Sabra Health Care REIT, Inc. quarterly report, Q3 FY2012

Sabra Health Care REIT, Inc. — Q3 2012 Form 10-Q

Reporting period: Three and nine months ended September 30, 2012. Unaudited results. Sabra owns and leases healthcare real estate, primarily under triple-net leases. At quarter-end it had 105 properties across 26 states, plus two mortgage loans and one mezzanine loan.

Financial performance and position

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total revenue	$26.0 million	$21.5 million	$74.9 million	$57.9 million
Net income	$5.2 million	$2.3 million	$15.6 million	$5.7 million
Diluted EPS	$0.14	$0.07	$0.42	$0.20
Operating cash flow	Not provided for quarter	Not provided for quarter	$47.9 million	$34.5 million

Q3 rental income rose 19% to $25.4 million; nine-month rental income rose 29% to $73.9 million. Growth chiefly reflected properties acquired since the comparable periods, with additional contribution from contractual rent escalators.
Q3 interest expense increased 25% to $9.5 million; nine-month interest expense increased 12% to $25.4 million. General and administrative expense fell 19% in Q3 to $3.8 million, but rose 13% year to date to $11.6 million.
Calculated net margin was approximately 20.1% for Q3 2012 versus 10.9% in Q3 2011; year-to-date margin was approximately 20.8% versus 9.8%. These comparisons reflect acquisition timing and financing and expense changes, not solely same-property performance.
Nine-month FFO was $37.9 million ($1.02 per diluted share), versus $24.9 million ($0.89 per share); AFFO was $44.5 million ($1.18 per share), versus $31.9 million ($1.13 per share). These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
At September 30, total assets were $843.0 million, cash and cash equivalents were $30.5 million, and total equity was $311.3 million. Debt book value was $488.4 million: $330.9 million of senior notes and $157.5 million of mortgage notes. The revolver had no balance outstanding.
Reported liquidity was approximately $232.1 million: $30.5 million cash plus $201.6 million available under the revolving facility. Operating cash flow of $47.9 million was more than offset by $121.2 million of investing outflows; cash fell $11.8 million from year-end to $30.5 million.

Material changes and transactions

Sabra acquired six skilled nursing and two senior housing facilities for $98.1 million during the first nine months; its portfolio grew from 97 properties at year-end 2011 to 105 at September 30, 2012.
It originated three loans totaling approximately $22.1 million. These included an $11.0 million mortgage loan at 8.5% and a $10.0 million mezzanine loan at 11%; all loans were reported performing and unimpaired.
In July, Sabra issued $100 million principal amount of 8.125% senior notes at 106% of face value, receiving $103 million net proceeds. A portion repaid $42.5 million of revolver borrowings. Total senior-note principal was $325 million, due in 2018.
The revolving facility’s capacity was increased to $230 million through its accordion feature; $201.6 million was available at quarter-end. The company refinanced certain HUD mortgages, reducing the applicable rates to 2.49%, and reduced the spread on certain floating-rate mortgage debt.
Reported net income and EPS improved year over year, but pro forma results—adjusting for acquisition, financing, and equity-issuance timing—showed lower earnings: nine-month pro forma net income was $16.6 million versus $18.8 million, and diluted EPS was $0.45 versus $0.51.

Outlook, risks, and unusual items

Management said available cash, operating cash flow, and revolver availability should fund operations, scheduled debt service, and dividends for the next 12 months. It plans further healthcare real estate investment as opportunities and financing permit; anticipated capital expenditures for the next 12 months were not expected to exceed $3 million. No company earnings guidance was provided.
Sabra’s largest concentration is Sun: 86 of 105 properties were leased to Sun subsidiaries, representing 69% of Q3 revenue and 72% of nine-month revenue. Sun’s nine-month EBITDAR coverage of consolidated rent was 1.49x; Sun reported lower adjusted earnings before rent and related items than in the prior-year period.
Sun had agreed to be acquired by Genesis for $8.50 per share; closing was subject to customary conditions and regulatory approvals and was expected in late fall 2012. Sabra anticipated a Genesis parent guaranty, a fixed 2.5% rent escalator, and cross-default protections, but stated there was no assurance the transaction or anticipated lease changes would occur.
Skilled nursing reimbursement is a key tenant risk. CMS’s FY2012 rule reduced Medicare rates by 11.1%; FY2013 rates increased 1.8%. Sabra reported no tenant payment impact to date but warned that inadequate mitigation could affect tenants’ ability to pay rent.
Other risks include dependence on tenant operating performance and government reimbursement, debt service and covenant restrictions, refinancing and interest-rate exposure, real estate illiquidity, and REIT compliance. A 100-basis-point increase on variable-rate debt was estimated to increase annual interest expense by $0.1 million. Sabra reported covenant compliance and no material legal proceedings or known material environmental liability.
Unusual expense movements included higher stock-based compensation, largely related to bonuses paid in shares and the stock-price increase, and lower acquisition pursuit costs than in the prior-year quarter. Acquisition purchase-price allocations for Q3 acquisitions remained preliminary.
The board declared a $0.33-per-share quarterly dividend payable November 30, 2012. Nine-month dividends paid totaled $36.7 million.

Investor verification priorities

Assess Sun’s and its prospective Genesis parent’s capacity to support rent, and confirm the status and final terms of the pending acquisition and lease-guaranty changes.
Review tenant coverage trends, especially Sun’s EBITDAR-to-rent coverage, and the continuing effects of Medicare reimbursement changes.
Reconcile reported earnings with pro forma and non-GAAP FFO/AFFO, including stock compensation, financing costs, acquisition timing, and share-count changes.
Check debt maturities and covenant headroom, the availability and borrowing-base limits of the revolver, and exposure to variable rates.
Verify whether acquisition growth and dividend payments remain supported by recurring cash flows, given the period’s investing outflows and concentration in Sun-related leases.