Sabra Health Care REIT Inc (SBRA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sabra Health Care REIT, Inc. First Quarter 2014 Earnings Conference. 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. 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 expectations regarding acquisition, and investment plans, our expectations regarding our financing plans and our 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 for the year ended December 31, 2013 that is on file 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 Exhibit 99.1 and 99.2 respectively to the Form 8-K we furnished to the SEC yesterday. These materials can be accessed in the Investor Relations sections of our website at www.sabrahealth.com.

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

Thanks, Talya and thanks everybody for joining us this morning. We are pleased to deliver the strong first quarter results. We had 27% revenue growth, 23% normalized AFFO growth. We had just about $166 million of investment activity inclusive of April's announced investments. We're well on our way to our stated goal for the year and pretty much where we said we'd be by the end of June at $170 million.

We completed $350 million aggregate principal amount of 5.5% senior unsecured notes earlier in the quarter. Our dividend, just been increased 6% to $0.38. Genesis's fixed charged coverage had a nice rebound coming in at 1.25 and [Harry pointed out] since we're doing trailing 12 I know some people were comparing it to the 1.12 we reported in the last quarter. That was the trailing three. If you go apples to apples, they're actually at 1.23 on trailing three-month basis, so still a huge improvement as we expected.

Our revenues from private pay sources is now 40.2% and that includes our private pay from all of our senior housing, the private pay within our skilled nursing facilities and the private pay from our hospital portfolio. We will be updating guidance shortly to reflect the activity to-date as well as some pending activity. So expect that shortly and I would also stress that as we continue to complete investment activity throughout the year, later on in the year, after this next update, we'll be updating guidance again.

Our pipeline is very consistent as it's been in the last number of quarters. We range anywhere from about $325 million to $400 million; 60% plus, 65% tends to be in senior housing.

In terms of cap rate and competition, let me make a couple of comments. Cap rates have been stable relative to where they've been in the last, I'd say, six months or so, which is a little bit tighter than they were, I'd say, the first half or the first three quarters of last year. So on the skilled nursing side, we're still seeing ranges of 9% to 10%, although the skilled facilities that we would attend to want to buy are going to be closer to 9% than 10%.

On the AL/memory care side, very close 7.7% to 8%-ish, and so a little bit of compression, and not very much, pretty consistent. On the IO side, closer to 7% and really don't have a number on hospitals because we just don't see enough deals that would be good data points on hospitals. So not much change really from our perspective in cap rates and we're seeing a pretty wide range of stuff given the size of our pipeline, so I think that's a pretty fair [barometer].

From a competitive perspective, we are not seeing that much different from a competitive perspective at this time relative to what we've been seeing in the last six months and really the main thing that changed in the last six months is we're seeing -- we see more financial buys than we saw earlier last year or in 2012. That seems to be the primary difference as far as non-traded guys. We haven't really seen them for quite a while. Whether we'll see them on a go-forward basis that kind of remains to be seen. But other than the financial buyers, the competition tends to be our peer group, which is what it's been for most of the time.

I'd also note that if we find ourselves competing for an asset with a financial buyer, they tend pay out. And so we usually are not going to be -- we are not going to want to win on those deals, but we seem to have enough in the pipeline to keep ourselves satisfied relative to hitting out goals for the year.

I also want to note, and I think most of you saw that CMS proposed rule for skilled nursing Medicare rates came out last week. And CMS is proposing a net 2% market basket increase that will be effective October 1 and no reason at this point to say that that's going to be challenged legislatively. So that will give us visibility on Medicare rates in the skilled nursing sector through October 1, 2015.

In terms of operating stats, I'll turn to those now. Our EBITDARM trailing 12 months 2014 for the entire portfolio was 1.71, down slightly from 1.76 in 2013. Our skilled portfolio was 1.66, down from 1.73. EBITDAR for trailing 12 months 2014, the entire portfolio was 1.32 versus 1.33 for 2013, so effectively flat on EBITDAR with skilled nursing slightly down to 1.21 from 1.26. Our senior housing portfolio rent coverage was relatively flat for the period.

One comment, as you know, we report a quarter in arrears. For the first quarter, fundamentals in our portfolio looked really good. We did and we will see -- we will report that that there was a pretty big impact from weather but the fundamentals looked really good and we expect that to continue into the second quarter.

The two areas that will get impacted by weather or at least found well impacted by weather for the first quarter were utility costs, as you would expect, and also [bear with this] productivity just because of difficulty getting into facilities in certain areas of the country. But fundamentals did look good for the first quarter. So we felt really good about that because the weather thing is just a temporary deal that's already passed.

The trailing 12 month occupancy for 2014, 88.1% versus 89.1% for the entire portfolio. Our skilled portfolio was at 87.9% versus 89.2% and our skilled nursing portfolio was 36.4% versus 37.5%. Senior housing occupancy was 89.3%, up from 88.2%.

And with that, I'll turn it over to Harold.

Thanks, Rick. This morning I will provide an overview of the results of operations for the first quarter of 2014 and our financial position as of the end of the quarter, including the pro forma impact of certain activities during and subsequent to the quarter.

For the three months ended March 31, 2014, we reported revenues of $40.9 million compared to $32 million for the first quarter of 2013, an increase of 27.6%. As of March 31, 2014, 47.7% of our revenues were derived from our leases to subsidiaries of Genesis and 69.9% were derived from skilled nursing related assets. These are down from 63.2% and 82.3% respectively as of March 31, 2013. In addition, we recorded $0.6 million of operating revenues from our recently initiated 50%/50% RIDEA-compliant senior housing operations joint venture.

FFO for the quarter was negative $0.5 million and on a normalized basis was $21.7 million or $0.55 per diluted common share, normalized to exclude a $22.1 million loss on extinguishment of debt primarily associated with redemption of all the outstanding [8.125%] senior notes due 2018 and a $0.1 million write-off of straight line of rental income associated with entering into the new lease for our senior housing operations joint venture. This normalized FFO compares to $17.5 million or $0.46 per diluted common share for the first quarter of 2013, an increase of 19.6% on a per share basis.

AFFO, which excludes from the FFO acquisition pursuit costs and certain non-cash revenue and expenses was $0.3 million and on a normalized basis was $21.1 million or $0.53 per diluted common share compared to $16.6 million or $0.43 per diluted common share for the first quarter of 2013, a 23.3% increase on a per share basis; AFFO being normalized to exclude the $20.8 million cash portion of loss on extinguishment of debt. Net loss attributable to common stockholders was $9.9 million or $0.25 per diluted common share for the quarter compared to net income of $9.3 million or $0.25 per diluted common share for the first quarter of 2013.

G&A costs for the quarter totaled $5.9 million including $0.6 million associated with operating costs and the straight line rent adjustment associated with our senior housing operations joint venture discussed previously. In addition, G&A costs for the quarter included $2.5 million of stock-based compensation expense and $0.4 million of acquisition pursuit costs. Excluding these joint venture, non-cash compensation and transaction related costs, G&A costs were 5.7% of total revenues for the quarter, down from 6.4% in the first quarter of 2013.

Interest expense for the quarter totaled $11.1 million, compared to $10 million in the first quarter of 2013 and included the amortization of deferred financing costs $0.9 million in the first quarter of 2014 and $0.8 million in the first quarter of 2013. Based on debt outstanding as of March 31, 2014, our weighted average interest rate was 4.78%, compared to 6.77% as of March 31, 2013, a reduction of 199 basis points.

During the quarter, we recorded an adjustment to the fair value of a contingent consideration liability associated with an asset acquisition resulting in non-cash other income of $0.3 million. Switching to the statement of cash flow and balance sheet, our cash flows from operations totaled $1.2 million for the first quarter of 2014 and $22 million, excluding the cash portion of loss on extinguishment of debt of $20.8 million, compared to $21.6 million for the first quarter of 2013.

Our investment activity during the quarter totaled $128.1 million. This activity was funded with various sources of capital as we completed a myriad of financing activities during the quarter as follows. First, we issued $350 million of 5.5% unsecured senior notes due 2021 and completed the retirement of all of the outstanding 8 and [8.125%] unsecured senior notes due in 2018 providing approximately $108.8 million of net cash which was used to fund investment activity and reduce the outstanding balance on our secured revolving credit facility.

Second, we repaid $56.4 million of existing variable-rate mortgages with proceeds from the new HUD debt totaling [$46.1 million] and borrowings on our secured revolving credit facility. The new HUD debt has an interest rate of 4.25% and is due between 2039 and 2044. Subsequent to March 31, 2014, we added an additional $11.6 million of HUD loans with an interest rate of 4.1% due in 2044.

Third and finally on May 1, 2014, we repaid all of our remaining $29.8 million of variable rate mortgage debt with proceeds from our secured revolving credit facility. This repayment was made in anticipation of paying additional HUD debt later in 2014 which is expected to refinance all or a vast majority of this repayment.

The result of this financing activity was the elimination of variable rate debt and a reduction of our weighted average effective interest rate as of May 1, 2014 to 5.18% from 5.96% as of December 31, 2013 excluding borrowings under our secured revolving credit facility, which continue to have a variable rate of interest with the current rate of 3.15%. In addition, we now have no debt maturities until 2021 excluding the secured revolving credit facility, which is due in 2016 with a one-year extension option.

During the first quarter of 2014 we sold 168,000 shares of our common stock at an average price of $27.68 per share through our ATM Program raising net proceeds of approximately $4.6 million. As of March 31, 2014 we have $57.1 million available for future issuance under the program. Once fully utilized, we expect to put up a new similar ATM Program to allow us to continue to match fund our acquisition activity with a quarterly preferred and common dividends totaling $16.6 million during the first quarter of 2014 and maintained a stable level of cash and cash equivalents of $4.3 million as of March 31, 2014. As of the end of the quarter, we had total liquidity of $129.8 million consisting of currently available funds under our revolving credit facility of $125.5 million and cash and cash equivalents of $4.3 million.

In addition, we were in compliance with all of our debt covenants under our senior notes indentures in our secured revolving credit agreement as of March 31, 2014. The key covenant metrics are as follows based on defining terms in our credit agreement; consolidated leverage ratio 5.23 times and 5.29 times on a pro forma basis taking into account investing and financing activities subsequent to the quarter, consolidated fixed charge coverage ratio of 2.87 times and 2.9 times on a pro forma basis, minimum interest coverage ratio of 4.22 times and 4.12 times on a pro forma basis, total debt to asset value 52% and secured debt to asset value 19%, both on an actual and pro forma basis, unencumbered asset value to unsecured debt 194% on an actual and pro forma basis, the investing and financing activity during and subsequent to quarter results and quarter ended March 31, 2014 to pro forma normalized FFO and normalized AFFO of $0.59 and $0.57 per share respectively, each being $0.04 over the actual results for the first quarter of 2014.

On May 5, 2014 our Board of Directors declared a quarterly cash dividend on our common and preferred stock. The common dividend was increased by 6% over the prior quarter to $0.38 per share and represents a payout ratio of 72% of normalized AFFO on a per share basis for the quarter. This increase demonstrates our strong normalized AFFO growth and our objective to increase the dividend as our AFFO increases to maintain an appropriate payout ratio over time.

Finally, our capital structure objective continues to be to maintain adequate liquidity and proper leverage to support making strategic accretive investments with an eye toward improved credit ratings over time. We will continue to be opportunistic in accessing the capital markets to achieve this objective.

With that, I'll turn it back to Rick.

Thanks, Harold. I wanted to comment before we turn it over to Q&A, we tweaked our reporting, as some of you noted, to just trailing 12 or reporting trailing three historically, and the reason we did that was really based on a lot of feedbacks that we got. As far as we know we were the only one that's doing that (inaudible) the skilled nursing portfolio and the amount of seasonality that affects that portfolio. The numbers really swing wildly as many of you know from quarter to quarter. So reporting on a trailing 12 kind of smoothes out the seasonality and also puts us in line with our peer group.

So with that I'll turn it over to Q&A.

Emmanuel Korchman, Citi.

Hi. This is Archena Alagappan for Manny Korchman. So you spoke a little bit about using more of the ATM going forward to match fund your investments putting a new ATM in place. So how do you think about like a more appropriate run rate leverage going forward? And why more of the ATM versus a larger equity issuance or maybe thought of issuing a preferred? Thank you.

Sure. Our leverage goal as we talked about a little bit in the last quarter is to get it closer to four times versus where it is today, and we also commented in the past and we'll reiterate that now is that the idea of doing a follow-on certainly isn't out of the question.

The ATM, obviously, it's great for matching funds but the issue for us with the ATM is really twofold. One, given all the blackout periods you really (inaudible) in terms of how much you can use which for us is exacerbated by the fact that we don't have that much average trading volume.

So usually with the ATM you are looking at 10% of your average volume, maybe 15%. You want to push it. So you don't get as much there as you'd like, at least for us, at this particular point in time.

So we'll consider other avenues.

In terms of doing another preferred equity offering, that's probably not in the cards. You should probably know, the agencies view that primarily as debt. One of the agencies views it as a 100% debt and another one of the agencies views [it as] 75% debt, so that would take our leverage really in the wrong direction and that's really not what we want to do, [we won't] deleverage the balance sheet down.

Michael Carroll, RBC Capital Markets.

Do you expect any additional investments to close in the first half of 2014? I think the original expectation was $170 million and you're already at $166 million right now.

We're working on the stuff. So whether we get it closed or not, we're going to do our best.

Okay. And then was Genesis able to fully recover the implementation of those operational synergies? Should we expect incremental improvements next quarter in their ratios?

Yes, I think in the first quarter what I would expect to see is good fundamentals relative to -- particularly their top line and temporary hit really because of the weather which everybody is kind of seeing, but that's very specific to the niche and the utility costs which by the time March and April while they are already normalizing and therapy productivity was off in the first quarter due to the same factor and that was already normalized by the end of the first quarter. So we feel like at this point with all the integration behind and really having [sent] on their own platform for the very first time with the same budget and all that kind of thing that they are starting to get a little bit of traction and they are really starting to get their arms around the business and obviously the 2% Medicare increase is going to help everybody that completely offset sequestration from last year.

Okay. Then how much will the weather impact those coverage ratios? I mean, will it register on a trailing 12-month basis?

It will register big time in a trailing 12-month basis and that's obviously kind of the benefit of doing that and we're just getting March numbers in from Genesis. So I don't have a solid number on that yet but it's not going to freak everybody out.

Okay. And then Harold, are we largely done with the HUD refinancings? I guess it sounded like in your comments that you're going to take out, what $30 million of HUD later in the year to refinance those mortgages that you paid off. Is there anything else outside of that?

No that's it. We did issue new HUD loans through the acquisition. Basically with this last piece all of our legacy mortgage debt now and including -- actually all of our mortgage debt will be with HUD after we complete this $30 million later this year. And so right now, all of the mortgage debt that we have on the balance sheet is with HUD and obviously the $30 million was paid off with the revolver in the short term, but it's just a matter of getting to the process with HUD. As you know that will take several months but we'll be kicking out that process here very shortly.

Omotayo Okusanya, Jefferies.

So you were kind of about kind of pending acquisition volume going forward. Again you guys are pretty much on track in regard to the amount of acquisition you expect to do this year versus what you've guided to. Just curious with -- if you could talk a little bit about this pending transactions about how large it could be and just whether you guys are setting up for a year where your acquisition volume is even better than you were initially expecting?

Yes, really -- I can't be specific because you never know exactly what's going to happen but basically, if there weren't a couple of things that we felt we had a shot at, and this is generalized activity, that we had a shot at getting done we would have updated in conjunction with its release. We'll be updating shortly kind of (multiple speakers).

Are they big like $100 million, $200 million type transactions or are they smaller transactions?

We're mostly working on transactions that are in the range of most of the stuff we do which is what $30 million to $60 million. And again I am not trying to be mysterious but if we (inaudible). In terms of acquisition volumes for the year, we are still sticking with kind of what we said back in January where we put guidance out, $350 million to $400 million and that would still be our best year. So if we can do more than that, obviously we would love to do more than that.

Got it. And could you just talk a little bit about what the mix is, is it maybe mainly more on assisted living, is it more on skilled nursing?

Yes, it's primarily senior housing. The only other potential main factor in there is -- we will finish funding the Fort Worth construction loan and we have a ways to go on that and then we'll see whether we are ready to exercise the purchase option of the Dallas hospital. So other than that -- other than those two hospital pieces, we would expect to do majority of senior housing with some skilled nursing.

And then lastly, I mean, the one thing we did notice in regards to the coverage ratios was the acute care hospital portfolio, the coverage did drop quite a bit there, just kind of curious what's going on with that.

I think it's really just a function of we've only got two hospitals in there. And so, it just doesn't take much for that to fluctuate from quarter to quarter. There wasn't anything kind of unusual, there wasn't anything kind of trending for the Frisco hospital is going more and more from outer network to in-network. They're negotiating new in-network contracts with United, for example. So we expect volumes to increase with United. So that really drives a lot of fluctuation as you're going from out network to in-network for everybody to sort of follow the hospital sector. You will have fluctuations in volume until you've got the new in-network contracts in place. And then when you have the new in-network contracts in place, the tendency is volumes improve with that particular insurer.

Rob Mains, Stifel.

Harold, the right day I know it's not a big number yet, but are the revenues for that -- are those embedded in rental revenue line?

No, it's in other -- interest income and other.

Okay. So just as with G&A, we should expect a bump to interest income and other arising from that?

Yes, and once it gets more material, we'll call it out in a separate line item, but at this point it's just too small to call it out.

Okay. Fair enough. And, Rick, you talked about the impact of weather on operation. It sounds like you talked about kind of expense items. Did it also affect either move-ins or, in the case of Genesis, occupancy and referrals?

No, it didn't, because we already talked about the weather (inaudible) I actually hate kind of talking about the weather, but it's just kind of the first-quarter reality. But on the expense side, it's specifically on the utility line.

On the top line, it actually did not affect move-ins from senior housing side or occupancy on the skilled side, even with Genesis or other skilled nursing partners. What it did affect was therapy productivity. So the ability of the therapists to get in on a timely basis and get in every day because you've got to spread therapy out under the rules of seven days in order to maximize treatment indications. So that's what it really affected the therapy productivity, not occupancy specifically or [skilledness].

So did some of the patients (inaudible) as a result?

Yes, that's exactly right. Yes, they were rugged down, right.

And then I know this is kind of dwelling on what's not a big part of something that you control, but I think last year you mentioned that Genesis in addition to some structural things that's going on was seeing lower volumes coming from the hospitals. It sounds like can I infer from what you're saying that that sort of anniversaried?

Yes, I mean, I think the whole sector still suffers from the observation day syndrome at the hospitals. [Actually] CMS put that rule that two-midnight hospital rule in place but then they got delayed. So that kind of hasn't really changed much. So I think observation day it's still the main thing that's preventing skilled niche from growing the way we all like to see it grow. But it's certainly not getting any -- it's not getting worse. But that said, Genesis is seeing some improvement in overall top line volumes in 2014.

Okay, great. And my last question, when you were calling out the cap rates for the different types of asset types and you mentioned 7% for independent living, should we still infer from that figure that your investments are going to be more AL and memory care?

Yes.

(Operator Instructions) At this time I show we have no further questions. I'd like to turn the call back to Rick Matros for closing comments.

Thank you everybody for your time today. As always Harold, Talya and myself are available for follow-up calls and we look forward to talking to you all soon to those of you that will be joining us for our Analyst Day in Dallas on May 19 and 20. We look forward to seeing you there. Thanks very much and have a great day.

This does conclude today's conference. Thank you for your participation.