fund operations, scheduled debt service and dividends for the next 12 months. It anticipated capital expenditures of no more than $56 million over the next 12 months.
- The board declared a $0.45 per-share common dividend payable November 30, 2018. Sabra reported compliance with applicable debt covenants at quarter-end.
- Approximately 63% of nine-month revenue was derived directly or indirectly from skilled nursing and transitional care facilities. Risks include tenant payment capacity, healthcare reimbursement and regulation, significant debt and floating interest rates. A 100-basis-point rate increase was estimated to reduce income by $12.2 million over the following 12 months after hedging effects.
- CMS’s Patient-Driven Payment Model for skilled nursing facilities took effect October 1, 2019. Management cited CMS’s estimate of an aggregate $820 million increase in fiscal 2019 Medicare payments to skilled nursing facilities under the final rule.
- Management reported no material changes to risk factors, no material legal proceedings, and effective disclosure controls. Environmental and legal contingencies were not expected to have a material adverse effect based on information then available.
Investor verification checklist
- Assess recurring earnings and dividend coverage using FFO/AFFO, cash flow and the impact of the $142.4 million disposition gain; note Q3 AFFO per share declined year over year.
- Track Senior Care Centers rent collection, facility operations and whether the proposed sale closes on stated terms and timing.
- Verify progress and realized rent effects from the Genesis dispositions and lease restructuring.
- Review debt maturities, variable-rate exposure, hedging, covenant headroom and the liquidity available after restricted cash is excluded.
- Monitor Enlivant joint-venture performance, debt and the terms or exercise of Sabra’s option to acquire the remaining interest.