Sabra Health Care REIT, Inc. — Q2 2012 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2012; financial statements are unaudited. Sabra owns and leases healthcare real estate, primarily under triple-net leases. At quarter-end, its portfolio included 103 properties across 25 states: 93 skilled nursing/post-acute facilities, nine senior housing facilities and one acute care hospital. It also held two healthcare loans. Most properties were leased for a weighted-average remaining term of 12 years.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. Q2 and six-month comparisons are with the respective 2011 periods.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $25.1 | $18.8 | $48.8 | $36.4 |
| Net income | $5.9 | $2.1 | $10.3 | $3.3 |
| Diluted EPS | $0.16 | $0.08 | $0.28 | $0.13 |
| Net cash from operations | Not provided quarterly | Not provided quarterly | $24.1 | $17.9 |
| FFO per diluted share | $0.36 | $0.33 | $0.68 | $0.62 |
| AFFO per diluted share | $0.42 | $0.40 | $0.79 | $0.76 |
Revenue growth was about 34% in Q2 and 34% for the six months. Net income margin, calculated as net income divided by revenue, was approximately 23.6% in Q2 versus 11.1%, and 21.1% for the six months versus 9.2%. These comparisons reflect portfolio expansion and are not same-property measures.
At June 30, total assets were $778.5 million, total liabilities $462.1 million and equity $316.4 million. Cash was $3.1 million, with another $7.1 million restricted. Principal debt was approximately $424.9 million: $225.0 million senior notes, $157.4 million mortgage debt and $42.5 million drawn on the revolving facility. The revolver had $157.5 million available; reported liquidity was $160.6 million, including cash.
Six-month investing cash outflow was $77.5 million, mainly $55.6 million for property acquisitions and $21.2 million for loan originations. Financing provided $14.2 million; dividends paid were $24.5 million. Cash decreased by $39.1 million during the period.
Material changes versus the prior period
- Rental income rose 33% in Q2 and 34% in the first half, primarily from acquisitions; management attributed $5.8 million of Q2 rental-income growth to acquired properties and $0.4 million to escalators on properties held before 2011.
- Sabra acquired six skilled nursing facilities for $55.6 million during the first half and originated a $10 million mezzanine loan and an $11 million mortgage loan. The portfolio increased from 88 properties at June 30, 2011 to 103 at June 30, 2012.
- Weighted-average shares outstanding increased substantially year over year, from about 25.2 million to 37.1 million. Accordingly, per-share growth was more modest than net-income growth.
- General and administrative expense increased 19% in Q2 and 40% for the first half, including higher stock-based compensation and acquisition pursuit costs. Interest expense increased 9% in Q2 and 5% in the first half.
- In June, Sabra refinanced four HUD mortgages totaling $20.9 million, reducing their weighted-average rate from 5.75% to 2.49%; it also reduced the floating-rate spread on a GE loan by 50 basis points. A further $13.5 million HUD mortgage refinancing occurred after quarter-end.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash flow and revolver availability were expected to fund operations, scheduled debt service and dividends for the next 12 months. It planned continued healthcare-property investment, subject to opportunities and financing availability; Sabra provided no company-wide earnings guidance in this filing.
- On July 26, after quarter-end, Sabra issued an additional $100 million of 8.125% senior notes at 106% of par, generating $103.8 million net proceeds before other offering expenses. A portion repaid the $42.5 million revolver balance. The filing does not state the resulting ending cash or updated liquidity.
- Sun Healthcare Group, a major tenant, agreed to be acquired by Genesis HealthCare for $8.50 per share; closing was expected in fall 2012, subject to approvals and other conditions. Sabra expected a Genesis parent guaranty, a fixed 2.5% annual rent escalator and cross-default provisions, but cautioned that terms or completion were not assured.
- Concentration is significant: 86 properties were leased to Sun subsidiaries, accounting for 72% of Q2 and 74% of first-half revenue. Sun’s first-half EBITDAR coverage was 1.46x; its adjusted earnings before interest, depreciation, amortization, transaction costs, restructuring costs and rent declined year over year. The filing identifies tenant operating performance and government reimbursement as key rent-payment risks.
- CMS’s fiscal 2012 skilled-nursing rate changes were described as a net 11.1% reduction. CMS later finalized a 1.8% net increase for fiscal 2013. Sabra warned that tenant inability to mitigate reimbursement pressure could impair rent payments.
- Sabra declared a $0.33-per-share quarterly dividend payable August 31, 2012. The filing reports compliance with applicable debt covenants, no material legal proceedings, no off-balance-sheet arrangements and no material change in previously disclosed risk factors.
- FFO and AFFO are non-GAAP supplemental measures, not substitutes for GAAP income or operating cash flow. Acquisition purchase-price allocations were preliminary; Q2 acquisition pursuit costs were $0.4 million and first-half costs $0.9 million. A $0.2 million financing-cost write-off accompanied mortgage refinancing.
Important facts for investors to verify
- Sun/Genesis transaction completion, guaranty terms and any lease amendments, given Sabra’s substantial revenue concentration in Sun tenants.
- Sun and other tenant coverage ratios, rent-payment performance and the operational impact of Medicare reimbursement changes.
- Post-July note issuance debt, revolver repayment, cash balance and actual liquidity after the transactions.
- Whether acquisition-driven revenue and FFO/AFFO growth translate into durable cash available for dividends and debt service; review the share-count increase and non-GAAP reconciliations.
- Final acquisition valuations and the effect of variable-rate debt, refinancing restrictions and debt maturities on financing capacity.