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SBRA > SEC Filings for SBRA > Form 10-Q on 5-Aug-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.


5-Aug-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 June 30, 2013, our investment portfolio consisted of 120 real estate properties held for investment (consisting of (i) 96 skilled nursing/post-acute facilities, (ii) 23 senior housing facilities, and (iii) one acute care hospital), three mortgage loan investments, two preferred equity investments and one mezzanine loan investment. As of June 30, 2013, our real estate properties had a total of 12,414 licensed beds, or units, spread across 27 states. As of June 30, 2013, all of our real estate properties were leased under triple-net operating leases with expirations ranging from eight to 21 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
Meridian Pipeline Agreement
On July 29, 2013, we agreed to terms on a non-binding term sheet (the "Term Sheet") on a forward purchase program with Meridian Realty Advisors, L.P. ("Meridian," and such forward purchase program the "Meridian Pipeline Agreement"), to acquire newly constructed senior housing, memory care and skilled nursing properties to be developed by affiliates of Meridian. The Term Sheet provides for the acquisition of, as well as certain interim capital commitments for, up to ten facilities with an estimated aggregate cost of $100.0 million through 2015, consisting of senior housing, memory care and skilled nursing facilities. Under the Term Sheet, Meridian will identify and develop the properties, we will contribute preferred equity capital and we will have the option to purchase the facilities upon stabilization. The preferred equity investments will earn an annual 15% preferred rate of return, which will accrue on a quarterly compounding basis with payment of the preferred return deferred until the earlier of the closing under the applicable purchase option, the exercise of Meridian's applicable call option, the exercise of our applicable put option or the sale of the applicable property. Should we exercise our purchase option on a facility, we would expect to lease the facility to Meridian under a long-term, triple net lease with an initial cash yield 7.5% to 9.0% depending on the type of facility. The Term Sheet is non-binding and is subject to the parties' negotiation of final terms, which is expected to be completed during the third quarter of 2013.

Revolving Credit Facility
On July 29, 2013, the Operating Partnership entered into an amended and restated secured revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility provides for a borrowing capacity of $375.0 million, of which $286.5 million was available for borrowing as of July 29, 2013. The Revolving Credit Facility also includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to $225.0 million, subject to terms and conditions. While the Prior Revolving Credit Facility (as defined in Note 6, "Debt," in the Notes to the Condensed Consolidated Financial Statements) was secured by mortgages on certain of our real estate assets, the Revolving Credit Facility is secured by pledges of equity by our wholly-owned subsidiaries that own certain of our real estate assets. This feature provides us with increased flexibility to increase the available borrowings under the Revolving Credit Facility.
The Revolving Credit Facility has a maturity date of July 29, 2016, and includes a one year extension option. Borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership's option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%,
(ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the "Base Rate"). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the Revolving Credit Facility, and will range from 2.50% to 3.50% per annum for LIBOR based borrowings and 1.50% to 2.50% per annum for borrowings at the Base Rate. In addition, the Operating Partnership is required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Revolving Credit Facility. See "-Liquidity and Capital Resources" for further information. Chai I Portfolio Mezzanine Loan Origination On June 28, 2013, we originated a $12.4 million mezzanine loan (the "Chai Mezzanine Loan") with an affiliate of Chai Facilities Acquisition Company, LLC (the "Borrower"), the indirect owner of twelve skilled nursing facilities having 1,689 licensed beds in seven states (the "Chai Portfolio"). The Chai Mezzanine Loan has a two-year term and bears interest at a fixed rate of 12.0% per annum. It is secured by the Borrower's equity interests in the entities that own the Chai Portfolio. In addition, we have an option to purchase up to $50.0 million of properties within the Chai Portfolio. Should we exercise our option to purchase any properties in the Chai Portfolio, we would expect to enter into a new 15 year master lease with two five-year renewal options at an initial cash yield of 9.5% with annual rent increases equal to the greater of the change in the Consumer Price Index and 3.0%. The Chai Mezzanine Loan was funded with available cash.
Greenfield of Woodstock
On June 28, 2013, we purchased a 32-unit assisted living facility located in Woodstock, Virginia for $6.2 million. Concurrently with the purchase, we entered into a triple-net lease agreement with affiliates of Greenfield Senior Living, Inc. The lease has an initial term of 15 years with two ten-year renewal options and provides for annual rent escalators of 3.0%,


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resulting in annual lease revenues determined in accordance with GAAP of $0.6 million and an initial yield on cash rent of 7.75%. The purchase price was funded with available cash.
Issuance of 2023 Notes
On May 23, 2013, we, through the Operating Partnership and Sabra Capital Corporation (the "Issuers"), completed an underwritten public offering of $200 million aggregate principal amount of 5.375% senior unsecured notes (the "2023 Notes") pursuant to an indenture, dated May 23, 2013 (the "2023 Notes Indenture"). The 2023 Notes were sold at par, resulting in gross proceeds of $200.0 million and net proceeds of approximately $194.9 million after deducting commissions and expenses. The 2023 Notes mature on June 1, 2023 assuming they are not redeemed by us prior to that time in accordance with the terms of the 2023 Notes Indenture. See "Liquidity and Capital Resources-Loan Agreements." Partial Redemption of 2018 Notes
On June 24, 2013, pursuant to the terms of the indenture (the "2018 Notes Indenture") governing the Issuers' 8.125% senior unsecured notes (the "2018 Notes"), the Issuers redeemed $113.8 million in aggregate principal amount of the outstanding 2018 Notes, representing 35% of the aggregate principal amount of the 2018 Notes outstanding. The 2018 Notes were redeemed at a redemption price of 108.125% of the principal amount redeemed, plus accrued and unpaid interest up to the redemption date. The redemption resulted in approximately $9.8 million of redemption related costs and write-offs, including $9.3 million in payments made to noteholders for early redemption and $0.5 million of write-offs associated with unamortized deferred financing and premium costs. Mortgage Debt Repayment
On April 11, 2013, the Company used available cash to repay in full a $7.3 million mortgage note that accrued interest at 9.43% per annum. 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 six months ended June 30, 2013.
Results of Operations
As of June 30, 2013, our investment portfolio included 120 real estate properties held for investment, four investments in loans receivable and two preferred equity investments. As of June 30, 2012, our investment portfolio included 103 real estate properties and two investments in loans receivable. 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 and six months ended June 30, 2013 and 2012 are not directly comparable due to the increase in acquisitions made subsequent to the beginning of the respective comparable period in the preceding year..


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Comparison of results of operations for the three months ended June 30, 2013 versus the three months ended June 30, 2012 (dollars in thousands):

                                                                                          Increase
                                                                                       (Decrease) due
                      Three Months Ended June 30,                                            to
                                                                                        Acquisitions
                                                                                            and
                                                         Increase /      Percentage     Originations     Remaining Increase
                           2013            2012          (Decrease)      Difference         (1)            (Decrease) (2)
Revenues:
Rental income        $       31,518     $  24,820     $      6,698             27  %   $      4,201     $        2,497
Interest and other
income                          757           297              460            155  %            719               (259 )
Expenses:
Depreciation and
amortization                  8,222         7,557              665              9  %          1,074               (409 )
Interest                     10,143         7,898            2,245             28  %              -              2,245
General and
administrative                3,422         3,489              (67 )           (2 )%           (186 )              119
Other income
(expense):
Loss on
extinguishment of
debt                          9,750           250            9,500          3,800  %              -              9,500
Other expense                 1,400             -            1,400            100  %              -              1,400

(1) Represents the dollar amount increase (decrease) for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 as a result of investments made on or after April 1, 2012.
(2) Represents the dollar amount increase (decrease) for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 that is not a direct result of investments made after April 1, 2012.

Rental Income
During the three months ended June 30, 2013, we recognized $31.5 million of rental income compared to $24.8 million for the three months ended June 30, 2012. The $6.7 million increase in rental income is due to an increase of $4.2 million from properties acquired on or after April 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 June 30, 2012. Under our original lease agreements with subsidiaries of Sun, the annual rent escalator was equal to the product of
(a) the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%, and (b) the prior year's rent. Effective December 1, 2012 with the acquisition of Sun by Genesis, these lease agreements were amended to fix the annual rent escalators at 2.5%. 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 June 30, 2013, we recognized $0.8 million of interest and other income, which consisted primarily of interest income earned on our four loans receivable investments and preferred dividends on our two preferred equity investments. During the three months ended June 30, 2012, we recognized $0.3 million of interest income, which consisted primarily of interest income earned on two loans receivable investments, one of which was repaid in November 2012 when we exercised our option to acquire the properties securing the loan.
Depreciation and Amortization
During the three months ended June 30, 2013, we incurred $8.2 million of depreciation and amortization expense compared to $7.6 million for the three months ended June 30, 2012. The $0.6 million net increase in depreciation and amortization was primarily due to an increase of $1.1 million from properties acquired on or after April 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 June 30, 2013, we incurred $10.1 million of interest expense compared to $7.9 million for the three months ended June 30, 2012. The $2.2 million net increase is primarily related to (i) a $1.8 million net increase in interest expense, amortization of deferred financing costs and premium related to the July 2012 issuance of $100.0 million aggregate principal amount of 2018 Notes and (ii) a $1.2 million increase in interest expense and amortization of deferred financing related to the May 2013 issuance of the $200.0 million aggregate principal amount of 2023 Notes. Included in the $1.8 million increase in interest expense on the 2018 Notes is $0.8 million of interest incurred from May 23, 2013 (the date 2023 Notes were issued) to June 24, 2013 (the date that $113.8 million in aggregate principal amount of the outstanding


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2018 Notes were redeemed) related to the $113.8 million of redeemed 2018 Notes. These increases were offset by a decrease in interest expense and amortization of deferred financing costs of $0.8 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 June 30, 2013, general and administrative expenses were $3.4 million compared to $3.5 million during the three months ended June 30, 2012. The $0.1 million net decrease is primarily related to a $0.2 million decrease in acquisition pursuit costs from $0.4 million during the three months ended June 30, 2012 to $0.2 million during the three months ended June 30, 2013, offset by a $0.1 million net increase in payroll expenses due in part to increased staffing and also includes a $0.1 million decrease in stock-based compensation expense. The decrease in stock-based compensation expense, from $1.6 million during the three months ended June 30, 2012 to $1.5 million during the three months ended June 30, 2013, is primarily related to annual bonuses paid to our management team. 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 decrease in stock-based compensation as a result of the annual bonuses to be received in stock is due to the decrease in our stock price during the three months ended June 30, 2013 (a decrease of $2.90 per share) compared to the three months ended June 30, 2012 (an increase of $0.67 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. Loss on Extinguishment of Debt
During the three months ended June 30, 2013, we recognized $9.8 million of loss on debt extinguishment related to the write-offs of deferred financing costs and issuance premium and the redemption fee paid in connection with the June 2013 redemption of $113.8 million in aggregate principal amount of the outstanding 2018 Notes.
Other Income (Expense)
During the three months ended June 30, 2013, we recognized $1.4 million in other expense as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition as described in Note 9, "Real Estate Investments," in the Notes to Condensed Consolidated Financial Statements. This contingent consideration payment, estimated at $2.2 million, is expected to be paid in the third quarter of 2013 and will result in additional rental income from the time of payment through the term of the related lease starting at an initial cash yield of 8.0%, increasing over time through annual rent escalators equal to the greater of the change in the Consumer Price Index or 3.0%.
Comparison of results of operations for the six months ended June 30, 2013 versus the six months ended June 30, 2012 (dollars in thousands):

                                                                                      Increase
                                                                                   (Decrease) due
                        Six Months Ended June 30,                                        to
                                                                                    Acquisitions
                                                                                        and
                                                                     Percentage     Originations     Remaining Increase
                           2013            2012         Increase     Difference         (1)            (Decrease) (2)
Revenues:
Rental income         $      62,993     $  48,483     $   14,510            30 %   $      9,550     $        4,960
Interest and other
income                        1,304           361            943           261 %            891                 52
Expenses:
Depreciation and
amortization                 16,468        14,860          1,608            11 %          2,413               (805 )
Interest                     20,145        15,596          4,549            29 %              -              4,549
General and
administrative                8,139         7,810            329             4 %           (516 )              845
Other income
(expense):
Loss on
extinguishment of
debt                          9,750           250          9,500         3,800 %              -              9,500
Other expense                   900             -            900           100 %              -                900

(1) Represents the dollar amount increase (decrease) for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 as a result of properties and other real estate-related assets acquired after January 1, 2012.
(2) Represents the dollar amount increase (decrease) for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 that is not a direct result of acquisitions or originations after January 1, 2012.


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Rental Income
During the six months ended June 30, 2013, we recognized $63.0 million of rental income compared to $48.5 million for the six months ended June 30, 2012. The $14.5 million increase in rental income is due to an increase of $9.6 million from properties acquired after January 1, 2012 and an increase of $5.0 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 six months ended June 30, 2012. Under our original lease agreements with subsidiaries of Sun, the annual rent escalator was equal to the product of
(a) the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%, and (b) the prior year's rent. Effective December 1, 2012 with the acquisition of Sun by Genesis, these lease agreements were amended to fix the annual rent escalators at 2.5%. 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 six months ended June 30, 2013, we recognized $1.3 million of interest and other income, which consisted primarily of interest income earned on our four loans receivable investments and preferred dividend on our two preferred equity investments. During the six months ended June 30, 2012, we recognized $0.4 million of interest income, which consisted mostly of interest income earned on two loans receivable investments, one of which was repaid in November 2012 when we exercised our option to acquire the properties securing the loan.
Depreciation and Amortization
During the six months ended June 30, 2013, we incurred $16.5 million of depreciation and amortization expense compared to $14.9 million for the six months ended June 30, 2012. The $1.6 million net increase in depreciation and amortization was primarily due to an increase of $2.4 million from properties acquired after January 1, 2012, partially offset by a decrease of $0.8 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 six months ended June 30, 2013, we incurred $20.1 million of interest expense compared to $15.6 million for the six months ended June 30, 2012. The $4.5 million net increase is primarily related to (i) a $3.7 million net increase in interest expense, amortization of deferred financing costs and premium related to the . . .

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