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SBRA > SEC Filings for SBRA > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for SABRA HEALTH CARE REIT, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SABRA HEALTH CARE REIT, INC.


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the "Risk Factors" section in Part I, Item 1A of our 2012 Annual Report on Form 10-K. Also see "Statement Regarding Forward-Looking Statements" preceding Part I.
The following discussion and analysis should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
Overview

Recent Transactions

Critical Accounting Policies

Results of Operations

Liquidity and Capital Resources

Concentration of Credit Risk

Skilled Nursing Facility Reimbursement Rates

Obligations and Commitments

Off-Balance Sheet Arrangements

Overview
We were incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. ("Old Sun"), a provider of nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Pursuant to a restructuring plan by Old Sun, Old Sun restructured its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which was then renamed "Sun Healthcare Group, Inc." or "Sun"). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the "Separation"), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common stock (this merger is referred to as the "REIT Conversion Merger"). The Separation and REIT Conversion Merger were completed on November 15, 2010, which we refer to as the Separation Date.
Following the restructuring of Old Sun's business and the completion of the Separation and REIT Conversion Merger, we began operating as a self-administered, self-managed REIT that, directly or indirectly, owns and invests in real estate serving the healthcare industry.
As of March 31, 2013, our investment portfolio consisted of 119 real estate properties held for investment (consisting of (i) 96 skilled nursing/post-acute facilities, (ii) 22 senior housing facilities, and (iii) one acute care hospital), three mortgage loan investments and two preferred equity investments. As of March 31, 2013, our real estate properties had a total of 12,382 licensed beds, or units, spread across 27 states. As of March 31, 2013, all of our real estate properties were leased under triple-net operating leases with expirations ranging from eight to 22 years.
We expect to continue to grow our portfolio primarily through the acquisition of senior housing and memory care facilities and with a secondary focus on acquiring skilled nursing facilities. We have and will continue to opportunistically originate financing secured directly or indirectly by healthcare facilities. We also expect to continue to work with operators to identify strategic development opportunities. These opportunities may involve replacing or renovating facilities in our portfolio that may have become less competitive and new development opportunities that present attractive risk-adjusted returns. In addition to pursuing acquisitions with triple-net leases, we expect to continue to pursue other forms of investment, including investments in senior housing through RIDEA-compliant structures, mezzanine and secured debt investments, and joint ventures for senior housing, memory care and skilled nursing assets.
As we acquire additional properties and expand our portfolio, we expect to further diversify by tenant, asset class and geography within the healthcare sector. We employ a disciplined, opportunistic approach in our healthcare real estate investment strategy by investing in assets that provide attractive opportunities for dividend growth and appreciation of asset values, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value.
We elected to be treated as a REIT with the filing of our U.S. federal income tax return for the taxable year beginning January 1, 2011. We believe that we have been organized and have operated, and we intend to continue to operate, in a manner


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to qualify as a REIT. We operate through an umbrella partnership (commonly referred to as an UPREIT) structure in which substantially all of our properties and assets are held by the Operating Partnership, of which we are the sole general partner, or by subsidiaries of the Operating Partnership. Recent Transactions
Mortgage Debt Repayment
Subsequent to March 31, 2013, the Company repaid in full one mortgage note totaling $7.3 million with available cash. This repayment will result in annual interest savings of approximately $0.7 million.

Preferred Equity Offering
On March 21, 2013, we completed an underwritten public offering of 5.8 million shares of 7.125% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") at a price of $25.00 per share, pursuant to an effective registration statement. The Company received net proceeds of $138.4 million from the offering, after deducting underwriting discounts and other offering expenses. The 5.8 million shares of the Company's Series A Preferred Stock includes the underwriters' exercise in full of their option to purchase up to an additional 0.8 million shares of the Company's Series A Preferred Stock. We used a portion of the proceeds from the offering to repay $92.5 million then outstanding under our Amended Secured Revolving Credit Facility. The remaining proceeds to us will be used to fund possible future acquisitions or for general corporate purposes.
At-The-Market Stock Offering Program ("ATM Program") On March 18, 2013, we entered into a sales agreement (each, a "Sales Agreement") with each of Barclays Capital Inc., Cantor Fitzgerald & Co., Credit Agricole Securities (USA) Inc., RBC Capital Markets, LLC, RBS Securities Inc. and Wells Fargo Securities, LLC (individually, a "Sales Agent" and together, the "Sales Agents") to sell shares of our common stock having aggregate gross proceeds of up to $100.0 million (the "ATM Shares") from time to time through the Sales Agents.
Pursuant to the terms of the Sales Agreements, the ATM Shares may be sold by any method permitted by law deemed to be an "at-the-market" offering, including, without limitation, sales made directly on the NASDAQ Global Select Market, on any other existing trading market for our common stock or to or through a market maker. In addition, with our prior consent, the Sales Agents may also sell the ATM Shares in privately negotiated transactions. We will pay each Sales Agent a commission equal to 2% of the gross proceeds from the sales of ATM Shares sold pursuant to the applicable Sales Agreement.
We are not obligated to sell and the Sales Agents are not obligated to buy or sell any ATM Shares under the Sales Agreements. No assurance can be given that we will sell any shares under the Sales Agreements, or, if we do, as to the price or amount of shares that we sell, or the dates when such sales will take place. As of March 31, 2013, no ATM Shares have been sold under the ATM Program. Bee Cave Preferred Equity Investment
On March 5, 2013, we entered into an agreement to provide up to $7.2 million of preferred equity funding to an affiliate of Meridian Realty Advisors, L.P. ("Meridian") for the construction of a 141-bed skilled nursing facility and a 52-unit memory care facility in Austin, Texas (collectively, the "Bee Cave Preferred Equity Investments"). We funded $4.3 million at closing and an additional $0.3 million during the three months ended March 31, 2013. In addition, we received an option to purchase the skilled nursing facility on or after the earlier to occur of the facility achieving and maintaining 90% occupancy for three consecutive months, or 36 months after receiving the certificate of occupancy for the facility. We also received an option to purchase the memory care facility that is not expected to be exercised as it is subordinate to a purchase option given to the manager of the memory care facility. In the event that we exercise the purchase option on the skilled nursing facility, we would expect to lease the facility to Meridian under a long-term, triple net lease. Our preferred equity investment with respect to the skilled nursing facility provides for an annual 15% preferred rate of return, which accrues on a quarterly compounding basis with payment of the preferred return deferred until the earlier of the closing under the purchase option, or 18 months after receiving a certificate of occupancy for the facility. Our preferred equity investment with respect to the memory care facility provides for an annual 15% preferred rate of return, which accrues on a quarterly compounding basis with payment of the preferred return deferred until the earlier of the closing under the purchase option (whether by the manager of the facility or by us), or 30 months after receiving a certificate of occupancy for the facility. In the event the applicable purchase option is not exercised, we have the right to require Meridian to redeem our investment, including the accrued preferred returns associated with such investment, within 180 days.


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Sun City West Mortgage Loan Origination
On January 31, 2013, we entered into a $12.8 million mortgage loan agreement with an affiliate of New Dawn Holding Company ("New Dawn") secured by a first trust deed on a 48-unit memory care facility located in Sun City West, Arizona ("Sun City West Mortgage Loan"). The Sun City West Mortgage Loan has a five-year term, bears interest at a fixed rate of 9.0% per annum and cannot be prepaid during the first three years of the loan term. In addition, beginning April 2014, we have an option to purchase the facility securing the Sun City West Mortgage Loan for a price equal to the greater of (a) the annualized earnings before interest, taxes, depreciation, amortization and rent ("EBITDAR") of the facility for the trailing three months prior to option exercise, divided by an EBITDAR coverage ratio of 1.30 and further divided by an implied lease rate of 8.25% (subject to adjustment up to 9.00%), and (b) $15.0 million. In the event that we exercise the purchase option, we would expect to enter into a long-term lease with affiliates of New Dawn with an initial cash yield consistent with the lease rate used to determine the option exercise price. The facility was built in 2012 and is operated by affiliates of New Dawn. The Sun City West Mortgage Loan was funded with available cash.
Critical Accounting Policies
Our condensed consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2012 Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2013.
Results of Operations
As of March 31, 2013, our investment portfolio included 119 real estate properties held for investment, three investments in loans receivable and two preferred equity investments. As of March 31, 2012, our investment portfolio included 99 real estate properties and one loan receivable investment. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of owning investments acquired in 2013 and 2012 for an entire period and the anticipated future acquisition of additional investments. The results of operations presented for the three months ended March 31, 2013 and 2012 are not directly comparable due to the increase in acquisitions made subsequent to January 1, 2012.

Comparison of results of operations for the three months ended March 31, 2013 versus the three months ended March 31, 2012 (dollars in thousands):

                                                                                            Increase
                                                                                         (Decrease) due
                      Three Months Ended March 31,                                             to
                                                                                          Acquisitions
                                                                                              and
                                                          Increase /       Percentage     Originations      Remaining Increase
                           2013             2012          (Decrease)       Difference         (1)             (Decrease) (2)
Revenues:
Rental income        $        31,475     $  23,663     $        7,812           33 %     $      5,349     $          2,463
Interest and other
income                           547            64                483          755 %              443                   40
Expenses:
Depreciation and
amortization                   8,246         7,303                943           13 %            1,339                 (396 )
Interest                      10,002         7,698              2,304           30 %                -                2,304
General and
administrative                 4,717         4,321                396            9 %             (309 )                705
Other income                     500             -                500          100 %                -                  500

(1) Represents the dollar amount increase (decrease) for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 as a result of investments made on or after January 1, 2012.
(2) Represents the dollar amount increase (decrease) for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 that is not a direct result of investments made during the periods presented.


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Rental Income
During the three months ended March 31, 2013, we recognized $31.5 million of rental income compared to $23.7 million for the three months ended March 31, 2012. The $7.8 million increase in rental income is due to an increase of $5.3 million from properties acquired on or after January 1, 2012 and an increase of $2.5 million primarily due to straight-line rental income adjustments recognized on Genesis properties that did not have fixed rent escalators until December 2012 and therefore did not have straight-line rental income adjustments during the three months ended March 31, 2012. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and there is no contingent rental income that may be derived from our properties. Interest and Other Income
During the three months ended March 31, 2013, we recognized $0.5 million of interest income, which consisted primarily of interest income earned on our three loans receivable investments and two preferred equity investments. During the three months ended March 31, 2012, we recognized $0.1 million of interest income, which consisted primarily of interest income earned on one loan receivable investment.
Depreciation and Amortization
During the three months ended March 31, 2013, we incurred $8.2 million of depreciation and amortization expense compared to $7.3 million for the three months ended March 31, 2012. The $0.9 million net increase in depreciation and amortization was primarily due to an increase of $1.3 million from properties acquired on or after January 1, 2012, partially offset by a decrease of $0.4 million related to assets that have been fully depreciated. Interest Expense
We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the three months ended March 31, 2013, we incurred $10.0 million of interest expense compared to $7.7 million for the three months ended March 31, 2012. The $2.3 million net increase is primarily related to (i) a $2.0 million increase in interest expense, amortization of deferred financing costs and premium related to the July 2012 issuance of the $100.0 million aggregate principal amount of 8.125% Senior Notes, and (ii) a $0.9 million increase in interest expense, unused facility fees and amortization of deferred financing costs related to the amounts outstanding (which we repaid during the three months ended March 31, 2013) and increase in capacity under our Amended Secured Revolving Credit Facility from $100.0 million to $230.0 million. These increases were offset by a decrease in interest expense of $0.6 million primarily due to the decreased interest rates on the refinanced mortgage notes and the 50 basis point reduction in the interest rate spread on certain floating rate mortgage notes. General and Administrative Expenses
General and administrative expenses include compensation-related expenses as well as professional services, office costs and other costs associated with acquisition pursuit activities. During the three months ended March 31, 2013, general and administrative expenses were $4.7 million compared to $4.3 million during the three months ended March 31, 2012. The $0.4 million net increase is primarily related to a $0.7 million increase in payroll expenses due in part to increased staffing and includes a $0.3 million increase in stock-based compensation expense, offset by a $0.3 million decrease in acquisition pursuit costs from $0.5 million during the three months ended March 31, 2012 to $0.2 million during the three months ended March 31, 2013. The increase in stock-based compensation expense, from $2.2 million during the three months ended March 31, 2012 to $2.5 million during the three months ended March 31, 2013, is primarily related to 2012 annual bonuses paid during the three months ended March 31, 2013. Management has elected to receive annual bonuses in stock rather than in cash and therefore changes in our stock price will result in changes to our bonus expense. The increase in stock-based compensation as a result of the annual bonuses to be received in stock is due to the increase in our stock price during the three months ended March 31, 2013 (an increase of $7.29 per share) compared to the three months ended March 31, 2012 (an increase of $4.35 per share). We expect acquisition pursuit costs to fluctuate from period to period depending on acquisition activity. We also expect stock-based compensation expense to fluctuate from period to period depending upon changes in our stock price and estimates associated with performance-based compensation. Other Income
During the the three months ended March 31, 2013, we recognized $0.5 million in other income as a result of adjusting our contingent consideration liability to fair value.


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Funds from Operations and Adjusted Funds from Operations

We believe that net income attributable to common stockholders as defined by GAAP is the most appropriate earnings measure. We also believe that funds from operations ("FFO"), as defined in accordance with the definition used by the National Association of Real Estate Investment Trusts ("NAREIT"), and adjusted funds from operations ("AFFO") (and related per share amounts) are important non-GAAP supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income attributable to common stockholders, as defined by GAAP. FFO is defined as net income attributable to common stockholders, computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. AFFO is defined as FFO excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and non-cash interest income adjustments), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts and premiums) and acquisition pursuit costs. We believe that the use of FFO and AFFO (and the related per share amounts), combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses from real estate dispositions, impairment charges, and real estate depreciation and amortization, and for AFFO, by excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and non-cash interest income adjustments), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts and premiums) and acquisition pursuit costs, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income attributable to common stockholders as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO also do not consider the costs associated with capital expenditures related to our real estate assets nor do they purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do.


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The following table reconciles our calculations of FFO and AFFO for the three months ended March 31, 2013 and 2012, to net income attributable to common stockholders, the most directly comparable GAAP financial measure, for the same periods (in thousands, except share and per share amounts):

                                                                  Three Months Ended March 31,
                                                                     2013               2012
Net income attributable to common stockholders                 $       9,253       $       4,405
Depreciation and amortization of real estate assets                    8,246               7,303

FFO                                                                   17,499              11,708

Acquisition pursuit costs                                                197                 491
Stock-based compensation expense                                       2,474               2,203
Straight-line rental income adjustments                               (3,683 )              (969 )
Amortization of deferred financing costs                                 766                 566
Amortization of debt premiums                                           (199 )                (4 )
Change in fair value of contingent consideration                        (500 )                 -
Non-cash interest income adjustments                                       5                   1

AFFO                                                           $      16,559       $      13,996

FFO per diluted common share                                   $        0.46       $        0.32

AFFO per diluted common share                                  $        0.43       $        0.38

Weighted average number of common shares outstanding, diluted:
FFO                                                               37,739,964          37,058,886

AFFO                                                              38,134,659          37,284,423

Please see the accompanying condensed consolidated statement of cash flows for details of our cash operating, investing, and financing activities. Liquidity and Capital Resources
As of March 31, 2013, we had approximately $247.6 million in liquidity, consisting of unrestricted cash and cash equivalents of $53.6 million and available borrowings under our Amended Secured Revolving Credit Facility of $194.0 million. As further described above under "-Recent Transactions-Preferred Equity Offering," we completed our preferred equity offering in March 2013, which provided net proceeds of $138.4 million, after deducting underwriting discounts and other offering expenses. A portion of these proceeds was used to repay the $92.5 million outstanding balance under our Amended Secured Revolving Credit Facility.
We believe that our available cash, operating cash flows and borrowings available to us under the Amended Secured Revolving Credit Facility provide sufficient funds for our operations, scheduled debt service payments with respect to the Senior Notes, amounts outstanding under the Amended Secured Revolving Credit Facility, mortgage indebtedness on our properties, and dividend requirements for the next twelve months. We have also filed with the SEC a shelf registration statement on Form S-3, which became effective on October 31, 2011, that will allow us to issue up to $356.3 million in new securities. As further described above under "-Recent Transactions-At-The-Market Stock Offering Program ("ATM Program")," we also entered into a $100.0 million ATM Program in March 2013. As of March 31, 2013, no ATM Shares have been sold under the ATM Program. We intend to invest in additional healthcare properties as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed, in . . .

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