Sabra Health Care REIT Inc (SBRA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabra Healthcare REIT, Inc., announces 2012 fourth-quarter earnings release date and conference call. This call is being recorded. I would now like to turn the call over to Talya Nevo-Hacohen, Chief Investment Officer. Please go ahead, Ms. Nevo.

Thank you very much. Before we begin, I want to remind you that we will be making forward-looking statements in our comments and in response to your questions concerning our business strategies and expectations for growth opportunities, expectations regarding our acquisition plans, and expectations regarding our future results of operations.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including the risks listed in our Form 10-K to be filed with the SEC, as well as in our earnings press release included as Exhibit 99.1 to the Form 8-K we furnished to the SEC yesterday. We undertake no obligation to update our forward-looking statements to reflect subsequent events or circumstances, and you should not assume later in the quarter that the comments we make today are still valid.

In addition, references will be made during this call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP results, included at the end of our earnings press release and the supplemental information materials included as Exhibits 99.1 and 99.2, respectively, to the Form 8-K we furnished the SEC yesterday. These materials can be accessed in the investor relations section of our website at www.SabraHealth.com.

And with that, let me turn the call over to Rick Matros, Chairman and CEO of Sabra Healthcare REIT.

Thanks, Talya. Good morning, everybody. Thanks for joining us. We appreciate it.

We finished the year with a strong quarter and had a good start so far in 2013. Excluding one-time items, revenues increased 21% over Q4 2011. Harold will address the details on FFO, AFFO, and EPS when he makes his remarks.

We completed $97.4 million of acquisitions in the quarter, with a weighted average cash yield of 8.49%. 60% of those acquisitions were in senior housing. We expect to continue prioritizing senior housing deals within the context of achieving approximately another $200 million in acquisitions for 2013. Along those lines, we are affirming guidance that we issued previously this year, but I want to point out that that guidance did not assume acquisitions.

We completed additional refinancings of existing mortgage debt, bringing total annual interest savings for all the refinancings completed during 2012 to $1.9 million. Subsequent to the quarter, our Board of Directors increased our dividend 3% to $0.34.

We entered into a $12.8 million mortgage loan agreement with New Dawn containing an option to purchase a new memory care facility in Arizona. This was our second deal with the New Dawn team and we expect to announce additional deals with them going forward.

We are working on developing additional pipeline deals that we can look forward to bringing new assets into the portfolio over the next several years. As you know, we announced one pipeline deal last year, and our expectation is that sooner than later we'll have potentially three more pipeline deals to announce. All the pipeline deals will have approximately 10 projects in them that will come on over the next several years.

So given the size of our asset base, we'll have to add, between four pipeline deals, approximately 40 facilities that are new assets, almost all senior housing, really changes and upgrades the quality of our portfolio pretty dramatically. So we're looking forward to doing that, and as I think most of you know from previous remarks we've made in the past, we think that today's assisted living and memory care resident costs are much different (technical difficulty) physical plant than the facilities that were built back in the 1990s. And so, having that many new facilities come into our portfolio will just bode well for the future.

We believe that those facilities will have much longer life to them than properties that were built in the 1990s where you had a population that was populating the assisted living facilities that was really quite independent compared to today's residents, which is a much higher needs resident and a resident that, as recently as five years ago, would've been comfortably placed in a skilled nursing facility.

Currently, our pipeline stands approximately $250 million with 70% senior housing, 30% skilled facilities. This excludes the pipeline deals that we're working on and just values anything that is contained in the pipeline that addresses new construction. It just values that at our investment level and not at the full value level of those assets.

EBITDAR rent coverage for the three months ending December 31, 2012, which was a month in arrears, was 1.6 for the entire portfolio, as compared to 1.63 for the fourth quarter December 2011. Coverage for those periods for our skilled facilities was flat at 1.59.

I want to point out, however, that both for the year-end 2011, because we report one month in arrears, that included one less facility in that cut. So being flat year over year, if you actually normalize for the pre-CMS month cut, we actually would've had an improvement in rent coverage.

Additionally, when you take a look at our supplemental, there's detail in the footnote on our senior housing rent coverage, which on a normalized basis actually improved fourth-quarter 2012 over fourth-quarter 2011.

For the full-year 2012 compared to 2011, our EBITDAR coverage was 1.5 and 1.76. For the full portfolio, a 1.45 versus 1.74 for the skilled facilities, reflecting the change with the CMS cuts.

Occupancy was essentially flat at 88.2% for the quarter for the full portfolio as compared to fourth-quarter 2011. Skilled occupancy was essentially -- skilled occupancy was 36.4%, down from 39.9% in the fourth quarter, but appears to be stabilizing after a relatively soft 2012. And again, because we report one month in arrears, it was one month of pre-CMS cut in there that contributed somewhat to the decrease in skilled mix.

One of the things that we've talked about on past calls is how we're going to approach capital raises on a go-forward basis. As it pertains to equity, we will look at doing capital raises involving equity, but we don't want to do anything that's dilutive to our shareholders. So based on the discussions we're having internally, I think what you all can expect from us is that we'll be focused on is ATM and additionally, potentially, for further equity offerings as well. So if the preferred and the ATM are extremely inexpensive compared to a follow-on offering and obviously not dilutive, so you should likely expect something along those lines from us in the near future as well.

And with that, let me turn it over to Harold.

Thanks, Rick, and thanks, everybody, for joining the call this morning.

For the three months and year ended December 31, 2012, we recorded revenues of $28.3 million and $103.2 million, respectively, compared to $23.3 million and $81.2 million for the same period in 2011, excluding $3 million of interest income in 2011 associated with the one-time Hillside Terrace mortgage note payoff.

This has been increases of 21.3% and 27%, respectively.

As of December 31, 2012, 64.5% of our annualized revenues are derived from the leases with Genesis, after taking into account an additional $8.1 million of annualized rent from Genesis associated with straight-line rents Sabra began recording in connection with fixing the annual rent escalators at 2.5% beginning in December 2012.

FFO for the three months and the year ended December 31, 2012, was $14.3 million, or $0.38 per diluted common share, and $52.3 million, or $1.40 per diluted common share, respectively. This compares to the same periods in 2011 of $14.5 million and $39.4 million, or $0.39 and $1.31 per share, respectively.

AFFO, which excludes from FFO acquisition pursuit costs and non-cash revenues and expenses, was $15.8 million, or $0.42 per diluted common share, and $60.3 million, or $1.59 per diluted common share, for the three months and year ended December 31, 2012, respectively. This compares to the same period in 2011 of $15.3 million and $47.1 million, or $0.41 and $1.55 per share, respectively.

FFO and AFFO in Q4 and for the full year of 2012, including a one-time lease consent fee of $2.2 million and a loan prepayment penalty of $2 million, which, when excluded from AFFO, resulted in normalized AFFO of $15.6 million and $60.1 million, respectively.

FFO and AFFO in Q4 and for the full year in 2011 include interest income earned in connection with the repayment of the Hillside Terrace mortgage note, net of related claim and expenses totaling $1.6 million, and for the full year also included one-time startup costs of $0.3 million, which, when excluded from AFFO, resulted in normalized AFFO of $13.7 million and $45.9 million, respectively.

Normalized AFFO per share increased in 2012, compared to 2011, from $0.37 to $0.41 per share for the fourth quarter and from $1.51 to $1.59 per share for the full year, or 10.8% and 5.3%, respectively.

Net income was $4 million, or $0.11 per diluted common share, and $19.5 million, or $0.52 per diluted common share, for the three months and year ended December 31, 2012, respectively. This compares to $7.2 million, or $0.19 per share, and $12.8 million, or $0.43 per share, during the same periods in 2011.

Net income for 2012 includes a $2.5 million impairment charge, offset by a $2.2 million lease consent fee associated with an asset class of items held for sale at December 31, 2012. This asset was disposed of in 2013 with no material gain or loss reported. In addition, in connection with the sale of this asset, we will continue to receive the rents from our tenant under the terms of the original lease agreement.

G&A costs for the three months ended December 31, 2012, totaled $4.5 million and included stock-based compensation expense of $2.5 million and acquisition pursuit costs of $0.4 million. G&A costs for the full-year 2012 totaled $16.1 million and included stock-based compensation expense of $8.3 million and acquisition pursuit costs of $1.7 million. 2012 stock-based compensation expense includes annual bonus payments which management elected to have paid in stock.

Excluding non-cash and transaction-related costs, G&A costs were 5.6% and 6% of total revenues for the three months and year ended December 31, 2012, respectively, compared to 5.2% and 6.5% for the three months ended December 31, 2011, excluding the impact of the Hillside Terrace mortgage note payoff in Q4 of 2011.

Interest expense for the three months and year ended December 31, 2012, totaled $11.6 million and $37 million, respectively, including the amortization of deferred financing costs and debt premium totaling $0.5 million during the quarter and $3 million for the full year. In addition, interest expense for the three months and year ended December 31, 2012, included prepayment penalty fees of $2 million associated with the refinancing of certain mortgage indebtedness.

Excluding the prepayment penalty fees and non-cash items, interest expense for the three months and year ended December 31, 2012, increased by $2 million and $3.7 million, respectively, compared to the same period in 2011, primarily related to net increased borrowings in 2012 of $192.1 million.

Our weighted average cost of debt at December 31, 2012, was 6.28%, compared to 7.25% at December 31, 2011.

I'll quickly turn the attention to the balance sheet and statement of cash flows. Our real estate investments totaled $956.4 million, excluding corporate assets and before accumulated depreciation, and our investments in loans receivable totaled $12 million at December 31, 2012, an increase of $207.9 million for the year. This increase resulted in the acquisition of 10 skilled nursing and 13 senior housing facilities and the origination of three loans, one of which was repaid prior to the end of 2012.

The weighted average year one cash or interest yield on our 2012 investments was 8.8%. These real estate acquisitions and loan originations were funded with available cash, including net cash proceeds from the issuance of an additional $106 million of senior unsecured notes during 2012 and from proceeds of our revolving credit facility.

Cash flows from operations totaled $56.3 million for the year ended December 31, 2012, compared to $44.7 million for the year ended December 31, 2011, an increase of 26%. Cash and cash equivalents decreased by $25.1 million during the year to $17.1 million as of December 31, 2012. In addition to acquisitions and loan originations, cash was primarily used for scheduled principal payments on mortgage debt of $3.3 million and to pay dividends totaling $48.9 million.

We incurred net new borrowings in 2012 under our revolving credit facility of $92.5 million, leaving remaining borrowing capacity of $109.1 million. This availability, along with cash and cash equivalents as of December 31, 2012, provide us with approximately $126.2 million of liquidity. This liquidity, along with cash flows from operations subsequent to December 31, 2012, is available to fund ongoing operations, future acquisitions, and the $0.34 per share dividend to be paid today, February 28, 2013.

We were in compliance with all of our debt covenants under our senior notes indenture and our secured revolving line of credit agreement as of December 31, 2012. Our key credit stats as of that date changed from the prior year as follows, based on defined terms in our credit agreements. Consolidated leverage ratio changed from 4.26 times to 4.71 times as we utilized the revolver and the add-on to our unsecured senior notes to fund acquisition activity. Consolidated fixed-charge coverage ratio improved from 2.87 to 2.92 and minimum interest coverage ratio improved from 3.17 to 3.22 times.

Total debt to asset value increased from 38 -- 39% to 48% and secured debt to asset value from 16% to 21%. Unencumbered asset value to unsecured debt decreased from 227% to 183%, due to the add-on to our unsecured senior notes in July 2012.

As we have stated before, we do not believe that any of the covenants in our indenture or unlimited credit agreement will limit in any significant manner our ability to deploy our available liquidity to support our acquisition strategy going forward.

Finally, the $0.34 per share dividend to be paid today is an increase from our prior fourth-quarter dividend of $0.33 per share and is consistent with our targeted dividend payout of approximately 80% of AFFO.

And with that, I'll turn it back to Rick.

Thanks, Harold. Why don't we open it up to Q&A now?

(Operator Instructions). Rob Mains, Stifel Nicolaus.

A question first to Harold. Do you have in mind, because when you talk about raising equity this year, a target leverage ratio?

Yes, well, we definitely have a targeted range that we'd like to keep our leverage and it's really driven by our objective over time to improve our credit rating, so the rating agencies have indicated that they'd like to see us keep our leverage below 6 times. We've targeted to keep it between 4.5 and 5.5 times, and so as you think about future capital raises, you can expect that we'll use a mix of equity and debt, but trying to maintain it below that 5.5 times.

So we should be looking at something like that, rather than like a debt to assets type of ratio?

Yes, I mean, that's our primary focus. Obviously, the debt to asset ratio falls in line. We've kept it below 50%. I would expect it to stay somewhere in that range, just based on maintaining that leverage ratio.

Okay. And then, question for -- well, I don't know which one of you two would handle this. Stock comps, should we be -- just for modeling purposes, should we assume that more of it is paid in cash this year than in 2012 or use kind of the 2012 numbers as a run rate?

Yes, use the 2012 numbers as a run rate. You know, basically how it works is we have to elect whether we want to take any cash or stock, and for the first two years of the Company's existence, we all choose to take our bonuses in stock, and my guess is that will continue.

Okay. And then, Rick, you mentioned that one of the reasons why you're looking at development is that some of the older stock of assisted living you don't think is appropriate for higher-needs patients. Why is that the case, as opposed to just doing renovations or some sort of facelift?

First of all, a lot of those stores are going to be fine because there's just not that much new development that's coming on to compete with them.

But that said, a lot of those buildings were built by multifamily guys. It's hallway after hallway with one common area, and some of them are just difficult to renovate. It's not like a skilled facility where these things were built with all rooms and little common areas and a bunch of three bedrooms, and you can take out beds and put some things out of service and build a bigger gym and build bigger dining rooms. It's just -- it's not like that with a lot of those facilities.

I'm sure there's some out there that you can renovate, but the facilities that we're looking at with our operating partners and developers, not -- built the first Phoenix development we announced last year and the other deals that we're currently looking at and the New Dawn facilities, which are new that we acquired for the process of acquiring, you know, these are built to accommodate an operational model where much of assisted living historically, there wasn't really an operational model in place. It was marketing and that was it. It was a real estate play.

So now you've got nursing and therapy and hospice services, a lot of services similar to what you see in skilled nursing. We've seen memory care facilities that have levels of acuity that are no different than an Alzheimer's unit and a skilled nursing facility. So when you think about building buildings that can accommodate staffing efficiency, if you worked with the private pay population, you don't have a lot of elasticity on price there, so you've really got to focus on efficiencies.

And you know, if you've got more common areas with less sort of road for the resident to travel, because you really don't have room to spread out in the hallways, you're able to focus your staff in smaller areas and make that staffing much more efficient and have really good quality outcomes.

Got it. And then, the last question, so I understand this, the facility that you sold, you took in a consent fee, you took an impairment, but you're going to continue to collect rents? Is that right?

That's correct. That's correct. Basically -- so essentially, we're coming out whole on a cash basis, but we've preserved our rental stream.

And what we did with that cash, Rob, is we paid -- there was some debt associated with that building, so we also paid off that debt.

This was a Sun, now Genesis, building, Rob. (Multiple speakers). The rent just gets spread across the master.

Oh, okay, got it. That makes sense, then. All right, thank you.

Michael Carroll, RBC Capital Markets.

Yes, thanks. What type of investment opportunities are you seeing with senior housing and skilled nursing, and what type of mix should we expect in 2013? I know you indicated that we should expect more senior housing, but is the fourth quarter a good example of what we should see in 2013?

This is Talya. To the extent that we are buying properties or investing in properties [wished] as through these pipelines that Rick referenced, I think you'll definitely see a bias, a strong bias, towards private-pay senior housing and assisted-living and memory care, for the most part.

Otherwise, it's -- my answer has two parts. One is we are clearly biased right now towards assisted living and memory care in terms of our acquisition interest. But the market serves up what the market serves up. We won't bypass a good skilled nursing facility if it comes up because it's an opportunity, so I think you'll continue to see a mix. I think based on what we're seeing today, right now, it's definitely skewed towards the assisted living and memory care product, but things can change.

Can you discuss the (multiple speakers)

Michael, I'd also say that things are a little bit slow, as we saw at the beginning of last year as well, but this year I think in part because so many guys tried to cram deals in prior to year-end for tax purposes.

So much of what we're working on right now is really development stuff, although there's some stabilized stuff in there as well, but we would expect that to pick up, particularly since we've got the NIC conference next week.

Okay, and then, could you describe the type of investment on the skilled side that you wouldn't want to pass up?

Well, I think a couple of things. One, two situations that we like a lot on the skilled side is a newer vintage asset, and we've been fortunate to be able to pick some of those up. Secondly, maybe not a newer vintage asset, but an operating team that is kind of ahead of the curve on where healthcare reform and reimbursement is going.

So for example, the two Fox subacute facilities that we acquired in Pennsylvania where the facilities were almost entirely ventilated facilities, those guys were really ahead of the curve.

The other situation that we like and we did two deals with Aurora like this last year, one was Encore in Texas last year and that is, assuming that we like the operating team, going into turnaround situations. And because of our operational background, we feel really comfortable in being able to assess the upside in turnaround and the quality of the operating team that would be handling that.

So those are the kinds of things that we like on the skilled side, so I don't want to say never -- that we would never pick up a plain vanilla facility because we have done a couple of those and we might do those. But it's the other situations that are more interesting to us.

Okay. And then, on your pro forma schedule, I guess on page 25 of your supplement, it indicated your pro forma annualize FFO run rate is closer to $2.08 a share. I guess, how should we tie that back to your guidance range of $1.85 to $1.89?

Well, you have to think about in the guidance we assume some equity offering, so that's going to drive up the number of shares that that's spread over. I think that's probably the primary difference.

So would you -- so it's safe to assume you expect $0.20 of dilution from an equity offering, then, or is there something else in that number that I'm missing?

You mean the number from the shares or from the --

The FFO.

Yes, I think the FFO number -- the AFFO number in our pro forma is consistent with kind of the way our guidance looks, but it doesn't have the incremental shares outstanding.

And I would also say that there's some -- obviously, the debt refinancing stuff that's not reflected there, so there's some other factors involved. But generally speaking, there is nothing, outside of -- in the forecast, outside of kind of the run rate from where we're starting.

Because, and remember, the equity rate that we assume in the guidance was not a follow-on. So it's not going to be particularly dilutive. It's -- that was really an ATM assumption.

And I think the thing to look at, too, really is focus on the normalized AFFO number because if you're looking at FFO, you're going to see that large consent fee that also needs to be pulled out, because it obviously would have (multiple speakers)

Was the debt charge pulled out in there, too? Or need to be pulled out?

Net charge on an FFO basis was not pulled out. It would be in the FFO as well, so I guess those two would offset each other to some extent.

Okay, and (multiple speakers)

(Multiple speakers). To focus on AFFO is your best spot to focus because that pulls out all the normalizing items.

Okay, great. And then, my last question relates to the decline in the general acute care hospital coverage ratio. Was that some type of accounting adjustment that caused that decline?

It was primarily a change -- they increased their contractual allowance, really, and really not a function of any trends but just being more conservative.

And I don't know with the increase in RAC orders and that sort of thing whether that cause them to do that, but it was really just a function of that. It was a 3% increase in that, and that 3% increase pretty much accounts for the difference in coverage.

Okay, great. Thank you.

Yes.

(Operator Instructions). Tayo Okusanya, Jefferies.

Yes, good afternoon, so just a couple of questions. First of all, if you did do preferreds, where do you think you could actually issue preferreds today in the market?

We think we can do it in the low sevens, and that was really the gating issue for us.

We've been looking at -- we've been following the preferred market as it relates to what we think we could do past year, and we felt like once we got -- once we had a shot at getting it done in the low sevens, you're probably talking about $75 million, give or take, that that was a point that really made a lot of sense for us, given the kind of assets that we're going after and having permanent capital in place, that given where we've been in is pretty attractive.

Got it, that's helpful. And then, in regards to 2013 and 2014, are there other opportunities to do more hard refinancing and refinancing your mortgage debt?

Yes, we're looking at a portfolio. It's financed right now in our portfolio with GE debt. We're actually focused on taking that in a couple of chunks. There's two different maturity levels on that, so we are working on that now.

But again, it's a long process and I wouldn't -- I'd say there are no guarantees, but we expect to get something done in 2013, at least on the first tranche and possibly both, and that's about -- a total of about $90 million of debt. (Multiple speakers)

With approximately a 275 to 300 basis point difference.

And how much of tranche one versus tranche two of the $90 million?

It's about, call it, in the high 50s for the first tranche, $57 million, $58 million, then low 30s for the second.

Okay, that's helpful. And then, going to the dividend, when we take a look at your AFFO per share forecast for 2013, $1.75, 80% of that is about $1.40, which is about $0.35 per quarter, but you guys are limiting to $0.33. Any particular reason why?

(Multiple speakers) $0.34.

$0.34, my bad, my math is a little rusty this morning.

(Multiple speakers). So I think it's possible you'll see $0.35 at some point; we're just not going to tell you when.

Okay (multiple speakers) (laughter)

Part of it is the issue, Tayo, is obviously we have to think about equity raises. As our share count goes up, if we issue equity, then we're -- you're never going to be right at 80%. You're going to be kind of around that number to kind of contemplating further share issuances and obviously growth in the AFFO numbers.

So we're still targeting that range around 80%, but it's going to be a bounce around it, as it has in the past.

And I know this is redundant, but I just want to reiterate, as we keep using the word equity, that we are not doing a follow-on offering.

So we're not looking (technical difficulty) because when you think about an ATM has got a 2% cost to us, a preferred is kind of in the low threes, have the discounts, with a follow-on between underwriting fees and the discounts and the overhang, you're hitting 10% sometimes. So given the size of the deals we do, this really is going to allow us to match funds in a way that makes the most sense for the Company and for the Company's shareholders.

Got it, thank you. That's helpful. And then, just lastly, as we kind of begin sequestration tomorrow, just kind of getting a sense -- try to get a sense of conversations you've had with Genesis recently in regards to what that may mean for them, especially in conjunction with the cuts to therapy as part on the tax relief act earlier on in the year. You know, you've had a good increase in coverage ratios, but is there some concern about weaker coverage ratios going forward?

There actually isn't, and it's only because we have a unique situation with Genesis. Because of the Sun deal, they've got material synergies, and those synergies, they've publicly stated $60 million in synergies. We're pretty comfortable that they'll do more than that in synergies.

And so, in terms of the therapy changes, which we're already accommodating, there is plenty of room there. And I think the expectation is that there will be 2% Medicare cut as a result of sequestration, but again, if it was still Sun on a standalone basis, coverages would get tighter, but because of the synergies there, net net, they're still going to be ahead of the game. And again, for us it's because we have a parent guarantee.

Got it. Okay, that's all I've got. Thank you very much.

(Operator Instructions). I show that we have no further questions.

All right. Thanks, everybody, for your time today. As always, Harold, Talya, and I are available for follow-up calls.

Harold and I will be at the Citi conference next week, so we'll be seeing some of you guys there. We look forward to that, and then we'll be at the NIC conference in San Diego, as well, next week. So, look forward to seeing you out on the road, and thanks again for your time today. Take care.

This does conclude today's conference. We thank you for your participation. You may now disconnect.