Sabra Health Care REIT Inc (SBRA) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Sabra Healthcare REIT Inc announces first quarter 2013 earnings 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-Q 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 explanations and reconciliations 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 to the SEC yesterday. These materials can also 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 Chief Executive Officer of Sabra Healthcare REIT.

Thanks Talya, and hello everybody, and thanks for joining our call today. We had a productive first quarter, we realized revenue growth in revenues -- we realized significant growth, excuse me, in revenues, net income, FFO and AFFO of 35%, 108%, 44%, and 13% respectively. We made a $12.8 million mortgage investment with a fixed rate of 9% annually. It includes an option to purchase a 48-unit memory care facility with New Dawn. This is our second facility with New Dawn, our first development deal with New Dawn, and you should expect to see announcements on additional deals -- development deals with New Dawn on a go-forward basis. They may come in one at a time or it may be in the context of a pipeline, but at any rate we'll be seeing more development deals with our New Dawn team.

We've also entered into two preferred equity investments to fund up to $7.6 million, with an option to purchase a new 141-bed skilled nursing facility upon stabilization. We've funded $4.6 million to date. This provides for an annual 15% preferred rate of return. This is another deal for us with the Meridian team, and we expect additional development deals with them as well, and as with New Dawn, are working on a development pipeline deal with them.

We've also completed a preferred equity offering that netted $138.4 million of proceeds for the company, and implemented $100 million ATM program, although, given the amount of liquidity on hand, we will not activate it until necessary. We reaffirm our previously issued guidance and continue to expect our 2013 investments to be in the $150 million to $200 million range. We expect our focus to remain on the expansion of our asset base into senior housing, although you can still expect to see us close skilled nursing facilities deals as well. We also expect that most of our development projects will be assisted living and memory care facilities. Our current pipeline stands at approximately $250 million, with 65% of it being in senior housing. We had a slow start to the year, and slow start was pretty typical of the first quarter, but it extended a little bit longer than we anticipated, but activity has proved -- has improved recently, and although the pipeline size is about the same size that we recorded in the last quarter, the quality of potential asset deals within that pipeline has improved quite a bit over the past four weeks.

Occupancy was stable to the portfolio the 87.9%, field mix came in at 36.5%, which is down from 38.6% from the third quarter 2012, however that was a smaller decrease than previous quarters in 2012, but we're starting to feel like that's bottomed out, maybe stabilizing a little more finally. In terms of coverage, our portfolio EBITDARM and EBITDAR coverage for the three months ending March 2013, came in at 1.73, and 1.3 respectively, versus 1.87 and 1.41 for the first quarter ending March 2012. Skilled coverage came in at 1.73 and 1.26 versus 1.8 and 1.31. The 12-month trailing coverage numbers for 2012 included nine months of pre-CMS cuts which accounts for the difference in coverage.

If we were to go back to our fourth-quarter numbers, and present them as facility-based, or no-Sun guarantee, and you'll recall that prior to the Genesis -- the completion of the Genesis-Sun merger, we presented the numbers of the Sun guarantee, so if we were to go back to those fourth-quarter numbers, which were still one month in arrears, the trailing '12 coverage would be flat sequentially. Our first-quarter coverage would be slightly down on skilled nursing coverage from 1.34 to 1.26, but that was essentially due to the fact that with our fourth quarter still being one month in arrears, September was included in those numbers and not December. December is typically a tougher month, with the holidays, and we saw that in occupancy. Occupancy in December was 1.4% lower than occupancy in September, which again is pretty typical of those skill mixes flat. At any rate, we view facility-level coverage as stable, and expect the fixed-charge coverage to naturally improve as synergies from the Genesis-Sun merger are realized. CMS, as you may have seen, also just announced a market basket increase of 1.4%, which will be effective this coming October. That will certainly help coverage as well.

From a Medicaid perspective, we expect to see Medicaid rates flat to slightly positive on a consolidated basis. So no downside there, and again, to summarize in terms of how we are reporting differently now, and Harold will get into more detail, but where historically we were reporting a month in arrears to accommodate Genesis' need to get us the financials, when they can get them to us on a timely and accurate basis, we'll now be reporting a quarter in arrears. And with that I'll turn the call over to Harold Andrews.

Thank you Rick, and thanks everybody for joining the call this morning. For the three months ended March 31, 2013, we recorded revenues of $32 million, compared to $23.7 million for the first quarter of 2012, an increase of 35%. As of March 31, 2013, 63.2% of our revenue was derived from our leases to subsidiaries of Genesis, and 82.3% of our portfolio revenue was derived from skilled nursing-related assets.

FFO for the three months ended March 31, 2013, was $17.5 million or $0.46 per diluted common share, compared to $11.7 million or $0.32 per diluted common share for the first quarter of 2012, an increase of 43.8% on a per-share basis. AFFO, which excludes from FFO acquisition-pursuit costs and certain non-cash revenues and expenses, was $16.6 million or $0.43 per diluted common share compared to $14 million or $0.38 per diluted common share for the first quarter of 2012, a 13.2% increase on a per-share basis.

Net income attributable to common stockholders was $9.3 million or $0.25 per diluted common share for the quarter, compared to $4.4 million or $0.12 per diluted common share for the first quarter of 2012. GMA cost for the three months ended March 31, 2013, totaled $4.7 million, and included stock-based compensation expense of $2.5 million, and acquisition pursuit costs of $0.2 million. Excluding these non-cash and transactional related costs, G&A costs were 6.4% of total revenues for the three months ended March 31, 2013, down from 6.9% in the first quarter of 2012.

Recurring cash G&A costs were up $0.4 million, compared to Q1 2012, from $1.6 million, to $2 million, primarily related to payroll cost increases as we hired two employees subsequent to the first quarter of 2012. Interest expense for the three months ended March 31, 2013 totaled $10 million, compared to $7.7 million in the first quarter of 2012, and included amortization of deferred financing costs of $0.8 million in the first quarter of 2013, and $0.6 million in the first quarter of 2012. This increase in interest expense was primarily related to the increase in our senior notes outstanding of $105.5 million period over period in the borrowings under the revolver for a portion of the first quarter of 2013.

Based on debt outstanding at the end of the quarter, we have a 6.8% weighted average interest rate, compared to 7.24% as of March 31, 2012. This reduction is a result of our continued efforts to take advantage of the low interest rate environment, refinancing certain mortgage indebtedness, along with the issuance of the additional bonds during 2012 at an attractive rate. We will continue this these efforts, as reflected by the payoff of a $7.3 million, 9.4% mortgage note subsequent to March 31, 2013. This payoff was executed at the expiration of a significant pre-payment penalty associated with the loan. During the quarter ending March 31, 2013, we recorded an adjustment to an asset purchase earnout liability, which was recorded in the fourth quarter of 2012, resulting in other income of $0.5 million. In addition, we accrued a preferred stock dividend of $0.3 million associated with the issuance of 5.75 million shares of preferred stock on March 21, 2013.

Looking at the balance sheet and statement of cash flows, our investment activity during the quarter consisted of the mortgage loan investment of $12.8 million and the preferred equity investment of $4.6 million. These transactions were funded with available cash. In addition, we sold one asset identified as held-for-sale at December 31, 2012, for $2.2 million, resulting in no gain or loss on sale.

Cash flows from operations totaled $21.6 million for the three months ended March 31, 2013, compared to $16.5 million for the first quarter of 2012, an increase of 31.2%. Cash and cash equivalents increased by $36.5 million during the quarter, to $53.6 million as of March 31, 2013. This increase in cash was primarily due to cash flows from operations, and the net proceeds provided by the issuance of the 5.75 million shares of 7% and 8% preferred equity during the quarter, which after paying down $92.5 million of outstanding borrowings under revolver, provided cash of $46.5 million. In addition, we paid a quarterly dividend totaling $12.7 million or $0.34 per share during the quarter.

After the pay-downs of revolver with proceeds from the preferred equity offering, we have total liquidity of $247.5 million. This liquidity, along with cash flows from operations subsequent to quarter end, is available to fund our $0.34 per share dividend to common shareholders and our $2 million preferred dividend both to be paid on May 31, 2013, along with ongoing operations and future acquisitions. We were in compliance with all of our debt covenants under our senior notes indenture and our secured revolving line of credit as of March 31, 2013. Our key metrics continue to improve, particularly this quarter, due to the preferred stock issuance. Those metrics are as follows based on defined terms in our credit agreements. Consolidated leverage ratio, 3.74 times, consolidated fixed-charge ratio of 2.62 times, and minimum interest-coverage ratio of 3.65 times. Total debt-to-asset value, 38%, and secured debt-to-asset value of 12%. Our unencumbered asset value to unsecured debt was at 206%.

As we've stated before, we don't believe that any of the covenants in our indenture or amended credit agreement will limit in any significant manner our ability to deploy our available liquidity to support our acquisition strategy. In addition to the issuance of a preferred equity during the quarter, we also entered into a sales agreement to sell shares of our common stock from time to time, having an aggregate gross proceeds of up to $100 million, through the after market or ATM offering program. This program will allow us to efficiently and economically manage our goal of funding future acquisitions, with an appropriate balance of debt and equity without the high cost of a full-blown follow-on equity offering. It provides us the ability to match funds more closely with our capital needs over time, and avoids much of the negative impact of issuing equity in larger marketed offerings. To date, no shares have been issued under the program, and we would expect to utilize our available cash and some portion of our available revolver before doing so.

Finally, just a couple of comments on our tenant disclosures that Rick touched on a little bit earlier. Effective this quarter, we have modified our reporting of our tenant data, including rent coverage metrics as follows. All coverage amounts are now reported one quarter in arrears, versus one month in arrears as previously reported. So our coverage amounts reported this quarter reflect data from the calendar fourth quarter of 2012, compared to our coverage amounts as reported in the fourth quarter 2012 which reflected data from September to November of 2012, so as such, the data reported this quarter has a two-month overlap to the data reported in the fourth quarter of 2012.

Secondarily, we revised certain calculations of coverage this quarter as follows. EBITDAR coverage is now based on our portfolio of assets only. In the prior quarter, this metric reflected coverages including -- taking into account the credit enhancement provided by parent guarantee from Sun. Our EBITDARM coverage is calculated on a consistent basis with the prior quarters, so no change on EBITDARM coverage. And finally, to provide insight into the credit enhancement provided by the Genesis guarantee, we have added a consolidated fixed charge coverage disclosure for Genesis. This coverage provides insight into the level that Genesis operations as a whole cover all of their rent and debt service operations. This coverage ratio of 1.18 times is calculated based on consolidated pro forma adjusted EBITDAR over consolidated pro forma rent and debt service payments for the fourth quarter of 2012. It excludes the impact of expected synergies which will be captured as they occur in future quarters. Including the expected synergies of $50 million annually, this coverage would have been 1.29 times.

So with that, I'll turn the call back over to Rick.

Thanks, Harold. We'll open it up to Q&A now.

We'll hear first from Michael Carroll with RBC Capital.

Yes, thank you. Hi Rick, with regards to the CMS proposed rules last night, how do you think the reporting of distinct therapy days impact the profitability of skilled nursing facilities?

I think it's pretty negligible because it's the lowest therapy category, so for most of our operators, that category is a pretty small percentage of their overall rehab, so I don't think it's going to affect it very much at all.

Okay. Great. And then with your investment pipeline, should we expect that activity in the second quarter will be similarly slow and kind of accelerating in the back half of the year?

I would expect us to have a little bit more activity in the second quarter than the first quarter, but certainly we're back-end loaded, but there should be an uptick in the second quarter.

Okay. And then, Harold, with regard to the HUD refinancing that we've been talking about for the past several quarters, were you able to, I thought there was a $60 million tranche that was going to come in the first quarter. Was that delayed for some reason?

No, the $60 million tranche is still in process. The first-quarter reference was really to what we're going to be working on in trying to get it filed. We should have that filed with HUD in the next week or two, but the expectation has always been that, that would come probably the end of July-August timeframe to be completed. Obviously it depends on HUD's cooperation. We're pretty confident that by late summer we'll have that completed.

Okay. Then the $30 million tranche that was going to come in at the end of the year, is that going to get pushed off into 2014?

I don't think so, but it is HUD, so you can't say for sure, but we're also working on that one simultaneously. We are keeping them separate, so we can get the first one on file, but still expect that toward the latter part of this year.

Okay. And then are there any other tranches that you're working on that may come in in 2014 that we should think about modeling in?

Actually, once we complete this, these two, we'll have all of our mortgage debt refinancing taken care of, and so there won't be any more opportunities, we'll basically have termed out all of our mortgage debt over 30 years, and have replaced what's now a GE that comes due in 2015, so that will be the end of the opportunities for HUD with existing mortgage debt.

All right. Great. Thanks, guys.

We'll take our next question from Rob Mains with Stifel.

Yes. Thanks, good morning Rick. Any change in the competitive environment for acquisitions? You said that usually you're not facing a lot of competition.

No. We don't see any, any change there. I think, we would expect to see who we normally see. LTC and NHI on senior housing, maybe occasionally SNF, and then nothing new on SNF, we see Omega, and we've saw these before they were public anyway, so it's actually the fact that they're public doesn't really change anything. And we haven't seen the private non-traded as much as we saw in 2011, that still hasn't changed, but we'll see.

Okay. And asset pricing stabled as well?

Yes. We haven't seen any change in asset pricing to date. I know a couple of the, a couple of the other guys on calls had said they noticed some compression on senior housing, although that's skilled nursing. We haven't seen that.

Okay. And then, you mentioned that you'd expect Genesis coverages to improve going forward, and I know part of that is synergy. Just generically, when you look at your SNF holdings, given that the transition to, or from the 11%, is increasing in the rear view mirror, do you expect SNF coverages in general to gradually improve this year?

Yes. Well, a couple comments. Our non-Genesis tenants, although small, all have really strong coverage and actually stronger than Genesis's coverage. But I would, well one, the market basket's going to help obviously, but I would like to think that as they become more efficient and parent guarantee aside and get through --

Because the synergies are going to help the fixed coverage, they're probably not going to really effect the facility level, because most of the synergies were at the overhead level, so once they get through synergies and get, and get sort of that diversion away from them, then I would expect to see coverage improve, but I think, in fairness to them, if it just stays stable for the time being while they're focused on getting this merger behind them, I think we'd be happy with that.

Okay. That's helpful. All right. That's all I have, thank you.

Yes.

We'll hear next from Emmanuel Korchman with Citi.

Hi guys, just looking out over your deal pipeline, could you maybe give us some idea of what's going to come, maybe split between relationship deals and deals with new tenants or operators? What's going to be debt and what's going to be real estate, and maybe a better idea on timing?

It's Talya here. I'd say, well, you never, I can never be that good at predicting timing. I wish I were. But I can certainly say that the -- there's a reasonable amount of deals coming to us from our existing tenant base, Rick mentioned the New Dawn guys, how we expect to do, we would anticipate doing additional deals with them. There are other tenants that we have done deals with that continue to bring us transactions to look at.

Sometimes they're speculative, they're an option process, and we bid alongside them. Sometimes they're deals that they have -- already have tied up. Of course, the probability of getting those closed are much higher than they are when we're involved in an auction process or looking at something through a broker or an advisor. So if I sack, if I probability-weight them, I bet it's closer to a 50/50 split of what we'll realize through, through kind of a broad process versus what we'll be able to acquire through our existing relationships.

And maybe on debt investments versus real estate?

Well, the debt investments are, for the most part, just associated with development pipelines. Some sort of relationship -- so we've got a few associated with the development pipeline agreement (inaudible). Last fall with Stoney River versus Phoenix group, that's the same organization. So there we have the ability to provide development loans, recap prior to stabilization. You can mortgage debt, so I think to the extent you see us doing mortgage financing or debt financing, it's going to be primarily in a situation that's, I would characterize it as long-term loan, it's just the loan is an interim step to the ownership.

Yes, and the only, the only potential exception there, because we're not -- we're not in the business of being a bank, the only potential exception there is there are a couple of states on the skilled nursing side where if you do a sale lease-back, the state Medicaid system doesn't take that into consideration in terms of capital structure and then subsequent pass-through to revenue.

But if you do it in the form of a mortgage, rather than a sale lease-back, then that actually improves the operator's revenue, so if we wind up doing any skilled nursing deals, and, in those states, and Maryland and Michigan come to mind, that's where you might see us do something, but that's about it.

Great. That was all for me. Thank you.

Sure.

We'll hear next from Tayo Okusanya from Jefferies & Company Bank.

Good afternoon guys, this is David in for Tayo.

Okay. Dave.

Just wondering based on recent NIC data that's come out from new construction activist for memory care and assisted living, just wondering what you're seeing on the ground in your existing markets and for your future developments, and how that changes your underwriting if at all?

Well, in terms of what we're seeing on the ground, we're not seeing -- because we focus with smaller to mid size operator and local and secondary and tertiary markets, these are the markets these guys live in. So we're not seeing any other new development other than the projects that these guys undertake.

We tend not to see the bigger guys focus on these markets because the local guys do tend to own them and they are secondary and tertiary, so we're not seeing anything broad-based or -- where we're seeing a development project on the market that we like -- we're not seeing two or three or four other development projects. We're just not seeing that at all. So I still think it's very market- and developer/operator specific, and again no trends to indicate otherwise, so in terms of the underwriting, it doesn't really affect how we underwrite.

I would add to that a couple things, one is, while there is an uptick in, on an absolute basis, the numbers are actually still quite small in terms of percentages, and then it's still challenging for, for operators and developers to get capital.

So unless they have their own capital to execute, construction transactions, which few do, it's, it's still tough. There are only a handful of lenders outside of HUD that are, that are willing to lend, and so that in and of itself creates a really strong governing on the amount of development that can start.

The other thing I'd add is, one of the things that we focus on in our underwrite opening development projects is market studies, and we focus, we look and assess supply demand, and what we're really looking at trying to target is those, are those communities, those areas that have an unbelievable demand with very little supply.

So the demand indicators are so strong, it's not like there's a few, there's some demand for additional supply, but it's underserved by seven times, 10 times, 20 times. It's those kind of markets, so that even if there's another facility that gets built, there's still underserved demand. So we really look at the gaps that exist in terms of supply in various markets.

Great. Thank you very much for the color.

(Operator Instructions)

At this time I show that we have no further questions. I'd like to turn the call over to Rick Matros for closing remarks.

Thanks, and just a couple of closing comments. One, a little bit more on the development stuff. So in terms of how we see the year rolling out. From a timing perspective on getting deals done, I think it will look like the last two years where we have a lot more in the back end than the front end but based on, again, on current trend and pipeline activity, we don't have any concern about not hitting or, our assumptions relative to deal flow.

From the perspective of how it differs from the past couple of years, get our focus is going to be on AL memory care, and you are going to see more development projects from us. And that's really critical from our perspective, because given the size of our Company, to bring on as many new assets, particularly in the senior housing arena, as we see coming on over these next few years, really is almost transformative for our portfolio.

And given the fact that the, the characteristics of the resident in assisted living is so much different than when most of these assisted-living facilities that currently exist were constructed, we think that with enough products in place that are much more conducive to meeting the needs of an assisted-living resident that has many more cognitive and mobility issues than residents even as recently as five years ago that would reside in nursing homes.

And with memory care being a relatively new business having purpose-built memory facilities, memory care facilities that again take into consideration the characteristics of those residents, we think is a very positive thing.

And the other thing to be mindful of when it comes to assisted living and memory care facilities is because it's a need-based resident now, and acuity is going to continue to rise, you've got staffing needs and so to have a physical plant configuration that lends itself to a more efficient staffing model is critical as well to maintain the quality of the margins in both the assisted-living and the memory care facilities, so, so we're looking forward to that.

We're looking forward to doing more repeat business with existing tenants, and other than that, we see, again on the reimbursement side, a pretty benign if not slightly positive environment. And with that, both Talya and Harold and I are available for calls. You guys have our numbers and e-mail we'll be responsive to you. We appreciate your support and thank you for your time today. Take care.