8-K: Sabra Health Care REIT Reports Strong Q2 2024 Results and Raises Full-Year Guidance

Sabra Health Care REIT announced positive second quarter results for 2024, driven by improvements in skilled nursing and senior housing, leading to an increase in their full-year earnings guidance.

Summary

• Sabra Health Care REIT reported a net income of $0.10 per diluted share for the second quarter of 2024.
• The company's Funds From Operations (FFO) was $0.35 per diluted share, with both Normalized FFO and Adjusted FFO (AFFO) at $0.35 and $0.36 per diluted share, respectively.
• EBITDARM coverage for skilled nursing/transitional care was 1.85x, for senior housing-leased was 1.35x, and for behavioral health, specialty hospitals, and other was 3.69x.
• Same-store managed senior housing cash NOI increased by 17.7% year-over-year.
• Investment activity through June 30, 2024, totaled $60.1 million with an expected initial cash yield of 8.7%.
• Subsequent to quarter end, Sabra acquired two managed senior housing communities for $75.8 million with an initial expected cash yield of 8.0%.
• The company disposed of four facilities during the second quarter for $6.7 million with a trailing-twelve-month cash yield of 5.0%, and another four properties post-quarter for $34.9 million with a 4.0% yield.
• Sabra has utilized its at-the-market equity offering program to sell 4.7 million shares year-to-date at a weighted average price of $14.72 per share.
• As of June 30, 2024, Net Debt to Adjusted EBITDA was 5.45x.
• Medicare rates for skilled nursing facilities are set to increase by 4.2% on October 1, 2024.
• Medicaid rate increases across Sabra's portfolio are estimated to average approximately 7%, most of which went into effect on July 1, 2024.
• Sabra's Board of Directors declared a quarterly cash dividend of $0.30 per share, payable on August 30, 2024.
• The company has increased its 2024 earnings guidance, with net income projected between $0.48 and $0.51 per diluted share, FFO between $1.33 and $1.36, and Normalized AFFO between $1.41 and $1.44.
• As of June 30, 2024, Sabra had approximately $906.0 million of liquidity, including $36.4 million in cash and $869.6 million available under its revolving credit facility.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to strong Q2 results, increased guidance, and positive industry trends. The company's strategic investments and focus on operational improvements contribute to this positive outlook. However, some risks and challenges are acknowledged, preventing a perfect score.

Positives

• Sabra's portfolio has gained momentum throughout the year, with skilled nursing margins and rent coverage exceeding pre-pandemic levels.
• Medicaid rate increases are anticipated to be approximately 200 basis points higher than last year's above-average increases.
• Growth in the managed senior housing portfolio has accelerated.
• The company's leverage has decreased.
• Sabra's pipeline continues to improve, as evidenced by announced investment activity.
• The company has a strong liquidity position with approximately $906.0 million available.
• The company has increased its 2024 earnings guidance.

Negatives

• The company disposed of four facilities during the second quarter for $6.7 million with a trailing-twelve-month cash yield of 5.0%, and another four properties post-quarter for $34.9 million with a 4.0% yield, which may indicate lower returns on these assets.
• There was a loss on extinguishment of debt of $1,541,000.

Risks

• The company's actual results may differ materially from the estimates set forth in the guidance due to various factors.
• Increased labor costs and historically low unemployment could impact the company's tenants and operators.
• Increases in market interest rates and inflation could affect the company's financial performance.
• Pandemics or epidemics, including COVID-19, could have a negative impact on the company's tenants, borrowers, and senior housing-managed communities.
• Operational risks with respect to the company's senior housing-managed communities could affect performance.
• Competitive conditions in the industry could impact the company's ability to attract and retain tenants.
• The loss of key management personnel could negatively affect the company's operations.
• Uninsured or underinsured losses affecting the company's properties could result in financial losses.
• Potential impairment charges and adjustments related to the accounting of the company's assets could impact financial results.
• The company's tenants' dependency on reimbursement from governmental and other third-party payor programs could pose a risk.
• The effect of tenants, operators, or borrowers declaring bankruptcy or becoming insolvent could negatively impact the company.
• The company's ability to find replacement tenants and the impact of unforeseen costs in acquiring new properties could affect performance.
• The impact of litigation and rising insurance costs on the business of the company's tenants could pose a risk.
• Environmental compliance costs and liabilities associated with real estate properties could impact the company's financial results.
• The company's concentration in the healthcare property sector makes it vulnerable to a downturn in a specific sector.
• The significant amount of and the company's ability to service its indebtedness could pose a risk.
• Covenants in the company's debt agreements may restrict its ability to pay dividends, make investments, incur additional indebtedness, and refinance indebtedness on favorable terms.
• Adverse changes in the company's credit ratings could impact its ability to access capital.
• The company's ability to make dividend distributions at expected levels could be affected by various factors.
• Changes and uncertainty in macroeconomic conditions and disruptions in the financial markets could impact the company's performance.
• Risks associated with the company's ownership of property outside the U.S., including currency fluctuations, could affect financial results.
• The relatively illiquid nature of real estate investments could pose a risk.
• The company's ability to maintain its status as a real estate investment trust (REIT) under the federal tax laws could be affected by various factors.
• Changes in tax laws and regulations affecting REITs could impact the company's financial performance.
• The ownership limits and takeover defenses in the company's governing documents and under Maryland law may restrict change of control or business combination opportunities.

Future Outlook

Sabra has increased its 2024 earnings guidance ranges, assuming mid-to-high teens same-store Cash NOI growth for the managed senior housing portfolio and incorporating all announced investment and disposition activity. The guidance does not assume additional transactions beyond those already disclosed.

Management Comments

• Rick Matros, CEO and Chair, stated that Sabra's portfolio has continued to gain momentum as the year has progressed.
• Rick Matros noted that skilled nursing margins and rent coverage are higher than pre-pandemic levels, with the potential for further gains as occupancy continues to recover.
• Rick Matros mentioned that Medicaid rate increases are anticipated to be approximately 200 basis points higher than last year's above-average rate increases.
• Rick Matros highlighted that growth in the managed senior housing portfolio has accelerated, leverage has ticked down, and the company is pleased to be in a position to increase guidance.
• Rick Matros stated that the company's pipeline continues to improve as evidenced by announced investment activity and that they expect to remain active as the year progresses in all asset classes as opportunities arise.
• Talya Nevo-Hacohen, Chief Investment Officer, stated that by consistently and deliberately executing their strategy, they deliver long-term value to their shareholders and provide the capital their tenants need to invest in their business and deliver quality care.
• Michael Costa, Chief Financial Officer, stated that their strong balance sheet and ready access to capital allows them to thoughtfully finance investment opportunities and drive value for their shareholders.

Industry Context

This announcement reflects a positive trend in the healthcare REIT sector, with improvements in skilled nursing and senior housing operations. The increase in Medicare and Medicaid rates is a positive development for the industry, which has been facing challenges related to reimbursement and occupancy. Sabra's strategic investments and dispositions align with the broader industry trend of portfolio optimization and focus on high-growth areas.

Comparison to Industry Standards

• Sabra's Net Debt to Adjusted EBITDA of 5.45x is within the range of its investment-grade peers, which range from 3.68x to 6.63x.
• Sabra's interest coverage ratio of 4.20x is also within the range of its investment-grade peers, which range from 3.80x to 5.46x.
• Sabra's debt as a percentage of asset value at 37% is within the range of its investment-grade peers, which range from 25% to 53%.
• Sabra's secured debt as a percentage of asset value at 1% is also within the range of its investment-grade peers, which range from 0% to 9%.
• Sabra's skilled nursing EBITDARM coverage of 1.85x is comparable to peers such as OHI (1.78x), AHR (1.80x), LTC (1.96x), CTRE (2.78x) and NHI (2.97x).
• Sabra's senior housing EBITDARM coverage of 1.35x is comparable to peers such as OHI (1.24x), LTC (1.30x), NHI (1.34x), CTRE (1.34x) and WELL (1.49x).
• Sabra's forward FFO multiple of 16.7x is within the range of its peers, which range from 11.5x to 17.8x.
• Sabra's dividend yield of 7.2% is also within the range of its peers, which range from 4.2% to 7.3%.

Stakeholder Impact

• Shareholders will benefit from the increased earnings guidance and the declared dividend.
• Employees will benefit from the company's commitment to diversity, equity, and inclusion.
• Tenants and operators will benefit from the company's support and capital solutions.
• Residents and patients will benefit from the company's focus on quality care and operator success.
• Creditors will benefit from the company's strong balance sheet and prudent financial management.

Next Steps

• Sabra intends to present the materials attached to this report in investor presentations.
• The company will continue to actively pursue investment opportunities in all asset classes as they arise.
• Sabra will continue to curate its portfolio to optimize diversification and maintain a mix of assets well-positioned for the future of healthcare delivery.
• The company will continue to maintain balance sheet strength and lower leverage by match funding accretive investing activity with a combination of available liquidity, recycled capital and ATM proceeds.

Key Dates

Keywords

Healthcare REIT, Skilled Nursing, Senior Housing, Real Estate Investment, EBITDARM, FFO, AFFO, Medicaid, Medicare, Net Operating Income, NOI, Investment, Acquisition, Disposition