Sabra Health Care REIT, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Sabra is a healthcare REIT that owns, finances and leases healthcare real estate, primarily skilled nursing/transitional care and senior housing properties in the U.S. and Canada. At quarter-end, its portfolio included 432 real estate properties, plus loans, preferred equity and a 49% interest in the Enlivant joint venture.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $219.4 million | $166.3 million | $356.1 million | $332.4 million |
| Net income attributable to common stockholders | $83.7 million | $193.6 million | $6.0 million | $253.5 million |
| Diluted EPS | $0.46 | $1.08 | $0.03 | $1.42 |
| FFO attributable to common stockholders | $139.4 million | $104.5 million | $216.6 million | $217.9 million |
| AFFO attributable to common stockholders | $132.4 million | $97.5 million | $215.5 million | $204.5 million |
Q2 revenue growth primarily reflected $66.9 million of income from converting 21 Holiday communities from a triple-net lease to managed operations, including a $57.2 million termination payment. Resident fees also rose with the managed portfolio. Rental revenue fell as properties were sold, Holiday communities left the leased portfolio, and lease accounting and restructurings affected recognition.
GAAP earnings comparisons were strongly affected by unusual items. Q2 2018 included $142.9 million of real estate sale gains, compared with $2.8 million in Q2 2019. For the first half, 2019 included $105.1 million of real estate impairments, including $92.2 million related to Senior Care Centers facilities and estimated indemnification obligations; 2018 included $1.4 million of impairments and $142.4 million of sale gains. FFO and AFFO are non-GAAP measures and are not cash flow or a substitute for GAAP earnings.
For the six months, operating cash flow was $191.9 million, versus $211.6 million a year earlier. Investing activities provided $317.9 million, chiefly from $322.7 million of property-sale proceeds. Financing activities used $512.2 million, including debt repayment and $161.7 million in dividends. Cash, cash equivalents and restricted cash ended at $57.5 million.
Balance sheet, debt and liquidity
- At June 30, total assets were $6.12 billion, total liabilities $2.86 billion and total equity $3.26 billion. Real estate investments, net, were $5.38 billion.
- Debt, net, was $2.686 billion: $114.7 million secured debt, $275.0 million drawn on the revolver, $1.190 billion term loans and $1.107 billion senior unsecured notes.
- Liquidity was approximately $772.4 million, comprising $47.4 million of unrestricted cash (excluding joint-venture cash) and $725.0 million available on the revolver. Sabra reported covenant compliance.
- Sabra issued $300 million of 4.80% notes due 2024 and redeemed $500 million of 5.50% notes due 2021. The redemption generated a $10.1 million extinguishment loss. The company also sold 11.1 million shares through its ATM program for $217.3 million gross proceeds; $282.7 million remained available.
- Management expected an amended credit facility to extend maturities and reduce borrowing spreads, subject to completion and final terms. The existing facility had a 2021 revolver maturity and term-loan maturities through 2022.
Changes, outlook and risks
- Sabra adopted lease accounting Topic 842 on January 1, 2019. Adoption reduced equity by $32.5 million and changed rental-revenue recognition and presentation; management said reported rental revenue may be more variable.
- During the first half, Sabra sold 31 skilled nursing/transitional care facilities and seven senior housing communities for $315.0 million net of closing costs, and completed no acquisitions. It transitioned 21 Holiday communities to managed operations and eight former Senior Care Centers facilities to a new operator; it expected to sell two remaining facilities.
- Management said available cash, operating cash flow and revolver capacity should cover operations, scheduled debt service and dividends for the next 12 months. It anticipated capital expenditures of no more than $64 million over the next 12 months. The board declared a quarterly common dividend of $0.45 per share, payable August 30, 2019.
- CMS finalized an estimated 2.4% net increase in fiscal 2020 skilled nursing facility Medicare rates, effective October 1, 2019. Sabra noted that 56.8% of first-half revenue, excluding the Holiday termination income, was derived directly or indirectly from skilled nursing/transitional care.
- Risks include tenant/operator financial health and rent collection, healthcare reimbursement and regulation, sector concentration, debt and interest-rate exposure, and successful transitions or dispositions. A 100-basis-point rate increase, after hedging effects and including Sabra’s share of joint-venture debt, was estimated to reduce income by $7.1 million over the following 12 months. Sabra reported no material change to previously disclosed risk factors and no material legal proceedings.
Important facts for investors to verify
- Whether the Holiday managed communities sustain occupancy, rates and operating performance after the lease conversion.
- Collection and recovery prospects for receivables affected by Topic 842, including the $15.0 million of cash-rent receivables written off at adoption that management believed collectible.
- Final costs and exposure under the Senior Care Centers buyer indemnity, and the status and proceeds of the remaining facility sales.
- Completion and final pricing, maturities and covenants of the expected amended credit facility; ongoing leverage, refinancing needs and variable-rate exposure.
- Dividend coverage using recurring operating cash flow and AFFO, while accounting for capital spending and the effect of ATM share issuance.
- Actual operator and portfolio effects of the October 2019 Medicare PDPM payment-model change.